-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MyDIlHl/iC2neenKDjspcT+IVYrzIj3+bkVf+Hp3IBxDkKw1Ry1YdQhsNO1qoKBP fPG01B2m4IRS7wxfCyN/Lw== 0000950116-98-000917.txt : 19980424 0000950116-98-000917.hdr.sgml : 19980424 ACCESSION NUMBER: 0000950116-98-000917 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19980423 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IBS INTERACTIVE INC CENTRAL INDEX KEY: 0001057257 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 133817344 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-47741 FILM NUMBER: 98599629 BUSINESS ADDRESS: STREET 1: 2 RIDGEDALE AVE STREET 2: STE 350 CITY: CEDAR KNOLLS STATE: NJ ZIP: 07927 BUSINESS PHONE: 9732852600 MAIL ADDRESS: STREET 1: 2 RIDGEDALE AVE STREET 2: STE 350 CITY: CEDAR KNOLLS STATE: NJ ZIP: 07927 SB-2/A 1 As filed with the Securities and Exchange Commission on April 23, 1998 Registration No. 333-47741 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- IBS INTERACTIVE, INC. (Name of small business issuer in its charter)
Delaware 7379 13-3817344 (State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
2 Ridgedale Avenue, Suite 350 Cedar Knolls, New Jersey 07927 (973) 285-2600 (973) 285-4777 (fax) (Address and telephone number of principal executive offices and principal place of business) NICHOLAS R. LOGLISCI, JR. President and Chief Operating Officer IBS Interactive, Inc. 2 Ridgedale Avenue, Suite 350 Cedar Knolls, New Jersey 07927 (973) 285-2600 (973) 285-4777 (fax) (Address and telephone number of principal executive offices and principal place of businss) Please send a copy of all communications to: JOHN T. CAPETTA, ESQ. ROBERT J. MITTMAN, ESQ. Kelley Drye & Warren LLP Tenzer Greenblatt LLP Two Stamford Plaza 405 Lexington Avenue 281 Tresser Boulevard New York, New York 10174 Stamford, Connecticut 06901 (212) 885-5000 (203) 324-1400 (212) 885-5001 (fax) (203) 351-8115 (fax) Approximate date of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Secur-ities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the offering. [ ] _____ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] _________ The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. =============================================================================== CALCULATION OF REGISTRATION FEE
========================================================================================================== Proposed Proposed Maximum Maximum Offering Aggregate Title of Each Class of Amount to be Price Per Offering Amount of Securities Being Registered Registered Share(1) Price(1) Registration Fee (1) - ----------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value 1,380,000 shares (2) $ 6.00 $8,280,000 $ 2,443 - ----------------------------------------------------------------------------------------------------------- Underwriter's Warrants(3) 120,000 shares $ .001 $ 120 --(4) - ----------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value, underlying Underwriter's Warrants 120,000 shares $ 8.10 $ 972,000 287 - ----------------------------------------------------------------------------------------------------------- Total $ 2,730(5) ===========================================================================================================
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) of the Securities Act. (2) Includes 180,000 shares underlying the Underwriter's over-allotment option. (3) Represents warrants to be issued to the Underwriter. Pursuant to Rule 416, there are also being registered hereby such additional indeterminate number of shares of Common Stock as may become issuable by reason of the anti-dilution provisions set forth in the Underwriter's Warrants. (4) None pursuant to Section 457(g). (5) Of such total registration fee, $2,230 has already been paid. IBS INTERACTIVE, INC. CROSS-REFERENCE SHEET
Form SB-2 Item Number and Caption Heading in Prospectus - --------------------------------- --------------------- 1. Front of Registration Statement and Outside Front Cover of Prospectus .......... Outside Front Cover of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus ........................ Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information and Risk Factors ....... Prospectus Summary; Risk Factors 4. Use of Proceeds ............................ Use of Proceeds 5. Determination of Offering Price ............ Risk Factors; Underwriting 6. Dilution ................................... Dilution; Risk Factors 7. Selling Security Holders ................... Not Applicable 8. Plan of Distribution ....................... Outside Front Cover Page of Prospectus; Underwriting 9. Legal Proceedings .......................... Business 10. Directors, Executive Officers, Promoters and Control Persons ........................ Risk Factors; Management 11. Security Ownership of Certain Beneficial Owners and Management ...................... Principal Stockholders 12. Description of Securities .................. Description of Securities 13. Interests of Named Experts and Counsel ..... Legal Matters; Experts 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities ................................ Description of Securities 15. Organization Within Last Five Years ........ Business; Certain Transactions 16. Description of Business .................... Business 17. Management's Discussion and Analysis or Management's Discussion and Analysis of Financial Plan of operation .......................... Condition and Results of Operations 18. Description of Property .................... Prospectus Summary; Risk Factors; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business 19. Certain Relationships and Related Transactions ............................... Certain Transactions 20. Market for Common Equity and Related Risk Factors; Dilution; Management; Shares Eligible for StockholderMatters ......................... Future Sale 21. Executive Compensation ..................... Management 22. Financial Statements ....................... Financial Statements 23. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................................. Not Applicable
Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. PRELIMINARY PROSPECTUS DATED APRIL 23, 1998 SUBJECT TO COMPLETION [LOGO] 1,200,000 Shares of Common Stock Prior to this offering, there has been no public market for the Common Stock and there can be no assurance that any such market will develop. It is anticipated that the Common Stock will be quoted on the Nasdaq SmallCap Market ("Nasdaq") under the symbol IBSX. For a discussion of the factors considered in determining the initial public offering price, see "Underwriting." ------------------------- THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" COMMENCING ON PAGE 6. ------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. =============================================================================== Price Underwriting Proceeds to Discounts and to Public Commissions(1) Company(2) - -------------------------------------------------------------------------------- Per Share ......... $6.00 $.60 $5.40 - -------------------------------------------------------------------------------- Total(3) .......... $7,200,000 $720,000 $6,480,000 =============================================================================== (1) In addition, the Company has agreed to pay to the Underwriter a 3% nonaccountable expense allowance and to sell to the Underwriter warrants (the "Underwriter's Warrants") to purchase up to 120,000 shares of Common Stock. The Company has also agreed to indemnify the Underwriter against certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $701,000, including the Underwriter's nonaccountable expense allowance in the amount of $216,000 ($248,400 if the Underwriter's over-allotment option is exercised in full). (3) The Company has granted to the Underwriter an option, exercisable within 45 days from the date of this Prospectus, to purchase up to an additional 180,000 shares of Common Stock on the same terms set forth above, solely for the purpose of covering over-allotments, if any. If the Underwriter's over-allotment option is exercised in full, the total price to public, underwriting discounts and commissions, and proceeds to Company will be $8,280,000, $828,000 and $7,452,000, respectively. See "Underwriting." ------------------------- The shares of Common Stock are being offered, subject to prior sale, when, as and if delivered to and accepted by the Underwriter and subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriter reserves the right to withdraw, cancel or modify the offering and to reject any order in whole or in part. It is expected that delivery of certificates representing the shares will be made against payment therefor at the offices of the Underwriter, 650 Fifth Avenue, New York, New York 10019, on or about , 1998. ---------------- Whale Securities Co., L.P. The date of this Prospectus is , 1998. Graphic Internet Services -- Dialup/email, Hosting, Leased Lines linked by arrow to Systems Integration -- Network design, implementation, systems support linked by arrow to Web Programming Services -- Database development, Internet programming, distance learning IBS Interactive, Inc. provides a broad range of computer networking, programming, applications development and Internet services primarily to businesses and organizations. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS, ON NASDAQ, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE, WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITER MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. SUCH ACTIVITIES, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. Except as otherwise indicated, the information in this Prospectus (i) gives effect to each of an approximate 1,029-for-1 stock split effected in March 1998, a subsequent approximate 1.19-for-1 stock split effected in April 1998 and the issuance upon the consummation of this offering of 25,000 shares of Common Stock upon conversion of $150,000 of indebtedness (the "Debt Conversion") and (ii) assumes no exercise of the Underwriter's over-allotment option to purchase up to 180,000 additional shares of Common Stock. See "Underwriting" and Notes 7 and 14 to Notes to the Company's Financial Statements. The Company IBS Interactive, Inc. (the "Company") provides a broad range of computer networking, programming, applications development and Internet services primarily to businesses and organizations. The Company has adopted a business model that includes Systems Integration; Programming and Applications Development; and Internet services. These services are designed to permit clients to outsource a variety of business needs such as computer networking, programming, maintenance and technical support. The Company believes that by combining computer consulting and Internet related services, it is positioned to capitalize on increasing demand by businesses and organizations for comprehensive, cost-effective information technology solutions. The Systems Integration services offered by the Company include systems consulting, analysis and design; implementation and integration; and maintenance. The Company's Programming and Applications Development services consist primarily of custom programming for Internet and Intranet applications, including distance learning and on-line trading applications and Web-site development and maintenance. Internet services offered by the Company include dedicated leased line and frame relay connections, Web hosting, dial-up access and electronic mail services. For the year ended December 31, 1997, Systems Integration, Programming and Applications Development and Internet services accounted for approximately 55%, 9% and 36%, respectively, of the Company's revenues. The Company's principal marketing efforts are focused on large businesses and organizations with systems development and maintenance needs. The Company's clients during the year ended December 31, 1997 included Aetna U.S. Healthcare Inc. ("Aetna"); Mobil Oil Corporation ("Mobil"); Black & Decker Corp.; TRW, Inc.; Bell Atlantic Corporation ("Bell Atlantic"); Unilever; Scientific Applications International Corporation; the City of Fairfax, Virginia; certain agencies of the U.S. Department of Defense; and The Archdiocese of New York (Catholic Healthcare Network). The Company's telecommunications network is comprised of a secure