Rule 424(b)(3)
Registration No. 333-126898
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 January 27, 2006 the last sale price for our common stock was
$0.80
__________
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 February 10, 2006
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 150, 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: 6,492,286 shares at January 15, 2006.
Outstanding After this Offering: 18,929,266 shares, including an
aggregate of 12,436,980 shares which are
reserved for possible issuance upon the
conversion of outstanding Series A
Convertible Preferred Stock and Series B
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.
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Common Stock Reserved: 12,436,980 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 1,833,334 shares issuable upon the
conversion of our Series B
Convertible Preferred Stock,
o 7,765,000 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 1,137,729, 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 34,250 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:
Year ended September 30,
---------------------------
2005 2004
----------- ------------
Revenues ........................................ $ 6,809,590 $ 6,662,652
Cost of Sales ................................... 4,753,276 5,015,494
Total Operating Expense ......................... 2,884,566 3,656,610
Operating income (loss) ......................... (828,252) (2,009,452)
Net income (loss) ............................... $ (903,508) $ (2,035,443)
Basic and diluted (loss) per common share ....... $ (0.15) $ (0.40)
Weighted common shares outstanding .............. 5,865,935 5,049,368
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BALANCE SHEET DATA:
September 30, 2005
------------------
Working capital ........................................... $ 319,137
Cash ...................................................... $ 557,175
Total current assets ...................................... $ 2,221,916
Total assets .............................................. $ 2,788,263
Total current liabilities ................................. $ 1,902,779
Total liabilities ......................................... $ 2,118,404
Total stockholders' equity ................................ $ 669,859
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.
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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 $6,500,655 at September 30, 2005. For
the years ended September 30, 2005 and 2004, we had a net loss of approximately
$903,000 and $2 million, respectively, and cash used in operations was
approximately $920,000 and $795,000, respectively. The report of our independent
registered public accounting firm on our financial statements for the fiscal
year ended September 30, 2005 contained a qualification expressing substantial
doubt as to our ability to continue as a going concern as a result of our net
losses in operations. While we reported a modest increase in our revenues for
fiscal 2005 as compared to fiscal 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 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
September 30, 2005, we had a working capital surplus of $319,137 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 fiscal 2005. However, we will need to raise additional capital
to fund our ongoing operations, pay our existing obligations and for future
growth of our company. As described below the terms of the sale of our Series B
Convertible Preferred Stock may significantly restrict our ability to raise
working capital as needed. 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 THE SHARES OF OUR SERIES B CONVERTIBLE PREFERRED STOCK ARE OUTSTANDING WE
ARE PROHIBITED FROM ENTERING INTO CERTAIN TYPES OF EQUITY AND DEBT TRANSACTIONS
WHICH MAY ADVERSELY EFFECT OUR ABILITY TO RAISE WORKING CAPITAL AS NEEDED.
Under the terms of our sale of Series B Convertible Preferred Stock in
December 2005, we agreed to a number of limitations on our future capital
raising activities, including:
o for a period of three years we will not issue any convertible
debt or preferred stock,
for a period of two years we will not enter into any new
borrowings of more than twice as much as the sum of EBITDA
(earnings before income taxes, depreciation and amortization)
from recurring operations over the past four quarters,
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o for so long as the shares are outstanding we will not issue
any debt or equity securities with a floating conversion price
or reset feature, and
o for so long as the shares are outstanding we cannot issue any
common stock or securities which are convertible into common
stock at an effective price per share less than the conversion
value of the Series B Convertible Preferred Stock which is
initially $0.2727 per share.
These restrictions are likely to adversely effect our ability to raise
working capital as needed in future periods as the types of financing
transactions generally available to us and other comparably-sized public
companies often involve the sale of a convertible security with a reset feature,
or the sale of common stock at a discount to market.
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.
OUR FACTORING AGREEMENT WITH SAND HILL FINANCE, LLC CONTAINS CERTAIN TERMS WHICH
MAY ADVERSELY AFFECT OUR ABILITY TO RAISE CAPITAL IN FUTURE PERIODS.
In December 2005 we entered into a Finance Agreement with Sand Hill
Finance, LLC for a $1 million accounts receivable factoring line. Under the
terms of this agreement we agreed not to take certain actions including
undertaking a transaction which would result in a change of control of our
company or the transfer of more than 20% of our securities and incurring any
indebtedness other than trade credit in the ordinary course of business. These
restrictions may limit our ability to raise working capital as needed.
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OUR PRIMARY ASSETS SERVE AS COLLATERAL UNDER OUR ACCOUNTS RECEIVABLE FACTORING
LINE. IF WE WERE TO DEFAULT ON THIS AGREEMENTS, THE LENDER COULD FORECLOSE ON
OUR ASSETS.
In December 2005 we entered into a $1 million accounts receivable
factoring agreement with Sand Hill Finance, LLC. The revolving line is
collateralized by a blanket security interest in our assets. If we should
default under the terms of this agreement, the lender could seek to foreclose on
our primary assets. If the lender was successful, we would be unable to conduct
our business as it is presently conducted and our ability to generate revenues
and fund our ongoing operations would be materially adversely affected.
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 37% and
approximately 34% of total revenues for the years ended September 30, 2005 and
2004, respectively, and approximately 53% of our accounts receivable at
September 30, 2005 are due from these two customers. 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.
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
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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 January 15, 2006 we had outstanding:
o 6,492,286 shares of our common stock,
o 1,666,667 shares of Series A Convertible Preferred Stock
which is convertible into 1,666,667 shares of our common
stock,
o 1,833,334 shares of our Series B Convertible Preferred
Stock which is convertible into 1,833,334 shares of common
stock,
o common stock purchase warrants to purchase a total of
7,765,000 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 1,137,729 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 or the
Series B 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 and December 2005, we issued five year common stock
purchase warrants to purchase an aggregate of 6,950,000 shares of our common
stock with exercise prices ranging from $2.00 to $9.60 per share in connection
with the sales of shares of our Series A Convertible Preferred Stock and Series
B Convertible Preferred Stock. In December 2005 we also issued a seven year
common stock purchase warrant to purchase 25,000 shares of our common stock with
an exercise price of $1.00 per share in connection with our accounts receivable
financing agreement with Sand Hill Finance, LLC. All of these 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.
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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
and 1,833,334 shares of our Series B 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.
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 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
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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
Fiscal 2006
First quarter ended December 31, 2005 ............... $1.05 $0.65
On January 27, 2006, the last sale price of our common stock as
reported on the OTCBB was $0.80 As of January 15, 2006, 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 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 both our Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock, we cannot pay dividends on our common
stock so long as shares of our Series A Convertible Preferred Stock or Series B
Convertible Preferred Stock are outstanding or under the terms of our Financing
Agreement with Sand Hill Finance, LLC. 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, 2005.
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 .............. 1,137,729 $4.91 34,250
Equity compensation plans
not approved by stockholders ... 0 0 0
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CAPITALIZATION
The following table sets forth our capitalization as of September 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.
September 30, 2005
------------------
Long-term liabilities ............................. $ 215,625
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,
6,492,286 shares issued and
outstanding .................................... 6,493
Treasury stock, at cost, 162,500 shares ........... (13,000)
Stock subscription receivable ..................... (143,477)
Additional paid-in capital ........................ 7,318,831
Accumulated deficit ............................... (6,500,655)
-----------
Total stockholders' equity ..................... $ 669,859
-----------
Total capitalization .............................. $ 885,484
-----------
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
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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.
