AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 2005
Registration No. 333-126898
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO THE
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ICEWEB, INC.
(Name of small business issuer in its charter)
Delaware 7389 13-2640971
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number) Identification No.)
or organization)
205 Van Buren Street
Herndon, Virginia 20170
703-964-8000
(Address and telephone number of principal executive offices)
(Address of principal place of business or intended principal place of business)
________________________
Mr. John R. Signorello
Chief Executive Officer
IceWEB, Inc.
205 Van Buren Street
Herndon, Virginia 20170
703-964-8000
(Name, Address and Telephone Number of Agent For Service)
________________________
Copies of all communications to:
James M. Schneider, Esq.
Schneider Weinberger & Beilly LLP
2200 Corporate Boulevard, N.W.
Suite 210
Boca Raton, Florida 33431
Telephone: 561-362-9595
Facsimile No: 561-361-9612
Approximate Date of Proposed Sale to the Public: As soon as practicable after
the effective date of this registration statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If 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, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration 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. [_]
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of each Dollar maximum maximum
class of securities Amount to be offering price aggregate amount of
to be registered registered per security offering price(1) registration fee
----------------------- ------------ -------------- ----------------- -----------------
Common stock, par value
$.001 per share (1 ) 250,000 $ 0.92 $ 230,000 $ 28
Common stock, par value
$.001 per share (1)(2) 1,666,667 $ 0.92 $ 1,533,334 181
Common stock, par value
$.001 per share (3) 2,000,000 $ 2.00 $ 4,000,000 471
Common stock, par value
$.001 per share (4) 1,250,000 $ 4.80 $ 6,000,000 706
Common stock, par value
$.001 per share (5) 1,250,000 $ 9.60 $ 12,000,000 1,412
Common stock, par value
$.001 per share (6) 287,500 $ 4.00 $ 1,150,000 136
Common stock, par value
$.001 per share (7) 287,500 $ 8.00 $ 2,300,000 271
Common stock, par value
$.001 per share (8) 175,000 $ 0.70 $ 122,500 14
Common stock, par value
$.001 per share (9) 5,000 $ 2.00 $ 10,000 2
--------- -------
7,171,667 $ 3,221
Total Registration Fee
ii
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933 based on the average of the
high and low sale price of the common stock as reported on the OTC Bulletin
Board on July 20, 2005.
(2) Includes shares of common stock issuable upon conversion of shares of Series
A Convertible Preferred Stock.
(3) Includes shares of common stock issuable upon the exercise of outstanding
Common Stock Purchase Warrants "A" issued in March 2005.
(4) Includes shares of common stock issuable upon the exercise of outstanding
Common Stock Purchase Warrants "B" issued in March 2005.
(5) Includes shares of common stock issuable upon the exercise of outstanding
Common Stock Purchase Warrants "C" issued in March 2005.
(6) Includes shares of common stock issuable upon the exercise of outstanding
Series H Common Stock Purchase Warrants.
(7) Includes shares of common stock issuable upon the exercise of outstanding
Series I Common Stock Purchase Warrants.
(8) Includes shares of common stock issuable upon the exercise of outstanding
$0.70 Common Stock Purchase Warrants "A" issued in March 2005.
(9) Includes shares of common stock issuable upon the exercise of an outstanding
common stock purchase warrant with an exercise price of $2.00 per share.
To the extent permitted by Rule 416, this registration statement also covers
such additional number of shares of common stock as may be issuable as a result
of the anti-dilution provisions of the Series A Convertible Preferred Stock and
common stock purchase warrants listed above.
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
iii
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 an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, dated November __, 2005
PROSPECTUS
ICEWEB, INC.
7,171,667 Shares of Common Stock
This prospectus covers the resale of a total of 7,171,667 shares being
offered by selling security holders listed in the section of this prospectus
entitled "Selling Security Holders." Of the shares covered by this prospectus,
250,000 shares are presently outstanding, 1,666,667 shares are issuable upon the
conversion of shares of our Series A Convertible Preferred Stock and 5,255,000
shares are issuable upon exercise of warrants with exercise prices ranging from
$0.70 to $9.60 per share. We will not receive any of the proceeds from the sale
of the shares being offered by the selling security holders.
For a description of the plan of distribution of the shares, please see
page 49 of this prospectus.
Our common stock is traded on the OTC Bulletin Board under the trading
symbol "IWEB." On November 4, 2005 the last sale price for our common stock was
$0.85.
__________________________
INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS TO READ ABOUT RISKS OF INVESTING
IN OUR COMMON STOCK.
__________________________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED 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 ________________ , 2005
PROSPECTUS SUMMARY
We market proprietary software products, information technology
professional services, and third party computer hardware and software. Our
mission is to provide value to our customers by delivering a broad range of
proven technologies and services that enable organizations to gain competitive
advantage, maximize business results and speed innovation.
Our suite of software products and integration service products enable
government and other organizations to independently manage, create, publish and
deliver content easily and affordably. Our suite of software products, which are
centered on knowledge-based support, are scaleable and can be implemented on any
website. We also provide a range of information technology consulting services
and product support services on a project-by-project basis, including software
programming and network engineering. Our suite of software products and
consulting services enable organizations to reduce time and effort by converging
knowledge-based information with easy to manage websites and e-learning portals.
We also market third party computer hardware and software as an authorized
reseller for a broad array of products, including large power supplies.
Our principal executive offices are located at 205 Van Buren Street, Suite
360, Herndon, Virginia 20170, and our telephone number is 703-964-8000. Our
fiscal year end is September 30.
When used in this prospectus, the terms "IceWEB," " we," "our," and "us"
refers to IceWEB, Inc., a Delaware corporation, and our subsidiaries. The
information which appears on our web site at www.iceweb.com is not part of this
prospectus.
All per share information contained in this prospectus gives effect to the
ten for one (10:1) forward stock split of our common stock effective October 13,
2004 and a one for eighty (1:80) reverse stock split effective April 27, 2005.
THE OFFERING
This prospectus covers the resale of a total of 7,171,667 shares of our
common stock by the selling security holders. Of the shares covered by this
prospectus, 250,000 shares are presently outstanding, 1,666,667 shares are
issuable upon the conversion of shares of our Series A Convertible Preferred
Stock and 5,255,000 shares are issuable upon exercise of warrants with exercise
prices ranging from $0.70 to $9.60 per share. The selling security holders may
resell their shares from time-to-time, including through broker-dealers, at
prevailing market prices. We will not receive any proceeds from the resale of
our shares by the selling security holders. We will pay all of the fees and
expenses associated with registration of the shares covered by this prospectus.
COMMON STOCK
Outstanding Prior to this Offering: 6,492,289 shares at November 4, 2005
Outstanding After this Offering: 15,118,517 shares, including an
aggregate of 8,626,231 shares which are
reserved for possible issuance upon the
conversion of outstanding Series A
Convertible Preferred Stock, exercise of
outstanding common stock purchase
warrants or exercise of options granted
under our 2000 Management and Director
Equity Incentive and Compensation Plan.
2
Common Stock Reserved: 8,971,771 shares, including:
o 1,666,667 shares issuable upon the
conversion of our Series A
Convertible Preferred Stock, the
resale of which is covered by this
prospectus,
o 5,490,000 shares upon the exercise
of outstanding warrants with
exercise prices ranging from $0.70
to $16.00 per share, the resale of
5,255,000 shares of which is
covered by this prospectus,
o 783,314 shares of our common stock
underlying options which are
presently outstanding under our
2000 Management and Director
Equity Incentive and Compensation
Plan with a weighted average
exercise price of $4.91 per share,
and
o 345,540 shares of our common stock
reserved for issuance under our
2000 Management and Director
Equity Incentive and Compensation
Plan.
RISK FACTORS The securities offered hereby involve a
high degree of risk and immediate
substantial dilution. See "Risk Factors"
and "Dilution."
OTC BULLETIN BOARD SYMBOL IWEB
SELECTED CONSOLIDATED FINANCIAL DATA
The following summary financial information has been derived from the
financial statements that are included elsewhere in this prospectus.
STATEMENT OF OPERATIONS DATA:
Nine months ended Year ended
June 30, September 30,
-------- -------------
2005 2004 2004 2003
Revenues $ 4,987,776 $ 4,848,499 $ 6,662,652 $ 1,681,505
Cost of Sales 3,789,535 3,379,655 5,015,494 1,264,338
Total Operating Expense 1,987,031 1,795,796 3,656,610 675,591
Operating income (loss) (788,790) (326,952) (2,009,452) (258,424)
Interest (expense) income ( 25,078) 4,913 (60,879) (30,736)
Net income (loss) $ (813,868) $ (322,039) $ (2,035,443) $ (105,844)
Preferred stock dividend (1,000,000) 0 0 0
Loss available to shareholders $(1,813,868) $ (322,039) $ (2,035,443) $ (105,844)
Basic and diluted (loss) per common share $ (0.31) $ (0.07) $ (0.00) $ (0.00)
Weighted common shares outstanding 5,795,522 4,846,944 5,049,368 3,987,558
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BALANCE SHEET DATA:
June 30, 2005 September 30, 2004
------------- ------------------
(unaudited)
Working capital (deficit) $ 259,645 $ (1,049,557)
Cash $ 269,960 $ 178,781
Total current assets $ 1,935,874 $ 1,241,488
Total assets $ 2,611,352 $ 2,208,473
Total current liabilities $ 1,676,229 $ 2,291,045
Total liabilities $ 1,889,353 $ 2,291,045
Total stockholders' equity (deficit) $ 721,999 $ (82,572)
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this prospectus contain or may contain
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived
utilizing numerous assumptions and other factors that could cause our actual
results to differ materially from those in the forward-looking statements. These
factors include, but are not limited to, our ability to increase our revenues,
develop our brands, implement our strategic initiatives, economic, political and
market conditions and fluctuations, government and industry regulation, U.S. and
global competition, and other factors. Most of these factors are difficult to
predict accurately and are generally beyond our control.
You should consider the areas of risk described in connection with any
forward-looking statements that may be made in this prospectus. Readers are
cautioned not to place undue reliance on these forward-looking statements and
readers should carefully review this prospectus in its entirety, including the
risks described in "Risk Factors." Except for our ongoing obligations to
disclose material information under the Federal securities laws, we undertake no
obligation to release publicly any revisions to any forward-looking statements,
to report events or to report the occurrence of unanticipated events. For any
forward-looking statements contained in any document, we claim the protection of
the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. These forward-looking statements speak
only as of the date of this prospectus, and you should not rely on these
statements without also considering the risks and uncertainties associated with
these statements and our business.
RISK FACTORS
Before you invest in our securities, you should be aware that there are
various risks. Additional risks and uncertainties not presently known to us or
that we currently believe to be immaterial may also adversely affect our
business. You should consider carefully these risk factors, together with all of
the other information included in this prospectus before you decide to purchase
our securities. If any of the following risks and uncertainties develop into
actual events, our business, financial condition or results of operations could
be materially adversely affected and you could lose your entire investment in
our company.
4
WE HAVE AN ACCUMULATED DEFICIT AND WE ANTICIPATE CONTINUING LOSSES THAT WILL
RESULT IN SIGNIFICANT LIQUIDITY AND CASH FLOW PROBLEMS ABSENT A MATERIAL
INCREASE IN OUR REVENUES.
We have an accumulated deficit of $6,411,015 at June 30, 2005. For the
year ended September 30, 2004, we had a net loss of approximately $2 million and
cash used in operations was approximately $795,000. For the nine months ended
June 30, 2005 we had a loss available to shareholders of $1,813,868 and cash
used in operations was approximately $1,003,322. The report of our independent
registered public accounting firm on our financial statements for the fiscal
year ended September 30, 2004 contained a qualification expressing substantial
doubt as to our ability to continue as a going concern as a result of our net
losses and cash used in operations. While we reported an increase in our
revenues for fiscal 2004 as compared to fiscal 2003, and a modest increase in
our revenues for the nine months ended June 30, 2005 as compared to the nine
months ended June 30, 2004, we cannot assure you that our revenues will increase
in future periods, nor can we assure you that they will not decrease. As long
as our cash flow from operations remains insufficient to fund our operations, we
will continue depleting our cash and other financial resources. Our failure to
achieve profitable operations in future periods will adversely affect our
ability to continue as a going concern. In this event, you could lose all of
your investment in our company.
WE ARE IN DEFAULT UNDER THE TERMS OF A LINE OF CREDIT WHICH IS SECURED BY ALL OF
OUR ASSETS. IF THE LENDER SHOULD EXERCISE ITS RIGHTS IN CONNECTION WITH THIS
DEFAULT, WE WOULD BE UNABLE TO CONTINUE OUR OPERATIONS.
In July 2004, we entered into a Loan and Security agreement with Comerica
Bank to obtain a revolving credit line in the amount of $500,000. At June 30,
2005, the amount outstanding under this credit line was $461,269. This note is
collateralized by a security interest in our assets. The agreement includes
certain financial covenants which we are required to meet on an ongoing basis.
In November 2004, after we were unable to meet certain of these financial
covenants, we executed a Forbearance Agreement with Comerica Bank, which
recognized our default and contained certain forbearances by the bank from
enforcing its rights and exercising its remedies in connection with the default.
Subsequent to that date, we have failed to meet certain financial covenants
related to our minimum tangible net worth, however, the bank is not presently
seeking to declare a subsequent default or otherwise enforce any of its rights
under the loan agreement. The amount we owe Comerica Bank under this revolving
line of credit is reflected on our balance sheet at June 30, 2005 as a current
liability. Under the terms of the Comerica Bank loan agreement, if we were
unable to cure the default under the terms of the loan agreement the lender
could foreclosure on all of our assets which would prohibit us from conducting
our business and would result in our inability to continue as a going concern.
WE WILL NEED ADDITIONAL FINANCING WHICH WE MAY NOT BE ABLE TO OBTAIN ON
ACCEPTABLE TERMS. IF WE CANNOT RAISE ADDITIONAL CAPITAL AS NEEDED, OUR ABILITY
TO EXECUTE OUR GROWTH STRATEGY AND FUND OUR ONGOING OPERATIONS WILL BE IN
JEOPARDY.
Historically, our operations have been financed primarily through the
issuance of equity. Capital is typically needed not only to fund our ongoing
operations and to pay our existing obligations, but capital is also necessary if
we wish to acquire additional assets or companies and for the effective
integration, operation and expansion of these businesses. Our future capital
requirements, however, depend on a number of factors, including our ability to
internally grow our revenues, manage our business and control our expenses. At
June 30, 2005, we had a working capital surplus of $259,645 as compared to a
working capital deficit of $1,049,557 at September 30, 2004. This change is
primarily attributable to proceeds we received from the sale of equity
securities during the three months ended March 31, 2005. However, we will need
to raise additional capital to fund our ongoing operations, pay our
5
existing obligations and for future growth of our company. We cannot assure you
that additional working capital is available to us in the future upon terms
acceptable to us. If we do not raise funds as needed, our ability to provide for
current working capital needs, make additional acquisitions, grow our company,
and continue our existing business and operations is in jeopardy. In this event,
you could lose all of your investment in our company.
WHILE SHARES OF OUR SERIES A CONVERTIBLE PREFERRED STOCK ARE OUTSTANDING WE ARE
PROHIBITED FROM UNDERTAKING CERTAIN CAPITAL RAISING TRANSACTIONS WHICH MAY
MATERIALLY ADVERSELY EFFECT OUR ABILITY TO RAISE FUNDS IN FUTURE PERIODS.
The designations of the Series A Convertible Preferred Stock prohibit us
from selling common stock or any other security which is convertible into common
stock or issuing any rights, options or warrants which entitle the holder to
purchase shares of our common stock at a price less than $0.60 per share,
subject to adjustment as described elsewhere in this prospectus. So long as
shares of our Series A Convertible Preferred stock are outstanding, this
prohibition will prevent us from raising additional capital at an effective
offering price of less than $0.60 per share. While the market value of our
common stock as of the date of this prospectus is greater than $0.60 per share,
we do not know if the trading price of our common stock will remain above $0.60
per share in future periods, particularly in light of the fact that we may be
significantly increasing the number of shares of our common stock which will be
freely tradeable as a result of sales made by the selling security holders under
this prospectus. If the market price of our common stock should fall to a price
range which is near or below $0.60 per share we may be unable to raise capital
in future periods as needed which could adversely effect our liquidity,
operation of our company and ability to continue as a going concern.
In addition, under the terms of the Preferred Stock Purchase Agreement for
the Series A Convertible Preferred Stock for a period of three years beginning
March 30, 2005 we have contractually agreed not to issue any additional shares
of preferred stock or any convertible debt, not to enter into any transactions
which contain a reset provision which could result in additional shares being
issued at some future date and not to enter into certain other types of
financing transactions. These contractual limitations may limit our ability to
raise capital as needed in future periods which could adversely effect our
ability to continue our operations.
WE ARE RELIANT ON REVENUES FROM TWO CUSTOMERS. BECAUSE WE ARE NOT A PARTY TO
LONG TERM AGREEMENTS WITH EITHER CUSTOMER, THE LOSS OF ONE OR BOTH OF THESE
CUSTOMERS WOULD BE ADVERSE TO OUR FINANCIAL RESULTS IN FUTURE PERIODS.
Revenues from two customers represented approximately 34% and
approximately 27% of total revenues for the years ended September 30, 2004 and
2003, respectively. Revenues from these two customers represented approximately
33% of our revenues for the nine months ended June 30, 2005. Both of these
customers purchase products and services from us on a purchase order basis and,
accordingly, may elect at any time to purchase similar products or services from
our competitors. Until such time, if ever, as we are able to sufficiently expand
our sales efforts and remove this dependency on revenues from these two
customers, if one or both of them should cease purchasing products and services
from us our revenues and results of operations would be materially adversely
affected.
6
OUR MANAGEMENT MAY BE UNABLE TO EFFECTIVELY INTEGRATE OUR ACQUISITIONS AND TO
MANAGE OUR GROWTH AND WE MAY BE UNABLE TO FULLY REALIZE ANY ANTICIPATED BENEFITS
OF THESE ACQUISITIONS.
Our business strategy includes growth through acquisition and internal
development. We are subject to various risks associated with our growth
strategy, including the risk that we will be unable to identify and recruit
suitable acquisition candidates in the future or to integrate and manage the
acquired companies. Acquired companies' histories, geographical locations,
business models and business cultures can be different from ours in many
respects. Our directors and senior management face a significant challenge in
their efforts to integrate our businesses and the business of the acquired
companies or assets, and to effectively manage our continued growth. There can
be no assurance that our efforts to integrate the operations of any acquired
assets or companies acquired in the future will be successful, that we can
manage our growth or that the anticipated benefits of these proposed
acquisitions will be fully realized. The dedication of management resources to
these efforts may detract attention from our day-to-day business. There can be
no assurance that there will not be substantial costs associated with these
activities or of the success of our integration efforts, either of which could
have a material adverse effect on our operating results.
WE HAVE NOT VOLUNTARILY IMPLEMENTED VARIOUS CORPORATE GOVERNANCE MEASURES, IN
THE ABSENCE OF WHICH, STOCKHOLDERS MAY HAVE MORE LIMITED PROTECTIONS AGAINST
INTERESTED DIRECTOR TRANSACTIONS, CONFLICTS OF INTEREST AND SIMILAR MATTERS.
Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has
resulted in the adoption of various corporate governance measures designed to
promote the integrity of the corporate management and the securities markets.
Some of these measures have been adopted in response to legal requirements.
Others have been adopted by companies in response to the requirements of
national securities exchanges, such as the NYSE or The Nasdaq Stock Market, on
which their securities are listed. Among the corporate governance measures that
are required under the rules of national securities exchanges and Nasdaq are
those that address board of directors' independence, audit committee oversight,
and the adoption of a code of ethics. Because our stock is not listed on an
exchange or quoted on Nasdaq, we are not required to adopt these corporate
governance standards. While our board of directors has adopted a Code of Ethics
and Business Conduct and our Board has established Audit and Compensation
Committees, we have not adopted all of the corporate governance measures which
we might otherwise have been required to adopt if our securities were listed on
a national securities exchange or Nasdaq. It is possible that if we were to
adopt all of these corporate governance measures, stockholders would benefit
from somewhat greater assurances that internal corporate decisions were being
made by disinterested directors and that policies had been implemented to define
responsible conduct. Prospective investors should bear in mind our current lack
of corporate governance measures in formulating their investment decisions.
THE EXERCISE OF WARRANTS AND OPTIONS AND THE CONVERSION OF SHARES OF OUR SERIES
A CONVERTIBLE PREFERRED STOCK WILL BE DILUTIVE TO OUR EXISTING STOCKHOLDERS.
At November 4, 2005 we had outstanding:
o 6,492,286 shares of our common stock,
7
o 1,666,667 shares of Series A Convertible Preferred Stock which is
convertible into 1,666,667 shares of our common stock,
o common stock purchase warrants to purchase a total of 5,490,000
shares of our common stock with exercise prices ranging from $0.70
to $16.00 per share, and
o options granted under our 2000 Management and Director Equity
Incentive and Compensation Plan which are exercisable into 783,314
shares of our common stock with a weighted average exercise price of
$4.91 per share.
The conversion of the Series A Convertible Preferred Stock and/or the
exercise of outstanding options and warrants may materially adversely affect the
market price of our common stock and will have a dilutive effect on our existing
stockholders.
CERTAIN OF OUR OUTSTANDING WARRANTS CONTAIN CASHLESS EXERCISE PROVISIONS WHICH
MEANS WE WILL NOT RECEIVE ANY CASH PROCEEDS UPON THEIR EXERCISE.
In March 2005, we issued:
o Common Stock Purchase Warrants "A" to purchase an aggregate of
2,175,000 shares of our common stock with a warrant to purchase
175,000 shares exercisable at $0.70 per share and a warrant to
purchase 2,000,000 shares exercisable at $2.00 per share,
o Common Stock Purchase Warrants "B" to purchase an aggregate of
1,250,000 shares of our common stock at an exercise price of $4.80
per share, and
o Common Stock Purchase Warrants "C" to purchase an aggregate of
1,250,000 shares of our common stock at an exercise price of $9.60
per share.
All of these five-year warrants are exercisable on a cashless basis which
means that the holders, rather than paying the exercise price in cash, may
surrender a number of warrants equal to the exercise price of the warrants being
exercised. The utilization of this cashless exercise feature will deprive us of
additional capital which might otherwise be obtained if the warrants did not
contain a cashless feature.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DELAY OR PREVENT A
TAKE-OVER WHICH MAY NOT BE IN THE BEST INTERESTS OF OUR STOCKHOLDERS.
Provisions of our certificate of incorporation and bylaws may be deemed to
have anti-takeover effects, which include when and by whom special meetings of
our stockholders may be called, and may delay, defer or prevent a takeover
attempt. In addition, certain provisions of the Delaware General Corporations
Law also may be deemed to have certain anti-takeover effects which include that
control of shares acquired in excess of certain specified thresholds will not
possess any voting rights unless these voting rights are approved by a majority
of a corporation's disinterested stockholders.
In addition, our certificate of incorporation authorizes the issuance of
up to 10,000,000 shares of preferred stock with such rights and preferences as
may be determined from time to time by our Board of Directors. We presently have
outstanding 1,666,667 shares of our Series A Convertible Preferred Stock. Our
Board of Directors may, without stockholder approval, issue additional series of
preferred stock with dividends, liquidation, conversion, voting or other rights
that could adversely affect the voting power or other rights of the holders of
our common stock.
8
IF THE SELLING SECURITY HOLDERS ALL ELECT TO SELL THEIR SHARES OF OUR COMMON
STOCK AT THE SAME TIME, THE MARKET PRICE OF OUR SHARES MAY DECREASE.