network operations center ("NOC") in Cedar Knolls, New Jersey, leased high-speed data lines and ten points-of-presence ("POPs") serving the northern New Jersey and New York City metropolitan area. The proximity of a POP to subscribers enables subscribers in the area in which a POP is located to access the Internet through a local telephone call. The Company currently supports 56k and ISDN technologies at each of its POPs. The Company has approximately 3,300 dial-up subscribers as of the date of this Prospectus. For the year ended December 31, 1997, dial-up access services accounted for approximately 15% of the Company's revenues. The Company commenced operations in June 1995 as an Internet service provider offering Web-site hosting services. Since April 1996, the Company has acquired Interactive Networks, Inc. ("Interactive Networks"), Mordor International ("Mordor") and AllNet Technology Services, Inc. ("AllNet"), each an Internet service provider principally offering dial-up access services. The Company began to provide Systems Integration and Programming and Applications Development services in April 1996 and has increasingly emphasized such services. In January 1998, the Company acquired Entelechy, Inc. ("Entelechy"), a 3 provider of programming and applications development services, including distance learning and on-line trading applications. During the twelve months following the consummation of this offering, the Company will seek to continue to expand its operations through internal growth and acquisitions. The Company believes that worldwide competition and rapid technological advancements, coupled with a trend by businesses to outsource non-core business functions, have created increasing demand for computer consulting and Internet related services. The Company's strategy is to capitalize on such increasing demand by (i) pursuing opportunities to expand its existing service offerings, the scope of its operations and client base through selective acquisitions of systems integrators, programmers, applications developers and Internet service providers; (ii) expanding the capacity and geographic scope of its network through the establishment or acquisition of additional POPs and network upgrades; (iii) hiring and retaining additional qualified network engineering, programming and technical personnel; and (iv) expanding its marketing and sales efforts through enhanced cross-marketing of its service offerings. There can be no assurance that the Company will be able to successfully implement this strategy or otherwise expand its operations. The Company was incorporated under the name Internet Broadcasting System, Inc. in February 1995 under the laws of the State of Delaware. The Company's principal executive offices are located at 2 Ridgedale Avenue, Suite 350, Cedar Knolls, New Jersey 07927, and its telephone number is (973) 285-2600. The Company maintains a Web-site at http://www.interactive.net. Information contained in the Company's Web-site does not constitute a part of this Prospectus. The Offering Common Stock offered..... 1,200,000 shares Common Stock to be outstanding after the offering(1)............. 3,074,237 shares Use of Proceeds.......... The Company intends to use the net proceeds of this offering for potential acquisitions; network expansion and upgrade; sales and marketing; repayment of indebtedness; and the balance for working capital and general corporate purposes. See "Use of Proceeds." Risk Factors............. The shares offered hereby are speculative and involve a high degree of risk and immediate and substantial dilution and should not be purchased by investors who cannot afford the loss of their entire investment. See "Risk Factors" at page 6 and "Dilution." Nasdaq SmallCap Market Symbol........... IBSX - ------------- (1) Does not include (i) 120,000 shares reserved for issuance upon exercise of the Underwriter's Warrants; (ii) 48,872 shares reserved for issuance upon exercise of warrants (the "Warrants") issued in connection with a private financing consummated in October 1997 (the "1997 Financing"); (iii) 130,124 shares reserved for issuance in connection with the acquisition of Entelechy in January 1998; (iv) 132,750 shares reserved for issuance upon exercise of options granted under the Company's 1998 Stock Option Plan (the "1998 Stock Option Plan"); (v) 20,000 shares reserved for a restricted stock award; and (vi) 197,250 shares reserved for issuance upon the exercise of options available for future grant under the 1998 Stock Option Plan. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Management--Employment Agreements," "--1998 Stock Option Plan," "Description of Securities--Warrants" and "Underwriting." 4 Summary Financial Information The following summary financial information for the years ended December 31, 1996 and 1997 and balance sheet data (actual) as of December 31, 1997 has been derived from audited financial statements of the Company and should be read in conjunction with "Management's Discussion and Analysis of Results of Operations" and the financial statements, including the notes thereto, contained elsewhere in this Prospectus.
Year Ended December 31, ----------------------------- 1996 1997 ------------- ------------- Statement of Operations Data(1): Revenues ................................................ $1,023,000 $2,741,000 Cost of services ........................................ 650,000 1,099,000 Gross profit ............................................ 373,000 1,642,000 Net income (loss) ....................................... (251,000) 198,000 Net income (loss) per share - basic and diluted ......... (.17) .12 Weighted average number of shares outstanding - diluted ................................................ 1,507,047 1,721,664
December 31, 1997 -------------------------------------------------- Actual Pro Forma(2) As Adjusted(3) ------------ -------------- ------------------ Balance Sheet Data: Working capital .............. $ 567,000 $ 425,000 $ 6,250,000 Total assets ................. 2,451,000 3,295,000 8,726,000 Total liabilities ............ 1,312,000 1,486,000 1,009,000 Stockholders' equity ......... 1,139,000 1,809,000 7,717,000(4)
- ------------- (1) Includes the results of operations of (i) Interactive Networks since the beginning of the periods presented, (ii) Mordor subsequent to May 31, 1996, and (iii) AllNet subsequent to March 1, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 to Notes to the Company's Financial Statements. (2) Gives effect to the acquisition of Entelechy in January 1998 including the issuance of 147,310 shares of Common Stock in connection therewith. (3) Gives effect to (i) the Debt Conversion and (ii) the sale of the shares offered hereby and the anticipated application of the estimated net proceeds therefrom. See "Use of Proceeds," "Management Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Transactions." (4) Gives effect to a non-recurring charge of $35,000 ($21,000, net of tax benefit) relating to the 1997 Financing which will be incurred upon consummation of this offering. See Note 6 to Notes to the Company's Financial Statements. Notices to California Investors. Each purchaser of Common Stock in California must be an "accredited investor" as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"), or satisfy one of the following suitability standards: (i) minimum annual gross income of $65,000 and a net worth (exclusive of home, home furnishings and automobiles) of $250,000; or (ii) minimum net worth (exclusive of home, home furnishings and automobiles) of $500,000. 5 RISK FACTORS The shares offered hereby are speculative and involve a high degree of risk. Each prospective investor should carefully consider the following risk factors before making an investment decision. Limited Operating History. The Company commenced operations in June 1995 as an Internet service provider and began to offer systems integration, programming and applications services in April 1996. Accordingly, the Company has a limited operating history upon which an evaluation of its prospects and performance can be made. The Company's prospects must be considered in light of the risks, uncertainties, expenses, delays, problems and difficulties frequently encountered in the establishment of a new business enterprise in a rapidly evolving industry characterized by intense competition and an increasing and substantial number of new market entrants and technologies and services. The Company is subject to the risks associated with an evolving business and the management of both internal and acquisition based growth. See "Business." Prior Operating Losses; Lack of Substantial Profitability; Future Operating Results. The Company incurred losses of $39,000 and $251,000, respectively, for the period from inception (February 28, 1995) to December 31, 1995 and the year ended December 31, 1996 and has an accumulated deficit at December 31, 1997 of $85,000. On a pro forma basis, the Company would have incurred a loss in the amount of $113,000 for the year ended December 31, 1997 after giving effect to the acquisition of Entelechy. The Company achieved only limited profitability for the year ended December 31, 1997 despite generating steadily increasing levels of revenues. The Company's operating expenses have increased and will continue to increase significantly in connection with any expansion activities undertaken by the Company, including those relating to acquisitions, network development and marketing. Accordingly, the Company's future profitability will depend on corresponding increases in revenues from operations. The Company's expense levels are based in part on the Company's expectations concerning future revenues and are fixed to a large extent. Any decline in demand for the Company's services or increases in the Company's expenses which are not offset by corresponding increases in revenue could have a material adverse effect on the Company. The Company expects to incur a non-recurring charge of $35,000 relating to the 1997 Financing upon the consummation of this offering, and charges of approximately $180,000, $197,000, $197,000 and $17,000 relating to the Entelechy acquisition in each of the years ending December 31, 1998, 1999, 2000 and 2001, respectively. Additionally, the Company expects to incur annual charges in the amount of $27,000 through the year ending December 31, 2001 in connection with the award of a restricted stock grant to an executive officer. There can be no assurance that the Company's recent rate of revenue growth will continue or that the Company's future operations will be profitable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Management -- Employment Agreements" and Financial Statements. Dependence on Aetna; Non-Recurring Revenues. The Company is dependent on a limited number of clients for a substantial portion of its revenues. For the year ended December 31, 1997, the Company's largest clients, Aetna (which engaged the Company in October 1997) and Mobil accounted for approximately 54.2% and 5.2%, respectively, of the Company's revenues. Revenues derived from the Company's consulting contracts are generally non-recurring in nature. The Company's contract with Aetna provides for the Company to render services pursuant to purchase orders, each of which constitutes a separate contractual commitment by Aetna. As of the date of this Prospectus, the Company has not received any purchase orders from Aetna for work to be performed subsequent to April 30, 1998. Non-renewal or termination of the Company's contract with Aetna or the failure by Aetna to issue additional purchase orders under the existing contract would have a material adverse effect on the Company. There can be no assurance that the Company will obtain additional contracts for projects similar in scope to those previously obtained from Aetna or any other client, that the Company will be able to retain existing clients or attract new clients or that the Company will not remain largely dependent on a limited client base which may continue to account for a substantial portion of the Company's revenues. In addition, the Company generally will be subject to delays in client funding; lengthy client review processes for awarding contracts; nonrenewal; delay, termination, reduction or modification of contracts in the event of changes in client policies or as a result of budgetary constraints; and