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 significantly increased both our revenues and
expenses during fiscal 2004. During fiscal 2005 we 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.
12
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,
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, which was released in December 2005. 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 improving our internal financial reporting systems and processes.
While we launched the first of our new software offering during June
2005 and our second in December 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 recently hired a Chief Financial Officer and intend 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.
13
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 2005 AS COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 2004
The following table provides an overview of the our certain key factors
of our result of operations for the fiscal year ended September 30, 2005 as
compared to the fiscal year ended September 30, 2004:
Fiscal Year Ended
September 30, $ %
2005 2004 Change Change
---------- ----------- ----------- ------
Revenues .................... $6,809,590 $ 6,662,652 $ 146,938 +2.2%
Marketing and selling ....... 56,538 125,414 $ (68,876) -5.5%
Research and development .... 0 580,053 $ (580,053) -100%
G&A expenses ................ 1,994,168 1,947,392 $ 46,776 +2.4%
Total operating expenses .... 2,884,566 3,656,610 $ (772,044) -21.2%
Operating (loss) ............ (828,252) (2,009,452) $(1,181,200) -58.8%
Net (loss) .................. $ (903,508) $(2,035,443) $(1,131,935) -55.6%
Other key indicators:
Fiscal 2005 Fiscal 2004 % of change
----------- ----------- -----------
Cost of sales as a percentage of revenues 69.8% 75.3% -5.5%
Gross profit margin ..................... 30.2% 24.7% +5.5%
G&A expenses as a percentage of revenues 29.3% 29.3% +0.1%
Total operating expenses as a
percentage of revenues ............... 42.4% 54.9% -12.5%
Revenues
For the year ended September 30, 2005, we reported a modest increase in
revenues of $6,809,590 as compared to revenues of $6,662,652 for the prior year
ended September 30, 2004, an increase of approximately 2.2%.
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 year ended September 30, 2005, cost of sales was $4,753,276, or
approximately 69.8% of revenues, compared to $5,015,494, or approximately 75.3%
of revenues, for the year ended September 30, 2004. The decrease in costs of
sales as a percentage of revenue and the corresponding increase in our gross
profit margin for fiscal 2005 as compared to fiscal 2004 was the result of an
increase during the year in commission revenue as a percentage of total revenue
compared to infrastructure and hardware revenue.
Total Operating Expenses
Our total operating expenses decreased approximately 21.1% for the year
ended September 30, 2005 as compared to the year ended September 30, 2004. These
decreases include:
Marketing and Selling. For the year ended September 30, 2005, marketing
and selling costs were $56,538 as compared to $125,414 for the year ended
September 30, 2004, a decrease of $68,876 or approximately 54.9%. These
decreases were the result of a reduction in marketing personnel, trade show
events, online web marketing, advertising and print advertising during fiscal
2005.
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, 2005, research and development
expenses were $0 as compared to $580,053 for the year ended September 30, 2004.
The research and development expenses in fiscal 2004 were related to efforts to
develop our Vista software and IceMAIL hosting services. Subsequent to September
30, 2005 we have capitalized approximately $157,000 in research and development
expenses related to our IceMAIL and Vista products.
14
General and administrative expense. For the year ended September 30,
2005, general and administrative expenses were $1,994,168 as compared to
$1,947,392 for the year ended September 30, 2004, an increase of $46,776 or
approximately 2.4%. These increased general and administrative expenses reflect
increases in personnel costs and other fixed expenses resulting from inflation.
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, 2005,
depreciation expense was $51,096 as compared to $52,716 for the prior year ended
September 30, 2004.
Amortization expense. Amortization expense is related to the customer
relationships which are intangible assets that we generated through our
acquisitions of DevElements, Inc. and Iplicity, Inc. The decrease in
amortization expense of $185,671, or approximately 19.6%, for fiscal 2005 as
compared to fiscal 2004 reflects previous amortizations of this intangible
asset.
Rental Revenue
During fiscal 2005 and fiscal 2004 we sub-leased excess space at our
principal executive offices to third parties. Rental revenue represents revenue
from this sub-lease arrangement. Rental revenue for fiscal 2005 decreased
$15,604, or approximately 44.7%, from fiscal 2004 as a result of the termination
of the sub-leasing arrangement in mid-fiscal 2005. As a result of our move to
other offices we will not have comparable revenue in future periods.
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, 2005, interest expense was $94,540 as compared to
$60,879 for the year ended September 30, 2004. This increase of approximately
55.3% is the result of increased borrowings during fiscal 2005.
Income Taxes
Because we incurred net operating losses in the years ended September
30, 2005 and 2004, 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.
15
Overall, our net (loss) was $(903,508) or $(0.15) per share for the
fiscal year ended September 30, 2005 compared to $(2,034,443) or $(0.40) for the
year ended September 30, 2004.
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 September 30, 2005 and September 30, 2004:
September 30, $ of % of
2005 2004 Change Change
----------- ----------- ----------- ------
Working capital (deficit) .... $ 319,137 $(1,049,557) $ 1,368,694 +130.4%
Cash ......................... $ 557,175 $ 178,781 $ 378,394 +211.6%
Accounts receivable, net ..... $ 1,577,460 $ 1,062,707 $ 514,753 +48.4%
Total current assets ......... $ 2,221,916 $ 1,241,488 $ 980,428 +79.0%
Property and equipment, net .. $ 259,852 $ 86,251 $ 173,601 +201.3%
Intangibles, net ............. $ 68,525 $ 822,764 $ (754,239) -91.7%
Deferred financing costs, net $ 180,000 $ 0 $ 180,000 +100.0%
----------- ----------- -----------
Total assets ................. $ 2,788,263 $ 2,208,473 $ 579,790 +26.3%
Accounts payable ............. $ 904,910 $ 1,233,708 $ (328,798) -26.7%
Accrued expenses ............. $ 37,488 $ 152,577 $ (115,089) -75.4%
Advances/notes related party . $ 86,001 $ 424,461 $ (338,460) -79.7%
Preferred stock to be issued . $ 408,836 $ 0 $ 408,836 +100.0%
Total current liabilities .... $ 1,902,779 $ 2,291,045 $ (388,266) -16.9%
Note payable - related parties $ 215,625 $ 0 $ 215,625 +100.0%
----------- ----------- -----------
Total liabilities ............ $ 2,118,404 $ 2,291,045 $ 172,641 -7.5%
Accumulated (deficit) ........ $(6,500,655) $(4,597,375) $ 1,903,280 +41.4%
Stockholders' equity (deficit) $ 669,859 $ (82,572) $ 752,431 +911.2%
Net cash used in operating activities was $920,515 for the year ended,
2005 as compared to net cash provided by operating activities of $794,861 for
the year ended September 30, 2004. The increase in cash used in operations is
primarily due to a decrease in accounts payable and accrued expenses.
Net cash used in investing activities for the year ended September 30,
2005 was $233,244 as compared to net cash provided by investing activities of
$27,454 for the fiscal 2004. During fiscal 2004 we acquired two companies and in
connection therewith recognized cash provided by investing activities of $37,637
which was offset by $10,183 of property and equipment purchases during fiscal
2004. In fiscal 2005 we purchased equipment and software which represented the
cash used in investing activities for the year and we did not have any
acquisitions or similar transactions during the year which provided cash from
investing activities. Net cash provided by financing activities for fiscal 2005
was $1,532,133 as compared to $841,874 for fiscal 2004. The primary reason for
the increase is an increase of $690,259 in proceeds from the sale of equity
securities during fiscal 2005 as compared to fiscal 2004.