It is possible that the selling security holders will offer all of the
shares for sale. Further, because it is possible that a significant number of
shares could be sold at the same time hereunder, the sales, or the possibility
thereof, may have a depressive effect on the market price of our common stock.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTCBB. On April 27, 2005 our symbol was
changed from ICEW to IWEB in connection with a 1:80 reverse split of our common
stock effective on that date. The reported high and low bid prices for the
common stock as reported on the OTCBB are shown below for the periods indicated.
The quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission, and may not represent actual transactions.
High Low
---- ---
Fiscal 2003
First quarter ended December 31, 2002 $1.84 $0.64
Second quarter ended March 31, 2003 $2.24 $0.32
Third quarter ended June 30, 2003 $2.64 $0.80
Fourth quarter ended September 30, 2003 $3.52 $1.52
Fiscal 2004
First quarter ended December 31, 2003 $3.82 $1.28
Second quarter ended March 31, 2004 $5.20 $1.28
Third quarter ended June 30, 2004 $4.08 $2.56
Fourth quarter ended September 30, 2004 $4.72 $1.92
Fiscal 2005
First quarter ended December 31, 2004 $5.60 $2.40
Second quarter ended March 31, 2005 $3.20 $1.60
Third quarter ended June 30, 2005 $2.20 $0.80
Fourth quarter ended September 30, 2005 $1.30 $0.65
On November 4, 2005, the last sale price of our common stock as reported
on the OTCBB was $0.85 As of November 4, 2005, there were approximately 360
record owners of our common stock.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. Under Delaware law,
we may declare and pay dividends on our capital stock either out of our surplus,
as defined in the relevant Delaware statutes, or if there is no such surplus,
out of our net profits for the fiscal year in which the dividend is declared
and/or the preceding fiscal year. If, however, the capital of our company,
computed in accordance with the relevant Delaware statutes, has been diminished
by depreciation in the value of our property, or by losses, or otherwise, to an
amount less than the aggregate amount of the capital represented by the issued
and outstanding stock of all classes having a preference upon the distribution
of assets, we are prohibited from declaring and paying out of such net profits
any dividends upon any shares of our capital stock until the deficiency in
9
the amount of capital represented by the issued and outstanding stock of all
classes having a preference upon the distribution of assets shall have been
repaired.
Under the terms of our Series A Convertible Preferred Stock, we cannot pay
dividends on our common stock so long as shares of our Series A Convertible
Preferred Stock are outstanding. We do not anticipate that any cash dividends
will be declared or paid on our common stock in the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth securities authorized for issuance under
our 2000 Management and Director Equity Incentive and Compensation Plan and any
compensation plan not approved by our stockholders as of September 30, 2004.
Number of Weighted Number of
securities to be average securities remaining
issued upon exercise available for future
exercise of price of issuance under equity
of outstanding outstanding compensation plans
options, warrants options, (excluding securities
and rights (a) warrants reflected in column (a))
and rights (b)
Plan category
2000 Management and Director
Equity Incentive and
Compensation Plan 783,314 $ 4.91 345,540
Equity compensation plans
not approved by stockholders 0 0 0
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2005.
This table gives no effect to the possible exercise of outstanding options or
common stock purchase warrants or the application of the proceeds therefrom. The
table should be read in conjunction with the financial statements and related
notes included elsewhere in this prospectus.
10
June 30, 2005
-------------
(unaudited)
Long-term liabilities ..................... $ 213,124
Stockholders' equity:
Preferred stock, $.001 par value,
10,000,000 shares authorized,
Series A Convertible Preferred Stock,
1,666,667 shares authorized, 1,666,667
shares issued and outstanding ............ 1,667
Common stock, $.001 par value,
1,000,000,000 shares authorized,
6,492,287 shares issued and outstanding... 6,493
Treasury stock, at cost, 162,500 shares (13,000)
Subscription receivable ................... (50,300)
Additional paid-in capital ................ 7,188,154
Accumulated deficit ....................... (6,411,015)
-----------
Total stockholders' equity ........... $ 721,999
-----------
Total capitalization ...................... $ 935,123
===========
USE OF PROCEEDS
We will not receive any proceeds upon the sale of shares by the selling
security holders. Any proceeds that we receive from the exercise of outstanding
warrants will be used by us for general working capital. The actual allocation
of proceeds realized from the exercise of these securities will depend upon the
amount and timing of such exercises, our operating revenues and cash position at
such time and our working capital requirements. There can be no assurances that
any of the outstanding warrants will be exercised. Pending utilization of any
proceeds from the exercise of warrants, the proceeds will be deposited in
interest bearing accounts or invested in money market instruments, government
obligations, certificates of deposits or similar short-term investment grade
interest bearing investments.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
OVERVIEW
We provide hosted web-based collaboration solutions that enable
organizations to establish Internet, Intranet, and email/collaboration services
immediately and with little or no up-front capital investment. Our portal and
IceMAIL collaboration software services are available on a monthly or annual
subscription basis to small and medium-sized businesses and non-profit and
government organizations. We also provide consulting services to our larger
enterprise and government customers including network infrastructure, enterprise
email/collaboration, and Internet/Intranet portal implementation and support
services. We offer pre-packaged and custom services, using proven best practices
to help organizations define their online business objectives and quickly deploy
their Internet, Intranet, and email/collaboration systems. Although most of our
small to medium-sized business customers purchase and activate our solutions
online, our professional services teams work closely with our government,
non-profit and larger customers to deploy customized solutions. We also market
an array of information technology services and third party computer hardware
and software.
11
Our history and acquisition strategy has been key in our growth as a
company. We began as a full service provider of computer systems and
professional services to private sector corporations and to the federal
government under a General Services Administration (GSA) schedule contract for
computer systems and peripherals. Beginning in 2001, we began a series of
strategic acquisitions which have resulted in our current business and
operations, including:
o in June 2001, we acquired the assets of Learning Stream, Inc., a
provider of digital content streaming services, which coincided with
the transition of our business model to a focus on e-learning. Learning
Stream had developed custom streaming solutions which we believed were
more efficient and effective thank the solutions we had implemented at
that time. We considered the software we acquired to be competitive
because it helped remove the complexity and unnecessary cost from the
implementation of the streaming technology,
o in June 2003, we acquired all of the outstanding stock of Interlan
Corporation, a provider of data communications and networking solutions
for business, government, and education. Interlan provided technical
services including presales design and consulting, installation,
troubleshooting, and long term maintenance and support contracts,
o in June 2003, we also acquired all of the outstanding stock of The
Seven Corporation, a provider of network engineering services to
commercial and government customers throughout the United States,
o in October 2003, we acquired the software ownership rights and
customers of Iplicity, Inc. of Virginia. Iplicity had developed a
complete content management software platform based on open source
architecture to run in any operating environment. In this transaction
we acquired software licenses, source code, potential patents and
trademarks, and
o in May 2004 we acquired substantially all of the assets of DevElements,
Inc. of Virginia, a professional IT consultancy firm that designs,
develops and implements web-based productivity solutions for the
customers. In this transaction we acquired software licenses, source
code, potential patents and trademarks, as well as some cash and
tangible assets.
We generate revenues from sales of software licenses and provision of
software application services, application development and network management
services and integrated technology, infrastructure solutions and third party
hardware sales. As a result of the growth of our company both through
acquisitions and organically, we have significantly increased both our revenues
and expenses during fiscal 2004. During fiscal 2005 we have capitalized on our
growth through these acquisitions to organically grow our company and introduce
new products. As a result of this growth, and as described elsewhere herein, we
anticipate that both revenues and expenses will continue to increase in future
periods.
We believe that the key factors to our continued growth and profitability
include the following:
o the introduction of our IceWEB Vista portal software which was released
to general availability during June 2005. IceWEB Vista is a powerful tool for
efficient website management, built upon open source architecture (.Net) that
allows users to quickly, easily and affordably update their Web content and site
structure,
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o the launch of IceMAIL, a packaged service that provides a
network-hosted groupware, email, calendaring, and collaboration solution
utilizing Microsoft Exchange 2003, the most widely used enterprise system
available. Customers will be able to leverage the full capabilities of Microsoft
Exchange 2003 and Outlook without the initial implementation and maintenance
costs associated with such an advanced system. We plan a launch of IceMAIL
before the end of fiscal 2005,
o raising approximately $4 million of additional working capital to
expand our marketing, support our growth and for an acquisition of an additional
company in the software services group,
o hiring additional qualified, technical employees, and
o hiring a Chief Financial Officer and improving our internal financial
reporting systems and processes.
While we launched the first of our new software offering during June 2005
and will launch the second offering before the end of fiscal 2005, and the sale
of these products are the focus of our business, we face a number of challenges
in other areas which we believe are key to our growth, many of which are beyond
our control. We have not identified any potential acquisition candidates and do
not have any firm commitments for additional working capital as of the date of
this prospectus, and we cannot assure you that we will be successful in either
undertaking. While we believe that we will be able to identify and recruit a
Chief Financial Officer prior to the end of fiscal 2005 and to implement
upgrades to our internal systems, we face continuing difficulties in locating
sufficient qualified technical personnel. Our company is located in the "Tech
Corridor" of Northern Virginia and we compete with a number of companies for
employees, many of which have been in business longer than we have and which are
more attractive to prospective employees. Our inability to accomplish one or
more of these key goals may limit our growth in future periods.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2005 AS COMPARED TO NINE MONTHS ENDED JUNE 30, 2004
The following table provides an overview of certain key factors of our
results of operations for the six months ended March 31, 2005 as compared to the
six months ended March 31, 2004:
Nine Months Ended
June 30, June 30,
-------- -------- $ %
2005 2004 Change Change
---- ---- ------ ------
Revenues $ 4,987,776 $ 4,848,499 $ 139,277 +2.9%
Marketing and selling 25,825 154,440 (128,615) -83.3%
General and administrative
expenses 1,337,326 1,588,640 (251,314) -15.8%
Total operating expenses 1,987,031 1,795,796 191,235 +10.6%
Operating (loss) (788,790) (326,952) (461,838) +141%
Net (loss) $ (813,868) $ (323,039) $(490,829) +153%
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Other key indicators:
Nine Months Ended
-----------------
June 30,
---------
2005 2004 % of change
---- ---- -----------
Cost of sales as a percentage of revenues 76.0% 69.7% + 9.0%
Gross profit margin 24.0% 30.3% -20.8%
General and administrative expenses as a
percentage of revenues 26.8% 32.8% -18.3%
Total operating expenses as a percentage
of revenues 39.8% 37.0% + 2.8%
Revenues
For the nine months ended June 30, 2005, we reported revenues of
$4,987,776 as compared to revenues of $4,848,499 for the comparative nine month
period in 2004, an increase of approximately 2.9%. Revenues for the three months
ended increased $349,700, or approximately 20.6%, from the comparable three
month period in fiscal 2004. Historically we have relied upon funds available
under its revolving credit line to provide sufficient cash to purchase hardware
for resale; during the three months ended March 31, 2005 we had reached the
maximum borrowing amount under the credit line and were unable to purchase
hardware from certain vendors for resale to our customers. As a result of
working capital made available to us from the sale of securities during March
2005 an advances from our CEO as described elsewhere herein, we now have capital
available to purchase the necessary hardware for resale. This increase in
working capital is the primary reason for the increase in revenue for the three
months ended June 30, 2005. We also increased our revenue 4% from software sales
and service for the nine months ending June 30, 2005
Cost of Sales
Our cost of sales consists of products purchased for resale, salaries of
technical personnel, third party contractors, hosting and sales commissions. For
the nine months ended June 30, 2005, cost of sales was $3,789,535 or
approximately 76% of revenues, compared to $3,379,655 or approximately 69.7% of
revenues, for the nine months ended June 30, 2004. We attribute the increase in
the cost of sales to an increase in cost of technical personnel and hardware for
resale.
Total Operating Expenses
Our total operating expenses increased $191,235, or approximately 10.6% to
$1,987,031 for the nine months ended June 30, 2005 as compared to $1,795,796 in
the same period in fiscal 2004. These decreases are attributable to the
following:
o Marketing and Selling. Our marketing and selling expense consists of
personnel costs, including commissions, public relations, advertising, marketing
programs, lead generation, travel and trade shows. For the nine months ended
June 30, 2005, marketing and selling costs were $25,825 as compared to $154,440
for comparative period in 2004, a decrease of $128,615 or approximately 83.3%.
These decreases were the result of a reduction in marketing personnel, trade
show events, online Web marketing, advertising and print advertising during the
first three quarters of fiscal 2005 as a result of limited working capital. As a
result of working capital made available to us from the sale of securities in
March 2005, we anticipate that our marketing and selling expense will increase
during the balance of fiscal 2005 in conjunction with the launch of our new
software offerings;
14
o General and administrative expenses. General and administrative expense
consists primarily of personnel costs, rent, legal, accounting, human resources,
telecommunications, office supplies and other costs related to our corporate
governance and compliance with the reporting requirements of publicly held
companies. For the nine months ended June 30, 2005, general and administrative
expenses were $1,337,326 as compared to $1,588,640 for the comparative period in
2004, a decrease of $251,314 or approximately 15.8%. This decrease in general
and administrative expenses reflects decreases in personnel costs, acquisition
efficiencies and other operating expenses incurred in the period. We anticipate
that general and administrative expenses will continue to remain flat during the
balance of fiscal 2005; and
o Amortization expense. Amortization expense includes the amortization of
intangibles which we acquired in our acquisitions The Seven Corporation,
Iplicity and DevElements as described later in this prospectus under "Our
Business - Our History. For the nine months ended June 30, 2005 amortization
expense was $587,073 as compared to $0 for the nine months ended June 30, 2004.
We expect that amortization expense in future periods will decrease in future
periods.
Interest Expense
Interest expense consists primarily of the amounts accrued on our
revolving credit line with Comerica Bank and notes payable to related parties.
For the nine months ended June 30, 2005 interest expense was $44,361 as compared
to $33,739 the comparative period in 2004. We anticipate that interest expense
will decline in the fourth quarter of fiscal 2005 as a result of the conversion
to equity of the notes held by related parties during the third quarter of
fiscal 2005.
Preferred stock Dividend
We issued preferred stock with a conversion to common stock below the fair
market value of the common stock on the date of closing. This resulted in a book
entry for a preferred dividend of $1,000,000 causing an increased loss per share
of $(.20). This is a one time charge and we do not expect a comparable charge in
future periods as the designations, rights and preferences of the preferred
stock do not provide for the payment of dividends.
FISCAL YEAR ENDED SEPTEMBER 30, 2004 AS COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 2003
The following table provides an overview of the our certain key factors of
our result of operations for the fiscal year ended September 30, 2004 as
compared to the fiscal year ended September 30, 2003:
15
Fiscal Year Ended
September 30,
------------- $ %
2004 2003 Change Change
---- ---- --------- ------
Revenues .................. $ 6,662,652 $ 1,681,505 $ 4,981,147 + 296%
Marketing and selling ..... 125,414 20,104 105,310 + 524%
Research and development .. 580,053 0 580,053 + 100%
General and administrative
expenses ............... 1,947,392 560,245 1,387,147 + 248%
Total operating expenses .. 3,656,610 675,591 2,981,019 + 441%
Operating (loss) .......... (2,009,452) (258,424) (1,751,028) + 678%
Net (loss) ................ $(2,035,443) $ (105,844) $ 1,929,599 +1,823%
Other key indicators:
Fiscal Fiscal
2004 2003 % of change
------ ------ -----------
Cost of sales as a percentage of revenues . 75.3% 75.2% + 0.1%
Gross profit margin ....................... 24.7% 24.8% + 0.1%
General and administrative expenses as a
percentage of revenues ................. 29.2% 33.3% - 4.1%
Total operating expenses as a
percentage of revenues ................. 40.7% 40.2% + 0.5%
Revenues
For the year ended September 30, 2004, we reported revenues of $6,662,652
as compared to revenues of $1,681,505 for the prior year ended September 30,
2003, an increase of approximately 296%. The primary reason for the increases in
our revenues is the integration of the subsidiaries acquired over the last 18
months.
Cost Of Sales
For the year ended September 30, 2004, cost of sales was $5,015,494, or
approximately 75.3% of revenues, compared to $1,264,338, or approximately 75.2%
of revenues, for the prior year ended September 30, 2003.
Total Operating Expenses
Our total operating expenses increased approximately 441% for the year
ended September 30, 2004 as compared to the year ended September 30, 2003. These
increases include:
Marketing and Selling. For the year ended September 30, 2004, marketing
and selling costs were $125,414 as compared to $20,104 for the year ended
September 30, 2003, an increase of $105,310 or approximately 524%. These
increases were the result of additional marketing personnel, trade show events,
online web marketing, advertising and print advertising during fiscal 2004.
Research and development. Our research and development expense consists
primarily of personnel costs related to the development of the software
products. For the year ended September 30, 2004, research and development
expenses were $580,053 as compared to $0 for the year ended September 30, 2003.
The research and development expenses in fiscal 2004 are related to efforts to
further develop and enhance certain software products acquired by us during this
fiscal year.
16
General and administrative expense. For the year ended September 30, 2004,
general and administrative expenses were $1,947,392 as compared to $560,245 for
the year ended September 30, 2003, an increase of $1,387,147 or approximately
248%. These increased general and administrative expenses reflect increases in
personnel costs and other fixed expenses resulting from acquisitions made by us
during fiscal 2004. Like many companies that grow through mergers and
acquisition, we have recently experienced attrition in our technical consulting
division. This attrition has not presently impacted client delivery as there is
skill set overlap in many areas. As we continue to implement our business
strategies, we expect general and administrative expenses to potentially
decrease as a percentage of sales due to the process efficiencies we have
already put in place. At this time, we do not anticipate any significant changes
in the number of employees through hiring or firing practices, however, any
additional acquisitions could result in increased general and administrative
expenses.
Depreciation Expense
Depreciation expense is provided by use of the straight-line method over
the estimated useful lives of the assets. The property and equipment are stated
at cost. For the year ended September 30, 2004, depreciation expense was $52,716
as compared to $95,242 for the year ended September 30, 2003. The decrease of
approximately 44.7% is primarily due to the fact that the majority of the assets
have already been fully depreciated.
Interest Expense
Interest expense consists primarily of the amounts accrued on the notes
payable to John R. Signorello, our CEO, and a third party stockholder as
described in Note 5 of the Notes to Consolidated Financial Statements and the
interest paid to Comerica Bank on the line of credit as described in Note 6 of
the Notes to Consolidated Financial Statements, appearing elsewhere herein. For
the year ended September 30, 2004, interest expense was $60,879 as compared to
$30,736 for the year ended September 30, 2003, and includes the effect of the
Comerica Bank line of credit established in July 2004.
Income Taxes
Because we incurred net operating losses in the years ended September 30,
2004 and 2003, we paid no federal, state or foreign income taxes in those
periods. We have also not recognized any tax benefits for the related tax
operating loss carry forwards and may not until we conclude that such benefits
will be utilized.
Overall, our loss was $(2,034,443) or $(0.00) per share for the fiscal
year ended September 30, 2004 compared to $(105,844) or $(0.00) for the year
ended September 30, 2003. The increased loss per share in 2004 is due primarily
to the increased expenses due to the acquisitions that occurred during the year,
which include costs for research and development of the software products
acquired.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support its
current and future operations, satisfy its obligations and otherwise operate on
an ongoing basis. The following table provides certain selected balance sheet
comparisons between June 30, 2005 (unaudited) and September 30, 2004:
17
June 30, September 30, $ of % of
2005 2004 Change Change
----------- ------------- ------ ------
Working capital (deficit) $ 259,645 $(1,048,557) $ 1,308,202 +124.8%
Cash $ 269,960 $ 178,781 $ 91,179 + 51.0%
Accounts receivable, net $ 1,558,077 $ 1,062,707 $ 495,370 + 46.6%
Total current assets $ 1,935,874 $ 1,241,488 $ 694,386 + 55.9%
Property and equipment, net $ 52,817 $ 86,251 $ (33,434) - 38.8%
Total assets $ 2,611,352 $ 2,208,473 $ 402,879 + 18.2%
Accounts payable $ 1,032,463 $ 1,233,708 $ (201,245) -116.3%
Accrued expenses $ 85,347 $ 152,577 $ (67,230) - 44.1%
Deferred revenue $ 4,275 $ 19,030 $ (14,755) - 77.5%
Total current liabilities $ 1,676,229 $ 2,291,045 $ (614,816) - 26.8%
Total liabilities $ 1,889,353 $ 2,291,045 $ (401,692) - 17.5%
Accumulated (deficit) $(6,411,015) $(4,597,375) $ 181,640 + 39.4%
Stockholders' equity (deficit) $ 721,999 $ (82,572) $ 804,571
Net cash used in operating activities was $(1,003,322) for the nine months
ended June 30, 2005 as compared to net cash provided by operating activities of
$30,428 for the nine months ended June 30, 2004. The decrease in cash from
operations is primarily due to increase in current assets excluding cash of
$603,000 and a decrease in Accounts Payable of $190,000, and an operating loss
excluding non-cash items of $210,000.
Net cash used in investing activities for the nine months ended June 30,
2005 was ($132,373) as compared to net cash provided by investing activities of
$25,670 for the comparative period in 2004. During the nine months ended June
30, 2004 we acquired two companies and in connection therewith recognized cash
provided by investing activities; we did not have any similar transactions
during the nine months ended June 30, 2005 which accounts for the increase in
cash used. Net cash provided by financing activities for the nine months ended
June 30, 2005 was $1,226,874 as compared to $110,942 for the comparative period
in 2004. The primary reason for the increase is an increase of $1,155,661 in
proceeds from the sale of equity securities during the nine months ended June
30, 2005 as compared to the nine months ended June 30, 2004.
At June 30, 2005 we had an accumulated deficit of $(6,411,015) and the
report from our independent registered public accounting firm on our audited
financial statements at September 30, 2004 contained an explanatory paragraph
regarding doubt as to our ability to continue as a going concern as a result of
our net losses and cash used in operations. We reported a net loss of $(813,868)
and a loss available to shareholders of $(1,813,868) for the nine months ended
June 30, 2005 and there are no assurances that we will report net income in any
future periods.
Historically, our revenues have not been sufficient to fund our operations
and we have relied on capital provided through the sale of equity securities, a
bank line of credit and loans from related parties. At June 30, 2005 we had cash
on hand of $269,960 and working capital of $259,645. At June 30, 2005 we owed
$461,269 under our line of credit with Comerica Bank, which is reflected as a
current liability, and we do not have any ability to borrow any additional sums
under this credit facility. While we do not have any working capital
commitments, we do not presently have any external sources of working capital.
Our working capital needs in future periods primarily on the rate at which we
can increase our revenues while controlling our expenses and decreasing the use
of cash to fund operations. Additional capital may be needed to fund
acquisitions of additional companies or assets, although we are not a party to
any pending agreements at this time and, accordingly, cannot estimate the amount
of capital which may be necessary, if any, for acquisitions.
18
As long as our cash flow from operations remains insufficient to
completely fund operations, we will continue depleting our financial resources
and seeking additional capital through equity and/or debt financing. In March
2005 we sold shares of our Series A Convertible Preferred Stock. The
designations of these shares included a restriction that so long as the shares
are outstanding, we cannot sell or issue any common stock, rights to subscribe
for shares of common stock or securities which are convertible or exercisable
into shares of common stock at an effective purchase price of less than the then
conversion value which is presently $0.60 per share. This may limit our ability
to raise capital in future periods. There can be no assurance that acceptable
financing can be obtained on suitable terms, if at all. Our ability to continue
our existing operations and to continue growth strategy could suffer if we are
unable to raise the additional funds on acceptable terms which will have the
effect of adversely affecting our ongoing operations and limiting our ability to
increase our revenues and maintain profitable operations in the future. If we
are unable to secure the necessary additional working capital as needed, we may
be forced to curtail some or all of our operations.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was released by the U.S.