increased or unexpected costs resulting in losses in the event of "fixed-price" contracts. See "Business -- Clients." Subscriber Attrition. The Company's operating results may be affected by dial-up subscriber attrition rates. Subscribers may discontinue service without penalty at any time, and there can be no assurance that subscribers will continue to purchase services from the Company or that the Company will not be subject to subscriber 6 attrition. Historically, the Company has not retained data enabling it to accurately compute subscriber attrition levels. Significant levels of subscriber attrition in the future could have a material adverse effect on the Company's operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Limited Number of POPs; Geographic Concentration; Uncertainty of Network Expansion. The Company currently has ten POPs in operation in the northern New Jersey and New York City metropolitan areas. Consequently, the results achieved to date by the Company may not be indicative of the prospects or market acceptance of a larger number of POPs in wider and more geographically dispersed areas. The process of acquiring existing POPs or identifying suitable sites and establishing additional POPs can be lengthy. There can be no assurance that the Company will be successful in acquiring existing POPs or identifying suitable sites and establishing additional POPs. Failure to obtain and install telephone lines and network equipment on a timely and cost-effective basis could materially delay the Company's plans with respect to the establishment of additional POPs in target markets. The Company has relatively limited experience in establishing POPs and has limited financial, technical and other resources. There can be no assurance that the Company will be able, for financial or other reasons, to successfully expand its network of POPs or that any expansion will not be subject to unforeseen delays and costs. See "Business -- Network Infrastructure." Emerging and Evolving Markets; Uncertainty of Market Acceptance; Limited Marketing, Service and Support Capabilities. The markets for the Company's services are relatively new and evolving and are characterized by consolidating trends. As a result, the ultimate level of demand for the Company's services is subject to a high degree of uncertainty. Any significant decline in demand for computer networking services or in the computer industry generally or in particular market segments could have a material adverse effect on the Company's business and prospects. The Company's success will be largely dependent upon its ability to continually attract and retain additional clients and subscribers and replace terminating clients and subscribers. Achieving significant market acceptance will require substantial efforts and expenditures to create enhanced awareness of the services offered by the Company. The successful implementation of the Company's business plans will also require the Company to expand client service and support capabilities to satisfy increasingly sophisticated client requirements. The Company currently has limited marketing experience and limited marketing, service, client support and other resources. To date, the Company has relied principally on the efforts of its executive officers to market its services. There can be no assurance that the Company will be able to successfully expand its marketing activities, client service or support capabilities, or that the Company's efforts will result in continued market acceptance for the Company's services. See "Business - -- Sales and Marketing." Competition. The markets for the Company's services are highly competitive. There are no substantial barriers to entry and the Company expects that competition will intensify in the future. The Company believes that its ability to compete successfully will be significantly affected by the availability of highly skilled engineers, programmers and technicians; continuing referrals by clients; the geographic scope of the Company's network; and industry and general economic trends. The Company competes with numerous large companies that have substantially greater market presence and financial, technical, marketing and other resources than the Company, including (i) large information technology consulting and service providers and application software firms such as Andersen Consulting, Cambridge Technology Partners, Electronic Data Systems Corporation and American Management Systems; (ii) international, national, regional and commercial Internet service providers such as Performance Systems International, Inc., Digex, Inc. and UUNET Technologies, Inc.; ("UUNET"); (iii) established on-line services companies such as America Online, Inc., and Prodigy Service Company; (iv) computer hardware and software and other technology companies such as IBM and Microsoft Corp.; (v) national long distance carriers such as AT&T Corp., MCI Communications Corp. and Sprint Corp. and regional telephone companies, including Bell Atlantic, and cable operators; and (vi) major accounting firms. Many of these competitors have announced plans to expand their service offerings and increase their focus on markets relating to computer networking and Internet related services. As a result, competition is expected to intensify for highly skilled network engineers, programmers and technicians. There can be no assurance that competitors will not develop or offer services that provide performance, price or other advantages over those offered by the Company, that the Company will be able to attract, hire or retain highly skilled network engineers, programmers and technicians or that the Company will have the financial resources, technical expertise or marketing and support capabilities to compete successfully. See "Business -- Competition." 7 Rapid Technological Change. The markets for the Company's services are characterized by rapid technological change, changes in client requirements and preferences, frequent new product and service introductions embodying new processes and technologies and evolving industry standards and practices that could render the Company's existing practices and methodologies obsolete or less attractive to existing and prospective clients. The Company's success will depend on its ability to improve existing and develop new services and solutions that address the increasingly sophisticated and varied needs of its current and prospective clients, and respond to technological advances, emerging industry standards and practices and competitive service offerings. There can be no assurance that the Company will be successful in responding quickly, cost-effectively and sufficiently to these developments. The Company's dial-up access service is also subject to fundamental changes in the manner in which Internet access services are delivered. Currently, the Internet is accessed primarily by computers and telephone lines. To the extent that the Internet becomes increasingly accessible by screen-based telephones, television or other consumer electronic devices which change the way Internet access is routinely provided, the Company may be required to acquire or develop new technology or modify its existing technology to accommodate these developments. The pursuit of these technological advances may require substantial time and expense, and there can be no assurance that the Company will succeed in adapting its Internet access service to alternate access devices and conduits. See "Business -- Competition." Capacity Constraints; System Failure and Security Risks. The Company's operations will depend upon the capacity, reliability and security of its network infrastructure. The Company currently has limited network capacity and will be required to continually expand its network infrastructure to accommodate significant numbers of users and increasing amounts of information. Expansion of the Company's network infrastructure will require significant financial, operational and management resources. There can be no assurance that the Company will be able to expand its network infrastructure to meet potential demand on a timely basis, at a commercially reasonable cost, or at all. Failure by the Company to expand its network infrastructure on a timely basis would have a material adverse effect on the Company. The Company's operations will also be dependent on the Company's ability to protect its computer equipment against damage from fire, power loss, telecommunications failures and similar events. The Company currently does not maintain redundant capacity. The Company's network infrastructure will be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with the Company's computer systems. Computer viruses or problems caused by third parties could lead to material interruptions, delays or cessation in service. Inappropriate use of the Internet by third parties could also potentially jeopardize the security of confidential information stored in computer systems. Security and privacy concerns may limit the Company's ability to develop a significant subscriber base. See "Business -- Network Infrastructure." Dependence on Third-Party Suppliers and Manufacturers; Possible Service Interruptions and Equipment Failures. The Company is dependent on Bell Atlantic and WorldCom, Inc. ("WorldCom") to provide leased telecommunications lines on a cost-effective and continuous basis, and on UUNET to provide Internet access. As is customary in the industry, the Company has not entered into interconnect agreements with these suppliers. Increases in rates charged by such suppliers could adversely affect the Company's operating margins. Failure to obtain continuing access to such networks resulting in material business interruptions would also have an adverse effect on the Company. The Company also is dependent on third-party manufacturers of hardware components. Except for a limited number of non-exclusive reseller agreements with certain suppliers, the Company has not entered into agreements with any equipment manufacturer. Failure by manufacturers to deliver quality equipment on a timely basis or any inability to obtain alternative sources of supply, could materially adversely affect the Company's business and limit the Company's ability to expand its network. In addition, the Company's operations require that its POPs and its third-party telecommunications networks operate on a continuous basis. It is possible that the Company's POPs and third-party telecommunications networks may from time to time experience service interruptions or equipment failures. Service interruptions and equipment failures resulting in material delays would adversely affect client and subscriber confidence as well as the Company's business operations and reputation. See "Business -- Network Infrastructure." Risks Associated with Expansion and Unspecified Acquisitions. The Company intends to use a portion of the proceeds of this offering to expand its operations through internal growth and acquisitions. The Company plans to establish or acquire additional POPs, upgrade and expand its network capacity, attract additional clients and subscribers, expand its work force and its presence in selected geographic markets. Such growth is expected 8 to place a significant strain on its management, administration, operational, financial and other resources. To successfully manage growth, the Company will be required to continue to implement and improve its administrative, operating and financial systems, train and manage its employees, monitor operations, control costs and maintain effective quality controls. The Company has limited experience in effectuating rapid expansion and in managing operations which are geographically dispersed, and there can be no assurance that the Company will be able to successfully expand its operations or manage growth. The Company intends to pursue opportunities by making selective acquisitions of systems integraters, programmers, applications developers and Internet service providers. While the Company regularly evaluates possible acquisition opportunities, as of the date of this Prospectus, the Company has no plans, agreements, commitments, understandings or arrangements with respect to any such acquisition. There can be no assurance that the Company will ultimately effect any acquisition, that it will be able to successfully integrate into its operations any