16
At September 30, 2005 we had an accumulated deficit of $6,500,655 and
the report from our independent registered public accounting firm on our audited
financial statements at September 30, 2005 contained an explanatory paragraph
regarding doubt as to our ability to continue as a going concern as a result of
our net losses in operations. We reported a net loss of $903,508 for fiscal 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 September
30, 2005 we had cash on hand of $557,175 and working capital of $319,137. At
September 30, 2005 we owed $461,269 under our line of credit with Comerica Bank,
which is reflected as a current liability, and we did not have any ability to
borrow any additional sums under this credit facility. Subsequent to September
30, 2005 we entered into a one year receivable factoring agreement with Sand
Hill Finance, LLC under which we can sell certain accounts receivable to the
lender on a full recourse basis at 80% of the face amount of the receivable up
to an aggregate of $1 million. We agreed to pay Sand Hill Finance, LLC an annual
commitment fee of $10,000 and a monthly finance fee of 2% of the average daily
balance under the line. We granted Sand Hill Finance, LLC a blanket security
interest in our assets and agreed to refrain from certain actions which the line
is outstanding. We used availability under this agreement to satisfy our
outstanding obligation to Comerica Bank and the remainder of availability under
this line will provide us with additional working capital.
While we do not have any working capital commitments, we do not
presently have any external sources of working capital other than what may be
available under the factoring agreement. 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.
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 and in December
2005 we sold shares of our Series B Convertible Preferred Stock to the same
purchaser. 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 for the Series
A Convertible Preferred Stock and $0.2727 for the Series B Convertible Preferred
Stock. Under the terms of the Series B Convertible Preferred Stock transaction
we also agreed not to issue and convertible debt or preferred stock. Finally,
under the terms of the financing agreement with Sand Hill Finance, LLC we agreed
not to incur any additional indebtedness other than trade credit in the ordinary
course of business. These covenants 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.
17
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.
RECENT CAPITAL RAISING TRANSACTION
On December 28, 2005, we consummated a Preferred Stock Purchase
Agreement and related agreements with Barron Partners LP. Under the terms of
these agreements we issued Barron Partners LP, an accredited investor, 1,833,334
shares of our Series B Convertible Preferred Stock and Common Stock Purchase
Warrants "D", "E" and "F" to purchase an aggregate of 2,250,000 shares of our
common stock at exercise prices ranging from $2.00 to $9.60 per share, for an
aggregate purchase price of $ 500,000. We are using these proceeds for general
working capital. Barron Partners LP had previously purchased shares of our
Series A Convertible Preferred Stock in a transaction which closed in March 2005
We received net proceeds of approximately $408,000 after payment of
commissions of $25,000 and other expenses of the offering. The proceeds were
paid to us through the satisfaction of a liability to Barron Partners LP for
funds advanced to us in September 2005. We also issued Liberty Company LLC, a
broker-dealer, a Common Stock Purchase Warrant "G" exercisable into 25,000
shares of our common stock with an exercise price of $1.00 per share as
additional compensation for its services. The proceeds are being used for
general working capital. The transaction was exempt from registration under the
Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of
that act.
18
Under the terms of the Preferred Stock Purchase Agreement, we agreed:
o that all convertible debt in our company would be cancelled and that
for a period of three years from the closing date we will not issue any
convertible debt or preferred stock. In addition, we agreed to cause all reset
features related to any shares of our outstanding common stock to be cancelled
and for a period of three years from the closing date to refrain from entering
into any transactions that have reset features,
o to maintain a majority of independent directors on our Board of
Directors, and that these independent directors will make up a majority of the
audit and compensation committees of our Board. If at any time we should fail to
maintain these independent majority requirements, we are required to pay Barron
Partners LP liquidated damages of 24% of the purchase price of the securities
($120,000) per annum, payable monthly in kind,
o that if within 24 months from the closing date we consummate the sale
of debt or equity securities with a conversion price less than the then
effective conversion price of the Series B Convertible Preferred Stock we will
make a post-closing adjustment in the conversion price of the Series B
Convertible Preferred Stock to such lower conversion price,
o that for a period of three years all employment and consulting
agreements must have the unanimous consent of the compensation committee of our
Board, and any awards other than salary are usual and appropriate for other
officers, directors, employees or consultants holding similar positions in
similar publicly held-companies,
o that for a period of two years from the closing we will not enter
into any new borrowings of more than twice as much as the sum of EBITDA from
recurring operations over the past four quarters, subject to certain exceptions,
o that for long as Barron Partners LP holds any of the securities we
will not enter into any subsequent financing in which we issue or sell any debt
or equity securities with a floating conversion price or containing a reset
feature, and
o that we will submit a proposal at our next annual meeting of
stockholders to amend our Certificate of Incorporation to require the consent of
the holders of a designated percentage of a designated class of our securities
to waive or amend the terms of any rights, options and warrants approved by our
Board.
Mr. John R. Signorello, our CEO, agreed not to sell any shares of our
common stock that he many own in excess of 1% per quarter or at a price of less
than $3.00 per share for a period ending August 30, 2007, and that the earliest
any other insiders could sell their shares would be beginning two years from the
closing date.
We granted Barron Partners LP a right of first to participate in any
subsequent funding we may undertake on a pro rata basis at 94% of the offering
price.
We have agreed to file a registration statement with the Securities and
Exchange Commission within 30 days to register for resale the shares of common
stock issuable upon the possible conversion of the Series B Convertible
Preferred Stock and the exercise of the warrants, and to use our best efforts to
cause such registration statement to be declared effective within 120 days from
the closing date. We have also granted Barron Partners LP demand registration
rights covering these securities, as well as piggy-back registration rights for
a period of two years from the closing date. We will pay all costs associated
with these registration statements and have indemnified Barron Partners LP with
respect thereto for any losses or claims related to material misstatements or
material omissions by us in the registration statement(s).
19
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.
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:
20
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.
ICEMAIL
In December 2005 we launched 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.
Our goal is to 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.
21
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:
- 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
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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.
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. Our
training classes are also being used as loss leaders to open doors to large
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government and commercial customers. During fiscal 2006 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.
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, 2005 and 2004 we spent $0 and $580,053, 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.
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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
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.
EMPLOYEES
As of December 31, 2005, we employed a total of 32 employees, all of
whom work full time. We also use the full-time services of 12 consultants in
areas of network consulting. 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.
PROPERTY
In November 2005, we entered into a three year lease for approximately
7,900 square feet of office space located in the same building in which our
principal executive offices had been located. This new lease provides for annual
base rental of approximately $202,000 which escalates to approximately $215,000
annually in the third year of the lease term. We are also responsible for our
pro-rata share of certain pass through costs. We have the option to renew this
lease for one additional five year term and we have a right of first refusal to
lease as additional approximately 7,200 square feet of adjoining office space
should it become available.
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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
In October 2005 two related lawsuits have been filed against us in the
Circuit Court of Fairfax County, Virginia, captioned Bonnie Edenfield vs.