Securities and Exchange Commission, encourages all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Our consolidated financial statements include a summary of
the significant accounting policies and methods used in the preparation of our
consolidated financial statements. Management believes the following critical
accounting policies affect the significant judgments and estimates used in the
preparation of the financial statements.
Revenue Recognition - revenues are recognized at the time of shipment of
the respective products and/or services. Our company includes shipping and
handling fees billed to customers as revenues. Costs of sales include outbound
freight. Licenses and software are billed as services are rendered on a biweekly
schedule.
Use of Estimates - Management's Discussion and Analysis or Plan of
Operations is based upon our unaudited consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, and expenses, and related disclosure
of contingent assets and liabilities. On an ongoing basis, management evaluates
these estimates, including those related to allowances for doubtful accounts
receivable and the carrying value of inventories and long-lived assets.
Management bases these estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis of making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
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CHANGE OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Daszkal Bolton LLP, Certified Public Accountants, by letter dated February
17, 2004, was dismissed as our independent registered public accounting firm for
the reasons specified below. Daszkal Bolton had been the independent registered
public accounting firm for, and audited the financial statements of, our company
for the fiscal years ended September 30, 2003 and 2002.
The reports of Daszkal Bolton on our financial statements for the past two
fiscal years prior to the dismissal contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles, except the reports expressed that the financial
statements were prepared assuming that we would continue as a going concern.
This qualification was attributable to the circumstance that we had suffered
recurring losses from operations and had a net capital deficiency. Our Board of
Directors unanimously approved the dismissal of Daszkal Bolton.
In connection with the audits for the two most recent fiscal years and in
connection with Daszkal Bolton's review of the subsequent interim period
preceding dismissal, there have been no disagreements between our company and
Daszkal Bolton on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which would have caused
Daszkal Bolton to make a reference thereto in its report on our financial
statements for those periods. During the two most recent fiscal years and prior
to the date hereof, we had no reportable events (as defined in Item 304
(a)(1)(v) of Regulation S-K).
We engaged Sherb & Co., LLP as our new independent registered public
accounting firm as of February 13, 2004, as our Board of Directors determined
that it would be more cost effective and efficient using the services of Sherb &
Co. Prior to such date, we did not consult with Sherb & Co. regarding the
application of accounting principles, or the type of audit opinion that might be
rendered by Sherb & Co.
OUR BUSINESS
OVERVIEW
We are a diversified technology company headquartered in Herndon,
Virginia, which was founded in 2000 and became public in 2002 through a reverse
merger. While our business plan has been in evolution since that time, our focus
has consistently remained on enabling governmental organizations and small to
medium size businesses to independently manage, create, publish and deliver
content easily and affordably. Our products and services are used by
organizations in both the public and private sectors with large, dispersed
audiences of customers, employees, or other trading or strategic partners.
Through internal software development and a series of acquisitions, we have
developed a suite of robust, scalable content creation, management, publication
and delivery tools that can be implemented on any website, as well as e-learning
content and customized e-learning portals. Our goal is to make this technology
available and affordable and to open up the world of independent web management
and publishing to any organization. Complementing these products is our hosted
e-mail solution, IceMAIL. We also offer consulting and product support services
on a project-by-project basis. In addition to our proprietary software and
professional services, we also market an array of information technology
services and third party computer hardware and software.
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Our solutions are centered on knowledge based support, enabling customers
to increase organizational efficiency by converging knowledge based information
with easy to manage websites and e-learning portals. Going forward, we intend to
leverage our expertise in content management, creation and delivery, and our
e-learning portal framework, to develop a Smart Enterprise Suite ("SES") that
extends beyond digital content to include dynamic human intelligence for greater
information sharing and organizational efficiency across the extended
enterprise. According to the Gartner Group, an SES "covers enterprise needs for
content management, knowledge management and collaboration, and supports the
extended virtual workplace - inside and between enterprises. The SES combines
the functionality of portal, collaborative and content management technologies,
and delivers these in an integrated suite; provides a broad foundation to
support knowledge or information work within an enterprise, or between groups in
different enterprises, and may be considered the platform for knowledge
management; and focuses on support for unstructured work processes, but through
portal-based integration with business applications can provide a comprehensive
digital or electronic workplace." Our objective is to provide an affordable SES
solution for governmental, association and small to medium size business
customers.
OUR PRODUCTS AND SERVICES
Our products and services are designed to provide customers with a
comprehensive view of their core business, promote better cross pollination of
strategies and objectives between development, sales, marketing and service
organizations, and guide strategic planning efforts to meet key corporate
objectives of profitability and growth. These products form the basis of our
emerging SES. The two key components currently consist of:
ICEWEB VISTA
This is a powerful tool for efficient website management, built upon open
source architecture (.Net) that allows users to quickly, easily and affordably
update their Web content and site structure. With IceWEB Vista, users can
manage, update, control and publish new content for Web sites anytime and
anyplace. Among the many advantages of IceWEB Vista is the ability to easily,
quickly and affordably deploy Web content as well as to control who can edit,
access and view content. IceWEB Vista eliminates the costs and constraints of
utilizing "third party" vendors for website management. With IceWEB Vista
organizations can reduce the cost of managing records and documents, and extend
the access and power of information to members, customers, or other site users,
while maintaining data security. IceWEB Vista empowers users with advanced
membership and profile management, a revamped HTML publisher, and more advanced
workflow and versioning capabilities. In addition, our mailing list management
tool enhances the ability of users to stay in contact with clients or members.
IceWEB Vista's single sign-on support enables users to easily access records and
documents through a customized interface.
We released the IceWEB Vista portal software solution during the third
quarter of fiscal 2005. We believe that IceWEB Vista is a major step forward in
terms of usability by eliminating several complexities that existed in previous
versions of the product. IceWEB Vista unified our earlier offering, IceWEB CMS,
and a number of new application modules including HTML Publishing Tool, News
Content Management, Advanced Mailing List Manger and Custom Forms Creator to
provide one product from the end user's perspective. We believe IceWEB Vista
provides the end user with powerful tools to manage not only text but also rich
media in a "what you see is what you get" or WYSIWYG environment. IceWEB Vista
also provides comprehensive and enterprise wide portal deployment features in a
single turnkey solution.
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ICEMAIL
In the fourth quarter of fiscal 2005 we intend to launch IceMAIL, a
packaged service that provides a network-hosted groupware, email, calendaring,
and collaboration solution utilizing Microsoft Exchange 2003, the most widely
used enterprise system available. Customers will be able to leverage the full
capabilities of Microsoft Exchange 2003 and Outlook without the initial
implementation and maintenance costs associated with such an advanced system. In
addition to providing hosted Exchange services, IceMAIL will have a substantial
focus on providing wireless PDA/Smart Phone synchronization services that enable
our customers to have everything in Outlook/Exchange available while traveling
away from their office. IceWEB will be a single-source provider of wireless
PDA/Smart Phones, GoodLink or Blackberry software, and the cellular carrier
services through reseller arrangements with those companies.
IceWEB will leverage existing technologies from several software and
hardware manufacturers and combine them with customized software systems to make
ordering and using our Internet hosted applications easy and quick. Most of the
solutions we will offer are somewhat common place for large organizations, but
cost prohibitive for small and medium sized businesses to manage much less
procure the initial technology. We will seek to leverage our expertise in
large-scale enterprise systems to build our service offerings that will share
these systems across numerous small to medium-sized business customers. We
believe that this scale of economy will allow us to offer our services to small
to medium-sized business customers at a fraction of the cost would pay if an
individual small to medium-sized business customer were to deploy it themselves.
IceMAIL is based on the advanced Microsoft Exchange 2003 platform which
provides industry-leading features such as calendars, group scheduling, contact
management, task management, notes, and shareable public folders. Using the
latest in network hosting, wireless, and Internet technologies, IceMAIL will be
accessible from anywhere on the Internet via Microsoft Outlook 2003 or a
web-browser. For the true "road warrior", we will also offer wireless handheld
PDA access using a Handspring Treo, RIM Blackberry, Windows PocketPC, or Smart
Phone devices.
LEARNINGSTREAM.COM
LearningStream.com is an online business education portal that offers
pay-per-view online classes to mid-level managers seeking to update their
management and project skills. Additionally, LearningStream.com has a user
interface that enables experts and instructional designers to create and publish
courses online. The courses have to pass scrutiny and upon acceptance by
LearningStream.com staff will be published to the site. We provide the hosting
and streaming and shares in the revenue generated by the content providers.
Business professionals can choose among many different subjects such as making
presentations, managing people and learning software applications from training
developers such as Fred Pryor Seminars, CareerTrack and Evelyn Woods.
CUSTOM SMART ENTERPRISE SOLUTIONS
Through the acquisition of assets of DevElements in May 2004, we increased
our capabilities to provide a custom smart enterprise solution, as DevElements
has experience developing and deploying complex web-based business solutions in
over 27 languages, primarily for Fortune 1000 businesses with offices in
multiple countries. By leveraging the core competencies acquired by us through
DevElements, we can assist organizations with:
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- Custom Application/Software Development: full, life-cycle web development
of applications that improve everyday business tasks & processes.
- Portal Integration: deploying, customizing and maintaining portal
frameworks, including custom development of applications to assist with
single sign-on authentication and extending the framework to meet multiple
language needs.
- Collaboration: integration of today's hottest collaboration packages, from
embedded awareness in applications to custom "Webinar" reservation
management tools.
- Extension of Legacy Systems: extension of well-documented and developed
legacy systems to the web for either secured or public access.
STORAGE AND DISTRIBUTION
We offer a competitive level of data security, backup and disaster
recovery in order to ensure the integrity of our clients' data. We have
redundant production services, a three-tier development cycle, tape backups and
redundant connectivity.
CONSULTING SERVICES
Our consulting staff has years of experience in providing custom, rich
media solutions. Our consulting services include personalized project
management, multimedia development, synchronization of media assets, application
design and development, software integration, instructional design, graphic
design, foreign language translations and delivery methods
SUPPORT AND MAINTENANCE SERVICES
We provide engineering and technical support to both government and
commercial organizations. These services include everything from security and
network analysis to full network technology refreshment and deployment. We also
provide support and maintenance to ensure that its solutions are deployed
correctly and continue to operate efficiently into the future.
THIRD PARTY HARDWARE
Through open market sales in the private sector and primarily through
United States General Services Administration (GSA) Schedule sales to the
federal government under GSA Schedules held by certain of our subsidiaries, we
sell a broad array of hardware, including large uninterruptible power supplies
and other power equipment through our Integrated Power Solutions, Inc.
subsidiary.
TECHNOLOGY
We currently have 20 engineers on staff with expertise in Microsoft.NET,
IBM Domino and Java technologies. In addition, we have developed relationships
with Sun Microsystems, RSA Security, Cisco Systems, SonicWall, Good Technologies
and SurfControl Incorporated, enabling enhanced product and service solutions
that combine the expertise of our engineering staff with the product offerings
of some of the leaders in the technology space. This is significant for our
growing customer base in the integration and customized software and services
sector of our business.
Our software is designed for Microsoft's Windows Operating Systems and
applications that use Microsoft's SQL 7 database software. The majority of our
applications are based on client-server technology. The authoring and content
management application software has been developed using a combination of C++,
ColdFusion, Javascript, ASP, VBscript, Java and Flash. Since a majority of the
processing is done on the server, clients only need a browser to author and
manage their web content.
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We surmounted a significant product development challenge by leveraging
the capabilities of the Microsoft.NET development environment and integrating
many of the disparate technologies driving our core software platforms. All of
our products utilize their original technology in one form or another. By
leveraging the code of existing products, we have been able to decrease product
development costs, shorten time to market and realize revenues from new products
quickly. This has also provided a significant advantage to our customers,
enhancing the stability of new software versions and new product offerings and
reducing the effort required to upgrade or deploy our software.
SALES AND MARKETING
We sell our products and services through our direct sales force, online
and through strategic and channel partners. Our direct sales process typically
includes a demonstration of our product capabilities followed by one or more
detailed technical reviews. Our employees utilize our software to generate
leads, sales, demos and references. Our websites all run on IceWEB CMS, and our
training resides on our intranet education portal.
Our online sales strategy includes generating leads through search engine
optimization as well as through pay-per-click venues such as Overture, Google
and KnowledgeStorm. Going forward, we intend to market online to web forums,
chat rooms and user groups, critical components to "buzz" marketing. Before the
end of fiscal 2005 we plan to offer certain of our low end products as
"freeware" to gain early adoption in the marketplace. Our training classes are
also being used as loss leaders to open doors to large government and commercial
customers. During fiscal 2005 we expect to implement a variety of other online
marketing initiatives as well, including event bulletin boards and expert
discussions, online surveys and questionnaires to gather valuable feedback and
encourage customer communications, focused user groups, referral programs,
membership communities and services that revolve around our offerings, and the
development and support of customer evangelists that promote, and are promoted
by, our products.
Our indirect sales channel strategy is to form additional relationships
with systems integrators, value-added resellers and original equipment
manufacturers to resell our products and services. We also plan to generate
leads from a variety of other sources, such as businesses seeking partners to
develop Web-based applications. Because our products are relatively inexpensive,
easy to understand, sell and use, they lend themselves to distribution by third
parties such as audio/video production companies, business centers and
hosting/delivery vendors.
We complement our sales initiatives with a variety of marketing programs
to build market awareness of our brand name and products, and to attract
potential customers. These marketing programs include market research, product
and strategy updates with customers and industry analysts, public relations
activities, radio and print advertising, direct marketing and relationship
marketing programs, webinars, seminars, trade shows and speaking engagements.
Our marketing organization also produces marketing materials in support of
prospective sales to new customers, including brochures, data sheets, white
papers, presentations and demonstrations.
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RESEARCH AND DEVELOPMENT
In addition to our focus on subscription-based "software as a service"
offerings, we are engaged in a comprehensive research and development plan to
integrate our portal and email/collaboration offerings into the next generation
of online applications. This next generation of online hosted application
services will focus on integrating "traditional email" and portal systems into
an integrated Smart Enterprise Suite with both applications running on both
Internet/Intranet as well as synchronized wireless/PDA systems. We anticipate
that we will launch these product before the end of fiscal 2005. For the fiscal
years ended September 30, 2004 and 2003 we spent $580,053 and $0, respectively,
on research and development.
INTELLECTUAL PROPERTY
Our success depends in part on our ability to protect our intellectual
property. The source codes, object codes, and documentation related to our
products are all proprietary to us and as to which copyright in favor of our
company arose from the date of creation of the products or the date on which the
products were assigned to us, whichever is later. We also rely on common law
rights to our trademark and service mark "IceWEB" in both block letters and
stylized form. To protect our proprietary rights, we rely generally on copyright
and trade secret laws, confidentiality agreements with employees and third
parties, and agreements with consultants, vendors and customers, although we
have not signed such agreements in every case. Despite such protections, a third
party could, without authorization, copy or otherwise obtain and use our
intellectual property.
It is also possible that our competitors will adopt product or service
names similar to ours, thereby impeding our ability to build brand identity and
possibly leading to customer confusion. We can give no assurance that our
agreements with employees, consultants and others who participate in development
activities will not be breached, or that we will have adequate remedies for any
breach, or that our trade secrets will not otherwise become known or
independently developed by competitors. There can be no assurance that we will
be able to adequately protect our trade secrets. Third parties may assert
infringement claims against us or against third parties upon whom we rely and,
in the event of an unfavorable ruling on any claim, we may be unable to obtain a
license or similar agreement to use technology that we rely upon to conduct our
business.
In the future we may pursue copyright protection of our source codes,
object codes and documentation as well as the registration of certain of our
trademarks and service marks in the United States. In general, there can be no
assurance that our efforts to protect our intellectual property rights through
copyright, trademark and trade secret laws will be effective to prevent
misappropriation of our content. Our failure or inability to protect our
proprietary rights could materially adversely affect our business, financial
condition and results of operations.
COMPETITION
Our competitors include portal vendors, application service providers,
software vendors, systems integrators and information technology consulting
service providers who offer some or all of the same products as we do to the
small to medium sized business and government markets. Our competitors,
particularly for larger customers within our target markets, include Plumtree,
Vignette, Hummingbird, Websphere, Oracle, SAP and Microsoft's content management
system. Our competitive strategy is to undercut the pricing model of our
competitors while delivering a higher value to customers and building brand name
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recognition for our company and our products. We face significant competition
from these and other companies, most of which have greater brand recognition,
are better capitalized than us and can obtain financing on more favorable terms.
We may never be able to successfully compete in our target market.
In addition, there are relatively low barriers to entry into our business.
We do not believe our proprietary technology would preclude or inhibit
competitors from entering our markets. We anticipate that new entrants will try
to develop competing products and services as well as new forums for conducting
eCommerce that could be deemed competitors. We believe we may be able to compete
successfully by relying on our established infrastructure, marketing strategies,
systems and procedures, by continuing to add additional products and services in
the future, by periodically revising our methods of doing business and by
continuing its expansion into international markets where we believe there is an
overall lower level of competition.
COMERICA BANK CREDIT LINE
In July 2004, we entered into a Loan and Security Agreement with Comerica
Bank related to a $500,000 revolving line of credit. Under the terms of this
agreement, we may request advances not to exceed the lesser of $500,000 or 80%
of certain of our eligible accounts receivable, less any amounts which may be
outstanding under letters of credit we have requested be issued against the
credit line. Interest on the credit line is prime plus 1%. As collateral we
granted Comerica Bank a security interest in our assets, including intellectual
property, any letters of credit we may be the beneficiary of, and all promissory
notes, securities, documents of title and chattel paper we own from time to
time. At the time we entered into the Loan and Security Agreement we issued
Comerica Bank a warrant to purchase 5,000 shares of our common stock at an
exercise price of $2.00 per share. The terms of this warrant are described later
in this prospectus under "Description of Securities" beginning on page 40.
Under the terms of the Loan and Security Agreement, we were required to
maintain certain financial ratios as well as a minimum tangible net worth of not
less than $190,000 through January 30, 2005. On November 18, 2004, we entered
into a Forbearance Agreement with Comerica Bank under which we acknowledged
certain events of default had occurred under the Loan and Security Agreement as
a result of our failure to maintain the financial ratios and minimum tangible
net worth. The lender agreed to delay enforcing its rights under the Loan and
Security Agreement through February 28, 2005 providing that no additional events
of default occurred. We made all payments on a timely basis and paid certain
additional fees totaling $2,350. Under the terms of the Forbearance Agreement,
the Loan and Security Agreement was also amended to include a provision that a
lock-box account was established into which all funds we receive from any source
are deposited. Subsequent to entering into the Forbearance Agreement, we have
failed to meet certain financial covenants related to our minimum tangible net
worth; however, the bank is not presently seeking to declare a subsequent
default or otherwise enforce any of its rights under the loan agreement. We owe
Comerica Bank $461,269 at June 30, 2005 and this liability is reflected on our
financial statements which appear elsewhere in this prospectus as a current
liability.
EMPLOYEES
As of October 31, 2005, we employed a total of 47 employees, all of whom
work full time. We are not a party to any collective bargaining agreements with
any unions, and we believe that the overall relations with our employees are
satisfactory.
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PROPERTY
We sublease approximately 12,000 square feet of office space, which serves
as our principal offices under the terms of an agreement that ends on December
31, 2005 with a present monthly base rental of approximately $17,900. We
presently anticipate that we will relocate our principal offices to an
alternative space in Northern Virginia upon the expiration of this lease. We do
not believe we will have any difficulty locating suitable office space at a
comparable rent.
We also rent 2,000 square feet of office space on a month-to-month basis
at 1455 Pennsylvania Avenue, NW, Washington D.C. at a monthly cost of $2,100.
LEGAL PROCEEDINGS
We are not a party to any pending or threatened litigation.
OUR HISTORY
We were originally formed under the laws of the State of Delaware in
February 1969. For many years, we were a wholesaler of custom one, two, three
and four-color processed commercial printing, as well as disposable and durable
office equipment including stock paper, fax paper, fax and copy machines,
computers, file cabinets and safes. We conducted our business throughout the
United States of America and Puerto Rico from our headquarters in New York.
In March 1999, we changed the focus of our business and closed a
transaction by which we acquired 100% of the outstanding capital stock of North
Orlando Sports Promotions, Inc., a privately held Florida corporation. From 1999
until July 2001, we operated a variety of Internet-related services, however, we
were unable to generate positive cash flow from these Internet-related
businesses.
In May 2001, we executed an Agreement and Plan of Reorganization and Stock
Purchase Agreement with Disease S.I., Inc. Under the terms of the agreement, we
acquired 100% of the issued and outstanding stock of Disease S.I., Inc. in
exchange for 750,000 shares of our common stock. The transaction was accounted
for as a reverse acquisition under the purchase method for business
combinations. Accordingly, the combination of the two companies was recorded as
a recapitalization of Disease S.I., Inc., pursuant to which Disease S.I., Inc.
was treated as the continuing entity. Disease S.I., Inc. was a developmental
stage biopharmaceutical clinical diagnostics company planning to employ a broad
array of technologies to detect, identify and quantify substances in blood or
other bodily fluids and tissues. It intended to derive revenues from patent
sub-licensing fees, royalties from pharmaceutical sales, appropriate milestone
payments and research and development contracts.
Following completion of the acquisition of Disease S.I., Inc., it became
apparent to us that it would be in our best long-term interest that the Internet
operations be conducted apart from the biopharmaceutical clinical diagnostics
operations. On July 24, 2001, we sold a former officer and director 100% of our
subsidiary North Orlando Sports Promotions, Inc., in exchange for the assumption
of all liabilities related to North Orlando Sports Promotions, Inc. and its
operations estimated at approximately $112,000, and which included the
forgiveness of $91,500 in accrued compensation. Included in the sale along with
the capital stock of North Orlando Sports Promotions, Inc. were fixed assets,
rights to several domain names and various contractual rights and obligations.
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On November 27, 2001, we acquired 9,050,833 shares of the common stock of
Healthspan Sciences, Inc., a privately held California corporation in exchange
for 5,000 shares of our common stock in a private transaction exempt from
registration under the Securities Act of 1933 in reliance on Section 4(2) of
that act. This agreement was rescinded on March 21, 2002. Pursuant to the
rescission, Healthspan Sciences, Inc. returned all 5,000 shares of our common
stock issued in the exchange and we returned all 9,050,833 shares of Healthspan
Sciences, Inc. we had received.
On March 21, 2002, we executed an Agreement and Plan of Merger with IceWEB
Communications, Inc., a Delaware corporation and its stockholders. Founded in
2000, IceWEB Communications, Inc. enabled interactive communications and
education on the web. In June 2001, it had acquired the assets in bankruptcy of
Learning Stream, Inc., a provider of streaming services. Pursuant to the
agreement, each of the 22,720,500 shares of common stock of IceWEB
Communications, Inc. issued and outstanding immediately prior to the merger were
converted into the right to receive 0.13375 shares of our common stock, for an
aggregate of 303,888 shares of common stock. Each of the warrants to purchase an
aggregate of 680,125 shares of IceWEB Communications, Inc. common stock issued
and outstanding immediately prior to the merger were converted into the right to
receive one warrant to purchase 0.13375 shares of our common stock upon exercise
of said warrant.
In June 2003, we acquired 100% of the capital stock of Interlan
Communications, Inc., a privately held corporation, in exchange for 25,000
shares of our common stock. In June 2003, we also acquired 100% of the capital
stock of Seven Corporation in exchange for 37,500 shares of our common stock and
cash consideration of $123,000.