personnel, businesses, clients or subscribers which it may acquire, that the Company will not incur significant charges related to an acquisition, goodwill amortization expense or write-offs associated with attrition of newly acquired subscribers or clients or be able to retain acquired key personnel. Additionally, stockholders will generally not have any opportunity to evaluate or approve any acquisition. See "Use of Proceeds" and "Business -- Strategy." Recruitment and Retention of Qualified Personnel. The Company's business is labor intensive. The Company's success will depend upon its ability to identify, hire, train and retain professional engineers, programmers and technicians who can provide the strategy, technology and creative skills required by clients. Qualified professionals are in high demand and are likely to remain a limited resource for the foreseeable future. The Company is currently dependent on the services of temporary personnel to satisfy increased client requirements. The Company competes intensely for qualified personnel with other companies, and there can be no assurance that the Company will be able to attract or retain other highly qualified engineers, programmers and technical personnel in the future. Failure to attract and retain qualified professionals in sufficient numbers would severely limit the Company's ability to complete existing projects and expand its operations. See "Business." Dependence on Offering Proceeds to Implement Proposed Expansion; Possible Need for Additional Financing. The Company's business is capital intensive. The Company is dependent on and intends to use a substantial portion of the proceeds of this offering to implement its expansion plans. Based on proposed plans and assumptions relating to its operations, the Company believes that the proceeds of this offering, together with projected cash flow from operations, will be sufficient to satisfy its contemplated cash requirements for at least twelve months following the consummation of this offering. In the event that the Company's plans change, its assumptions change or prove to be inaccurate or if the proceeds of this offering or cash flow prove to be insufficient to implement its business plans, the Company may be required to seek additional financing or curtail its expansion activities. There can be no assurance that the proceeds of this offering will be sufficient to permit the Company to implement its business plans, that any assumptions relating to the implementation of such plans will prove to be accurate or that any additional financing would be available to the Company on commercially reasonable terms, or at all. The inability to obtain additional financing, if required, would have a material adverse effect on the Company. The Company may determine to seek additional debt or equity financing to fund the cost of continuing expansion. To the extent that the Company finances an acquisition with equity securities, the issuance of such equity securities would result in dilution to the interests of the Company's stockholders. Additionally, if the Company incurs indebtedness or issues debt securities in connection with any acquisition, the Company will be subject to risks that interest rates may fluctuate and cash flow may be insufficient for the payment of principal and interest on any such indebtedness. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Possible Fluctuations in Operating Results; Lengthy Sales Cycle. The Company's operating results may fluctuate significantly from period to period as a result of the length of the Company's sales cycle, as well as from client budgeting cycles; the introduction of new products and services by competitors; the timing of expenditures; pricing changes in the industry; technical difficulties; and general economic conditions. The Company's business is generally subject to lengthy sales cycles, which requires the Company to make expenditures and use significant resources prior to receipt of corresponding revenues. Historically, the Company's revenues have been higher in the fourth quarter as a result of client budgeting and expenditures cycles. There can be no assurance that the foregoing factors will not result in significant fluctuations in future operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 9 Outstanding Accounts Receivable, Credit and Collection Risks. The Company's accounts receivable, less allowance for doubtful accounts, at December 31, 1997, were $1,636,000, compared to $310,000 at December 31, 1996. Of such 1997 receivables, approximately 93% were due from Aetna, all of which were collected in January 1998. At December 31, 1997, the Company's allowance for doubtful accounts was $66,000. Delays in collection or uncollectibility of accounts receivable could have an adverse effect on the Company and could require the Company to increase its allowance for doubtful accounts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Government Regulation; Potential Liability for Content. Recently enacted federal, state and local legislation aimed at limiting the use of the Internet to transmit certain content and materials could result in significant liability to Internet service providers. These types of legislative actions present the potential for increased scrutiny and attempts to impose liability upon Internet service providers for information disseminated through their networks. The adoption or strict enforcement of any such laws or regulations may limit the growth of the Internet, which could decrease demand for the Company's services and increase the Company's cost of doing business. Additionally, the applicability to the Internet of existing laws governing issues such as property ownership, libel and personal privacy is uncertain. As a result, it is possible that the adoption of new legislation or regulation or the application to the Internet of existing laws and regulations relating to property ownership, libel and personal privacy could have a material adverse effect on the Company. Changes in the regulatory environment relating to Internet access, including regulatory changes which directly or indirectly affect telecommunication costs or increase the likelihood or scope of competition from local and regional telephone companies or others, could also have a material adverse effect on the Company. See "Business." Limited Intellectual Property Protection. The Company relies on a combination of copyright and trademark laws, trade secrets and nondisclosure agreements to protect its proprietary information. The Company currently has no registered copyrights or patents or patent applications pending. It may be possible for unauthorized third parties to copy aspects of, or otherwise obtain and use, the Company's proprietary information without authorization. In addition, there can be no assurance that any confidentiality agreements between the Company and its employees or any agreements with its customers will provide meaningful protection for the Company's proprietary information in the event of any unauthorized use or disclosure of such proprietary information. The majority of the Company's current agreements with its clients contain provisions granting to the client intellectual property rights to certain of the Company's work product, including customized programming that is created during the course of a project. The Company anticipates that agreements with future clients may contain similar provisions. Other existing agreements to which the Company is a party are, and future agreements may be, silent as to the ownership of such rights. To the extent that the ownership of such intellectual property rights is expressly granted to a client or is ambiguous, the Company's ability to reuse or resell such rights will or may be limited. See "Business -- Intellectual Property." Potential Liability to Clients. The Company's consulting engagements often involve development, implementation and maintenance of applications that are critical to the operations of its clients' businesses. The Company's failure or inability to meet a client's expectations in the performance of its services could harm the Company's business reputation or result in a claim for substantial damages against the Company, regardless of the Company's responsibility for such failure or inability. In addition, in the course of performing services, the Company's personnel often gain access to technologies and content which include confidential or proprietary client information. Although the Company has implemented policies to prevent such client information from being disclosed to unauthorized parties or used inappropriately, any such unauthorized disclosure or use could result in a claim for substantial damages. The Company attempts to limit contractually its damages arising from negligent acts, errors, mistakes or omissions in rendering services and, although the Company maintains general liability insurance coverage in the amount of $1,000,000, including coverage for errors and omissions, there can be no assurance that such coverage will continue to be available on reasonable terms or will be available in sufficient amounts to cover one or more large claims. The successful assertion of one or more large claims against the Company that are uninsured, exceed available insurance coverage or result in changes to the Company's insurance policies, including premium increases or the imposition of a large deductible or co-insurance requirements, would adversely affect the Company. See "Business -- Insurance." Dependence on Key Personnel. The success of the Company will be dependent on the personal efforts of Nicholas R. Loglisci, Jr., its President and Chief Operating Officer; Clark D. Frederick, its Chief Technical 10 Officer; Frank R. Altieri, Jr., its Chief Information Officer and other key personnel. Although the Company has entered into employment agreements with Messrs. Loglisci, Frederick and Altieri, the loss of the services of any of such individuals, as a result of extended leaves due to military service or otherwise, could have a material adverse effect on the Company. Prior to the consummation of this offering, the Company intends to obtain "key-man" insurance on the life of each of Messrs. Loglisci, Frederick and Altieri in the amount of $2,000,000. See "Management." Dependence on Personal Guarantees. Certain of the Company's equipment leases have been personally guaranteed by each of Messrs. Loglisci, Frederick and Altieri. Additionally, the Company's bank indebtedness has been personally guaranteed by each of Messrs. Loglisci and Altieri. At December 31, 1997, the aggregate obligations of the Company personally guaranteed by these executive officers amounted to $117,000. None of these individuals nor any other person has any obligation to make personal guarantees available to the Company in the future and it is expected that such persons will not personally guarantee obligations of the Company following the consummation of this offering. There can be no assurance that the absence of such personal guarantees will not adversely affect the Company's ability to borrow funds or lease equipment in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Transactions." Broad Discretion in Application of Proceeds; Allocation of Proceeds to Repay Indebtedness; Benefits to Related Parties. Approximately $2,372,000 (41.0%) of the estimated net proceeds of this offering has been allocated to working capital and general corporate purposes. Accordingly, the Company's management will have broad discretion as to the application of such proceeds. The Company also intends to use $307,000 of the net proceeds of this offering to repay outstanding indebtedness, including indebtedness owing to Steven Loglisci, Nicholas R. Loglisci, Sr., Frank R. Altieri, Sr., each a member of the family of an executive officer of the Company, and Barrett Wissman, a nominee for director of the Company, in the amount of $28,750, $10,000, $50,000 and $25,000, respectively. Additionally, a portion of the proceeds of this offering allocated to working capital may be used to pay the salaries of executive officers (which is anticipated to approximate $395,000 during the twelve months following this offering) to the extent cash flow from operations is insufficient for such purpose. See "Use of Proceeds" and "Certain Transactions." Control by Current Stockholders. Upon