IceWEB, Inc., et al., Chancery No. CH 2005 4303; and Christopher MacDonald vs.
IceWEB, Inc., et al., Chancery No. CH 2005 4304. Both suits are brought by
former shareholders of DevElements, Inc., the assets of which were purchased by
us. Ms. Edenfield and Mr. MacDonald were parties to the asset purchase agreement
with DevElements. The plaintiffs seek money damages from us in the aggregate
amount of $18,000 for alleged breach of the asset purchase agreement, rights to
exercise options for 100,000 shares of our common stock and damages related to
stock options. We have filed a response and intend to vigorously defend this
litigation as we believe the litigation is without merit.
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.
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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.
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.
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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.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Name Age Positions
---- --- ---------
John R. Signorello 39 Chairman and Chief Executive Officer
G. Anthony Munno 43 President
Brian E. Crooks 52 Chief Financial Officer
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.
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Brian E. Crooks. Mr. Crooks as served as our Chief Financial Officer
since November 2005. From May 2005 until his appointment as Chief Financial
Officer Mr. Crooks has been providing financing and accounting consulting
services to our company. Mr. Crooks, a certified public accountant, has been a
partner in the Northern Virginia firm of Crooks & Seth P.C. since co-founding
the firm in 1982. Mr. Crooks' practice has centered around assisting companies
with accounting, tax compliance, financing, tax planning, legal support and
management consulting. From December 2002 until April 2004 Mr. Crooks provided
various accounting services to our company on a consulting basis. Mr. Crooks
holds a B.S. in Accounting from Clarion University.
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 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.
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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
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
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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.
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
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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.
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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 $100,000.
Long-Term
Annual Compensation Compensation
---------------------------------------------------------------------------------------------------------------
Restricted Securities
Name and Other Annual Stock Underlying
Principal Fiscal Salary Bonus Compensation Awards Options All Other
Position Year ($) ($) ($) ($) SAR (#) Compensation
---------------------------------------------------------------------------------------------------------------
John R. Signorello .. 2003 $ 5,000 $ -0- $ -0- $ -0- 75,000 -0-
Chief Executive ..... 2004 $ 80,000 $ -0- $ -0- $ -0- -0- -0-
Officer (1) ......... 2005 $ 120,000 $ -0- $ -0- $ -0- -0- -0-
(1) In fiscal year 2003, Mr. Signorello was granted options to purchase 75,000
shares at $3.20 per share, expiring in September 2008.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants
of options made during fiscal 2005 to the named executive officers.
% of Total
Number of Shares Options Granted Exercise or
Underlying Options to Employees in Base Price Expiration
Granted (#) Fiscal Year ($/Sh) Date
--------------------------------------------------------------------------------
John R. Signorello 0 n/a n/a n/a
33
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 Unexercised Options/SARs at In-the-money Options/SARs at
Acquired on Value FY End (#) FY End (#)(1)
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
-------------------------------------------------------------------------------------------------------------------
John R. Signorello .. 25,000 $ 0(2) 104,000 (3) 12,000 (4) $ 0 $ 0
(1) The dollar value of the exercisable and unexercisable options is calculated
based upon the difference between the option exercise price and $0.90 per share,
being the last sales price of our common stock on September 30, 2005 as reported
on the OTC Bulletin Board.
(1) The exercise price of the options were $0.80 per share and the fair market
value of our common stock on October 15, 2004, the date of exercise, was $1.04
per share. Accordingly, Mr. Signorello did not realize any value upon the
exercise of these options.
(3) Includes options to purchase 50,000 shares of our common stock at an
exercise price of $1.60 per share which expire in February 2007 and options to
purchase 54,000 shares of our common stock at an exercise price of $3.20 per
share which expire in September 2008.
(4) Includes options to purchase 21,000 shares of our common stock at an
exercise price of $3.20 per share which expire in September 2008 which had not
vested at September 30, 2005.
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 1,250,000 shares of common stock for issuance under the Plan. At
January 15, 2006 we have granted options to purchase 1,215,750 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.
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.
34
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
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.
35
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.
36
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.
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.
37
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 which closed on
March 30, 2005 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 we issued 416,667 shares of our common stock in exchange
for a $50,000 subscription receivable to our company and the satisfaction of
this note payable. The shares of common stock issued to Mr. Druzak remain
restricted until such time as the subscription receivable has been satisfied. At
September 30, 2005 this receivable remains outstanding.
Subsequent to this note conversion, from time to time Mr. Signorello
has continued to provide funds to us for operating expenses. At September 30,
2005 we owed Mr. Signorello $86,001, net of repayment of $86,001 made subsequent
to the April 2005 note conversion described above. These advances are short-term
and non-interest bearing. We will repay Mr. Signorello this amount as working
capital is available to us.
Immediately prior to the closing of the Preferred Stock Purchase
Agreement with Barron Partners, L.P. we had other stockholders/employees 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 was a $150,000 principal
amount promissory note bearing interest at the rate of 12.5% per annum due on
demand 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 which had been orally agreed to in fiscal
2004. The shares were valued at $200,000 the fair value at the date of issuance.
The note remains outstanding and at September 30, 2005 we owed the stockholder
the $150,000 principal plus accrued interest of approximately $65,625.
38
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.
PRINCIPAL STOCKHOLDERS
At January 15, 2006, 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 January 15, 2006,
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 150, 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 January 15, 2006
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 January 15, 2006, 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) ...................... 2,339,164 35.4%
G. Anthony Munno(2) ........................ 122,588 1.9%
Brian E. Crooks(6) ......................... 95,000 1.4%
Hal Compton(7) ............................. 8,310 *
Raymond Pirtle(8) .......................... 8,310 *
Joseph L. Druzak (3) ....................... 210,126 3.2%
Jack Bush(9) ............................... 30,000 *
All executive officers and as a group
(seven persons) ......................... 2,813,498 40.3%
Robert Druzak (4) .......................... 506,667 7.8%
Nite Capital L.P. (5) ...................... 375,000 5.7%
* 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 63,000 shares of our common stock at an exercise
price of $3.20 per share, but excludes options to purchase 12,000 shares of our
common stock at an exercise price of $3.20 per share which have not yet vested.
(2) The number of shares beneficially owned by Mr. Munno includes options to
purchase 60,000 shares of our common stock at an exercise price of $2.16 per
share, options to purchase 2,088 shares of our common stock at an exercise price
of $2.40 per share and options to purchase 40,000 shares of our common stock at
an exercise price of $0.65 per share but excludes options to purchase 2,500
shares of common stock at an exercise price of $2.16 per share which have not
yet vested.
39
(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, Series I Common Stock Purchase
Warrants exercisable into 50,000 shares of our common stock at an exercise price
of $8.00 per share and options to purchase 7,500 shares of common stock at an
exercise price of $0.80 per share. The number of shares beneficially owned by
Mr. Druzak excludes options to purchase an additional 22,500 shares of common
stock at an exercise price of $0.80 per share which have not yet vested..
(4) The number of shares beneficially owned by Mr. Druzak includes options to
purchase 40,000 shares of our common stock at an exercise price of $0.65 per
share. Mr. Robert Druzak is the brother of Mr. Joseph Druzak.
(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.
(6) The number of shares beneficially owned by Mr. Crooks includes options to
purchase 95,000 shares of our common stock at an exercise price of $0.65 per
share but excludes options to purchase 70,000 shares of common stock at $2.40
per share which have not yet vested.