In October 2003, we acquired 19% of the capital stock of Iplicity, Inc. of
Virginia, together with substantially all of its assets including software
licenses, source code, potential patents and trademarks for a combined stock and
cash value of approximately $632,000 which included the issuance of 191,381
shares of our common stock and cash consideration of $65,500.
In May 2004, we acquired substantially all of the assets of DevElements,
Inc. of Virginia, including software licenses, source code, potential patents
and trademarks, cash, hardware, and equipment. As consideration for the purchase
of the assets, we paid DevElements $100,000 and agreed to the assumption of
liabilities up to an aggregate of $150,000. In exchange for the 19% interest in
DevElements, we issued to the shareholders of DevElements 187,500 shares of our
common stock and options to purchase 187,500 shares of common stock exercisable
at a price of $27.20 per share and expiring May 13, 2009. We issued to the
stockholders options to purchase 6,250 shares, which were contingently
exercisable upon the satisfaction of certain performance criteria. The
performance criteria, which required contracts, task orders and other work
assignments involving billing of at least $840,000 during the six-month period
ending November 13, 2004, was not met and the options were cancelled.
On October 18, 2004, we entered into a non-binding letter of intent to
acquire 100% of the issued and outstanding stock of Plan Graphics, Inc. The
transaction was subject to approval by the Plan Graphics, Inc. shareholders, and
certain terms and conditions, including terms and conditions which are
customary to this type of transaction. On April 29, 2005 the letter of intent
expired with a definitive agreement having been executed or all conditions
precedent to the closing having been completed.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Name Age Positions
---- --- ---------
John R. Signorello 39 Chairman and Chief Executive Officer
G. Anthony Munno 43 President
Harold F. Compton (1) 57 Director
Raymond Pirtle (2) 64 Director
Joseph L. Druzak (1) 53 Director
Jack Bush (1) 70 Director
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
John R. Signorello. Mr. Signorello has served as Chairman of the Board and
CEO since March 2000. From 1991 until September 1997, Mr. Signorello served as
the Chief Executive Officer of STMS -"Solutions That Make Sense" - a private
technology company he founded that specialized in computer networks, systems
integration and information technology. In 1996, STMS was ranked the 17th
fastest growing technology company in America by The National Technology
Council's "The Fast Five Hundred". In September 1997, the company was acquired
by Steelcloud (Nasdaq: SCLD), and Mr. Signorello remained as Vice President of
Sales and Marketing until November 1998. From 1998 through 2000, Mr. Signorello
served as a Director for a publicly traded Internet Venture Fund. Mr. Signorello
is an accomplished musician, and serves as a principal in New York City Lights
Entertainment. Mr. Signorello received a B.B.A. in Marketing from Radford
University in 1989.
G. Anthony Munno. Mr. Munno has served as our President since October
2004. From August 2003 until being elected President, Mr. Munno served as Vice
President of Sales and Marketing. Mr. Munno was the founder, President and CEO
of Interlan Communications, Inc. a privately held Virginia based data networking
and network security company which we acquired in June 2003. From March 1990 to
August 1995 Mr. Munno was a Director of Sales for Microcom Incorporated, a
publicly traded manufacturer of modems and other wide area networking products.
From October 1988 to March 1990, Mr. Munno held the position of Major Business
Opportunities, Manager of Systems, and Tests for Government Technology Services
Inc. (GTSI), a publicly traded systems provider to government and education.
From January 1987 to October 1988, Mr. Munno was employed as a Product
Specialist for SMS Data Products Group of Virginia. Prior to starting his
civilian career, Mr. Munno was a member of the US Army for seven years where he
was awarded the Meritorious Service Medal twice while a member of the US Army
Signal Corps. Mr. Munno attended the City College of Chicago.
Harold F. Compton. Mr. Compton has been a member of our Board of Directors
since May 2005. Mr. Compton has been a retailer for more than 30 years. Mr.
Compton joined CompUSA Inc. in 1994 as Executive Vice President-Operations,
becoming Executive Vice President and Chief Operating Officer in 1995, President
of CompUSA Stores in 1996 and Chief Executive Officer of CompUSA Inc. in 2000, a
position he held until his retirement in 2004. Prior to joining CompUSA, Inc.,
from 1993 until 1994 he served as President and COO of Central Electric Inc.,
Executive Vice President Operations and Human Resources, and Director of Stores
for HomeBase (1989 to 1993), Senior Vice President Operations and Director of
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Stores for Roses Discount Department Stores (1986 to 1989), and held various
management positions including Store Manager, District Manager, Regional Vice
President and Zone Vice President for Zayre Corporation from 1965 to 1986. Since
1998 Mr. Compton has been a member of the Board of Directors of Linens `N
Things, Inc., and is a member of its Compensation Committee and Corporate
Governance and Nominating Committee of the Board of Directors of that company.
Raymond Pirtle, Jr. Mr. Pirtle has been a member of our Board of Directors
since June 2005. Mr. Pirtle is a veteran of the financial services industry,
having spent the past three decades in a variety of senior roles in corporate
finance, institutional sales, investment banking, and equity research From 1966
until 1989 he was employed by J.C. Bradford & Co., a large regional investment
banking and brokerage, departing as a general partner. From 1989 until 2001 he
was a Director and co-head of institutional sales of Equitable Securities Corp.,
a banking and institutional brokerage firm later known as SunTrust Equitable. In
2001 he was one of the founding partners of Avondale Partners, LLC, an
institutional equity research and investment banking firm focusing on small
companies generally with a market cap in the range of $200 million to $2
billion. Mr. Pirtle presently serves as a member of Avondale Partners' Advisory
Board Committee. In March 2005 Mr. Pirtle founded Clairidge Company, LLC., a
consulting firm that represents micro-cap to small-cap companies with a public
equity valuation under $200 million or larger companies that are seeking to
attract broad attention from institutional portfolio managers, research analysts
or investment bankers. Since 1985 Mr. Pirtle has been serving on the board of
both public and private companies. He currently serves on the board of Premier
Global Services, Inc. (NYSE: PGI), a provider of business communications
services and business process solutions that enable enterprise customers to
automate and simplify components of their critical business processes and to
communicate more effectively with their constituents, and eNucleus, Inc. (OTCBB:
ENUI), a provider of supply chain software applications.
Joseph L. Druzak. Mr. Druzak has been a member of our Board of Directors
since June 2005. After first joining the company more than 20 years ago, since
1985 Mr. Druzak has served President and CEO of Kreher Steel Company, LLC., a
large, privately-held specialty steel distribution company serving such diverse
markets as automotive, rail, construction, oil and gas, aerospace and defense.
Jack Bush. Mr. Bush has been a member of our Board of Directors since
August 2005. Mr. Bush has served as the President of Raintree Partners, Inc., a
management consulting company, since September 1995. He is also currently
Chairman and Director of IdeaForest.com (Joann.com), Vice Chairman and Director
of FPE Corporation (Framed Picture Enterprises) and Co-Chairman of Country
Sampler stores. From 1995 to 1999 he served as Chairman of Aaron Brothers
Holding Company and of Carolina Art & Frame Co. He was a founder, Chief Concept
Officer and Director of Artistree Art, Frame & Design Company. During this time
he was also a Director of Cyberplay, New York Coffee & Bagels, Bradlees Stores,
Stage Stores, Telequip and Jumbo Sports Company. He served on the board of
Bradlees during a successful reorganization and served as special assistant to
the board of Stage Stores during a successful reorganization. From 1997 to 1999
he served as Chairman, CEO and President of Jumbo Sports Co. From 1991 to August
1995, he was President and Director of Michaels Stores, Inc. and was Chairman of
Michaels of Canada. The company grew from 136 to 530 stores and became the
largest arts and crafts retailer in the world. Upon leaving the Nasdaq-quoted
company, sales reached $1.5 billion and had 22,000 associates. From 1990 to 1991
he served as Executive Vice President, Director of Operations and Stores for
Ames Department Stores. From 1985 to 1990 Mr. Bush was President and Director of
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Roses stores, a Nasdaq-quoted company. During his tenure the company grew to 226
stores with $1.6 billion in sales and 25,000 associates From 1980 to 1985 He
served as Vice President of Zayre Corporation, an NYSE-listed company
responsible for 105 stores and $750 million in sales. From 1958 to1980 He served
in a variety of potions with J.C. Penney Company, an NYSE-listed company. Mr.
Bush was a U.S. Air Force Reserve officer and holds a Bachelor of Science from
the University of Missouri.
There are no family relationship between any of the executive officers and
directors. Directors are elected at our annual meeting of stockholders and hold
office for one year or until his or her successor is elected and qualified.
KEY EMPLOYEES
John Younts. Mr. Younts, 38, has served as Vice President Integrated Power
Solutions since August 2003. His responsibilities include promotion and local
support of mission critical computer room equipment as a manufacturer's
representative to local companies with computers, as well as offering
maintenance agreements for legacy and new customers. Mr. Younts has 17 years of
experience in hardware support equipment business. From 1988 until 2003 Mr.
Younts was a Senior Sales Associates with Lee Associates, a provider of
infrastructure products and solutions. He was responsible for a nationwide roll
out requiring mission critical support equipment for customers including Nextel
and Qwest. He was also responsible for building long lasting relationships with
his customers as well as the vendors. Mr. Younts' primary focus was on the
design, sale and implementation of these critical support systems for MEP firms,
end users, electric and general contractors in the Mid-Atlantic Region. Mr.
Younts holds a Bachelor degree from Radford University.
James M. Bond. Mr. Bond, 34, has served as our Vice President of Program
Services since June 2003. His responsibilities include management of our
consulting services practice which is focused on network infrastructure and
enterprises messaging services. Mr. Bond is also responsible for developing new
services and product offerings. From August 2000 until our acquisition of the
company in June 2003, Mr. Bond was President of The Seven Corporation, which is
now our consulting services division. Mr. Bond has over 15 years of information
technology design and implementation experience. He has been the architect of
and has implemented solutions for medium and large corporate and government
organizations with some multi-year projects exceeding $50M. Mr. Bond served as
Vice President with Steelcloud from 1997 until 2000 where he ran the
Professional Services division with over 50 consulting engineers and revenues
exceeding $15M annually. Mr. Bond's earlier work experience includes senior
engineering, architecture/design, and project management responsibilities with
companies such as Electronic Data Systems (EDS) and Computer Sciences
Corporation (CSC). Mr. Bond holds a Bachelor degree from the University of
Maryland in Computer Science and is currently pursuing a Master's Degree. He has
been a certified engineer for products and companies including Microsoft,
Novell, 3Com, NetFRAME, Tricord, and currently serves on the Microsoft
Architect's Council for the Mid-Atlantic region.
Andrea T. Williams, Ph.D. Dr. Williams, 51, has been our Vice President of
E-Learning since February 2002. Dr. Williams is responsible for implementing our
marketing strategy for state and local agencies, educational institutions, and
select target accounts. Prior to joining our company from February 1998 to
February 2002 Dr. Williams was Associate Vice President of Internet Client
Development at Lightspan, Inc., a leading provider of curriculum-based
instructional and assessment resources that include software, print materials,
professional development and Internet products and services. While at Lightspan,
31
Inc. Dr Williams was responsible for Internet marketing and new business
development. Dr. Williams helped launch and complete large-scale implementations
of a new suite of Internet products, and re-position Lightspan's online content
as a primary resource to educators throughout the US. She has held national
level positions with Excel, Inc., and The Educational Management Group, a
digital satellite company owned by Viacom, where educational institutions
received on-demand video, audio, and software. She has designed and directed
state and national training initiatives while working for state education
department divisions, and has experience in learning assessment from CTB
McGraw-Hill. Dr. Williams earned a Doctor of Philosophy in Education
Administration at the University of Pittsburgh.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors has created both an Audit Committee and a
Compensation Committee.
AUDIT COMMITTEE. The Audit Committee of our Board of Directors was formed
to assist the Board of Directors in fulfilling its oversight responsibilities
for the integrity of our consolidated financial statements, compliance with
legal and regulatory requirements, the independent registered public accounting
firm's qualifications and independence, and the performance of our internal
audit function and independent auditors. The Audit Committee will also prepare
the report that SEC rules require be included in our annual proxy statement. The
Audit Committee has adopted a charter which sets forth the parameters of its
authority. The Audit Committee Charter provides that the Audit Committee is
empowered to:
o Appoint, compensate, and oversee the work of the independent registered
public accounting firm employed by our company to conduct the annual
audit. This firm will report directly to the audit committee;
o Resolve any disagreements between management and the auditor regarding
financial reporting;
o Pre-approve all auditing and permitted non-audit services performed by
our external audit firm;
o Retain independent counsel, accountants, or others to advise the
committee or assist in the conduct of an investigation;
o Seek any information it requires from employees - all of whom are
directed to cooperate with the committee's requests - or external
parties;
o Meet with our officers, external auditors, or outside counsel, as
necessary; and
o The committee may delegate authority to subcommittees, including the
authority to pre-approve all auditing and permitted non-audit services,
provided that such decisions are presented to the full committee at its
next scheduled meeting.
Each Audit Committee member is required to:
o satisfy the independence requirements of Section 10A(m)(3) of the
Securities Exchange Act of 1934, and all rules and regulations
promulgated by the SEC as well as the rules imposed by the stock
exchange or other marketplace on which our securities may be listed
from time to time, and
32
o meet the definitions of "non-employee director" for purposes of SEC
Rule 16b-3 and "outside director" for purposes of Section 162(m) of the
Internal Revenue Code.
Each committee member is required to be financially literate and at least
one member is to be designated as the "financial expert," as defined by
applicable legislation and regulation. No committee member is permitted to
simultaneously serve on the audit committees of more than two other public
companies. Mr. Pirtle is presently the sole member of our Audit Committee. As we
expand our Board of Directors with additional independent directors the number
of directors serving on the Audit Committee will also increase.
COMPENSATION COMMITTEE. The Compensation Committee was appointed by the
Board to discharge the Board's responsibilities relating to:
o compensation of our executives,
o equity-based compensation plans, including, without limitation, stock
option and restricted stock plans, in which officers or employees may
participate, and
o arrangements with executive officers relating to their employment
relationships with our company, including employment agreements,
severance agreements, supplemental pension or savings arrangements,
change in control agreements and restrictive covenants.
The Compensation Committee charter provides that the Compensation
Committee has overall responsibility for approving and evaluating executive
officer compensation plans, policies and programs of our company, as well as all
equity-based compensation plans and policies. In addition, the Compensation
Committee oversees, reviews and approves all of our ERISA and other employee
benefit plans which we may establish from time to time. The Compensation
Committee is also responsible for producing an annual report on executive
compensation for inclusion in the our proxy statement and assisting in the
preparation of certain information to be included in other periodic reports
filed with the SEC.
Each Compensation Committee member is required to:
o satisfy the independence requirements of Section 10A(m)(3) of the
Securities Exchange Act of 1934, and all rules and regulations
promulgated by the SEC as well as the rules imposed by the stock
exchange or other marketplace on which our securities may be listed
from time to time, and
o meet the definitions of "non-employee director" for purposes of SEC
Rule 16b-3 and "outside director" for purposes of Section 162(m) of the
Internal Revenue Code.
No committee member is permitted to simultaneously serve on the audit
committees of more than two other public companies. Messrs. Compton, Druzak and
Bush are the members of our Compensation Committee. As we expand our Board of
Directors with additional independent directors the number of directors serving
on the Compensation Committee will also increase.
33
CODE OF ETHICS
In May 2005, we adopted a Code of Business Conduct and Ethics applicable
to our Chief Executive Officer, principal financial and accounting officers and
persons performing similar functions. A Code of Business Conduct and Ethics is a
written standard designed to deter wrongdoing and to promote:
o honest and ethical conduct,
o full, fair, accurate, timely and understandable disclosure in
regulatory filings and public statements,
o compliance with applicable laws, rules and regulations,
o the prompt reporting violation of the code, and
o accountability for adherence to the Code.
A copy of our Code of Business Conduct and Ethics is filed as an exhibit
to the registration statement of which this prospectus forms a part, and we will
provide a copy, without charge, to any person desiring a copy of the Code of
Business Conduct and Ethics, by written request to us at our principal offices.
EXECUTIVE COMPENSATION
Cash Compensation
The following table summarizes all compensation recorded by us in each of
the last three fiscal years for our Chief Executive Officer and each other
executive officers serving as such whose annual compensation exceeded $100,000.
Annual Compensation Long-Term Compensation
------------------------------------------ ----------------------------------------
Restricted Securities
Name and Other Annual Stock Underlying
Principal Fiscal Salary Bonus Compensation Awards Options All Other
Position Year ($) ($) ($) ($) SAR (#) Compensation
------------------ ------ -------- ----- ------------ ---------- ---------- ------------
John R. Signorello 2002 $ 68,000 $ -0- $ -0- $ -0- 75,000 -0-
Chief Executive 2003 $ 5,000 $ -0- $ -0- $ -0- 75,000 -0-
Officer (1) 2004 $ 80,000 $ -0- $ -0- $ -0- -0- -0-
(1) In fiscal year 2002, Mr. Signorello was granted options to purchase 75,000
shares at $1.60 per share, expiring in February 2007. In fiscal year 2003, Mr.
Signorello was granted options to purchase an additional 75,000 shares at $3.20
per share, expiring in September 2008.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants of
options made during fiscal 2004 to the named executive officers.
% of Total
Number of Shares Options Granted Exercise or
Underlying Options to Employees in Base Price Expiration
Granted (#) Fiscal Year ($/Sh) Date
------------------------------------------------------------------------------------------------
John R. Signorello 0 n/a n/a n/a
34
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table indicates each exercise of stock options (or tandem
SARS) and freestanding SARS during the last fiscal year by each of the named
executive officers and the fiscal year end value of unexercised options and
SARs.
Number of Securities Underlying Value of Unexercised
Shares Value Unexercised Options/SARs at In-the-money Options/SARs at
Acquired on Realized FY End (#) FY End (#)
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ -------- ----------- ------------- ----------- -------------
John R. Signorello 25,000 0 109,500 40,500 0 0
STOCK OPTION PLAN
In August 2000, our Board of Directors adopted our 2000 Management and
Director Equity Incentive and Compensation Plan (the "Plan"). The Plan was
approved by our stockholders in August 2001. As amended, we have reserved an
aggregate of 10,000,000 shares of common stock for issuance under the Plan. At
October 31, 2005 we have granted options to purchase 9,654,460 shares of our
common stock under the Plan. Until such time as we have completed an initial
public offering, our Board of Directors (or at their discretion a committee of
our Board members) administers the Plan including, without limitation, the
selection of recipients of awards under the Plan, the granting of stock options,
restricted share or performance shares, the determination of the terms and
conditions of any such awards, the interpretation of the Plan and any other
action they deem appropriate in connection with the administration of the Plan.
Following our initial public offering, in the event we should ever undertake one
of which there is no assurance, the Plan will be administered by a committee of
our Board of Directors who will be comprised of not less than two non-employee
directors. As of the date of this registration statement, we presently have no
plans to proceed with such a transaction.
The purpose of the Plan is to advance our interests and those of our
stockholders by providing a means of attracting and retaining key employees,
directors and consultants. In order to serve this purpose, we believe the Plan
encourages and enables key employees, directors and consultants to participate
in our future prosperity and growth by providing them with incentives and
compensation based on our performance, development and financial success.
Participants in the Plan may include our officers, directors, other key
employees and consultants who have responsibilities affecting our management,
development or financial success.
Awards may be made under the Plan in the form of Plan options, shares of
our common stock subject to a vesting schedule based upon certain performance
objectives ("performance shares") and shares subject to a vesting schedule based
on the recipient's continued employment ("restricted shares"). Plan options may
either be options qualifying as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended or options that do not so qualify. Any
incentive stock option granted under our Plan must provide for an exercise price
of not less than 100% of the fair market value of the underlying shares on the
date of such grant, but the exercise price of any incentive option granted to an
eligible employee owning more than 10% of our common stock must be at least 110%
of such fair market value as determined on the date of the grant. Only persons
who are our officers or other key employees are eligible to receive incentive
stock options and performance share grants. Any non-qualified stock option
granted under our Plan must provide for an exercise price of not less than 50%
of the fair market value of the underlying shares on the date of such grant.
35
The term of each Plan option and the manner in which it may be exercised
is determined by the Board of Directors, provided that no Plan option may be
exercisable more than three years after the date of its grant and, in the case
of an incentive option granted to an eligible employee owning more than 10% of
our common stock, no more than five years after the date of the grant. The
exercise price of the stock options may be paid in either:
o cash, or
o delivery of unrestricted shares of our common stock having a fair
market value on the date of delivery equal to the exercise price, or
o surrender of shares of our common stock subject to the stock option
which has a fair market value equal to the total exercise price at the
time of exercise, or
o a combination of the foregoing methods.
All Plan options are nonassignable and nontransferable, except by will or
by the laws of descent and distribution and, during the lifetime of the
optionee, may be exercised only by such optionee. At the discretion of the Board
of Directors, it may approve the irrevocable transfer, without payment, of
non-qualified options to the option holder's spouse, children, grandchildren,
nieces or nephews, or to the trustee of a trust for the principal benefit of one
or more such persons, or to a partnership whose partners are one or more of such
persons. If an optionee's employment is terminated for any reason, other than
due to his or her death, disability or termination for cause, or if an optionee
is not our employee but is a member of our Board of Directors and his or her
service as a director is terminated for any reason, other than due to his or her
death or disability, the Plan option granted may be exercised on the earlier of
the expiration date or 90 days following the date of termination. If the
optionee dies during the term of his or her employment, the Plan option granted
to him or her shall lapse to the extent unexercised on the earlier of the
expiration date of the Plan option or the date one year following the date of
the optionee's death. If the optionee's employment, membership on the Board of
Directors or engagement as a consultant terminates by reason of the optionee's
retirement, then the Plan option granted may be exercised until the earlier of
90 days following the date of termination or the expiration date. If the
optionee is permanently and totally disabled within the meaning of Section
22(c)(3) of the Internal Revenue Code, the Plan option granted to him or her
lapses to the extent unexercised on the earlier of the expiration date of the
option or one year following the date of such disability.
At the time of the restricted share grant, the Board of Directors may
determine the vesting schedule of such shares and that after vesting, such
shares may be further restricted as to transferability or be subject to
repurchase by us or forfeiture upon the occurrence of certain events. Awards of
restricted shares must be accepted by the participant within 30 days of the
grant.
At the time of the award of performance shares, the Board of Directors
shall establish a range of performance goals to be achieved during the
performance period, including, without limitation, earnings, return on capital,
or any performance goal approved by our stockholders in accordance with Section
162(m) of the Internal Revenue Code. Attainment of the highest performance goal
for the performance period will earn 100% of the performance shares awarded for
the performance period; failure to attain the lowest performance goal will
result in the participant earning no performance shares. Attainment of the
36
performance goals will be calculated from our financial statements, excluding
changes in federal income tax rates and the effect of non-recurring and
extraordinary items. The performance goals may vary for different performance
periods and need not be the same for each participant receiving an award during
a performance period.
If the participant's employment by us, membership on our Board of
Directors, or engagement by us as a consultant is terminated before the end of
any performance period, or upon the participant's death, retirement or
disability, the Board of Directors, taking into consideration the performance of
such participant and our performance over the performance period, may authorize
the issuance to the participant or his or her legal representative or designated
beneficiary all or a portion of the performance shares which would have been
issued to him or her had the participant's employment, Board membership or
consulting engagement continued to the end of the performance period. If the
participant's employment, Board membership or consulting engagement terminates
before the end of the performance period for any other reason, all performance
shares are forfeited.