consummation of this offering, the Company's current stockholders will beneficially own, in the aggregate, approximately 60.2% of the outstanding shares of Common Stock. Accordingly, such persons, acting together, will be in a position to control the Company, elect all of the Company's directors, change the Company's authorized capital or cause the dissolution, merger or sale of the assets of the Company, and generally direct the affairs of the Company. See "Management" and "Principal Stockholders." Potential Conflicts of Interest. The Company has entered into certain transactions or arrangements with its affiliates, including borrowings and personal guarantees made on behalf of the Company, which could result in conflicts of interest. Although the Company believes that all such transactions or arrangements were on terms no less favorable to the Company than could have been obtained from unaffiliated third parties, there can be no assurance that conflicts of interest will not arise with respect to future transactions or arrangements or that such conflicts will be resolved in a manner favorable to the Company. Any such future transactions will be approved by a majority of the independent and disinterested members of the Board of Directors and, to the extent deemed necessary or appropriate by the Board of Directors, the Company will obtain fairness opinions or stockholder approval in connection with any such transactions. See "Certain Transactions." No Dividends. To date, the Company has not paid any dividends on its Common Stock and does not expect to declare or pay dividends on the Common Stock in the foreseeable future. See "Dividend Policy." Limitation on Liability. The Company's Restated Certificate of Incorporation (the "Restated Certificate") includes provisions to limit, to the full extent permitted by Delaware General Corporation Law (the "DGCL"), the personal liability of directors of the Company for monetary damages arising from a breach of their fiduciary duties as directors. As a result of such provisions in the Restated Certificate, stockholders may be unable to recover damages against the directors of the Company for actions taken by them which constitute negligence, 11 gross negligence or a violation of certain of their fiduciary duties, which may reduce the likelihood of stockholders instituting derivative litigation against directors and may discourage or deter stockholders from suing directors for breaches of their duty of care, even though such an action, if successful, might otherwise benefit the Company and its stockholders. See "Management -- Indemnification of Directors and Officers." Immediate and Substantial Dilution. This offering involves an immediate and substantial dilution of $3.76 per share (62.7%) between the net tangible book value per share after the offering and the initial public offering price per share. See "Dilution." Authorized Preferred Stock. The Restated Certificate authorizes the Company's Board of Directors to issue one million shares of "blank check" preferred stock, par value $.01 per share (the "Preferred Stock"), and to fix the rights, preferences, privileges and restrictions, including voting rights, of such shares of Preferred Stock, without further stockholder approval. The rights of the holders of Common Stock will be subject to and may be adversely affected by the rights of holders of any Preferred Stock that may be issued in the future. The ability to issue Preferred Stock without stockholder approval could have the effect of making it more difficult for a third party to acquire a majority of the voting stock of the Company thereby delaying, deferring or preventing a change in control of the Company. See "Description of Securities." Shares Eligible for Future Sale; Registration Rights. Upon consummation of this offering, the Company will have 3,074,237 shares of Common Stock outstanding, of which the 1,200,000 shares of Common Stock offered hereby will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), except for any shares purchased by an "affiliate of the Company" (in general, a person who has a controlling position with regard to the Company), which will be subject to the resale limitations of Rule 144 promulgated under the Securities Act. All of the remaining 1,874,237 shares of Common Stock which will be outstanding upon the consummation of this offering are "restricted securities," as that term is defined under Rule 144. Subject to the contractual restrictions described below, 1,701,927 shares of Common Stock will be eligible for sale pursuant to Rule 144 commencing 90 days following the date of this Prospectus, 147,310 shares will become eligible for sale pursuant to Rule 144 on January 31, 1999 and 25,000 shares will become eligible for sale pursuant to Rule 144 on the first anniversary of the date of consummation of this offering. The holders of 1,548,102 of such shares (and holders of 48,872 shares issuable upon the exercise of the Warrants) have agreed not to sell or otherwise dispose of such shares for a period of twelve months from the date of this Prospectus without the Underwriter's prior written consent. The Company has granted certain "piggy-back" registration rights to the holders of 354,330 shares of Common Stock (including 48,872 shares issuable upon the exercise of Warrants), and certain demand and "piggy-back" registration rights to the Underwriter with respect to the securities issuable upon exercise of the Underwriter's Warrants. No prediction can be made as to the effect, if any, that sales of shares of Common Stock or even the availability of such shares for sale will have on the market prices prevailing from time to time. The possibility that substantial amounts of Common Stock may be sold in the public market may adversely affect the prevailing market price for the Common Stock and could impair the Company's future ability to raise capital through the sale of its equity securities. See "Shares Eligible for Future Sale" and "Underwriting." No Assurance of Public Market; Arbitrary Determination of Offering Price; Possible Volatility of Market Price of Common Stock; Underwriter's Potential Influence on the Market. Prior to this offering, there has been no public trading market for the Common Stock. There can be no assurance that a regular trading market for the Common Stock will develop after this offering or that, if developed, it will be sustained. Moreover, the initial public offering price of the Common Stock has been determined by negotiations between the Company and the Underwriter and, as a result, such initial public offering price has been arbitrarily determined and may not bear any relationship to the assets, book value or potential earnings of the Company or any other recognized criteria of value and may not be indicative of the prices that may prevail in the future in the public market. The market price of the Common Stock following this offering may be highly volatile. Factors such as the Company's operating results, announcements by the Company or its competitors and new products and services affecting the computer networking and Internet industry may have a significant impact on the market price of the Company's securities. In addition, in recent years, the stock market has experienced a high level of price and volume volatility and the market price for the stock of many companies have experienced wide price fluctuations which have not necessarily been related to the operating performance of such companies. Although it has no obligation to 12 do so, the Underwriter intends to make a market in the Common Stock and may otherwise effect transactions in the Common Stock. If the Underwriter makes a market in the Common Stock, such activities may exert a dominating influence on the market and such activity may be discontinued at any time. The prices and liquidity of the Common Stock may be significantly affected to the extent, if any, that the Underwriter participates in such market. See "Underwriting." Possible Delisting of Common Stock from Nasdaq SmallCap Market; Risks Relating to Low-Priced Stocks. It is currently anticipated that the Common Stock will be eligible for quotation on the Nasdaq SmallCap Market upon the completion of this offering. For the Common Stock to remain eligible for continued quotation on the Nasdaq SmallCap Market, the Company must maintain net tangible assets in the minimum amount of $2,000,000, a market value of the public float in the minimum amount of $1,000,000, two market makers and a minimum bid price of $1.00 per share. Failure to meet these maintenance criteria may result in the delisting of the Common Stock from the Nasdaq SmallCap Market, and trading, if any, in the Common Stock would thereafter be conducted in the non-Nasdaq over-the-counter market. As a result of such delisting, an investor would find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Common Stock. In addition, if the Common Stock were to become delisted from quotation on the Nasdaq SmallCap Market and the trading price of the Common Stock were to fall below $5.00 per share on the date the Common Stock was delisted, trading in the Common Stock would also be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally institutions). For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in the Common Stock, which could materially adversely effect the market price and severely limit liquidity of the Common Stock and the ability of purchasers in this offering to sell Common Stock in the secondary market. Potential Litigation. A former employee has threatened to institute legal action against the Company for breach of contract and wrongful termination on the basis of racial and gender discrimination and is seeking salary and attorney's fees aggregating $20,000. Additionally, certain persons have threatened to institute legal action against the Company for unspecified damages and expenses in connection with the Company's termination of service to an Internet subscriber. There can be no assurance that these matters will be resolved in a manner favorable to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Legal Proceedings." 13 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares offered hereby are estimated to be approximately $5,779,000 ($6,719,000 if the Underwriter's over-allotment option is exercised in full). The Company intends to use the net proceeds during the twelve months following this offering approximately as follows:
Approximate Approximate Percentage Application of Proceeds Dollar Amount of Net Proceeds - ----------------------- --------------- ----------------------- Potential acquisitions(1) ................................. $ 2,000,000 34.6% Network expansion and upgrade(2) .......................... 600,000 10.4 Sales and marketing(3) .................................... 500,000 8.6 Repayment of indebtedness(4) .............................. 307,000 5.4 Working capital and general corporate purposes(5) ......... 2,372,000 41.0 ----------- ----- Total .......................................... ......... $ 5,779,000 100.0% =========== =====