(7) The number of shares beneficially owned by Mr. Compton includes options to
purchase 8,310 shares of our common stock at an exercise price of $0.80 per
share but excludes options to purchase an additional 21,690 shares at $0.80 per
share which have not yet vested.
(8) The number of shares beneficially owned by Mr. Pirtle includes options to
purchase 8,310 shares of our common stock at an exercise price of $0.80 per
share but excludes options to purchase an additional 21,690 shares at $0.80 per
share which have not yet vested.
(9) The number of shares beneficially owned by Mr. Bush includes options to
purchase 30,000 shares of our common stock at an exercise price of $0.80 per
share.
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 and 1,833,334 shares have been designated as
Series B Convertible Preferred Stock. As of January 15, 2006, there are
6,492,286 shares of common stock, 1,666,667 shares of Series A Convertible
Preferred Stock and 1,833,334 shares of Series B 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.
40
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.
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
41
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.
SERIES B CONVERTIBLE PREFERRED STOCK
Our Board of Directors has also created a series of 1,833,334 shares of
preferred stock designated as Series B Convertible Preferred Stock. We sold
these shares in a transaction described earlier in this prospectus under
"Management's Discussion and Analysis or Plan of Operation - Recent Capital
Raising Transaction." The designations, rights and preferences of the Series B
Convertible Preferred Stock provide:
o no dividends are payable on the Series B 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 B 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 B 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 B Convertible Preferred Stock or increase the
number of authorized shares of Series B Convertible Preferred Stock,
o the shares carry a liquidation preference of $0.2727 per share,
o each share of Series B Convertible Preferred Stock is convertible at
the option of the holder into one share of our common stock based
upon an initial conversion value of $0.2727 per share. The
conversation ratio is subject to adjustment in the event of stock
dividends, stock splits or reclassification of our common stock. The
conversion ratio is also subject to adjustment in the event we
should sell any shares of our common stock or securities convertible
into common stock at an effective price less than the conversion
ratio then in effect, in which case the conversion ratio would be
reduce to the lesser price. No conversion of the Series B
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 4.9% of our outstanding common shares
following such conversion. Barron Partners LP may waive this
provision only with the consent of all of the Series B Preferred
Stockholders and the consent of the holders of a majority of our
outstanding shares of common stock who are not affiliates,
42
o so long as the Series B Convertible Preferred Stock is outstanding,
we have agreed not to issue any rights, options or warrants to
holders of our common stock entitling the holders to purchase shares
of our common stock at less than the conversion ratio with out the
consent of the holders of a majority of the outstanding shares of
Series B Convertible Preferred Stock. If we should elect to
undertake such an issuance and the Series B holders consent, the
conversion ratio would be reduced. Further, if we should make a
distribution of any evidence of indebtedness or assets or rights or
warrants to subscribe for any security to our common stockholders,
the conversion value would be readjusted,
o the shares of Series B Convertible Preferred Stock automatically
convert into shares of our common stock in the event of change of
control of our company, and
o so long as the shares of Series B 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 of
the Series B Convertible Preferred Stock.
COMMON STOCK PURCHASE WARRANTS
At January 15, 2006 we had outstanding an aggregate of 7,765,000 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:
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.
43
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.
WARRANTS ISSUED IN THE SERIES B CONVERTIBLE PREFERRED STOCK TRANSACTION
In connection with the sale of shares of our Series B Convertible
Preferred Stock, we issued the purchaser the following common stock purchase
warrants:
o Common Stock Purchase Warrants "D" to purchase an
aggregate of 1,000,000 shares of our common stock at an
exercise price of $2.00 per share,
o Common Stock Purchase Warrants "E" to purchase an
aggregate of 625,000 shares of our common stock at an
exercise price of $4.80 per share, and
o Common Stock Purchase Warrants "F" to purchase an
aggregate of 625,000 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 "G" to
purchase 25,000 shares of our common stock at an exercise price of $1.00 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 Warrants "E" and
"F" issued to the purchaser.
The expiration date of the warrants is five years, or 18 months after
effectiveness of a registration statement subsequent to the issuance hereof with
such 18 months to be extended by one month for each month or portion of a month
during which such registration statement's effectiveness has lapsed or been
suspended, whichever is longer. The warrants contain a cashless exercise
provision which permits the holder, rather than paying the exercise price in
44
cash, to surrender a number of warrants equal to the exercise price of the
warrants being exercised. The holder cannot utilize the cashless exercise
feature during the first six months of the term or so long as there is an
effective registration statement covering the shares of common stock underlying
the warrants. 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, as well as if we issue
common stock or securities convertible into common stock at an effective price
less than the then current exercise price of the warrant.
As with the shares of Series B Convertible Preferred Stock, no exercise
of these warrants may occur if a conversion would result in the holder, Barron
Partners LP, and any of its affiliates beneficially owning more than 4.9% of our
outstanding common shares following such exercise. Barron Partners LP may waive
this provision only with the consent of all of the Series B Preferred
Stockholders and the consent of the holders of a majority of our outstanding
shares of common stock who are not affiliates. This limitation, however,
immediately terminates as to the warrants in the event of the sale of all or
substantially all of our assets or a merger or consolidation in which we are not
the surviving entity.
If our common stock trades at or above $2.85 per share for 20
consecutive trading days, upon notice from us the holder must exercise the
Common Stock Purchase Warrant "D" within 45 days, or transfer the warrant to a
third party. If the holder elects to so transfer the warrant, the new holder
then has an additional 45 days to exercise the Common Stock Purchase Warrant
"D". If we have called the warrants and all or any portion of the warrants are
not exercised within these respective periods, the unexercised Common Stock
Purchase Warrants "D" will terminate.
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:
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
45
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.
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.
46
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.
SAND HILL FINANCE, LLC WARRANT
In connection with the Financing Agreement entered into in December
2005 for our accounts receivable factoring arrangement we issued Sand Hill
Finance, LLC, the lender, a seven year common stock purchase warrant to purchase
25,000 shares of our common stock at an exercise price of $1.00 per share. The
warrant also contains a cashless exercise provision similar to that which is
contained in the Comerica warrant described above. The number of shares issuable
upon the exercise of the warrant and the exercise price are subject to
adjustment in the event of stock dividends, stock splits and reclassifications.
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
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.
47
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, of which approximately $170,000 principal
amount was then outstanding, into an aggregate of 541,667 shares
of our common stock,
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,
48
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.
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.