Notwithstanding the foregoing, but subject to any stockholder approval or
other requirements of Section 162(m) of the Internal Revenue Code, the Board of
Directors in its discretion and as determined at the time of award of the
performance shares, may provide the participant with the option of receiving
cash in lieu of the performance shares in an amount determined at the time of
award including, without limitation, by one or more of the following methods:
o the fair market value of the number of shares subject to the
performance shares agreement on the date of award, or
o part or all of any increase in the fair market value since such date,
or
o part or all of any dividends paid or payable on the number of shares
subject to the performance share agreement, or
o any other amounts which in the Board's sole discretion are reasonably
related to the achievement of the applicable performance goals, or
o any combination of the foregoing.
The purchase price for restricted shares or performance shares granted
under the Plan shall be set by the Board of Directors but may not be less than
par value. Payment of the purchase price for the restricted shares or
performance share may be made in either,
o cash, or
o by delivery of unrestricted shares of our common stock having a fair
market value on the date of such delivery equal to the total purchase
price, or
o a combination of either of these methods.
The restricted stock awards, performance stock awards and stock options
are subject to accelerated vesting in the event of our change of control. We
may, at our option, terminate all unexercised stock options 30 days after a
change in control and pay to the participant holding these unexercised options
cash in an amount equal to the difference between fair market value and the
exercise price of the stock option. If the fair market value is less than the
exercise price, we may terminate the options without payment to the holder. The
per share purchase price of shares subject to Plan options granted under the
Plan or related to performance share awards or restricted share awards may be
adjusted in the event of certain changes in our capitalization, but any such
adjustment shall not change the total purchase price payable upon the exercise
in full of such option or award. No participant in our Plan has any rights as a
stockholder until the shares subject to the Plan options or stock awards have
been duly issued and delivered to him or her.
37
We have an option to purchase any shares of our common stock which have
been issued to Plan participants pursuant to restricted stock awards,
performance stock awards or stock options if the participant ceases to be our
employee, a member of our Board of Directors or a consultant to us for any
reason. We must exercise our repurchase right at the time of termination. The
purchase price for any shares we repurchase will be equal to the fair market
value of the our total stockholders' equity divided by the total outstanding
shares of our common stock on the last day of that calendar month, calculated on
a fully-diluted basis. If we exercise our repurchase right, we much close the
transaction within 20 days from the termination date. At closing, we are
entitled to delivery a one-year promissory note as payment for the purchase
price or, at our option, we may pay same in cash at closing.
We also have a right of first refusal to meet the offer if the holder of
any shares of our common stock awarded or issued pursuant to our Plan desires to
sell such shares to a third party.
The Board of Directors may amend, suspend or terminate our Plan at any
time, except that no amendment shall be made which:
o increases the total number of shares subject to the Plan or changes the
minimum purchase price therefore (except in either case in the event of
adjustments due to changes in our capitalization), or
o affects outstanding Plan options or any exercise right thereunder, or
o extends the term of any Plan option beyond 10 years, or
o extends the termination date of the Plan.
Unless the Plan shall be earlier suspended or terminated, the Plan shall
terminate 10 years from the date of the Plan's adoption by our stockholders. Any
such termination of our Plan shall not affect the validity of any Plan options
previously granted thereunder.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
As authorized by the Delaware General Corporation Laws, our certificate of
incorporation provide that none of our directors shall be personally liable to
us or our stockholders for monetary damages for breach of fiduciary duty as a
director, except liability for:
o any breach of the director's duty of loyalty to our company or its
stockholders;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o unlawful payments of dividends or unlawful stock redemptions or
repurchases; and
o any transaction from which the director derived an improper personal
benefit.
38
This provision limits our rights and the rights of our stockholders to
recover monetary damages against a director for breach of the fiduciary duty of
care except in the situations described above. This provision does not limit our
rights or the rights of any stockholder to seek injunctive relief or rescission
if a director breaches his duty of care. These provisions will not alter the
liability of directors under federal securities laws. Our by-laws require us to
indemnify directors and officers against, to the fullest extent permitted by
law, liabilities which they may incur under the circumstances described above.
Our certificate of incorporation further provide for the indemnification
of any and all persons who serve as our director, officer, employee or agent to
the fullest extent permitted under Delaware law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers and controlling persons
according to the foregoing provisions, or otherwise, we have been advised that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time we have borrowed funds from Mr. Signorello, our Chairman
and CEO, for working capital. In April 2002 we issued Mr. Signorello a demand
promissory note in the principal amount of $150,000. This note bears interest at
12.5% per annum. At March 31, 2005 we owed Mr. Signorello $93,177. Under the
terms of the Preferred Stock Purchase Agreement with Barron Partners, L.P. as
described later in this prospectus beginning on page 46. Mr. Signorello was
required to convert the principal and interest due under this note into shares
of our common stock. In April 2005, Mr. Signorello sold this note to Mr. Robert
Druzak, a principal stockholder of our company. In April 2005 Mr. Druzak
converted the note into 416,667 shares of our common stock and the note was
retired.
From time to time Mr. Signorello has provided funds to us for operating
expenses. During the three months ended June 30, 2005 Mr. Signorello advanced us
$92,875, net of repayments. These advances are short-term and non-interest
bearing. We will repay Mr. Signorello this amount as working capital is
available to us.
At March 31, 2005 other stockholders/employees have loans totaling
$227,186 plus accrued interest of approximately $62,400. Included in this amount
was approximately $77,000 due Mr. James Bond, one of our key employees, which
represented the remaining portion of the cash consideration due him under the
terms of our purchase of the stock of The Seven Corporation as described earlier
in this prospectus. This amount was converted by Mr. Bond into 125,000 shares of
our common stock in April 2005 in accordance with the terms of the Preferred
Stock Purchase Agreement with Barron Partners, L.P.
Also included in this total at March 31, 2005 is a $150,000 principal
amount due under a promissory note bearing interest at the rate of 12.5% per
annum due to a stockholder of our company. In May 2005 we issued this
stockholder 125,000 shares of common stock as consideration for the extension of
the maturity date of the note by 10 years. The shares were valued at $200,000
the fair value at the date of issuance.
In 2002, we borrowed $100,000 from three stockholders. During the fiscal
year ended September 30, 2003, these notes were converted to equity at $0.10 per
share, resulting in the issuance of 12,500 shares.
39
PRINCIPAL STOCKHOLDERS
At November 4, 2005, there were 6,492,286 shares of our common stock
issued and outstanding. Our common stock is the only outstanding class of our
voting securities. The following table sets forth, as of November 4, 2005,
information known to us relating to the beneficial ownership of these shares by:
o each person who is the beneficial owner of more than 5% of the
outstanding shares of common stock;
o each director;
o each executive officer; and
o all executive officers and directors as a group.
Unless otherwise indicated, the address of each beneficial owner in the
table set forth below is care of 205 Van Buren, Suite 420, Herndon, Virginia
20170.
We believe that all persons named in the table have sole voting and
investment power with respect to all shares of beneficially owned by them. Under
securities laws, a person is considered to be the beneficial owner of securities
he owns and that can be acquired by him within 60 days from the date of this
prospectus upon the exercise of options, warrants, convertible securities or
other understandings. We determine a beneficial owner's percentage ownership by
assuming that options, warrants or convertible securities that are held by him,
but not those held by any other person and which are exercisable within 60 days
of November 4, 2005, have been exercised or converted. Unless otherwise noted,
the address of each of these principal stockholders is our principal executive
offices.
Name of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class
---------------- -------------------- --------
John R. Signorello(1) 2,321,164 34.9%
G. Anthony Munno(2) 35,675 *
Hal Compton 0 n/a
Raymond Pirtle 0 n/a
Joseph L. Druzak (3) 203,126 3.1%
Jack Bush 0 n/a
All executive officers and 2,559,965 37.8%
as a group (six persons)
Robert Druzak (4) 591,667 9.0%
Nite Capital L.P. (5) 375,000 5.5%
* represents less than 1%
(1) The number of shares beneficially owned by Mr. Signorello includes options
to purchase 50,000 shares of our common stock at an exercise price of $1.60 per
share and options to purchase 45,000 shares of our common stock at an exercise
price of $3.20 per share.
(2) The number of shares beneficially owned by Mr. Munno includes options to
purchase 11,250 shares of our common stock at an exercise price of $2.16 per
share and options to purchase 4,175 shares of our common stock at an exercise
price of $2.24 per share.
(3) The number of shares beneficially owned by Mr. Druzak includes Series H
Common Stock Purchase Warrants exercisable into 50,000 shares of our common
stock at an exercise price of $4.00 per share and Series I Common Stock Purchase
Warrants exercisable into 50,000 shares of our common stock at an exercise price
of $8.00 per share.
(4) Mr. Robert Druzak is the brother of Mr. Joseph Druzak.
40
(5) The number of shares beneficially owned by Nite Capital L.P. includes
125,000 shares of our common stock presently outstanding and 250,000 shares of
our common stock issuable upon the exercise of common stock purchase warrants
with exercise prices ranging from $4.00 to $8.00 per share. Mr. Keith Goodman
exercises investment and voting rights over the securities held by Nite Capital
LP.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 1,000,000,000 shares of common
stock, $.001 par value per share, and 10,000,000 shares of preferred stock, par
value $.001 per share, of which 1,666,667 shares have been designated as Series
A Convertible Preferred Stock. As of November 4, 2005, there are 6,492,286
shares of common stock and 1,666,667 shares of Series A Convertible Preferred
Stock issued and outstanding. We have not included 437,502 shares of common
stock listed as outstanding on our transfer records in the number of shares
common shares which are currently issued and outstanding. Although the
certificates have not been cancelled, these shares were contributed to our
capital by agreement at the time of our reverse merger in March 2002 and may not
be voted.
COMMON STOCK
Holders of common stock are entitled to one vote for each share on all
matters submitted to a stockholder vote. Holders of common stock do not have
cumulative voting rights. Holders of common stock are entitled to share in all
dividends that the Board of Directors, in its discretion, declares from legally
available funds. In the event of our liquidation, dissolution or winding up,
subject to the preferences of any shares of our preferred stock which may then
be outstanding, each outstanding share entitles its holder to participate in all
assets that remain after payment of liabilities and after providing for each
class of stock, if any, having preference over the common stock.
Holders of common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions for the common
stock. The rights of the holders of common stock are subject to any rights that
may be fixed for holders of preferred stock, when and if any preferred stock is
authorized and issued. All outstanding shares of common stock are duly
authorized, validly issued, fully paid and non-assessable.
PREFERRED STOCK
Our Board of Directors, without further stockholder approval, may issue
preferred stock in one or more series from time to time and fix or alter the
designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions of the shares of each series. The rights,
preferences, limitations and restrictions of different series of preferred stock
may differ with respect to dividend rates, amounts payable on liquidation,
voting rights, conversion rights, redemption provisions, sinking fund provisions
and other matters. Our Board of Directors may authorize the issuance of
preferred stock, which ranks senior to our common stock for the payment of
dividends and the distribution of assets on liquidation. In addition, our Board
of Directors can fix limitations and restrictions, if any, upon the payment of
dividends on our common stock to be effective while any shares of preferred
stock are outstanding.
The rights granted to the holders of any series of preferred stock could
adversely affect the voting power of the holders of common stock and issuance of
preferred stock may delay, defer or prevent a change in our control.
41
SERIES A CONVERTIBLE PREFERRED STOCK
Our Board of Directors has created a series of 1,666,667 shares of
preferred stock designated as Series A Convertible Preferred Stock. We sold
these shares in a transaction described later in this prospectus under "Selling
Security Holders." The designations, rights and preferences of the Series A
Convertible Preferred Stock provide:
o no dividends are payable on the Series A Convertible Preferred Stock.
So long as these shares are outstanding, we cannot pay dividends on our
common stock nor can we redeem any shares of our common stock,
o the shares of Series A Convertible Preferred Stock do not have any
voting rights, except as may be provided under Delaware law,
o so long as the shares are outstanding, we cannot change the
designations of the Series A Convertible Preferred Stock, create a
class of securities that in the instance of payment of dividends or
distribution of assets upon our liquidation ranks senior to or pari
passu with the Series A Convertible Preferred Stock or increase the
number of authorized shares of Series A Convertible Preferred Stock,
o the shares carry a liquidation preference of $0.60 per share,
o each share of Series A Convertible Preferred Stock is convertible at
the option of the holder into shares of our common stock, subject to
adjustment in the event of stock splits and stock dividends, based upon
a conversion value of $0.60 per share, and
o so long as the shares of Series A Convertible Preferred Stock are
outstanding, we cannot sell or issue any common stock, rights to
subscribe for shares of common stock or securities which are
convertible or exercisable into shares of common stock at an effective
purchase price of less than the then conversion value.
No conversion of the Series A Convertible Preferred Stock may occur if a
conversion would result in the holder, Barron Partners LP, and any of its
affiliates beneficially owning more than 4.99% of our outstanding common shares
following such conversion. Barron Partners LP may waive this provision upon 61
days prior notice to us, or it immediately terminates in the event of a sale or
merger of substantially all of our company or upon an underwritten public
offering.
COMMON STOCK PURCHASE WARRANTS
We currently have outstanding an aggregate of 5,490,000 common stock
purchase warrants as follows:
WARRANTS ISSUED IN THE SERIES A CONVERTIBLE PREFERRED STOCK TRANSACTION
In connection with the sale of shares of our Series A Convertible
Preferred Stock in March 2005, we issued the purchaser the following five-year
common stock purchase warrants:
42
o Common Stock Purchase Warrants "A" to purchase an aggregate of
2,000,000 shares of our common stock at an exercise price of $2.00 per
share,
o Common Stock Purchase Warrants "B" to purchase an aggregate of
1,250,000 shares of our common stock at an exercise price of $4.80 per
share, and
o Common Stock Purchase Warrants "C" to purchase an aggregate of
1,250,000 shares of our common stock at an exercise price of $9.60 per
share.
We also issued Liberty Company LLC, a broker dealer which served as finder
for us in the transaction, a Common Stock Purchase Warrant "A" to purchase
175,000 shares of our common stock at an exercise price of $0.70 per share.
Other than the exercise price, all other terms of the warrant issued to Liberty
Company LLC are identical to the Common Stock Purchase Warrant "A" issued to the
purchaser.
The warrants contain a cashless exercise provision which permits the
holder, rather than paying the exercise price in cash, to surrender a number of
warrants equal to the exercise price of the warrants being exercised. The
exercise price of the warrants and the number of shares issuable upon the
exercise of the warrants is subject to adjustment in the event of stock splits,
stock dividends and reorganizations.
If we earn between $.20 and $.002 per share, on a fully taxed fully
diluted basis as reported for the 12 month period ending March 31, 2006 from
recurring operations before any non recurring items, the exercise price of the
Common Stock Purchase Warrants "A", including the warrant held by the investor
and the warrant held by Liberty Company LLC, will be reduced proportionately by
0% if the earnings are $.20 per share and by 99% if the earnings are $.002 per
share. For example, if we earn $.15 per share, or 25% below $.20 per share, then
the warrant exercise price will be reduced by 25%. In the event we earn below
$.002 per share, or have a loss, the warrant exercise price will be reduced by
99%. There are no similar provisions which apply to the Common Stock Purchase
Warrants "B" or Common Stock Purchase Warrants "C."
In the event we issue any shares, options, warrants, or any instrument
convertible into shares or equity in any form below the exercise price of the
particular warrant, then the exercise price of the warrant will be reduced
proportionately. For example, if we issue shares at $1.60 per share, or 20%
below $2.00 per share exercise price of the Common Stock Purchase Warrant "A",
then the warrant exercise price of that warrant will be reduced by 20%.
No exercise of any warrant can occur if the exercise would result in the
holder, Barron Partners LP, and any of its affiliates beneficially owning more
than 4.99% of our outstanding common shares following such exercise. Barron
Partners LP may waive this provision upon 61 days prior notice to us, or it
immediately terminates in the event of a sale or merger of substantially all of
our company or upon an underwritten public offering.
SERIES H AND SERIES I COMMON STOCK PURCHASE WARRANTS
In connection with our unit private placement of securities between
December 2004 and January 2005, we issued the following common stock purchase
warrants to the purchasers:
43
o Series H Common Stock Purchase Warrant to purchase an aggregate of
250,000 shares of our common stock at an exercise price of $4.00 per
share expiring on December 31, 2007, and
o Series I Common Stock Purchase Warrants to purchase an aggregate of
250,000 shares of our common stock at an exercise price of $8.00 per
share expiring on December 31, 2009.
We also issued Cove Partners LLC Series H Common Stock Purchase Warrants
to purchase an aggregate of 37,500 shares of our common stock and Series I
Common Stock Purchase Warrants to purchase an aggregate of 37,500 shares of our
common stock as partial compensation for certain assistance and advisory
services to the company, including the structure of financing, strategic
planning and business combinations. Cove Partners LLC maintains that it has a
right to a greater level of compensation based upon the completion of the
private placement. We believe, however, that such claim is without merit.
These warrants contain anti-dilution protection for the holders in the
event of reorganization, consolidation or merger. We can call the Series H
Common Stock Purchase Warrants at a call price of $4.00 per underlying common
share should our common stock trade at or above $4.00 per share for 10
consecutive trading days following 15 days' prior written notice of our
intention to call this warrant. Likewise, we can call the Series I Common Stock
Purchase Warrants at a call price of $8.00 per underlying common share should
our common stock trade at or above $8.00 per share for 10 consecutive trading
days following 15 days' prior written notice of our intention to call this
warrant. In the event these warrants or warrant series subject to call have not
been exercised by written notice within such 15-day notice period, these
warrants will cease to exist.
WARRANTS ISSUED IN OUR AUGUST 2001 PRIVATE PLACEMENT
In connection with a private placement of our securities in August 2001,
we issued:
o Series A warrants representing the right to purchase an aggregate of
58,750 shares of our common stock at an exercise price of $2.40 per
share;
o Series B warrants representing the right to purchase an aggregate of
58,750 shares of our common stock at an exercise price of $4.80 per
share;
o Series C warrants representing the right to purchase an aggregate of
58,750 shares of our common stock at an exercise price of $8.00 per
share; and
o Series D warrants representing the right to purchase an aggregate of
58,750 shares of our common stock at an exercise price of $16.00 per
share.
These warrants expire on May 1, 2006. These warrants contain anti-dilution
protection for the holders in the event of reorganization, consolidation or
merger. We can call any of these warrant series or all of the warrants at a call
price of $.01 per underlying share should our common stock trade at or above
$5.00 per share, based on the reported closing bid price of the common stock,
for 10 consecutive trading days following 15 days prior written notice of our
intention to call the warrants. In the event these warrants or warrant series
subject to call have not been exercised by written notice within such 15-day
notice period, these warrants will cease to exist.
44
COMERICA BANK WARRANT
In July 2004, in connection with the granting of a revolving credit line
to us we issued Comerica Bank a warrant to purchase 40,000 shares of our common
stock at an initial exercise price of $0.38 per share. The warrant contained
anti-dilution protection as described below. As a result of the anti-dilution
protection and our subsequent sales of common stock and Series A Convertible
Preferred Stock described later in this prospectus under "Selling Security
Holders," the number of shares underlying the warrant and the exercise price of
the warrant has been adjusted to 5,000 shares with an exercise price of $2.00
per share.
The warrant is exercisable until July 21, 2011. At the option of the
holder, the warrant is convertible into a number of shares of our common stock
as determined by dividing the aggregate fair market value of our common stock
minus the aggregate exercise price of the warrant by the fair market value of
one share of our common stock. In addition, Comerica Bank has right to put the
warrant to us at any time on or after July 21, 2006 and we are obligated to pay
Comerica Bank $15,000 upon the exercise of this put.
The exercise price of the warrant is subject to adjustment in the event we
issue or sell shares of our common stock or securities exercisable or
convertible into shares of our common stock at a price less than the then
effective exercise price as well as in the event of stock splits, stock
dividends or recapitalizations.
We granted Comerica Bank registration rights covering the shares of common
stock issuable upon the exercise of this warrant. We have included those shares
in the registration statement of which this prospectus is a part.
TRANSFER AGENT
Our transfer agent is Olde Monmouth Stock Transfer Co., Inc., 77 Memorial
Parkway, Atlantic Highlands, NJ 07716, and its telephone number is 732-872-2727.
SELLING SECURITY HOLDERS
BACKGROUND OF THE TRANSACTIONS
This prospectus covers the resale of 7,171,167 shares of our common stock
issued or issuable in connection with the following transactions:
UNIT PRIVATE PLACEMENT
Between December 2004 and January 2005, we sold 250,000 units of our
securities at a purchase price of $2.00 per unit to three accredited investors
in a private transaction exempt from registration under the Securities Act in
reliance on exemptions provided by Section 4(2) and Regulation D of that act. We
issued these investors an aggregate of 250,000 shares of our common stock,
250,000 Series H Common Stock Purchase Warrants and 250,000 Series I Common
Stock Purchase Warrants. The terms of the warrants are described earlier in this
prospectus under "Description of Securities - Series H and Series I Common Stock
Purchase Warrants." We received gross proceeds of $500,000 from this offering.
Mr. Joseph Druzak, a member of our Board of Directors since June 2005, was one
of the investors in this offering. He was not a member of our Board of Directors
at the time of his investment and at the time of his investment there was no
agreement or understanding that he would join our board following the
45
investment. Cove Partners LLC, who previously entered into an agreement with the
company to provide assistance and advisory services to the company, including
the structure of financing, strategic planning and business combinations,
introduced the company to two accredited investors and received fees of $20,000
in cash, 37,500 Series H Common Stock Purchase Warrants and 37,500 Series I
Common tock Purchase Warrants. Cove Partners LLC maintains that it has a right
to a greater level of compensation based upon the completion of the private
placement. We believe, however, that such claim is without merit.
We agreed to file a registration statement covering the shares of common
stock sold in this offering, including the shares issuable upon the exercise of
the warrants, within 120 days from the closing date of the offering. This
prospectus is part of that registration statement. We agreed that if we failed
to timely file the registration statement, we would be subject to a delayed
registration penalty requiring us to issue an additional 1.0% of the total
number of shares of our common stock purchased by the investors, including the
shares underlying the warrants. Because the registration statement was not filed
within 120 days from the closing date of the offering, at June 30, 2005 we are
subject to a delayed registration penalty equal to 15,000 shares of our common
stock.
SERIES A CONVERTIBLE PREFERRED STOCK TRANSACTION
On March 30, 2005, we entered into a Preferred Stock Purchase Agreement
and related agreements with Barron Partners LP. Under the terms of this
agreement we sold Barron Partners LP, an accredited investor, 1,666,667 shares
of our Series A Convertible Preferred Stock and issued the purchaser the Common
Stock Purchase Warrants "A", "B" and "C" to purchase an aggregate of 4,500,000
shares of our common stock at exercise prices ranging from $2.00 to $9.60 per
share for an aggregate purchase price of $1,000,000. We received net proceeds of
$900,000 after payment of expenses of $35,000 and a finder's fee to Liberty
Company LLC of $65,000. We also issued Liberty Company LLC, a broker-dealer, a
Common Stock Purchase Warrant "A" exercisable into 175,000 shares of our common
stock with an exercise price of $0.70 per share as additional compensation for
its services. We intend to use these proceeds for general working capital and
acquisitions. The transaction was exempt from registration under the Securities
Act in reliance on an exemption provided by Section 4(2) of that act. The
designations, rights and preferences of the Series A Convertible Preferred Stock
and terms of the warrants are described earlier in this prospectus under
"Description of Securities."