- ------------ (1) Represents estimated expenditures to acquire systems integrators, programmers, applications developers and Internet service providers which the Company believes will enhance its prospects. In January 1998, the Company acquired Entelechy and certain assets of JDT WebwerX LLC. As of the date of this Prospectus, the Company has no plans, agreements, commitments, understandings or arrangements with respect to any acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Strategy." (2) Represents anticipated expenditures associated with (i) the acquisition of additional computer hardware and software used to support network infrastructure, including backup and redundant capacity, (ii) the establishment of additional POPs in selected geographic locations and (iii) salaries of three additional technical support personnel. See "Business -- Network Infrastructure." (3) Includes costs associated with increased print and radio advertising and the salaries for up to four additional marketing and sales personnel, including a Director of Marketing. See "Business -- Sales and Marketing." (4) Includes the repayment of (i) $200,000 principal amount of unsecured promissory notes (the "1997 Notes") issued in October 1997, together with accrued interest at the rate of 8% per annum, payable on the earlier of (a) the consummation of this offering, (b) a private placement of securities resulting in net proceeds to the Company in the minimum amount of $1,000,000 or (c) October 31, 1999; and (ii) $95,000 outstanding principal amount of unsecured promissory notes (the "1995 Notes") issued in August 1995, together with accrued interest at the rate of 6% per annum, payable on July 31, 1998. The proceeds of the 1997 Notes were used for working capital and general corporate purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Transactions." (5) Working capital may be used, among other things, to pay salaries of the Company's executive officers (which is anticipated to be approximately $395,000 during the twelve months following this offering), rent, telecommunications expenses, trade payables, consulting and professional fees and other expenses. If the Underwriter exercises the over-allotment option in full, the Company will realize additional net proceeds of $940,000, which will be added to working capital. See "Underwriting." The allocation of the net proceeds set forth above represents the Company's best estimates based on proposed plans and assumptions relating to its operations and growth strategy and general economic conditions. The Company believes that the proceeds of this offering, together with projected cash flow from operations, will be sufficient to satisfy its contemplated cash requirements for at least twelve months following the consummation of this offering. In the event that the Company's plans change (due to changes in market conditions, competitive factors or new opportunities that may become available in the future), its assumptions change or prove to be inaccurate or if the proceeds of this offering or cash flow prove to be insufficient to implement its business plans (due to unanticipated expenses, technical difficulties or otherwise), the Company may be required to reallocate the proceeds among the categories set forth above, use proceeds for other purposes, seek additional 14 financing or curtail its expansion activities. There can be no assurance that the proceeds of this offering will be sufficient to permit the Company to implement its business plans, that any assumptions relating to the implementation of such plans will prove to be accurate or that any additional financing would be available to the Company on commercially reasonable terms, or at all. Proceeds not immediately required for the purposes described above will be invested principally in short-term United States Government securities, short-term certificates of deposit, money market funds or other short-term interest bearing investments. DILUTION The difference between the initial public offering price per share and the net tangible book value per share of Common Stock after this offering constitutes the dilution to investors in this offering. Net tangible book value per share is determined by dividing the net tangible book value of the Company (total tangible assets less total liabilities) by the number of outstanding shares of Common Stock. At December 31, 1997, the Company had a net tangible book value of $1,003,000, or $.59 per share ($.48 per share, on a pro forma basis, after giving effect to the issuance of 147,310 shares of Common Stock in connection with the Entelechy acquisition in January 1998). After giving further effect to (i) the Debt Conversion and (ii) the sale by the Company of the 1,200,000 shares offered hereby and after deducting estimated underwriting discounts and expenses of the offering, the net tangible book value of the Company at December 31, 1997 would have been $6,881,000, or $2.24 per share, representing an immediate increase in net tangible book value of $1.76 per share to the existing stockholders and an immediate dilution of $3.76 (62.7%) per share to new investors. The following table illustrates the foregoing information with respect to dilution to new investors on a per share basis: Initial public offering price ............................... $ 6.00 Pro forma net tangible book value before offering ......... $ .48 Increase attributable to new investors. ................... 1.76 ------ Net tangible book value after offering ...................... 2.24 ------ Dilution to new investors. .................................. $ 3.76 ======
The following table sets forth with respect to the Company's existing stockholders (giving effect to the Entelechy acquisition and the Debt Conversion) and new investors, a comparison of the number of shares of Common Stock acquired from the Company, the percentage ownership of such shares, the total consideration paid, the percentage of total consideration paid and the average price per share.
Average Price Shares Purchased Total Consideration per Share ----------------------- -------------------------- -------------- Number Percent Amount Percent ----------- --------- ------------- ---------- Existing Stockholders ......... 1,874,237 61.0% $1,327,000 15.6% $ .71 New Investors ................. 1,200,000 39.0 7,200,000 84.4 6.00 --------- ----- ---------- ----- Total ........................ 3,074,237 100.0% $8,527,000 100.0% ========= ===== ========== =====
The above table assumes no exercise of the Underwriter's over-allotment option. If such option is exercised in full, it is estimated that the new investors will have paid $8,280,000 for 1,380,000 shares offered by the Company, representing approximately 86.2% of the total consideration, for 42.4% of the total number of shares of Common Stock outstanding. In addition, the above table does not give effect to the shares issuable upon exercise of the Warrants. The Warrants represent the right to purchase 48,872 shares of Common Stock at an exercise price of $3.54 per share. To the extent the Warrants are fully exercised, there will be reduced dilution to new investors of $.02. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Management--1998 Stock Option Plan," "Description of Securities--Warrants" and "Underwriting." 15 DIVIDEND POLICY Since its inception, the Company has not declared or paid any dividends on the Common Stock and does not in the foreseeable future expect to declare or pay any cash or other dividends on the Common Stock. The future declaration and payment of dividends is within the discretion of the Board of Directors and will depend upon the Company's earnings, if any, its capital requirements, financial condition, the terms of then existing indebtedness, general economic conditions and such other factors as are considered relevant by the Board of Directors. CAPITALIZATION The following table sets forth the short-term indebtedness and the capitalization of the Company as of December 31, 1997 on (i) an actual basis, (ii) a pro forma basis giving effect to the issuance of 147,310 shares of Common Stock in connection with the acquisition of Entelechy in January 1998 and (iii) an as adjusted basis giving effect to the Debt Conversion and the sale by the Company of 1,200,000 shares offered hereby and the anticipated application of the estimated net proceeds therefrom. See "Use of Proceeds," "Description of Securities" and Financial Statements.
At December 31, 1997 ---------------------------------------------------- Actual Pro Forma As Adjusted -------------- ------------- ------------------- Debt and capital leases including current maturities ............... $ 413,000 $ 563,000 $ 106,000 ========== ========== =========== Stockholders' equity(1): Preferred Stock, par value $.01 per share, 1,000,000 shares authorized; no shares issued or outstanding, actual or as adjusted ........................................................ $ -- $ -- $ -- Common Stock, par value $.01 per share, 11,000,000 shares authorized; 1,701,967 shares issued and outstanding, actual; 1,849,237 shares issued and outstanding, pro forma; 3,074,237 shares issued and outstanding, as adjusted(2) ......... 17,000 18,000 31,000 Additional paid-in capital ......................................... 1,214,000 1,883,000 7,799,000 Unearned compensation .............................................. (7,000) (7,000) (7,000) Accumulated deficit ................................................ (85,000) (85,000) (106,000)(3) ---------- ---------- ----------- Total Stockholders' Equity ........................................ 1,139,000 1,809,000 7,717,000 ---------- ---------- ----------- Total Capitalization ............................................ $1,552,000 $2,372,000 $ 7,823,000 ========== ========== ===========
- ------------ (1) Gives effect to an increase in the Company's authorized capital stock effected in March 1998. See Note 7 to Notes to the Company's Financial Statements. (2) Does not include (i) 120,000 shares reserved for issuance upon exercise of the Underwriter's Warrants; (ii) 130,124 shares reserved for issuance in connection with the acquisition of Entelechy in January 1998; (iii) 48,872 shares reserved for issuance upon exercise of the Warrants; (iv) 132,750 shares reserved for issuance upon exercise of options granted under the 1998 Stock Option Plan; (v) 20,000 shares reserved for a restricted stock award; and (vi) 197,250 shares reserved for issuance upon exercise of options available for future grant under the 1998 Stock Option Plan. See "Management Discussion and Analysis and Results of Operations," "Management -- Employment Agreements," "-- 1998 Stock Option Plan," "Description of Securities -- Warrants" and "Underwriting." (3) Gives effect to a non-recurring charge of $35,000 ($21,000, net of tax benefit) relating to the 1997 Financing which will be incurred upon consummation of this offering. See Note 6 to Notes to the Company's Financial Statements. 16 SELECTED FINANCIAL DATA The selected financial data is derived from the audited financial statements of the Company, and should be read in conjunction with such financial statements, including the notes thereto, contained elsewhere in this Prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Year Ended December 31, --------------------------------------------- 1996 1997 ------------- ----------------------------- Actual Actual Pro Forma(2) ------------- ------------- ------------- Statement of Operations Data(1): Revenues ........................................................ $1,023,000 $2,741,000 3,065,000 Cost of services ................................................ 650,000 1,099,000 1,356,000 Gross profit .................................................... 373,000 1,642,000 1,709,000 Operating expenses: Selling, general and administrative ............................ 670,000 1,296,000 1,411,000 Amortization of intangible assets .............................. 1,000 12,000 168,000 Compensation expense -- Entelechy .............................. -- -- 197,000 Operating income (loss) ......................................... (298,000) 334,000 (67,000) Net income (loss) ............................................... (251,000) 198,000 (113,000) Net income (loss) per share -- basic and diluted ................ (.17) .12 (.06) Weighted average number of shares outstanding -- diluted ........ 1,507,047 1,721,664 1,890,661
December 31, ---------------------------------------------------------------- 1996 1997 ----------- -------------------------------------------------- Actual Pro Forma(3) As Adjusted(4) ------------ -------------- ------------------ Balance Sheet Data: Working capital .............. $393,000 $ 567,000 $ 425,000 $ 6,250,000 Total assets ................. 935,000 2,451,000 3,295,000 8,726,000 Total liabilities ............ 214,000 1,312,000 1,486,000 1,009,000 Stockholders' equity ......... 721,000 1,139,000 1,809,000 7,717,000(5)