49
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) ....... 820,373 4.9%% 6,166,667 820,373 4.9%
Barbara Russo (2) ........... 250,000 3.7% 225,000 25,000 *
Joseph Druzak (3) ............ 210,126 3.2% 150,000 60,126 *
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) ...... 200,000 2.6% 175,000 25,000 *
Cove Partners LLC (7) ........ 75,000 * 75,000 0 n/a
---------
7,171,667
=========
* less than 1%
(1) Barron Partners LP holds 1,666,667 shares of our Series A Convertible
Preferred Stock which is convertible into 1,666,667 shares of our common stock,
1,833,334 shares of our Series B Convertible Preferred Stock which is
convertible into 1,833,334 shares of our common stock and common stock purchase
warrants exercisable into 6,750,000 shares of our common stock with exercise
prices ranging from $2.00 to $9.60 per share. The number of shares offered
includes 1,666,667 shares of our common stock issuable upon the conversion of
the shares of Series A Convertible Preferred Stock and 4,500,000 shares of
common stock issuable upon the exercise of 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 the related 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 has also
contractually agreed that if the number of shares of common stock issuable upon
the conversion of the shares of Series B Convertible Preferred Stock and
exercise of those related warrants is limited so that Barron Partners LP and any
of its affiliates cannot beneficially own more than 4.9% of our outstanding
common shares following such exercise or conversion. Barron Partners LP may
waive the provision as it relates to the Series A Convertible Preferred Stock
and related warrants to purchase 4,500,000 shares of common stock 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. Barron Partners LP may waive this provision as it relates to the
Series B Convertible Preferred Stock and related warrants to purchase 2,250,000
shares of common stock only with the consent of the holders of a majority of our
issued and outstanding common stock who are not affiliates. As a result of these
ownership limitations, at January 15, 2006 Barron Partners LP beneficially owns
820,373 shares of our common stock based upon shares of our Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock and warrants which are
convertible or exercisable, as the case may be, within 60 days.
(2) The number of shares owned by Mr. Druzak includes 103,126 shares presently
outstanding, warrants to purchase 100,000 shares of common stock at exercise
prices ranging from $4.00 to $8.00 per share and options to purchase 40,000
shares of common stock at an exercise price of $2.40 per share. 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.
50
(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 owned 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 and 25,000 shares of common stock issuable upon the
exercise of a common stock purchase warrant with an exercise price of $1.00 per
share. 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. Liberty
Company, LLC also received a warrant to purchase 25,000 shares of our common
stock as partial compensation for its services in the ordinary course of its
business as a finder in the Series B 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;
51
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.
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.
52
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 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.
53
SHARES ELIGIBLE FOR FUTURE SALE
As of January 15, 2006, 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,
2005 and 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.
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
100 F Street, N.E.
Room 1580
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 100 F Street, N.E., Room
1580, Washington, D.C. 20549. Callers in the United States can also call
1-202-551-8090 for further information on the operations of the public reference
facilities.
54
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, 2005 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years ended
September 30, 2005 and 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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 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 consolidated financial position of IceWEB,
Inc. and Subsidiaries, as of September 30, 2005 and the consolidated results of
their operations and their cash flows for the years ended September 30, 2005 and
2004, 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 13 to
the consolidated financial statements, the Company had net losses in operations
of $903,508 and $2,035,443 respectively, for the years ended September 30, 2005
and 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 13. 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
Boca Raton, Florida
January 12, 2006
F-1
IceWEB, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
September 30, 2005
------------------
Assets
Current assets:
Cash .................................................................. $ 557,175
Accounts receivable, net of allowance for bad debt of $5,846 .......... 1,577,460
Prepaid expense ....................................................... 25,979
Advances .............................................................. 61,302
-----------
Total current assets .................................................. 2,221,916
Non-current assets:
Property and equipment, net ........................................... 259,852
Goodwill .............................................................. 41,800
Deposits .............................................................. 16,170
Customer relationships, net of accumulated amortization of $1,711,199 . 68,525
Deferred financing costs, net of accumulated amortization of $20,000 .. 180,000
------------------------------------------------------------------------------- -----------
Total Assets .................................................................. $ 2,788,263
------------------------------------------------------------------------------- -----------
Liabilities and Stockholders' equity
Current liabilities:
Note payable .......................................................... $ 461,269
Accounts payable ...................................................... 904,910
Accrued expenses ...................................................... 37,488
Deferred revenue ...................................................... 4,275
Advances from related party ........................................... 86,001
Preferred stock to be issued .......................................... 408,836
Total current liabilities ..................................................... 1,902,779
Non-current liabilities
Note payable - related party .......................................... 215,625
------------------------------------------------------------------------------- -----------
Total Liabilities ............................................................. 2,118,404
------------------------------------------------------------------------------- -----------
Stockholders' equity:
Preferred stock (par value $.001; 1,000,000 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) 6,492,287
issued, and 6,329,787 outstanding ............................................. 6,493
Stock subscription receivable ................................................. (143,477)
Additional paid in capital .................................................... 7,318,831
Accumulated deficit ........................................................... (6,500,655)
Treasury Stock, at cost, (162,500 shares) ..................................... (13,000)
-----------
Total Stockholders' Equity .................................................... 669,859
------------------------------------------------------------------------------- -----------
Total Liabilities and Stockholders' Equity .................................... $ 2,788,263
------------------------------------------------------------------------------- -----------
See accompanying notes to consolidated financial statements
F-2
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended September 30, 2005 and 2004
2005 2004
--------------------------------
Revenue ....................................... $ 6,809,590 $ 6,662,652
Cost of sales ................................. 4,753,276 5,015,494
--------------------------------------------------------------------------------
Gross profit .................................. 2,056,314 1,647,158
Operating expenses:
Marketing and selling .................... 56,538 125,414
Stock compensation expense ............... - 2,600
Research and development ................. - 580,053
Depreciation expense ..................... 51,096 52,716
General and administrative ............... 1,994,168 1,947,392
Amortization expense ..................... 782,764 948,435
--------------------------------------------------------------------------------
Total operating expense ....................... 2,884,566 3,656,610
Operating loss ................................ (828,252) (2,009,452)
Rental revenue ................................ 19,284 34,888
Interest expense .............................. (94,540) (60,879)
--------------------------------------------------------------------------------
Net loss ...................................... $ (903,508) $ (2,035,443)
--------------------------------------------------------------------------------
Basic and diluted loss per share .............. $ (0.15) $ (0.40)
--------------------------------------------------------------------------------
Weighted average common shares
outstanding - basic and diluted .............. 5,865,935 5,049,368
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-3
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended September 30, 2005 and 2004
Common Stock Preferred Stock Treasury Stock
------------------ ----------------- Subscription Additional Accumulated -------------------
Shares Amount Shares Amount Receivable Paid-In Deficit Share Amount Total
--------- ------ --------- ------ ------------ ---------- ----------- -------- -------- -----------
Balance at
September 30,
2003 ......... 4,512,610 $4,513 - - $ - $2,315,291 $(2,561,704) - $ - $ (241,900)
Sale of common
stock ........ 390,000 390 - - - 413,210 - - - 413,600
Common stock
issued in
acquisitions . 378,881 379 - - - 1,706,109 - - - 1,706,488
Common stock
issued for the
exercise of
common stock
options ...... 151,000 151 - - (52,000) 137,160 - - - 85,311