The Preferred Stock Purchase Agreement provides:
o we were required to appoint or elect four additional directors, of whom
three directors are required to be independent. In addition, the audit
and compensation committees of our Board of Directors are to be
comprised solely of independent directors. If at any time after the
closing our Board of Directors is not comprised of a majority of
qualified independent directors, these independent directors do not
make up a majority of the members of the audit and compensation
committees of the Board of Directors we are required to pay Barron
Partners LP liquidated damages of 24% of the purchase price per annum,
payable monthly,
o Messrs. John R. Signorello and James Bond, executive officers of our
company, agreed to exchange indebtedness in the principal amount of
$325,000 into an aggregate of 541,667 shares of our common stock,
46
o for period of three years we agreed not to issue any preferred stock,
convertible debt or other equity instruments containing reset features.
In addition, while the securities issued in the transaction are
outstanding, we are prohibited from entering into any financing
involving a variable rate feature,
o Barron Partners LP was given the right of first refusal to participate
in any funding transaction by us on a pro rata basis at 94% of the
offering price or funding amount received in the transaction,
o if we sell notes, shares of our common stock or shares of any class of
preferred stock within 24 months from the closing of the offering at an
effective price per share of common stock less than the conversion
price of the Series A Convertible Preferred Stock then in effect we are
required to reduce the conversion price of the Series A Convertible
Preferred Stock to this lower price,
o Mr. Signorello agreed not to sell any shares of our common stock in
excess of 1% of our outstanding shares per quarter or at a price less
than $3.00 per share during the two-year period following the closing
date. In addition, the remaining officers and directors of our company
cannot sell any shares of common stock owned by them for the two year
period following the closing date,
o for a period of two years from the closing date we are prohibited from
entering into employment or consulting agreements which provide for any
bonus compensation not directly related to increases in our earnings,
any car allowances which were not approved by the unanimous vote of our
Board of Directors, any anti-dilution or reverse stock split
protection, any deferred compensation, any unreasonable compensation or
benefit clauses or any termination clauses which exceed one year of
salary, unless specifically waived by Barron Partners LP, and
o for a period of three years from the closing date we agreed not to
enter into any new borrowings of more than twice the sum of our EBITDA
(earnings before income taxes, depreciation and amortization) from
recurring operations over the past four quarters, other than short-term
borrowings to purchase products to be resold by us.
We agreed to file a registration statement within 30 days of the closing
for the common shares underlying the securities sold in this offering and to use
our best efforts to cause the registration statement to be declared effective by
the SEC within 120 days of the closing date of the transaction. This prospectus
is part of that registration statement. We agreed to pay Barron Partners
liquidated damages of 36% per annum for each day we did not file this
registration statement after the initial 30 day period. As we did not file the
registration statement within 30 days from the closing date of the offering, at
June 30, 2005 we owed Barron Partners $36,000 representing the failure to file
penalty. In addition, we agreed to pay Barron Partners liquidated damages of 36%
per annum for each day this registration statement is not effective beginning on
July 30, 2005 through the earlier of the effective date of the registration
statement or March 30, 2007. We are unable at this time to predict if we will be
subject to the payment of any damages under this provision of our agreement with
Barron Partners.
Subsequently we have agreed to issue Barron Partners $500,000 stated
amount of our Series A Convertible Preferred Stock or other comparable preferred
stock, together with common stock purchase warrants to purchase 1,000,000 shares
of our common stock at an exercise price of $2.00 per share, 625,000 shares of
our common stock at an exercise price of $4.80 per share and 625,000 shares of
our common stock at an exercise price of $9.60 per share. We are in the process
of finalizing the contractual terms of this additional purchase by Barron
Partners.
47
THE SELLING SECURITY HOLDERS
The following table sets forth
o the name of each selling security holder,
o the number of shares owned, and
o the number of shares being registered for resale by each selling
security holder.
The information presented herein is derived from a record list of our
stockholders and warrant holders. We may amend or supplement this prospectus
from time to time to update the disclosure set forth herein. All of the shares
owned by the selling security holders may be offered hereby. Because the selling
security holders may sell some or all of the shares owned by them, and because
there are currently no agreements, arrangements or understandings with respect
to the sale of any of the shares, no estimate can be given as to the number of
shares that will be held by the selling security holders upon termination of any
offering made hereby. If all the shares offered hereby are sold, the selling
security holders will not own any shares after the offering.
Number Percentage Shares Shares to Percentage
Name of selling of shares owned before to be be owned owned after
security holder owned offering offered after offering offering
--------------- --------- ------------ --------- -------------- -----------
Barron Partners LP (1) 6,166,667 48.7% 6,166,667 0 n/a
Barbara Russo (2) 250,000 3.7% 225,000 25,000 *
Joseph Druzak (3) 203,126 3.1% 150,000 53,126 *
Nite Capital LP (4) 375,000 5.5% 375,000 0 n/a
Comerica Bank (5) 5,000 * 5,000 0 n/a
Liberty Company LLC (6) 175,000 2.6% 175,000 0 n/a
Cove Partners LLC (7) 75,000 * 75,000 0 n/a
---------
7,171,667
=========
* less than 1%
(1) The number of shares owned and the number of shares offered includes
1,666,667 shares of our common stock issuable upon the conversion of 1,666,667
shares of our Series A Convertible Preferred Stock and 4,500,000 shares of our
common stock underlying common stock purchase warrants with exercise prices
ranging from $2.00 to $9.60 per share. Mr. Andrew Barron Worden exercises
investment and voting rights over the securities held by Barron Partners LP.
Barron Partners LP has contractually agreed that if the number of shares of
common stock issuable upon the conversion of the shares of Series A Convertible
Preferred Stock and exercise of these warrants is limited so that Barron
Partners LP and any of its affiliates cannot beneficially own more than 4.99% of
our outstanding common shares following such exercise or conversion. Barron
Partners LP may waive this provision upon 61 days prior notice to us, or it
immediately terminates in the event of a sale or merger of substantially all of
our company or upon an underwritten public offering. As a result of this 4.99%
ownership limitation, at June 29, 2005 Barron Partners LP beneficially owns
326,355 shares of our common stock based upon shares of our Series A Convertible
Preferred Stock and warrants which are convertible or exercisable, as the case
may be, within 60 days. The number of shares owned by Barron Partners excludes
any shares of our common stock issuable upon the possible conversion of any
additional shares of our Series A Convertible Preferred Stock or comparable
preferred stock and common stock purchase warrants which Barron Partners will
purchase from us upon the finalization of certain contractual terms and the
execution of a definitive agreement by the parties.
48
(2) The number of shares offered includes 100,000 shares of our common stock
presently outstanding and 150,000 shares of our common stock issuable upon the
exercise of common stock purchase warrants with exercise prices ranging from
$4.00 to $8.00 per share.
(3) The number of shares offered includes 50,000 shares of our common stock
presently outstanding and 100,000 shares of our common stock issuable upon the
exercise of common stock purchase warrants with exercise prices ranging from
$4.00 to $8.00 per share. Mr. Druzak has been a member of our Board of Directors
since June 2005.
(4) The number of shares offered includes 125,000 shares of our common stock
presently outstanding and 250,000 shares of our common stock issuable upon the
exercise of common stock purchase warrants with exercise prices ranging from
$4.00 to $8.00 per share. Mr. Keith Goodman exercises investment and voting
rights over the securities held by Nite Capital LP.
(5) The number of shares offered includes 5,000 shares of our common stock
issuable upon the exercise of a common stock purchase warrant with an exercise
price of $2.00 per share. Mr. Bryan Tom exercises investment and voting rights
over the securities held by Comerica Bank. As described earlier in this
prospectus under "Description of Securities - Comerica Bank warrant" on page 45,
this warrant was issued in connection with the granting of a credit line to us
by the bank.
(6) The number of shares offered includes 175,000 shares of our common stock
issuable upon the exercise of a common stock purchase warrant with an exercise
price of $0.70 per share. Mr. Phil Seifert exercises investment and voting
rights over securities held by Liberty Company, LLC.
(7) The number of shares offered includes 37,500 shares of our common stock
issuable upon the exercise of common stock purchase warrants with an exercise
price of $4.00 per share and 37,500 shares of our common stock purchase warrants
with an exercise price of $8.00 per share. Mr. Richard A. Mager exercises
investment and voting rights over the securities held by Cove Partners LLC.
Liberty Company, LLC is a broker/dealer and a member of the National
Association of Securities Dealers, Inc. As described earlier in this section,
Liberty Company, LLC received a warrant to purchase 175,000 shares of our common
stock as compensation for its services in the ordinary course of its business as
a finder in the Series A Convertible Preferred Stock transaction. To our
knowledge, this firm does not have any arrangement with any person to
participate in the distribution of such securities. None of the selling security
holders has, or within the past three years has had, any position, office or
other material relationship with us or any of our predecessors or affiliates,
other than as described previously in this section. We are required to pay all
fees and expenses incident to the registration of the shares. We have agreed to
indemnify the selling security holders against certain losses, claims, damages
and liabilities, including liabilities under the Securities Act of 1933. We will
not pay selling commissions and expenses associated with any sale by the selling
security holders.
PLAN OF DISTRIBUTION
The selling security holders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling security holders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
49
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o settlement of short sales;
o broker-dealers may agree with the selling security holders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; or
o any other method permitted pursuant to applicable law.
The selling security holders may also sell shares under Rule 144 under the
Securities Act of 1933, if available, rather than under this prospectus.
Broker-dealers engaged by the selling security holders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated. The selling security holders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
Broker-dealers may agree to sell a specified number of such shares at a
stipulated price per share, and, to the extent such broker-dealer is unable to
do so acting as agent for us or a selling stockholder, to purchase as principal
any unsold shares at the price required to fulfill the broker-dealer commitment.
Broker-dealers who acquire shares as principal may thereafter resell such shares
from time to time in transactions, which may involve block transactions and
sales to and through other broker-dealers, including transactions of the nature
described above, in the over-the-counter markets or otherwise at prices and on
terms then prevailing at the time of sale, at prices then related to the
then-current market price or in negotiated transactions. In connection with such
resales, broker-dealers may pay to or receive from the purchasers of such
shares, commissions as described above. In the event that shares are resold to
any broker-dealer, as principal, who is acting as an underwriter, we will file a
post-effective amendment to the registration statement of which this prospectus
forms a part, identifying the broker-dealer(s), providing required information
relating to the plan of distribution and filing any agreement(s) with such
broker-dealer(s) as an exhibit. The involvement of a broker-dealer as an
underwriter in the offering will require prior clearance of the terms of
underwriting compensation and arrangements from the Corporate Finance Department
of the National Association of Securities Dealers, Inc.
The selling security holder and these broker-dealers and agents and any
other participating broker-dealers, or agents may be deemed to be "underwriters"
within the meaning of the Securities Act of 1933, in connection with the sales.
The selling security holders may, from time to time, pledge or grant a
security interest in some or all of the shares or common stock or warrants owned
by them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of common stock,
from time to time, under this prospectus, or under a supplement to this
prospectus under Rule 424 (b)(3) or other applicable provision of the Securities
Act of 1933 amending the list of selling security holders to include the
pledgee, transferee or other successors-in-interest as selling security holders
under this prospectus.
50
The selling security holders also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors-in-interest will be the selling beneficial owners for purposes of
this prospectus.
SPECIAL CONSIDERATIONS RELATED TO PENNY STOCK RULES
Shares of our common stock may be subject to rules adopted by the SEC that
regulate broker-dealer practices in connection with transactions in "penny
stocks". Penny stocks are generally equity securities with a price of less than
$5.00 (other than securities registered on certain national securities exchanges
or quoted on the Nasdaq Stock Market, provided that current price and volume
information with respect to transactions in those securities is provided by the
exchange or system). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from those rules, to deliver a
standardized risk disclosure document which contains the following:
o a description of the nature and level of risk in the market for penny
stocks in both public offerings and secondary trading;
o a description of the broker's or dealer's duties to the customer and of
the rights and remedies available to the customer with respect to
violation to these duties or other requirements of securities laws;
o a brief, clear, narrative description of a dealer market, including
"bid" and "ask" prices for penny stocks and the significance of the
spread between the "bid" and "ask" price;
o a toll-free telephone number for inquiries on disciplinary actions;
o definitions of significant terms in the disclosure document or in the
conduct of trading in penny stocks; and
o other information as the SEC may require by rule or regulation.
Prior to effecting any transaction in a penny stock, the broker-dealer
also must provide the customer the following:
o the bid and offer quotations for the penny stock;
o the compensation of the broker-dealer and its salesperson in the
transaction;
o the number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the
market for such stock; and
o monthly account statements showing the market value of each penny stock
held in the customer's account.
In addition, the penny stock rules require that prior to a transaction in
a penny stock not otherwise exempt from those rules, the broker-dealer must make
a special written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser's written acknowledgment of the
51
receipt of a risk disclosure statement, a written agreement to transactions
involving penny stocks, and a signed and dated copy of a written statement.
These disclosure requirements may have the effect of reducing the trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. Holders of shares of our common stock may have difficulty selling
those shares because our common stock may be subject to the penny stock rules.
SHARES ELIGIBLE FOR FUTURE SALE
As of November 4, 2005, we had 6,492,286 shares of common stock issued and
outstanding. Of the issued and outstanding shares, approximately 4,755,375
shares of our common stock are "restricted securities." We have included 250,000
shares, which are considered restricted securities in the registration statement
of which this prospectus is a part. These shares may be resold by their holders
as long as they are covered by a current registration statement or under an
available exemption from registration.
In general, Rule 144 permits a stockholder who has owned restricted shares
for at least one year, to sell without registration, within a three-month
period, up to one percent of our then outstanding common stock. In addition,
stockholders other than our officers, directors or 5% or greater stockholders
who have owned their shares for at least two years, may sell them without volume
limitation or the need for our reports to be current.
We cannot predict the effect, if any, that market sales of common stock or
the availability of these shares for sale will have on the market price of the
shares from time to time. Nevertheless, the possibility that substantial amounts
of common stock may be sold in the public market could adversely affect market
prices for the common stock and could damage our ability to raise capital
through the sale of our equity securities.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be passed
upon for us by Schneider Weinberger & Beilly LLP, 2200 Corporate Boulevard,
N.W., Suite 210, Boca Raton, Florida 33431. A partner of the firm is the
beneficial owner of 8,125 shares of our common stock.
EXPERTS
Our financial statements as of and for the years ended September 30, 2004
included in this prospectus have been audited by Sherb & Co. LLP, independent
registered public accounting firm, as indicated in their report with respect
thereto, and have been so included in reliance upon the report of such firm
given on their authority as experts in accounting and auditing.
Our financial statements as of and for the year ended September 30, 2003
included in this prospectus have been audited by Daszkal Bolton LLP, independent
registered public accounting firm, as indicated in their report with respect
thereto, and have been so included in reliance upon the report of such firm
given on their authority as experts in accounting and auditing.
52
ADDITIONAL INFORMATION
We have filed with the SEC the registration statement on Form SB-2 under
the Securities Act for the common stock offered by this prospectus. This
prospectus, which is a part of the registration statement, does not contain all
of the information in the registration statement and the exhibits filed with it,
portions of which have been omitted as permitted by SEC rules and regulations.
For further information concerning us and the securities offered by this
prospectus, we refer to the registration statement and to the exhibits filed
with it. Statements contained in this prospectus as to the content of any
contract or other document referred to are not necessarily complete. In each
instance, we refer you to the copy of the contracts and/or other documents filed
as exhibits to the registration statement.
We file annual and special reports and other information with the SEC.
Certain of our SEC filings are available over the Internet at the SEC's web site
at http://www.sec.gov. You may also read and copy any document we file with the
SEC at its public reference facilities:
Public Reference Room Office
450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549
You may also obtain copies of the documents at prescribed rates by writing
to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Callers in the United States can also call
1-800-732-0330 for further information on the operations of the public reference
facilities.
53
IceWEB, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
June 30, 2005
(Unaudited)
Current assets:
Cash $ 269,960
Accounts receivable, net of allowance of $20,846 1,558,077
Prepaid expense 7,400
Other current assets 40,437
Employee advances 60,000
-----------
Total current assets 1,935,874
Property and equipment, net of accumulated depreciation of 342,409 52,817
Software development costs 129,000
Goodwill 41,800
Intangibles, net 250,691
Deposits 16,170
Deferred financing costs 185,000
-------------------------------------------------------------------------------
Total assets $ 2,611,352
-------------------------------------------------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,032,463
Accrued expenses 85,347
Advances from related party 92,875
Line of credit 461,269
Deferred revenue 4,275
-----------
Total Current liabilities 1,676,229
Notes payable - related parties 213,124
-------------------------------------------------------------------------------
Total liabilities $ 1,889,353
-------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock (par value $.001; 10,000,000 shares authorized;
Series A Convertible Preferred Stock, par value .001, 1,666,667
shares issued and 1,666,667 shares outstanding) 1,667
Common stock (par value $.001 1,000,000,000 shares authorized
6,654,787 issued, and 6,492,287 outstanding) 6,493
Treasury Stock, at cost, (162,500 shares) (13,000)
Subscription receivable (50,300)
Additional paid in capital 7,188,154
Accumulated deficit (6,411,015)
-------------------------------------------------------------------------------
Total stockholders' equity 721,999
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,611,352
-------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
F-1
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
-------------------------
June 30, June 30,
2005 2004
(Unaudited) (Unaudited)
----------- -----------
Revenue $ 2,049,483 $ 1,699,783
-------------------------------------------------------------------------------
Cost of Sales 1,464,673 1,153,591
-------------------------------------------------------------------------------
Gross Profit 584,810 546,192
Operating Expenses:
Marketing and Selling 9,402 58,231
General and Administrative 459,526 674,067
Depreciation 8,846 12,461
Amortization Expense 195,691 -
----------- -----------
Total Operating Expenses 673,465 744,759
Operating (Loss)/Income (88,655) (198,567)
Interest Expense (13,424) (11,787)
Other Income - 38,652
-------------------------------------------------------------------------------
Net (Loss)Income $ (102,079) $ (171,702)
-------------------------------------------------------------------------------
Basic Income (Loss) per common share $ (0.02) $ (0.03)
Diluted Income (Loss) per common share $ (0.01) $ (0.03)
Weighted average common shares outstanding basic 5,962,657 5,148,806
Weighted average common shares outstanding diluted 12,907,606 5,148,806
See accompanying notes to unaudited consolidated financial statements
F-2
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
-------------------------
June 30, June 30,
2005 2004
(Unaudited) (Unaudited)
----------- -----------
Revenue $ 4,987,776 $ 4,848,499
-------------------------------------------------------------------------------
Cost of Sales 3,789,535 3,379,655
-------------------------------------------------------------------------------
Gross Profit 1,198,241 1,468,844
Operating Expenses:
Marketing and Selling 25,825 154,440
General and Administrative 1,337,326 1,588,640
Depreciation 36,807 52,716
Amortization Expense 587,073 -
----------- -----------
Total Operating Expense 1,987,031 1,795,796
Operating Loss (788,790) (326,952)
Interest Expense (44,361) (33,739)
Other Income 19,283 38,652
-------------------------------------------------------------------------------
Net (Loss) (813,868) (322,039)
-------------------------------------------------------------------------------
Preferred Stock Dividend (1,000,000) -
-------------------------------------------------------------------------------
Loss available to Shareholders $(1,813,868) $ (322,039)
-------------------------------------------------------------------------------
Basic and diluted Loss per common share $ (0.31) $ (0.07)
-------------------------------------------------------------------------------
Weighted average common shares outstanding basic
and diluted 5,795,522 4,846,944
-------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
F-3
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
-------------------------
June 30, June 30,
2005 2004
(Unaudited) (Unaudited)
----------- -----------
-------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $(1,003,322) $ 30,428
-------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (132,373) (77,437)
Cash acquired in acquisitions - 103,107
-------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (132,373) 25,670
-------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments from(to) related parties (116,337) (44,318)
Payment of subscription receivable 1,700 -
Common Stock issued for cash 468,375 158,600
Net Preferred Stock issued for cash 845,836 -
Proceeds from the exercise of common stock option 27,300 9,660
Purchase of treasury stock - (13,000)
-------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,226,874 110,942
-------------------------------------------------------------------------------
NET INCREASE IN CASH 91,179 167,040
CASH - beginning of year 178,781 104,314
-------------------------------------------------------------------------------
CASH - end of period 269,960 271,354
-------------------------------------------------------------------------------
See accompanying notes to the unaudited consolidated financial statements
F-4
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
JUNE 30, 2005
NOTE 1 - BASIS OF PRESENTATION
The financial statements included in this report have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission for interim reporting and include all adjustments (consisting only of
normal recurring adjustments) that are, in the opinion of management, necessary
for a fair presentation. These financial statements have not been audited.
Certain amounts in the 2004 consolidated financial statements have been
reclassified to conform to the 2005 consolidated financial statement
presentation. These reclassifications had no impact on previously reported net
results of operations or stockholders' equity.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations for
interim reporting. The Company believes that the disclosures contained herein
are adequate to make the information presented not misleading. However, these
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report for the year ended
September 30, 2004^, as amended. The financial data for the interim periods
presented may not necessarily reflect the results to be anticipated for the
complete year.
NOTE 2 - RELATED PARTIES
Stockholders/Employees have loans totaling $152,186 plus accrued interest of
approximately $60,938. Of this amount, $150,000 bears interest at a rate of
12.5% per annum. The Company has issued the note holder 125,000 shares of common
stock in exchange for the individual to extend the maturity date of the note by
10 years. The cost associated with these shares has been accounted for as
deferred finance charges, and are being amortized over the life of the deferral
period. The shares were valued at $200,000 the fair value at the date of
issuance. An employee has a loan totaling $60,000 payable on demand. This item
is shown separately on the balance sheet as employee advances. This employee is
not an officer of the company.
The Chief Executive Officer of the Company, from time to time, provides advances
to the Company for operating expenses. These advances are short-term in nature
and non-interest bearing. The amount due to the Chief Executive Officer of
$92,875, at June 30, 2005 is shown separately on the balance sheet as advances
from related party.
NOTE 3 - STOCKHOLDERS' EQUITY
Between December 2004 and January 2005, the Company sold 250,000 units of its
securities at a purchase price of $2.00 per unit to three accredited investors
in exchange for gross proceeds of $500,000. In this transaction the Company
issued an aggregate of 250,000 shares of its common stock, 250,000 Series H
Common Stock Purchase Warrants with an exercise price of $4.00 per share and
expiring in December 2007 and 250,000 Series I Common Stock Purchase Warrants
with an exercise price of $8.00 per share and expiring in December 2009. A third
party with whom the Company had previously entered into an agreement with to
provide assistance and advisory services to the Company, including the structure
of financing, strategic planning and business combinations, introduced the
Company to the investors and received fees of $20,000 in cash and common stock
purchase warrants to purchase an aggregate of 75,000 shares of our common stock
at exercise prices ranging from $4.00 to $8.00 per share.
F-5
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
JUNE 30, 2005
In March 2005, the Company sold an accredited investor 1,666,667 shares of its
Series A Convertible Preferred Stock and issued the purchaser Common Stock
Purchase Warrants "A", "B" and "C" to purchase an aggregate of 4,500,000 shares
of its common stock at exercise prices ranging from $2.00 to $9.60 per share for
an aggregate purchase price of $1,000,000. These five year common stock purchase
warrants contain a cashless exercise provision and the exercise price of the "A"
warrants are subject to reduction in the event the Company does not meet certain
financial criteria in future periods. The Company received net proceeds of
$845,000 after payment of expenses of $70,000 and a finder's fee to a broker
dealer of $65,000. The Company also issued the broker dealer a warrant to
purchase 175,000 shares of its common stock with an exercise price of $0.70 per
share, the terms of which, other than the exercise price, are identical to the
Common Stock Purchase Warrants "A" issued to the investor.