- ------------ (1) Includes the results of operations of (i) Interactive Networks since the beginning of the periods presented, (ii) Mordor subsequent to May 31, 1996, and (iii) AllNet subsequent to March 1, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 to Notes to the Company's Financial Statements. (2) Gives effect to the acquisition of Entelechy as if such acquisition had occurred on January 1, 1997. (3) Gives effect to the acquisition of Entelechy in January 1998 including the issuance of 147,310 shares of Common Stock in connection therewith. (4) Gives effect to (i) the Debt Conversion and (ii) the sale of the shares offered hereby and the anticipated application of the estimated net proceeds therefrom. See "Use of Proceeds," "Management Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Transactions." (5) Gives effect to a non-recurring charge of $35,000 ($21,000, net of tax benefit) relating to the 1997 Financing which will be incurred upon consummation of this offering. See Note 6 to Notes to the Company's Financial Statements. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company provides a broad range of computer networking, programming, applications development and Internet services primarily to businesses and organizations. The Company's revenues are derived principally from consulting fees earned in connection with the performance of systems integration services, recurring monthly Internet connectivity fees and consulting fees earned in connection with programming and applications development services. The Company recognizes revenue as services are provided to its clients and subscribers. Deferred revenue in the amount of $238,000 at December 31, 1997 related to unearned consulting fees. These fees were recognized in full as of January 31, 1998. See Note 2 to Notes to the Company's Financial Statements. The Company commenced operations in June 1995 as an Internet service provider offering Web-site hosting services. Since April 1996, the Company has acquired Interactive Networks, Mordor and AllNet, each an Internet service provider principally offering dial-up access services. The Company began to provide Systems Integration and Programming and Applications Development services in April 1996 and has increasingly emphasized such services. In January 1998, the Company acquired Entelechy, a provider of programming and applications development services, including distance learning and on-line trading applications. The Company's consulting services generally produce higher profit margins than the Company's Internet services. For the year ended December 31, 1997, Systems Integration, Programming and Applications Development and Internet services accounted for approximately 55%, 9% and 36%, respectively, of the Company's revenues. The Company has achieved only limited profitability for the year ended December 31, 1997. Operating expenses have increased and will continue to increase significantly in connection with any expansion activities undertaken by the Company, including those relating to acquisitions, network development and marketing. Accordingly, the Company's future profitability will depend on corresponding increases in revenues from operations. The Company's expense levels are based in part on its expectations concerning future revenues and are fixed to a large extent. Any decline in demand for the Company's services or increases in expenses which are not offset by corresponding increases in revenues could have a material adverse effect on the Company. The Company expects to incur a non-recurring charge of $35,000 relating to the 1997 Financing upon the consummation of this offering, and charges of approximately $180,000, $197,000, $197,000 and $17,000 relating to the acquisition of Entelechy in each of the years ending December 31, 1998, 1999, 2000 and 2001, respectively. Additionally, the Company expects to incur annual charges in the amount of $27,000 through the year ending December 31, 2001 in connection with the award of a restricted stock grant to an executive officer. See "Management -- Employment Agreements" and Notes 6 and 14 to Notes to the Company's Financial Statements. The Company anticipates that growth in its client and subscriber base will increase operating costs (including expenses relating to network infrastructure and client support) and will require the Company to hire additional network engineers, programmers and technical personnel. The Company currently has 46 full-time employees. The Company has entered into employment agreements with eighteen of its employees, including its executive officers, which provide for aggregate salaries of $1,113,000 during the year ending December 31, 1998. See Note 9 to Notes to the Company's Financial Statements. During the twelve months following this offering, the Company anticipates that it will use a portion of the proceeds of this offering to hire up to four additional employees to market and sell the Company's services. The Company also intends to hire up to three additional technical and support personnel. Acquisitions In April 1996, the Company acquired all of the outstanding capital stock of Interactive Networks in consideration of the issuance of 377,536 shares of Common Stock. At the time of the combination, Interactive had approximately 400 dial-up subscribers, two POPs in northern New Jersey and one POP in New York City. The combination has been accounted for as a pooling of interests. Accordingly, the Company's financial statements have been restated to include the results of operations and financial position of Interactive Networks. 18 In May 1996, the Company acquired all the assets of Mordor in consideration of a $20,000 cash payment. At the time of the acquisition, Mordor had approximately 400 dial-up subscribers and network equipment valued at $15,000. The acquisition was accounted for as a purchase. In March 1997, the Company acquired substantially all of the assets of AllNet in consideration of (i) a $75,000 cash payment and (ii) the issuance of 15,883 shares of Common Stock. At the time of the acquisition, AllNet had approximately 1,000 dial-up subscribers and five POPs in the northern New Jersey area. AllNet's computer and network equipment was valued at $75,000. The acquisition was accounted for as a purchase. In January 1998, the Company acquired all of the issued and outstanding capital stock of Entelechy in consideration of the issuance of an aggregate of 277,434 shares of Common Stock, of which 147,310 shares were issued at the closing and 130,124 shares are to be issued ratably on each of the first, second and third anniversary of the acquisition closing date, provided, that, the former Entelechy stockholders to whom such shares are issuable remain employees of the Company on each respective anniversary. The Company expects to incur charges of approximately $180,000, $197,000, $197,000 and $17,000 relating to the issuance of such Common Stock in each of the years ending December 31, 1998, 1999, 2000 and 2001, respectively. The acquisition was accounted for as a purchase. See Note 14 to Notes to the Company's Financial Statements. In January 1998, the Company acquired substantially all of the assets of JDT WebwerX LLC (consisting primarily of computer equipment and intangible assets) in consideration of a $35,000 cash payment. See Note 14 to Notes to the Company's Financial Statements. Results of Operations The following table sets forth, for the periods indicated, the percentage of the Company's revenues represented by certain items reflected in the Company's income statement data: Years Ended December 31, ------------------------ 1996 1997 ----------- ----------- Revenues ............................................ 100.0% 100.0% Cost of services .................................... 63.5 40.1 Gross Profit ........................................ 36.5 59.9 Selling, general and administrative expense ......... 65.5 47.3 Amortization expense ................................ -- .5 Operating income (loss) ............................. (29.0) 12.1 Interest and other expenses ......................... 1.0 1.8 Income (loss) before income taxes ................... (30.0) 10.3 Income tax (provision) benefit ...................... 5.7 (3.0) Net income (loss) ................................... (24.3)% 7.3% Year Ended December 31, 1996 compared to Year Ended December 31, 1997 Revenues. Revenues increased by $1,718,000, or 168%, from $1,023,000 for the year ended December 31, 1996 to $2,741,000 for the year ended December 31, 1997, principally as a result of services rendered to Aetna since October 1997. The fees for such services accounted for 54.2% of the Company's revenues for 1997. The increase in revenues was also attributable in part to an increase in the number of clients utilizing the Company's systems integration and programming and applications development services. Additionally, the continued expansion of the Company's network infrastructure during 1997 resulted in additional Internet access subscribers and related revenue. 19 Cost of Services. Cost of services consists primarily of expenses relating to the operation of the network, including telecommunications and Internet access costs, costs associated with monitoring network traffic and quality and providing technical support to clients and subscribers, cost of equipment and applications sold to clients and subscribers, salaries and expenses of engineering, programming and technical personnel and fees paid to outside consultants. Cost of services increased by $449,000, or 69%, from $650,000 for 1996 to $1,099,000 for 1997. This is a result principally of increases in salaries and expenses paid to engineering, programming and technical personnel whose services are billed by the Company to clients and which are directly related to the provision of services offered. Additionally, the Company incurred increased telecommunications and Internet access costs due to expansion of the Company's network and an increase in the number of Internet access subscribers. The Company expects that these costs will continue to increase in the future to the extent the Company offers additional consulting services and its network expands. Selling, general and administrative. Selling, general and administrative expenses consist primarily of salaries and costs associated with marketing literature, advertising, direct mailings and the Company's management, accounting, finance and administrative functions. Selling, general and administrative expenses increased by $626,000, or 93.4%, from $670,000 in 1996 to $1,296,000 for 1997. This increase is primarily attributable to the hiring of additional personnel whose salaries, in whole or in part, are not directly allocable to hours billed for services rendered to clients and additional costs incurred in connection with expanded administrative functions. The Company expects to incur charges in the amount of approximately $180,000, $197,000, $197,000 and $17,000 in each of the years ending December 31, 1998, 1999, 2000 and 2001, respectively, in connection with the acquisition of Entelechy. Additionally, the Company expects to incur annual charges in the amount of $27,000 through the year ending December 31, 2001 in connection with the award of a restricted stock grant to an executive officer. See "Management -- Employment Agreements." Amortization of Intangible Assets. Amortization of intangible assets increased by $11,000, or 1,100%, from $1,000 for 1996 to $12,000 for 1997. This increase is primarily attributable to the amortization of intangible assets, including customer lists and goodwill, acquired by the Company in connection with its purchase of Mordor and AllNet which were consummated in May 1996 and April 1997, respectively. Interest. Interest expense consists of interest on indebtedness and capital leases and financing charges in connection with the 1997 Financing. Interest expense increased by $26,000, or 236%, from $11,000 for 1996 to $37,000 for 1997. This increase was principally attributable to expenses incurred in connection with the 1997 Financing. The Company will incur additional interest expense in the aggregate amount of $35,000 relating to the 1997 Financing, upon the consummation of this offering. Net Income. As a result of the foregoing, the Company achieved net income of $198,000 for the year ended December 31, 1997 compared to a net loss of $251,000 for the year ended December 31, 1996. Liquidity and Capital Resources The Company's primary cash requirements have been to fund expenses in connection with providing consulting services to clients and Internet access to subscribers. The Company has historically satisfied its working capital requirements principally through the issuance of debt and equity securities and borrowings. At December 31, 1997, the Company had working capital of $567,000, compared to working capital of $393,000 at December 31, 1996. The Company received net proceeds of $200,000 in connection with the issuance and sale of the 1997 Notes and Warrants to purchase an aggregate of 48,872 shares of Common Stock at an exercise price of $3.54 per share. The 1997 Notes bear interest at the rate of 8% per annum and are due on the earliest to occur of (a) the consummation of this offering, (b) a private placement of securities resulting in net proceeds to the Company in a minimum amount of $1,000,000, or (c) October 31, 1999. The proceeds of the 1997 Notes were used for working capital and general corporate purposes. The Company intends to use a portion of the net proceeds of this offering to repay the entire principal amount of and interest accrued on the 1997 Notes. See "Certain Transactions" and Note 6 to Notes to the Company's Financial Statements. In January 1997, the Company completed a private placement (the "1996 Financing") pursuant to which it received net proceeds in the amount of $1,000,000 in connection with the issuance and sale of an aggregate of 305,451 shares of Common Stock. See "Certain Transactions." 