Common stock
issued for
settlement ... 1,250 1 - - - 2,599 - - - 2,600
Common stock
cancelled .... (3,750) (4) - - - 4 - - - -
Treasury stock - - - - - - - (162,500) (13,000) -
Net loss for
the year ..... - - - - - - (2,035,443) - - (2,035,443)
---------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30,
2004 ......... 5,429,991 $5,430 - - $ (52,000) $4,574,373 $(4,597,147) (162,500) $(13,000) $ (82,344)
Preferred A
stock issued . - - 1,666,667 $1,667 844,169 - - - 845,836
for cash
Preferred A
Stock Dividend - - - - - 1,000,000 (1,000,000) - - -
Common stock
issued ....... 503,129 503 - - - 469,477 - - - 469,980
Common stock
issued in
satisfaction
of liabilities 541,667 542 - - (91,477) 403,230 - - - 312,295
Common stock
issued for
exercise of
common stock
options ...... 17,500 (18) - - - 27,582 - - - 27,600
Net loss for
the year ..... - - - - - - (903,508) - - (903,508)
=================================================================================================================================
Balance at
September 30,
2005 ......... 6,492,287 $6,493 1,666,667 1,667 $(143,477) $7,318,831 $(6,500,655) (162,500) $(13,000) $ 669,859
=================================================================================================================================
See accompanying notes to consolidated financial statements
F-4
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 2005 and 2004
2005 2004
----------- -----------
CASH FLOWS FROM OPERATIONS:
Net Loss ..................................... $ (903,508) $(2,035,443)
Adjustments to reconcile net loss to net cash used
in operating activities:
Common stock and options issued for settlement - 2,600
Depreciation and amortization ................ 833,860 1,001,151
Interest from stock issued for note payable .. 37,500 -
Changes in operating assets and liabilities:
(Increase) decrease in:
----------------------------------------------------
Accounts receivable .......................... (514,753) (672,934)
Prepaid expense .............................. (25,979) 8,056
Advances ..................................... (61,302) -
Deposits ..................................... - (3,505)
Increase (decrease) in:
----------------------------------------------------
Accounts payable ............................. (156,489) 856,363
Accrued expense .............................. (115,089) 43,236
Deferred revenue ............................. (14,755) 5,615
---------------------------------------------------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES .............. (920,515) (794,861)
---------------------------------------------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........... (224,698) (10,183)
Cash acquired in acquisitions, net ........... - 37,637
Increase in Intangibles ...................... (8,526) -
---------------------------------------------------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (233,224) 27,454
---------------------------------------------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments on) proceeds from line of credit ... - 334,269
Payments to related parties .................. (219,616) (43,805)
Proceeds from Preferred Stock to be issued ... 408,836 -
Proceeds from related party .................. - 65,499
Common stock issued for cash ................. 469,477 413,600
Preferred stock issued for cash .............. 845,836 -
Exercise of common stock options ............. 27,600 85,311
Purchase of treasury stock ................... - (13,000)
---------------------------------------------------- ----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......... 1,532,133 841,874
---------------------------------------------------- ----------- ----------
NET INCREASE IN CASH ............................... 378,394 74,467
CASH - beginning of year ........................... 178,781 104,314
CASH - end of year ................................. $ 557,175 $ 178,781
Non-cash investing and financing activities:
Common stock issued for debt and interest........... $ 270,000
Common stock issued for subscription receivable..... $ 143,177
Cash paid for interest.............................. $ 28,725
See accompanying notes to consolidated financial statements
F-5
ICEWEB, INC and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2005 and 2004
NOTE 1 - ORGANIZATION
IceWEB, Inc. began trading publicly in April 2002. In June 2003, the Company
added two subsidiaries, acquiring all of the outstanding stock of Interlan
Communications Incorporated 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 customers. Utilizing resources
gained through acquisitions, the company has developed two applications that are
now available to the general public, IceWEB Vista which is a website portal
development and management application, and IceMAIL which is a hosted Microsoft
Exchange application service. In addition to the new application services,
IceWEB also continues to provide customers with systems integration, network
consulting, and customized software application services.
On October 13, 2004, the Company affected 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.
On April 27, 2005, the Company affected a 1:80 reverse split of its issued and
outstanding common stock. All amounts have been retroactively adjusted to
reflect this split.
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 consists of normal trade receivables. The Company recorded a
bad debt allowance of $5,846 for the year ended September 30, 2005. Management
performs ongoing evaluations of its accounts receivable and customer base.
Management believes that all remaining receivables are fully collectable. Bad
debt expense is $3,127 and $20,086 for the years ended September 30, 2005 and
2004, 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. Revenue from
services is recorded each month as it is earned. Commissions earned on third
party sales are recorded in the month in which contracts are awarded. 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.
F-6
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 from the calculation if
their effect is antidilutive.
(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 and Intangible Assets
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. 142, "Accounting
for the Impairment of Long-Lived Assets," 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. Customer relationships have been book as intangible assets
and amortized over the life of the customer contracts. The Company has amortized
these intangible assets in the amount of $762,764 and $948,435 respectively, for
the year ended September 30, 2005 and 2004. The Company has not recognized any
impairment of goodwill during the year ended September 30, 2005 and 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 in 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.
F-7
NOTE 3 - PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follows:
ESTIMATED
USEFUL LIFE 9/30/2005
----------- -----------
Computer equipment 3 years $ 223,369
Computer software 3 years 163,314
Furniture and fixtures 5 years 30,133
Vista and IceMAIL Software 3 years 154,734
Electrical generator equipment 5 years 45,000
-----------
Total property and equipment 616,550
Less: accumulated depreciation (356,698)
-----------
Property and equipment, net $ 259,852
===========
Depreciation expense for the years ended September 30, 2005 and 2004 was $51,096
and $52,716 respectively.
NOTE 4 - OPERATING LEASES
The Company leases office space in Herndon, VA. Total rental expense for the
years ended September 30, 2005 and 2004 was $152,921 and $103,037, respectively.
The Company also leases facilities for one of its subsidiaries at $2,100 per
month. This lease continues through June 30, 2006.
The Company has 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
----------- ------
2006 $ 45,488
2007 $ 45,488
2008 $ 26,535
2009 $ -
2010 $ -
----------
$ 117,511
==========
NOTE 5 - RELATED PARTY TRANSACTIONS
A Stockholder has a loan totaling $150,000 plus accrued interest of
approximately $65,625. 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 to September 30, 2014. 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 $61,602 payable on demand
along with 6% annual interest. This item is shown separately on the balance
sheet as employee advances. This employee is not an executive 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.
F-8
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, 2005, the amount outstanding was $461,269. The term of the
agreement is 364 days from the date of closing. The Company has extended the
term of the agreement through December 31, 2005. The terms of the agreement
gives Comerica Bank a first position on the Company's assets. 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 $390,000 through
January 30, 2006. The Tangible Net Worth increases incrementally thereafter.
At September 30, 2005, the Company does meet the financial covenants for Quick
Ratio and Tangible Net Worth. The Company did not meet these covenants during
the year and 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. This forbearance has been extended to December
31, 2005. On December 23, 2005, the Company entered into a credit facility for
$1,000,000 with Sand Hill Finance which effectively closed the facility with
Comerica Bank.
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, 2005 the Company had approximately $522,204 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 37% and 34% of total sales for
the years ended September 30, 2005 and 2004, respectively. As of September 30,
2005 approximately 53% of the Company's accounts receivable were due from these
two customers.
NOTE 9 - INCOME TAXES
As of September 30, 2005 the Company had an unused net operating loss carry
forward of approximately $4,881,102 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.
2005
----
Deferred tax asset:
Tax benefit of net operating loss carry forward $ 1,835,294
Less: valuation allowance (1,835,294)
-------------
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 2005:
2005
----
Computed "expected" tax expense (benefit) (34.0)%
State income taxes (3.6)%
Change in valuation allowance 37.6%
Effective tax rate 0.0%
The effective tax rate is 34% Federal and 6% Virginia State reduce by 2.4%
Federal tax benefit.
Net operating loss carry forward expires between 2021 and 2025. The utilization
of the above loss carry forwards, for federal income tax purposes may be subject
to limitations resulting from changes in ownership.