During the current quarter no common stock options were exercised by employees.
In April 2005 the Company issued 416,667 shares of its common stock in exchange
for $50,000 and the satisfaction of a note payable in the principal amount of
$93,177 which had been acquired from a related party. The $50,000 is reflected
on the Company's balance sheet at June 30, 2005 as a subscription receivable.
The transfer or sale of the shares is restricted until such time as the
subscription receivable has been paid.
In April 2005 the Company also issued 125,000 shares of its common stock to an
employee as satisfaction of a related party loan in the amount of $77,000.
On April 27, 2005, the Company effected a 1 for 80 reverse split of its issued
and outstanding common stock. All amounts have been retroactively adjusted to
reflect this split.
In May 2005 the Company issued a stockholder whom it owed $150,000 principal
plus interest under an unsecured promissory note 125,000 shares of its common
stock as consideration for a 10 year extension of the due date of the note. See
Note 2.
NOTE 4 - STOCK OPTIONS AND COMMON STOCK PURCHASE WARRANTS
A summary of the status of the Company's outstanding stock options as of June
30, 2005 and changes during the period ending on that date is as follows:
Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at March 31, 2005 .................. 779,460 $2.17
Granted ........................................ 270,500 1.57
Exercised ...................................... - (0.00)
Forfeited ...................................... (44,375) (2.64)
--------- -----
Outstanding at June 30, 2005 ................... 1,005,585 $2.01
--------- -----
Options exercisable at end of period ........... 603,282 $1.99
--------- -----
Weighted-average fair value of options granted
during the period .............................. - $1.57
F-6
ICEWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
JUNE 30, 2005
Common stock warrants
---------------------
A summary of the status of the Company's outstanding stock warrants granted as
of June 30, 2005 and changes during the period is as follows:
Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at March 31, 2005 .................. 6,176,250 $5.00
Granted ........................................ - -
Exercised ...................................... - -
Forfeited ...................................... - -
--------- -----
Outstanding at June 30, 2005 ................... 6,176,250 $5.00
--------- -----
Warrants exercisable at end of period .......... 6,176,250 $5.00
--------- -----
The following information applies to all warrants outstanding at June 30, 2005:
Warrants Outstanding Warrants Exercisable
---------------------------- ---------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Life Exercise Exercise
Prices Shares (Years) Price Shares Price
-------- --------- ---------------- -------- --------- --------
$ 0.70 175,000 4.75 $ 0.70 175,000 $ 0.70
$ 2.00 2,000,000 4.75 $ 2.00 2,000,000 $ 2.00
$ 4.80 1,250,000 4.75 $ 4.80 1,250,000 $ 4.80
$ 9.60 1,250,000 4.75 $ 9.60 1,250,000 $ 9.60
$ 4.00 250,000 2.5 $ 4.00 250,000 $ 4.00
$ 8.00 250,000 4.5 $ 8.00 250,000 $ 8.00
$ 2.40 58,750 10 months $ 2.40 58,750 $ 2.40
$ 4.80 58,750 10 months $ 4.80 58,750 $ 4.80
$ 8.00 58,750 10 months $ 8.00 58,750 $ 8.00
$16.00 58,750 10 months $16.00 58,750 $16.00
$ 2.40 228,750 3 months $ 2.40 228,750 $ 2.40
$ 4.80 228,750 3 months $ 4.80 228,750 $ 4.80
$ 8.00 228,750 3 months $ 8.00 228,750 $ 8.00
$ 2.00 5,000 6.0 $ 2.00 5,000 $ 2.00
$ 4.00 37,500 2.5 $ 4.00 37,500 $ 4.00
$ 8.00 37,500 4.5 $ 8.00 37,500 $ 8.00
SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") and SFAS No.
148 "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS
148") requires the Company to disclose pro forma information regarding option
grants made to its employees. SFAS 123 specifies certain valuation techniques
that produce estimated compensation charges that are included in the pro forma
results below. These amounts have not been reflected in the Company's Statement
of Operations, because Accounting Principles Board Opinion 25, "Accounting for
Stock issued to Employees" specifies that no compensation charge arises when the
price of the employees' stock options equal the market value of the underlying
stock at the grant date, as in the case of options granted to the Company's
employees.
F-7
Pro forma results are as follows for the three months ended June 30, 2005:
Actual net income(loss) ............................. (102,079)
SFAS 123 Compensation Cost .......................... 0
--------
Pro forma net income(loss) .......................... (102,079)
--------
Pro forma basic and diluted net income per share .... (.02)
Under SFAS 123, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. The following weighted
average assumptions were used:
Risk free interest rate ....................... 4%
Expected dividends ............................ 0
Volatility factor ............................. 52%
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of the Company's options.
NOTE 5 - ACCOUNTS RECEIVABLE
Accounts receivable consist of normal trade receivables. The Company assesses
the collectability of its accounts receivable regularly.
NOTE 6 - SOFTWARE DEVELOPMENT COSTS
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," capitalization of
software development costs begins upon the establishment of technological
feasibility of the software. The establishment of technological feasibility and
the ongoing assessment of the recoverability of these costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, anticipated future gross product revenues, estimated economic
life, and changes in software and hardware technology. Capitalized software
development costs are amortized utilizing the straight-line method over the
estimated economic life of the software not to exceed three years.
As of June 30, 2005, such capitalizable software development costs were
approximately $129,000. These costs will be amortized over a period of three
years beginning July, 1, 2005. The Company regularly reviews the carrying value
of software development assets and a loss is recognized when the unamortized
costs are deemed unrecoverable based on the estimated cash flows to be generated
from the applicable software.
F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
IceWEB, Inc.
We have audited the accompanying consolidated balance sheet of IceWEB, Inc. and
Subsidiaries as of September 30, 2004 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of IceWEB,
Inc. and Subsidiaries, as of September 30, 2004 and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 15 to
the consolidated financial statements, the Company had net losses and cash used
in operations of $2,035,443 and $794,861 respectively, for the year ended
September 30, 2004. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regards to these
matters are also described in Note 15. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Sherb & Co., LLP
Certified Public Accountants
New York, New York
January 11, 2005, except as to
Note 10 for which the date is November 8, 2005
F-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of IceWEB, Inc. and subsidiaries:
We have audited the accompanying consolidated statements of operations,
stockholders' deficit and cash flows of IceWEB, Inc. and subsidiaries for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of its operations and its cash
flows for the year September 30, 2003, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Notes. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/Daszkal Bolton LLP
Daszkal Bolton LLP
Boca Raton, Fl
January 14, 2004
F-10
Iceweb, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
September 30, 2004
Assets
Current assets:
Cash $ 178,781
Accounts receivable, net 1,062,707
------------------------------------------------------------------------------
Total current assets 1,241,488
Property and equipment, net 86,251
Goodwill 41,800
Deposits 16,170
Intangibles, net 822,764
------------------------------------------------------------------------------
Total assets $ 2,208,473
------------------------------------------------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Note payable $ 461,269
Accounts payable 1,233,708
Accrued expenses 152,577
Deferred revenue 19,030
Notes payable - related parties 424,461
------------------------------------------------------------------------------
Total current liabilities 2,291,045
------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock (par value $.001; 1,000,000 shares
authorized and no shares issued and outstanding) -
Common stock (par value $.001; 1,000,000,000 shares authorized,
434,399,240 issued, and 421,399,240 outstanding) 434,399
Subscription receivable (52,000)
Additional paid in capital 4,145,404
Accumulated deficit (4,597,375)
Treasury Stock, at cost, (13,000,000 shares) (13,000)
------------------------------------------------------------------------------
Total stockholders' equity (82,572)
------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,208,473
------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-11
Iceweb, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended September 30, 2004 and 2003
2004 2003
------------------------------------
Revenue $ 6,662,652 $ 1,681,505
Cost of sales 5,015,494 1,264,338
------------------------------------------------------------------------------
Gross profit 1,647,158 417,167
Operating expenses
Marketing and selling 125,414 20,104
Stock compensation expense 2,600 -
Research and development 580,053 -
Depreciation expense 52,716 95,242
General and administrative 1,947,392 560,245
Amortization expense 948,435 -
------------------------------------------------------------------------------
Total operating expense 3,656,610 675,591
Operating loss (2,009,452) (258,424)
Rental revenue 34,888 -
Change in estimate - 183,316
Interest expense (60,879) (30,736)
------------------------------------------------------------------------------
Net loss $ (2,035,443) $ (105,844)
------------------------------------------------------------------------------
Basic & diluted loss per common share $ (0.00) $ (0.00)
------------------------------------------------------------------------------
Weighted average common shares
outstanding - basic and diluted 403,949,470 319,004,670
------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-12
Iceweb, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended September 30, 2004 and 2003
Common Stock Subscription Additional Accumulated Treasury Stock
Shares Amount Receivable Paid-In Deficit Share Amount Total
----------- -------- ------------ ---------- ----------- ----------- -------- ----------
Balance at
September 30, 2002 301,128,780 $301,130 $ - $1,341,049 $(2,456,088) - $ - $ (813,909)
Common stock issued 47,700,000 47,700 - 374,300 - - - 422,000
Equity issued for services 1,680,000 1,680 - 47,480 - - - 49,160
Common stock issued
in satisfaction -
of liabilities 5,500,000 5,500 - 104,965 - - - 110,465
Common stock issued in
acquisitions 5,000,000 5,000 - 91,000 - - - 96,000
Net loss for the year - - - - (105,844) - - (105,844)
-----------------------------------------------------------------------------------------------------
Balance at
September 30, 2003 361,008,780 361,010 - 1,958,794 (2,561,932) - - (242,128)
Sale of common stock 31,200,000 31,200 - 382,400 - - - 413,600
Common stock issued in
acquisitions 30,310,460 30,309 - 1,676,179 - - - 1,706,488
Common stock issued for
the exercise of common
stock options 12,080,000 12,080 (52,000) 125,231 - - - 85,311
Common stock issued for
settlement 100,000 100 - 2,500 - - - 2,600
Common stock cancelled (300,000) (300) - 300 - - - -
Treasury stock - - - - - (13,000,000) (13,000) (13,000)
Net loss for the year - - - - (2,035,443) - - (2,035,443)
-----------------------------------------------------------------------------------------------------
Balance at
September 30, 2004 434,399,240 $434,399 $(52,000) $4,145,404 $(4,597,375) (13,000,000) $(13,000) $ (82,572)
=====================================================================================================
See accompanying notes to consolidated financial statements
F-13
Iceweb, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 2004 and 2003
2004 2003
------------ -----------
CASH FLOWS FROM OPERATIONS:
Net loss $ (2,035,443) $ (105,844)
Adjustments to reconcile net loss to net cash in operating activities:
Common stock and options issued for settlement 2,600 -
Depreciation & Amortization 1,001,151 95,242
Changes in operating assets and liabilities, net of acquisitions:
(Increase) decrease in:
-----------------------
Accounts receivable (672,934) (303,201)
Prepaid expense 8,056 (938)
Deposits (3,505) (3,132)
Increase (decrease) in:
-----------------------
Accounts payable 856,363 9,163
Accrued expense 43,236 91,700
Deferred revenue 5,615 12,920
--------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (794,861) (204,090)
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (10,183) (40,763)
Cash acquired in acquisitions, net 37,637 -
Acquisition of subsidiaries - (174,866)
--------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 27,454 (215,629)
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments on) Proceeds from line of credit 334,269 (206,075)
Payments to related parties (43,805) (54,528)
Proceeds from related party 65,499 98,000
Common stock issued for cash 413,600 -
Exercise of common stock options 85,311 -
Contributed capital - 677,626
Purchase of treasury stock (13,000) -
--------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 841,874 515,023
--------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 74,467 95,304
CASH - beginning of year 104,314 9,010
--------------------------------------------------------------------------------------------------------------------
CASH - end of year $ 178,781 $ 104,314
--------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 6,175 $ -
--------------------------------------------------------------------------------------------------------------------
Cash paid for taxes $ - $ -
--------------------------------------------------------------------------------------------------------------------
Non-cash investing and financing activities:
Common stock issued for acquisitions $ 1,706,488 $ -
--------------------------------------------------------------------------------------------------------------------
Stock subscription receivable $ 52,000 $ -
--------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-14
ICEWEB, INC and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2004 and 2003
NOTE 1--ORGANIZATION
Iceweb Communications, Inc. was originally incorporated in Virginia in March
1996, and then was reincorporated as Iceweb, Inc. in Delaware in September 2001.
The Company first operated as a full service provider of computer systems and
professional services to private sector corporations and to the federal
government under a General Services Administration (GSA) schedule contract for
computer systems and peripherals. The Company acquired the assets of
LearningStream, Inc. in June 2001, which coincided with the transition of the
Company's business model to focus on e-learning. In March 2002, the Company
executed a reverse merger with Disease Sciences, Inc. and began trading publicly
on the OTC Bulletin Board. Under the agreement, the former business of Disease
Sciences was separated from the post merger company. The Company filed the
required documents to record the merger and change the name to Iceweb, Inc.
("the Company") with the Delaware Secretary of State in September 2002. In June
2003, the Company added two subsidiaries, acquiring all of the outstanding stock
of Interlan Corporation and The Seven Corporation. Interlan is a full service
provider of computer equipment and integration services. The Seven Corporation
provides network engineering services. On October 5, 2003, the Company acquired
the software ownership rights and customers of Iplicity, Inc. of Virginia.
Iplicity had developed a complete content management software platform based on
open source architecture to run in any operating environment. On May 13, 2004,
the Company, through its wholly owned subsidiary Propster, Inc., acquired
substantially all of the assets of DevElements, Inc. of Virginia. DevElements is
a professional IT consultancy firm that designs, develops and implements
web-based productivity solutions for the customers.
On October 13, 2004, the Company effected a 10:1 forward split of its common
stock. Additionally, the Company amended its Articles of Incorporation to
increase its authorized number of shares to 1,000,000,000. All amounts presented
in these financial statements have been retroactively restated to give effect to
the forward split of the Company's stock.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(b) Accounts Receivable
Accounts receivable consist of normal trade receivables. The Company recorded an
allowance of $28,446 for the year ended September 30, 2004. Management performs
ongoing evaluations of its accounts receivable and customer base. Managements
believe that all remaining receivables are fully collectable. Bad debt expense
is $100,244 and $0 for the years ended September 30, 2004 and 2003,
respectively.
(c) Revenue Recognition
Generally, revenues from sales of products are recognized when products are
shipped unless the Company has obligations remaining under sales or licensing
agreements, in which case revenue is either deferred until all obligations are
satisfied or recognized ratably over the term of the contract. The Company uses
the percentage of completion method to recognize revenue and expense from
contracts extending through fiscal quarters. Revenue from services is recorded
each month as it is earned. Customers are generally billed every two weeks based
on the units of production for the project. Each project has an estimated total
which is based on the estimated units of production and agreed upon billing
rates.
(d) Property and equipment
Property and equipment are stated at cost, and depreciation is provided by use
of the straight-line method over the estimated useful lives of the assets.
(e) Earnings Per Share
The Company computes earnings per share in accordance with Statement of
Accounting Standards No. 128, "Earnings per Share ("SFAS No. 128"). Under the
provisions of SFAS No. 128, basic earnings per share is computed by dividing the
net income (loss) for the period by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing the net income (loss) for the period by the weighted average number of
common and potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares consist of the common shares issuable upon
the exercise of stock options and warrants (using the treasury stock method) and
upon the conversion of convertible preferred stock (using the if-converted
method). Potentially dilutive common shares are excluded form the calculation if
their effect is antidilutive.
F-15
(f) Stock Based Compensation
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations including FASB Interpretation No. 44,
"Accounting for Certain Transactions involving Stock Compensation an
interpretation of APB Opinion No. 25" issued in March 2000, to account for its
fixed plan stock options. Under this method, compensation expense is recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. SFAS No. 123 and SFAS No. 148, "Accounting for
Stock-Based compensation," established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123 and SFAS No.
148.
(g) Use of Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the balance sheets and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
(h) Goodwill
Goodwill represents the amount by which the purchase price of a business
acquired exceeds the fair market value of the net assets acquired under the
purchase method of accounting. The Company assesses whether its goodwill and
other intangible assets are impaired as required by SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets to be Disposed of," based on an
evaluation of undiscounted projected cash flows through the remaining
amortization period. If impairment exists, the amount of such impairment is
calculated based on the estimated fair value of the asset. The Company has not
amortized or recognized any impairment of goodwill during the year ended
September 30, 2004.
(i) Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 153 "Exchanges of Non-Monetary Assets" -
an amendment of APB Opinion No. 29. This Statement amended APB Opinion 29 to
eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. A non-monetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The adoption of this Standard is not
expected to have any material impact on the Company's financial position,
results of operations or cash flows.
In December 2004, the FASB issued SFAS 123 (revised 2004) "Share-Based Payment".
This Statement requires that the cost resulting from all share-based
transactions be recorded in the financial statements. The Statement establishes
fair value as the measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a fair-value-based measurement
in accounting for share-based payment transactions with employees. The Statement
also establishes fair value as the measurement objective for transactions in
which an entity acquires goods or services from non-employees in share-based
payment transactions. The Statement replaces SFAS 123 "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25 "Accounting for
Stock Issued to Employees". The provisions of this Statement will be effective
for the Company beginning with its fiscal year ending 2007. The Company is
currently evaluating the impact this new Standard will have on its financial
position, results of operations or cash flows.
(j) Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations or retained earnings.
F-16
NOTE 3--PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follows:
ESTIMATED
USEFUL LIFE 9/30/2004
----------------- -------------------
Computer equipment 3 years $ 198,406
Computer software 3 years 163,314
Furniture and fixtures 5 years 30,133
-------------------
Total property and equipment 391,853
Less: accumulated depreciation (305,602)
-------------------
Property and equipment, net $ 86,251
===================
Depreciation expense for the years ended September 30, 2004 and 2003 was $52,716
and $95,242 respectively.
NOTE 4--OPERATING LEASES
The Company leases facilities in Herndon, VA for office space and developmental
work through December 2005. During 2004, the Company negotiated to lease office
space at its current location, as the prior lease expired in April 2004. Total
rental expense for the years ended September 30, 2004 and 2003 was $103,037 and
$49,875, respectively. The Company also leases facilities for one of its
subsidiaries at $2,100 per month. This lease continues through June 30, 2005.
The Company assumed responsibility for the remainder of the office lease of
Iplicity, Inc., which was acquired in the beginning of the current fiscal year.
The monthly rental expense for this space is $3,885. The Company has sub-leased
this space beginning November 1, 2003 through March 31, 2005, for a monthly
payment of $3,172. The total of all rental payments for the term of the sublease
were paid up-front. As of September 30, 2004, $34,888 of sub-lease rental income
and deferred revenue includes $19,030 representing sub-lease income for October
2004 through March 2005.
The Company also assumed responsibility for four lease agreements with Dell
Financial, for computer equipment, and one lease with GE Capital for an office
copy and fax machine. These leases were entered into by the companies acquired
during the year. The total minimum lease obligation for the office space and
equipment leases combined for the next five fiscal years is as follows:
Fiscal Year Amount
----------- ------
2005 $ 191,685
2006 $ 57,541
2007 $ 2,798
-------------
$ 252,024
=============
NOTE 5--RELATED PARTY TRANSACTIONS
At September 30, 2004, the Company had a note payable to John R. Signorello, the
Chairman and CEO, for $109,176 plus accrued interest of approximately $44,490.
This note bears interest at a rate of 12.5% per annum and is due on-demand.
At September 30, 2004, the Company had a note payable to one of its shareholders
for $150,000 plus accrued interest of approximately $43,607. This note bears
interest at a rate of 12.5% per annum and is due on-demand.
At September 30, 2004 other Stockholders/Employees have loans totaling $77,188.
These notes are non-interest bearing and are due on or before December 31, 2004.
NOTE 6--NOTE PAYABLE
On July 21, 2004, the Company entered into a Loan and Security agreement with
Comerica Bank, to obtain a revolving credit line in the amount of $500,000. At
September 30, 2004, the amount outstanding was $461,269. The term of the
agreement is 364 days from the date of closing. The terms of the agreement give
Comerica Bank a first position on the Company's debt. In addition this note is
collateralized by the assets of the Company. Advances on the credit line bear
interest at a variable rate equal to one (1) percentage point above the Prime
Rate. The Prime Rate is defined as that most recently announced by Comerica Bank
as its "prime rate", whether or not such rate is the lowest available from the
Bank. The agreement includes financial covenants for a Quick Ratio of at least
1.00 to 1.00 and Tangible Net Worth of $190,000 through January 30, 2005. The
Tangible Net Worth increases incrementally thereafter.
F-17
At September 30, 2004, the Company does not meet the financial covenants for
Quick Ratio and Tangible Net Worth and is therefore in default per the terms of
the agreement. On November 18, 2004, the Company executed a Forbearance and
Consent agreement with Comerica Bank, which recognizes the default and contains
certain forbearances by the Bank from enforcing rights and exercising remedies
in connection with the default.
NOTE 7--CONCENTRATION OF CREDIT RISK
The Company maintains its cash bank deposits at various financial institutions
which, at times, may exceed federally insured limits. Accounts are guaranteed by
the Federal Deposit Insurance Corporation (FDIC) up to $100,000. At September
30, 2004 the Company had approximately $75,030 in excess of FDIC insured
limits. The Company has not experienced any losses in such accounts.
NOTE 8--MAJOR CUSTOMERS
Sales to two customers represented approximately 34% and 27% of total sales for
the years ended September 30, 2004 and 2003, respectively. As of September 30,
2004 approximately 36% of the Company's accounts receivable were due from these
two customers.
NOTE 9--INCOME TAXES
As of September 30, 2004 the Company had an unused net operating loss carry
forward of approximately $3,533,823 available for use on its future corporate
federal tax returns. The Company's evaluation of the tax benefit of its net
operating loss carry forward is presented in the following table. The tax
amounts have been calculated using the Company's effective income tax rate
resulting from the use of graduated rates.
2004
----
Deferred tax asset:
Tax benefit of net operating loss carry forward $ 1,680,847
Tax provision of accumulated depreciation (6,607)
Tax benefit of allowance for doubtful accounts 15,531
Tax benefit of accumulated depreciation -
Less: valuation allowance (1,689,771)
-------------
Total deferred tax asset $ -
The table below summarizes the differences between the Company's effective tax
rate and the statutory federal rate as follows for fiscal 2004:
2004
----
Computed "expected" tax expense (benefit) (34.0)%
State income taxes (3.5)%
Change in valuation allowance 37.50%
Effective tax rate 0.0%
The valuation allowance at September 30, 2004 was $1,334,108. The increase
during fiscal 2004 was $441,018.
Net operating loss carryforward expires between 2021 and 2024. The utilization
of the above loss carry forwards, for federal income tax purposes may be subject
to limitation resulting from changes in ownership.
Note 10--ACQUISITIONS
For the year ended September 30, 2004, two companies were acquired, Iplicity,
Inc. and DevElements, Inc. On October 4, 2003, the Company acquired
substantially all of the assets of Iplicity, Inc. of Virginia. The Company
purchased software licenses, source code, potential patents and trademarks for a
combined stock and, cash value of approximately $632,000. These items are
reflected in the Financial Statements as $65,500 for software and $566,487
goodwill. Per this amended filing the goodwill in the amount of $566,487 has
been reclassified as an intangible assets for customer relationships and is
being amortized over a 2 year period of 57% in year one and 43% in year two.
Iplicity had developed a complete content management software platform based on
open source architecture to run in any operating environment.
F-18
On May 13, 2004, the Company, through its wholly owned subsidiary Propster,
Inc., acquired substantially all of the assets of DevElements, Inc. of Virginia.
The Company purchased software licenses, source code, potential patents and
trademarks, cash, hardware, and equipment for a combined stock and cash value of
approximately $1,290,000. The Company issued 15,000,000 shares of common stock
and options to purchase 15,000,000 shares of common stock exercisable at a price
of $0.34 per share and expiring May 13, 2009. These items were reflected in the
Financial Statements as $103,107 in cash, $73,101 accounts receivable and $7,118
other current asset, $12,028 fixed assets, $1,094,645 goodwill and $150,000 note
payable to SunTrust Bank, which was assumed by Iceweb in lieu of a cash payment
to DevElements, Inc. Per this amended filing, the goodwill in the amount of
1,094,645 has been reclassified as intangible assets for customer relations and
acquired software in the amounts of $860,645 and $234,000, respectively. The
customer relationship asset is being amortized over a two year period of 42% in
year one and 58% in year two. The acquired software is being amortized over a
one to five year period. The SunTrust liability was an open-ended revolving line
of credit in the amount of $150,000, principle due on demand and interest
charged at a rate of prime plus 2.00%. Pursuant to the Asset Purchase Agreement,
the future owners of DevElements, Inc. could be eligible for contingent cash
payments up to $100,000. Potential payments were to be based on the achievement
of certain cash flow objectives. To date these objectives have not been met.
DevElements, Inc. is a professional IT consultancy that designs, develops and
implements web-based productivity solutions for organizations with operational
efficiency goals. By combining leading edge technologies with an innovative
approach to business process management, the staff builds solutions that
capitalize on an organization's strengths and empower their employees to do
their jobs better, faster and cheaper. From highly creative, interactive,
sales-focused web sites to knowledge management and employee information
systems, DevElements solutions embody the vision of the paperless workplace.
DevElements was incorporated in Virginia in June 1999. At the time of the
acquisition, DevElements employed 30 people.
For the year ended September 30, 2003, two companies were acquired, Interlan
Corporation and The Seven Corporation. In June 2003, the Company acquired all of
the outstanding stock of Interlan and Seven in exchange for $165,000 in cash,
$42,000 paid at closing and $123,000 payable over the next six months and
5,000,000 shares of Iceweb stock. The total value of cash and stock paid was
$261,000, resulting in goodwill recorded of $174,866. Per this amended filing, a
portion of the goodwill in the amount of $110,066 has been reclassified as
customer relationships, an intangible asset and is being fully amortized in the
current period.
During the first quarter of fiscal 2004, the note payable due to the seller of
The Seven Corporation agreed to reduce the amount owed by $23,000. This amount
was reflected as an adjustment to the purchase price and goodwill.
The following unaudited pro forma consolidated results of operations have been
prepared as if the acquisitions of Interlan, Seven Corporation, Iplicity and
Develements had occurred as of the beginning of the following periods:
Year Ended September 30,
2004 2003
----------- -----------
Net revenues $ 8,053,984 $6,278,890
Net loss from continuing operations $(1,216,214) $ (415,102)
Net loss $(1,249,203) $ (277,447)
Net loss per share $ (0.00) $ (0.00)
Pro forma data does not purport to be indicative of the results that would have
been obtained had these events actually occurred at the beginning of the periods
presented and is not intended to be a projection of future results.
NOTE 11--STOCKHOLDERS' EQUITY
The Company is authorized to issue 1,000,000 shares of Preferred Stock, par
value $.001, with such designations, rights and preferences as may be determined
from time to time by the Board of Directors. There are currently zero shares of
Preferred Stock issued and outstanding.
During the year ended September 30, 2004, the Company sold 31,200,000 shares of
common stock to accredited investors for $413,600 exempt from registration
pursuant to Section 4(2). The investors were sophisticated and had access to the
consolidated financial statements of the corporation. During the year ending
September 30, 2003, the Company sold 47,700,000 shares of common stock for
$422,000.
On October 4, 2003, the Company issued 15,310,460 shares of common stock as part
of the acquisition agreement with Iplicity, Inc (See Note 10).
On May 13, 2004, the Company issued 15,000,000 shares of common stock as part of
the acquisition agreement with DevElements, Inc (See Note 10).
The Company issued 67,759,960 stock options to employees under the Company's
stock option plan (See Note 12).
F-19
NOTE 12--STOCK OPTION PLAN
During March 2002, the Company adopted the "Management and Director Equity
Incentive and Compensation Plan." The maximum number of shares authorized and
available under the plan is 10,000,000 shares. Under the terms of the plan, the
options expire after 5 years, as long as the employees remain employed with the
Company. The following is a summary of option activity for the years ended
September 30, 2004 and 2003:
Stock option activity during the period is indicated as follows:
OPTIONS AVAILABLE EXERCISE
FOR GRANT OPTIONS PRICE
----------------- ----------- ---------
Balance, September 30, 2002 85,750,000 14,250,000 .02
Granted 39,820,000 .01 - .04
Forfeited (15,050,000) .01 - .04
-------------------------------------------------------------------------
Balance, September 30, 2003 60,980,000 39,020,000 .01 - .04
Granted 67,759,960 .02 - .04
Exercised (12,080,000) .01 - .04
Forfeited (47,636,000) .01 - .04
-------------------------------------------------------------------------
Balance, September 30, 2004 40,856,040 47,063,960 .01 - .04
=========================================================================
Options and Warrants Options and Warrants
Outstanding Exercisable
--------------------------------------------------- -------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise September 30, Contractual Exercise September 30, Exercise
Price 2004 Life (Years) Price 2004 Price
-------- -------------- ------------ -------- -------------- --------
.008-.012 8,655,000 1.60 $ 0.01 3,859,000 $ 0.009
.013-.020 19,235,000 2.20 0.02 7,142,600 0.018
.021-.040 19,173,960 2.09 0.03 6,054,150 0.033
---------- ------ --------- -------
47,063,960 $ 0.02 7,055,750 $ 0.022
========== ====== ========= =======
The employee option grants provide that the option will be canceled ninety days
after an employee leaves employment with the Company.
SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") and SFAS No.
148 "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS
148") requires the Company to disclose pro forma information regarding option
grants made to its employees. SFAS 123 specifies certain valuation techniques
that produce estimated compensation charges that are included in the pro forma
results below. These amounts have not been reflected in the Company's Statement
of Operations, because Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees," specifies that no compensation charge arises when
the price of the employees' stock options equal the market value of the
underlying stock at the grant date, as in the case of options granted to the
Company's employees
SFAS No. 123 pro forma results are as follows for the fiscal year periods ended
September 30, 2004 and 2003:
2004 2003
---- ----
Actual net loss $2,035,443 $105,844
SFAS 123 Compensation Cost 237,198 53,238
---------- --------
Pro forma net loss $2,272,641 $159,082
========== ========
Pro forma basic and diluted net loss per share ($0.00) ($0.00)
========== ========
Under SFAS 123, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. The following weighted
average assumptions were used:
Risk free interest rate 4%
Expected dividends 0
Volatility factor 148%
F-20
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of the Company's options.
NOTE 13--SIGNIFICANT CUMSTOMER INFORMATION AND SEGMENT REPORTING
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, establishes standards for the reporting by business enterprises of
information about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments with Iceweb
for making operational decisions and assessments of financial performance.
IceWEB's chief operating decision-maker is considered to be the chief executive
officer (CEO). The CEO reviews financial information presented on a consolidated
basis for purposes of making operating decisions and assessing financial
performance. The financial information reviewed by the CEO is identical to the
information presented in the accompanying consolidated statements of operations.
Therefore, Iceweb has determined that it operates in a single operating segment,
specifically, web communications services. For the periods ended September 30,
2004 and 2003 all material assets and revenues of IceWEB were in the United
States.
NOTE 14--CHANGE IN ESTIMATE
During the year ended September 30, 2003, the Company recognized approximately
$183,316 in reduced expenses. This reduction in expenses related to 2002 accrued
payroll and expenses that were either forgiven or settled for less than the
original amount.
NOTE 15--GOING CONCERN
The Company's auditors stated in their reports on the financial statements of
the Company for the years ended September 30, 2004 and 2003 that the Company is
dependent on outside financing and has had losses since inception that raise
substantial doubt about our ability to continue as a going concern.
For the year ended September 30, 2004, the Company incurred net annual losses of
($2,035,443) and used cash in operations of $794,861. The financial statements
do not include any adjustments relating to the recoverability and classification
of recorded assets, or the amounts and classification of liabilities that might
be necessary in the event the Company cannot continue in existence.
Management has established plans intended to increase the sales of the Company's
products and services. Management intends to seek new capital from new equity
securities offerings to provide funds needed to increase liquidity, fund growth
and implement its business plan; however, no assurance can be given that the
Company will be able to raise any additional capital.
NOTE 16--SUBSEQUENT EVENTS
a) On October 13, 2004 the Iceweb stock was forward split 10:1. As of that
date, the stock began trading at one-tenth of the share price from the
previous day close. Each shareholder received nine (9) additional
shares for every one share owned.
b) On October 18, 2004, the Company entered into a Letter of Intent to
purchase PlanGraphics, Inc. Subsequently, on November 11, 2004, the
Company received preliminary consent by their banking partner,
Comerica, to move forward with the letter of intent to merge the two
companies. The merger is subject to approval by the PlanGraphics, Inc.
shareholders, and certain terms and conditions as are customary to this
type of transaction.
c) On December 1, 2004, the Company released a Confidential Offering
Memorandum through the investment banking firm of Cove Partners, LLC.
The total offering is 50,000,000 units at a price of $0.025 per unit.
Each unit consists of one share of the Company's common stock together
with two detachable warrants to purchase shares of the Company's common
stock at prices of $0.05 and $0.10 per share, respectively. The five
cent warrants have an approximate 3 year exercise period and the ten
cent warrants have an approximate 5 year exercise period. The minimum
offering is $500,000 for 20,000,000 units and the maximum offering is
$1,250,000 for 50,000,000 units.
d) A related party note payable in the amount of $150,000 plus accrued
interest of approximately $43,607 will be converted to 1,000,000 shares
of pre-split common stock. The related expense will be amortized by the
company over 10 years.
NOTE 17--CONTINGENCIES
From time to time the Company faces litigation in the ordinary course of
business. Currently, we are not involved with any litigation which will have a
material adverse effect on our financial condition.
F-21
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations other than those contained in
this prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized by the company or any of the
underwriters. This prospectus does not constitute an offer of any securities
other than those to which it relates or an offer to sell, or a solicitation of
any offer to buy, to any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
the information set forth herein is correct as of any time subsequent to the
date hereof.
TABLE OF CONTENTS
Prospectus Summary................... 2
Cautionary Statements Regarding
Forward-Looking Information ....... 4
Risk Factors......................... 4
Market for Common Equity and Related
Stockholder Matters.................. 9 ICEWEB, INC.
Capitalization....................... 10
Use of Proceeds...................... 11
Management's Discussion and
Analysis or Plan of Operation...... 11 PROSPECTUS
Change of Independent Registered
Public Accounting Firm............. 20
Our Business......................... 20
Management........................... 29 ________________, 2005
Certain Relationships and
Related Transactions............... 39
Principal Stockholders............... 40
Description of Securities............ 41 7,171,667 SHARES
Selling Security Holders............. 45
Plan of Distribution ................ 49
Shares Eligible for Future Sale...... 52
Legal Matters........................ 52
Experts.............................. 52
Additional Information............... 53
Financial Statements.................F-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law allows us to indemnify each of our
officers and directors who are made a party to a proceeding if:
(a) the officer or director conducted himself or herself in good faith;
(b) his or her conduct was in our best interests, or if the conduct was
not in an official capacity, that the conduct was not opposed to our best
interests; and
(c) in the case of a criminal proceeding, he or she had no reasonable
cause to believe that his or her conduct was unlawful. We may not indemnify our
officers or directors in connection with a proceeding by or in our right, where
the officer or director was adjudged liable to us, or in any other proceeding,
where our officer or director are found to have derived an improper personal
benefit.
Our by-laws require us to indemnify directors and officers against, to the
fullest extent permitted by law, liabilities which they may incur under the
circumstances described above.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the registrant has been
informed that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as express in the act and is therefore
unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by us in connection with the distribution
of the securities being registered are as follows:
SEC Registration and Filing Fee......................................... $ 3,221
Legal Fees and Expenses*................................................ 35,000
Accounting Fees and Expenses*........................................... 13,500
Financial Printing*..................................................... 7,500
Transfer Agent Fees*.................................................... 500
Blue Sky Fees and Expenses*............................................. 500
Miscellaneous*.......................................................... 779
-------
TOTAL......................................................... $61,000
=======
* Estimated
None of the foregoing expenses are being paid by the selling security holders.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Following are all issuances of securities by the small business issuer
during the past three years which were not registered under the Securities Act
of 1933, as amended (the
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"Securities Act"). In each of these issuances the recipient represented that he
was acquiring the shares for investment purposes only, and not with a view
towards distribution or resale except in compliance with applicable securities
laws. No general solicitation or advertising was used in connection with any
transaction, and the certificate evidencing the securities that were issued
contained a legend restricting their transferability absent registration under
the Securities Act or the availability of an applicable exemption therefrom.
Unless specifically set forth below, underwriter participated in the transaction
and no commissions were paid in connection with the transactions.
Between September 2002 and May 2003, we sold 299,375 units of our
securities to 17 accredited investors in a private placement pursuant to
exemptions from the registration requirements of the Securities Act available to
us under an exemption Section 4(2) and Regulation D of the Securities Act. Each
unit consisted of one share of common stock and one common stock purchase
warrant. We received gross proceeds of $239,500.
In August 2003, notes payable totaling $97,000 plus accrued interest held
by two accredited investors were converted to 56,250 shares of our common stock.
This issuance was exempt from registration under the Securities Act in reliance
on Section 4(2) thereof.
Between June 2003 and April 2004 we sold 593,750 shares of common stock to
14 accredited investors in a private placement exempt from registration under
the Securities Act in reliance on an exemption provided by Section 4(2) and
Regulation D of that act. We received gross proceeds of $575,000.
In October 2003, we issued 191,381 shares of our common stock to 12
individuals or entities as consideration for our acquisition of substantially
all of the assets of Iplicity, Inc. of Virginia. The recipients were accredited
or sophisticated or non-accredited who had such knowledge and experience in
business matters that they were capable of evaluating the merits and risks of
the prospective investment in our securities. The recipients had access to
business and financial information concerning our company. The securities were
issued in reliance on an exemption from registration provided by Section 4(2) of
the Securities Act.
In May 2004, we acquired substantially all of the assets of DevElements,
Inc. of Virginia, including software licenses, source code, potential patents
and trademarks, cash, hardware, and equipment. In exchange for the 19% interest
in DevElements, we issued to the 20 individuals who were the shareholders of
DevElements 187,500 shares of our common stock and options to purchase 187,500
shares of common stock exercisable at a price of $27.20 per share and expiring
May 13, 2009. The recipients were accredited, sophisticated or non-accredited
investors who had such knowledge and experience in business matters that they
were capable of evaluating the merits and risks of the prospective investment in
our securities. The recipients had access to business and financial information
concerning our company. The securities were issued in reliance on an exemption
from registration provided by Section 4(2) of the Securities Act.
Between December 2004 and January 2005, we sold 250,000 units of our
securities at a purchase price of $2.00 per unit to two accredited investors in
a private transaction exempt from registration under the Securities Act in
reliance on exemptions provided by Section 4(2) and Regulation D of that act. We
issued these investors an aggregate of 250,000 shares of our common stock,
250,000 Series H Common Stock Purchase Warrants and 250,000 Series I Common
Stock Purchase Warrants. The terms of the warrants are described earlier in this
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prospectus under "Description of Securities - Series H and Series I Common Stock
Purchase Warrants." We received gross proceeds of $500,000 from this offering.
Cove Partners LLC, who previously entered into an agreement with the company to
provide assistance and advisory services to the company, including the structure
of financing, strategic planning and business combinations, introduced the
company to two accredited investors and received fees of $20,000 in cash and
common stock purchase warrants to purchase an aggregate of 75,000 shares of our
common stock at exercise prices ranging from $4.00 to $8.00 per share.
In March 2005, we sold an accredited investor 1,666,667 shares of our
Series A Convertible Preferred Stock and issued the purchase Common Stock
Purchase Warrants "A", "B" and "C" to purchase an aggregate of 4,500,000 shares
of our common stock at exercise prices ranging from $2.00 to $9.60 per share for
an aggregate purchase price of $1,000,000. We received net proceeds of $900,000
after payment of expenses of $35,000 and a finder's fee to Liberty Company LLC,
a broker dealer, of $65,000. We also issued Liberty Company LLC a warrant to
purchase 175,000 shares of our common stock with an exercise price of $0.70 per
share, the terms of which, other than the exercise price, are identical to the
Common Stock Purchase Warrants "A" issued to the investor. We intend to use
these proceeds for general working capital and acquisitions. The transaction was
exempt from registration under the Securities Act in reliance on an exemption
provided by Section 4(2) of that act.
In April 2005 we issued Mr. James Bond, one of our key employees, 125,000
shares of our common stock in satisfaction of $77,000 owed him which represented
the remaining portion of the cash consideration due him under the terms of our
purchase of the stock of The Seven Corporation as described earlier in this
prospectus. This amount was converted by Mr. Bond in accordance with the terms
of the Preferred Stock Purchase Agreement with Barron Partners, L.P. This
transaction was exempt from registration under the Securities Act in reliance on
an exemption provided by Section 4(2) of that act. The recipient was a
sophisticated investor who had such knowledge and experience in business matters
that he was capable of evaluating the merits and risks of the prospective
investment in our securities. The recipient had access to business and financial
information concerning our company.
In April 2005 we also issued 416,667 shares of our common stock to an
accredited investor as full payment for amounts due under a promissory note in
the principal of $93,177^. This transaction was exempt from registration under
the Securities Act in reliance on an exemption provided by Section 4(2) of that
act.
In May 2005 we issued a stockholder whom we owe $150,000 principal plus
interest under an unsecured promissory note 125,000 shares of our common stock
as consideration for a 10 year extension of the due date of the note. The
recipient was an accredited investor and the transaction was exempt from
registration under the Securities Act in reliance on an exemption provided by
Section 4(2) of that act.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit No. Description of Document
2.1 Agreement and Plan of Reorganization and Stock Purchase Agreement
with Disease S.I. Inc.(4)
2.2 Agreement and Plan of Merger with IceWEB Communications, Inc. (8)
2.3 Agreement and Plan of Merger with Seven Corporation (9)
3.1 Certificate of Incorporation (1)
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3.2 Certificate of Amendment to Certificate of Incorporation (1)
3.3 Certificate of Amendment to Certificate of Incorporation (1)
3.4 Certificate of Amendment to Certificate of Incorporation (1)
3.5 Certificate of Amendment to Certificate of Incorporation (2)
3.6 Certificate of Amendment to Certificate of Incorporation (3)
3.7 Certificate of Amendment to Certificate of Incorporation (11)
3.8 Certificate of Designations of Series A Convertible Preferred Stock
(12)
3.9 Certificate of Amendment to Certificate of Incorporation (13)
3.10 Bylaws (1)
4.1 Form of Common Stock Purchase Warrant "A" (12)
4.2 Form of Common Stock Purchase Warrant "B" (12)
4.3 Form of Common Stock Purchase Warrant "C" (12)
4.4 Form of Series H Common Stock Purchase Warrant *
4.5 Form of Series I Common Stock Purchase Warrant *
4.6 Form of $0.70 Common Stock Purchase Warrant "A" *
4.7 Form of Comerica Bank warrant *
5.1 Opinion of Schneider Weinberger & Beilly LLP **
10.1 Acquisition Agreement with North Orlando Sports Promotions, Inc. (1)
10.2 Asset Purchase Agreement with Raymond J. Hotaling (5)
10.3 2000 Management and Director Equity Incentive and Compensation Plan
(6)
10.4 Stock Purchase Agreement with Health Span Sciences, Inc. (7)
10.5 Stock Purchase and Exchange Agreement with Interlan Communications
(9)
10.6 Preferred Stock Purchase Agreement dated March 30, 2005 (12)
10.7 Registration Rights Agreement with Barron Partners LP (12)
10.8 Asset and Stock Purchase Agreement for iPlicity, Inc.*
10.9 Asset and Stock Purchase Agreement for DevElements, Inc. of Virginia
(15)
10.10 Form of Loan and Security Agreement with Comerica Bank*
10.11 Forbearance Agreement*
10.12 Sublease Agreement for principal executive offices*
10.13 Demand Promissory Note in the principal amount of $150,000 to John
Signorello*
14.1 Code of Business Conduct and Ethics*
16.1 Letter from Daszkal Bolton LLP (14)
21.1 Subsidiaries of the small business issuer **
23.1 Consent of Sherb & Co. LLP **
23.2 Consent of Daszkal Bolton LLP **
23.3 Consent of Schneider Weinberger & Beilly LLP (contained in such
firm's opinion filed as Exhibit 5) **
* previously filed herewith
** filed herewith
(1) Incorporated by reference to the Form 10-SB, file number 000-27865, filed
with on October 28, 1999, as amended.
(2) Incorporated by reference to the definitive Information Statement on
Schedule 14C as filed on June 18, 2001.
(3) Incorporated by reference to the definitive Information Statement on
Schedule 14C as filed on June 26, 2001.
(4) Incorporated by reference to the Report on Form 8-K as filed on June 6,
2001. (5) Incorporated by reference to the Report on Form 8-K as filed on
July 26, 2001.
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(6) Incorporated by reference to the definitive Information Statement on
Schedule 14C as filed on July 23, 2001.
(7) Incorporated by reference to the Report on Form 8-K as filed on December
4, 2001.
(8) Incorporated by reference to the Report on Form 8-K as filed on April 4,
2002.
(9) Incorporated by reference to the Report on Form 8-K as filed on August 1,
2003.
(10) Incorporated by reference to the Report on Form 8-K/A as filed on February
20, 2004.
(11) Incorporated by reference to the definitive Information Statement on
Schedule 14C as filed on August 20, 2004.
(12) Incorporated by reference to the Report on Form 8-K as filed on April 5,
2005.
(13) Incorporated by reference to the definitive Information Statement on
Schedule14C as filed on April 4, 2005.
(14) Incorporated by reference to Amendment No. 1 to the Report on Form 8-K/A
as filed on February 20, 2004. (15) Incorporated by reference to the
Report on Form 8-K as filed on July 23, 2004.
ITEM 28. UNDERTAKINGS
The undersigned small business issuer will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; and notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospects filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, the small business
issuer will treat each post-effective amendment as a new registration statement
of the securities offered, and the offering of the 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.
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Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or preceding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer 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 Act and will be governed by the final adjudication of such
issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in City of Herndon, State of Virginia on November 9, 2005.
ICEWEB, INC.
By: /s/ John R. Signorello
----------------------
John R. Signorello, CEO
Principal executive officer and
principal financial officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
Signature Title Date
--------- ----- ----
/s/ John R. Signorello CEO and director November 9, 2005
----------------------
John R. Signorello
/s/ * President November 9, 2005
----------------
G. Anthony Munno
/s/ * Director November 9, 2005
-----------
Hal Compton
/s/ * Director November 9, 2005
----------------------
Raymond J. Pirtle, Jr.
/s/ * Director November 9, 2005
-------------
Joseph Druzak
Director
---------
Jack Bush
* By: /s/ John R. Signorello November 9, 2005
John R. Signorello
Attorney-in-Fact
The foregoing represents a majority of the Board of Directors.
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