F-9
NOTE 10 - STOCKHOLDERS' EQUITY
During the year ended September 30, 2005, the Company sold 503,129 shares of
common stock to accredited investors for $469,477 exempt from registration
pursuant to Section 4(2). The investors were sophisticated and had access to the
consolidated financial statements of the corporation. The Company issued 541,667
shares of common stock for cash and in exchange for or assumption of liabilities
in the total amount of $403,230. During the year ending September 30, 2004, the
Company sold 390,000 shares of common stock for $413,600.
During the year ended September 30, 2005, 17,500 shares of common stock were
issued in connection with the exercise of stock options.
The Company issued 470,250 stock options to employees under the Company's stock
option plan (See Note 12).
During the year ended September 30, 2004, the Company sold 390,000 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 596,250 shares of common stock for
$422,000.
On October 4, 2003, the Company issued 191,381 shares of common stock as part of
the acquisition agreement with Iplicity, Inc (See Note 10).
On May 13, 2004, the Company issued 187,500 shares of common stock as part of
the acquisition agreement with DevElements, Inc.
The Company is authorized to issue 10,000,000 shares of Series A Preferred
Stock, par value $.001, with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. During the year ended
September 30, 2005, the Company sold 1,666,667 shares of preferred stock for
$845,836. There are currently 1,666,667 shares of Series A Preferred Stock
issued and outstanding.
NOTE 11 - 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 1,250,000 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, 2005:
A summary of the status of the Company's outstanding stock options as of
September 30, 2005 and changes during the period ending on that date is as
follows:
Weighted Average
Shares Exercise Price
-------- ----------------
Outstanding at September 30, 2003 .............. 487,750 $2.75
Granted ........................................ 847,000 1.21
Exercised ...................................... (151,000) (2.25)
Forfeited ...................................... (327,619) (2.01)
-------- -----
Outstanding at September 30, 2004 .............. 856,131 $1.99
Granted ........................................ 470,250 1.21
Exercised ...................................... - -
Forfeited ...................................... (443,902) (2.01)
-------- -----
Outstanding at September 30, 2005 ............... 882,479 $1.55
-------- -----
Options exercisable at end of period ........... 882,479 $1.55
-------- -----
Weighted-average fair value of options granted
during the period .............................. 470,250 $1.21
F-10
Common stock warrants
---------------------
The following information applies to all warrants outstanding at September 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 4.5 $ 0.70 175,000 $ 0.70
$ 2.00 2,000,000 4.5 $ 2.00 2,000,000 $ 2.00
$ 4.80 1,250,000 4.5 $ 4.80 1,250,000 $ 4.80
$ 9.60 1,250,000 4.5 $ 9.60 1,250,000 $ 9.60
$ 4.00 250,000 2.25 $ 4.00 250,000 $ 4.00
$ 8.00 250,000 4.25 $ 8.00 250,000 $ 8.00
$ 2.40 58,750 7 months $ 2.40 58,750 $ 2.40
$ 4.80 58,750 7 months $ 4.80 58,750 $ 4.80
$ 8.00 58,750 7 months $ 8.00 58,750 $ 8.00
$16.00 58,750 7 months $16.00 58,750 $16.00
$ 2.00 5,000 5.75 $ 2.00 5,000 $ 2.00
$ 4.00 37,500 2.25 $ 4.00 37,500 $ 4.00
$ 8.00 37,500 4.25 $ 8.00 37,500 $ 8.00
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, 2005 and 2004:
2005 2004
---- ----
Actual net loss $ 903,508 $ 2,035,443
SFAS 123 Compensation Cost 380,479 237,198
----------- -----------
Pro forma net loss $ 1,283,987 $ 2,272,641
=========== ===========
Proforma basic and diluted 2005 net loss per share $ (0.22) $ (0.08)
=========== ===========
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 111%
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.
F-11
NOTE 12 - 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,
2005 and 2004 all material assets and revenues of IceWEB were in the United
States.
NOTE 13 - 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, 2005, the Company incurred net annual losses of
($903,508) and used cash in operations of $920,515. 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 14 - CONTINGENCIES
From time to time the Company faces litigation in the ordinary course of
business. Currently, we are involved with litigation with two prior employees,
which in our opinion will not have a material adverse effect on our financial
condition. The two related lawsuits have been filed against the Company in the
Circuit Court of Fairfax County, Virginia, captioned Bonnie Edenfield vs.
IceWEB, Inc., et al., Chancery No. CH 2005 4303; and Christopher MacDonald vs.
IceWEB, Inc., et al., Chancery No. CH 2005 4304. Both suits are brought by
former shareholders of DevElements, Inc., the assets of which were purchased by
a Company subsidiary. Edenfield and MacDonald were parties to the asset purchase
agreement between DevElements and the Company subsidiary. The plaintiffs seek
money damages from the Company for alleged breach of the asset purchase
agreement, and damages related to stock options. The Company intends to
vigorously defend this litigation. The Company believes the litigation is
without merit.
NOTE 15 - SUBSEQUENT EVENTS
On December 23, 2005, the Company entered into a credit facility for $1,000,000
with Sand Hill Finance which effectively closed the facility with Comerica Bank.
On December 28, 2005, the Company consummated the sale of 1,833,333 shares of
Series BConvertible Preferred Stock to Barron Partners, L.P.and issued the
purchaser common stock purchase warrants to purchase an aggregate of 2,250,000
shares of the Company's common stock for an aggregate purchase price of
$500,000. The purchase price was paid through the satisfaction of a liability to
Barron Parnters, L.P. for funds advanced to the Company in September 2005.
In the event the Company sells, grants or issues any shares, options, warrants,
or any instrument convertible into shares or equity in any form below $2.00 per
share the warrant exercise price shall be reduced proportionately. For example,
if the Company sells, grants or issues any shares, options, warrants, or any
instrument convertible into shares or equity in any form at $1.60 per share, or
20% below $2.00 per share, then the warrant exercise price shall be reduced by
20%. Such reduction shall be made at the time such transaction is made, and
shall be cumulative upon any other changes to the exercise of the warrant that
may already have been made.
F-12
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 4.9%
of our outstanding common shares following such conversion. Barron Partners LP
may waive this provision only with the consent of all of the Series B Preferred
Stock Holders and the consent of the holders of a majority of the shares of
outstanding Common Stock of the Company who are not affiliates.
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.
F-13
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
Page
----
Prospectus Summary ....................................................... 2
Cautionary Statements Regarding Forward-Looking Information .............. 4
Risk Factors ............................................................. 4
Market for Common Equity and Related Stockholder Matters ................. 9
Capitalization ........................................................... 11
Use of Proceeds .......................................................... 11
Management's Discussion and Analysis or Plan of Operation ................ 11
Our Business ............................................................. 20
Management ............................................................... 28
Certain Relationships and Related Transactions ........................... 38
Principal Stockholders ................................................... 39
Description of Securities ................................................ 40
Selling Security Holders ................................................. 47
Plan of Distribution ..................................................... 51
Shares Eligible for Future Sale .......................................... 54
Legal Matters ............................................................ 54
Experts .................................................................. 54
Additional Information ................................................... 54
Financial Statements ..................................................... F-1
ICEWEB, INC.
PROSPECTUS
FEBRUARY 10, 2006
7,171,667 SHARES