20 During the period from May to August 1995, the Company received net proceeds in the amount of $100,000 in connection with the issuance and sale of 48,870 shares of Common Stock and the 1995 Notes ($95,000 of which are currently outstanding). The Company intends to use a portion of the net proceeds of this offering to repay the entire principal amount of and interest accrued on the remaining outstanding 1995 Notes. See "Certain Transactions." Net cash used in operating activities decreased from $406,000 for 1996 to $78,000 for 1997. This change was primarily attributable to the increased operational activity undertaken by the Company in 1997 which resulted in net income in the amount of $198,000, increases in accounts payable in the amount of $440,000 and increases in deferred revenue in the amount of $238,000, offset by increases in accounts receivable in the amount of $1,064,000. Net cash used in investing activities decreased from $360,000 for 1996 to $229,000 for 1997. The change was attributable, in part, to a decrease in capital expenditures in 1997 as compared to 1996 when the Company established its NOC and network. The change was also a result of increases in acquisitions of equipment during 1997 in the amount of $70,000 relating principally to assets acquired in connection with the Company's purchase of the assets of AllNet. Net cash provided by financing activities decreased from $907,000 for 1996 to $223,000 for 1997. This change is primarily attributable to the net proceeds of $927,000 received in connection with the 1996 Financing as compared to the net proceeds of $200,000, received in connection with the 1997 Financing. At December 31, 1997, the Company had outstanding indebtedness owing to Interchange State Bank in the amount of $12,000. This debt bears interest at the rate of 10% per annum, is due and payable in December 1998 and is secured by a lien on substantially all the assets of the Company and the personal guarantees of Messrs. Loglisci and Altieri. The Company has not allocated any proceeds of this offering to repay such indebtedness. See "Certain Transactions." At December 31, 1997, the Company had obligations pursuant to capital lease obligations in the aggregate amount of $105,000. These capital lease obligations are secured by the personal guarantees of Messrs. Loglisci, Frederick and Altieri and, in addition, certain of these capital lease agreements are secured by the equipment which is the subject of the capital lease. See "Certain Transactions." In connection with the acquisition of Entelechy in January 1998, the Company assumed debt in the principal amount of $150,000 which will automatically convert into 25,000 shares of Common Stock upon the consummation of this offering. The Company believes that the proceeds of this offering, together with projected cash flow from operations, will be sufficient to satisfy its contemplated cash requirements for at least twelve months following the consummation of this offering. In the event that the Company's plans change (due to changes in market conditions, competitive factors or new opportunities that may become available in the future), its assumptions change or prove to be inaccurate or if the proceeds of this offering or cash flow prove to be insufficient to implement its business plans (due to unanticipated expenses, technical difficulties or otherwise), the Company may be required to seek additional financing or curtail its expansion activities. There can be no assurance that the proceeds of this offering will be sufficient to permit the Company to implement its business plans, that any assumptions relating to the implementation of such plans will prove to be accurate or that any additional financing would be available to the Company on commercially reasonable terms, or at all. Fluctuations in Operating Results The Company's operating results may fluctuate significantly from period to period as a result of the length of the Company's sales cycle, as well as from client budgeting cycles; the introduction of new products and services by competitors; the timing of expenditures; pricing changes in the industry; technical difficulties; and general economic conditions. The Company's business is generally subject to lengthy sales cycles, which requires the Company to make expenditures and use significant resources prior to receipt of corresponding revenues. Historically, the Company's revenues have been higher in the fourth quarter as a result of client budgeting and expenditure cycles. Inflation Inflation has not had a significant impact on the Company's results of operations. 21 Year 2000 Issue The Company has assessed the potential computer sotfware issues associated with the year 2000 and believes that its cost to address such issues will not be material. The Company also believes that the costs or consequences of an incomplete or untimely resolution would not result in the occurrence of a material event or uncertainty reasonably likely to have a material adverse effect on the Company. 22 BUSINESS Overview The Company provides a broad range of computer networking, programming, applications development and Internet services primarily to businesses and organizations. The Company has adopted a business model that includes Systems Integration; Programming and Applications Development; and Internet services. These services are designed to permit clients to outsource a variety of business needs such as computer networking, programming, maintenance and technical support. The Company believes that by combining computer consulting and Internet related services, it is positioned to capitalize on increasing demand by businesses and organizations for comprehensive, cost-effective information technology solutions. The Systems Integration services offered by the Company include systems consulting, analysis and design; implementation and integration; and maintenance. The Company's Programming and Applications Development services consist primarily of custom programming for Internet and Intranet applications, including distance learning and on-line trading applications, and Web-site development and maintenance. Internet services offered by the Company include dedicated leased line and frame relay connections, Web hosting, dial-up access and electronic mail services. For the year ended December 31, 1997, Systems Integration, Programming and Applications Development and Internet services accounted for approximately 55%, 9% and 36%, respectively, of the Company's revenues. The Company's principal marketing efforts are focused on large businesses and organizations with systems development and maintenance needs. The Company's clients during the year ended December 31, 1997 included Aetna; Mobil; Black & Decker Corp.; TRW, Inc.; Bell Atlantic; Unilever; Scientific Applications International Corporation; the City of Fairfax, Virginia; certain agencies of the U.S. Department of Defense; and The Archdiocese of New York (Catholic Healthcare Network). The Company's telecommunications network is comprised of a secure NOC in Cedar Knolls, New Jersey, leased high-speed data lines and ten POPs serving the northern New Jersey and New York City metropolitan area. The proximity of a POP to subscribers enables subscribers in the area in which a POP is located to access the Internet through a local telephone call. The Company currently supports 56k and ISDN technologies at each of its POPs. The Company has approximately 3,300 dial-up subscribers as of the date of this Prospectus. For the year ended December 31, 1997, dial-up access services accounted for approximately 15% of the Company's revenues. The Company commenced operations in June 1995 as an Internet service provider offering Web-site hosting services. Since April 1996, the Company has acquired Interactive Networks, Mordor and AllNet, each an Internet service provider principally offering dial-up access services. The Company began to provide Systems Integration and Programming and Applications Development services in April 1996 and has increasingly emphasized such services. In January 1998, the Company acquired Entelechy, a provider of programming and applications development services, including distance learning and on-line trading applications. During the twelve months following the consummation of this offering, the Company will seek to continue to expand its operations through internal growth and acquisitions. Strategy The Company believes that worldwide competition and rapid technological advancements, coupled with a trend to outsource non-core business functions, have created increasing demand for computer consulting and Internet related services. The Company's strategy is to capitalize on such increasing demand by (i) pursuing opportunities to expand its existing service offerings, the scope of its operations and client base through selective acquisitions of systems integrators, programmers, applications developers and Internet service providers; (ii) expanding the capacity and geographic scope of its network through the establishment or acquisition of additional POPs and network upgrades; (iii) hiring and retaining additional qualified network engineering, programming and technical personnel; and (iv) expanding its marketing and sales efforts through enhanced cross-marketing of its service offerings. There can be no assurance that the Company will be able to successfully implement this strategy or otherwise expand its operations. 23 Pursue opportunities to expand its service offerings, the scope of its operations and client base through selective acquisitions of systems integrators, programmers, application developers and Internet service providers. The Company intends to continue to seek to acquire systems integrators, programmers, applications developers and Internet service providers. The Company believes that it may most effectively increase the services it offers, expand the scope of its knowledge base to include new networking protocols, endeavor to maintain its existing systems engineering capabilities at the highest possible levels and acquire significant numbers of new Internet access subscribers through selective acquisitions. The Company also believes that the selective acquisitions are an effective way to hire the additional qualified network engineers, programmers and technical personnel that are necessary to meet the needs of its new and existing clients and subscribers. Expand the capacity and geographic scope of the Company's network through the establishment or acquisition of additional POPs and network upgrades. The Company believes that the continued development and geographic expansion of its network through the establishment or acquisition of additional POPs and network upgrades is among the most effective methods of acquiring clients in new geographic markets. The Company believes that the establishment or acquisition of additional POPs within the mid-Atlantic and northeastern United States may increase both the Company's subscriber base and market awareness of the broad range of services offered by the Company. The Company further believes that ongoing network upgrades may enhance the Company's ability to offer its subscribers fast, robust and reliable Internet services. Hire and retain additional qualified network engineering, programming and technical personnel. The Company relies upon qualified network engineering and programming personnel to offer its services, and upon such personnel's ability to provide timely and consistently high-quality, cost-effective services to the Company's clients. To meet the needs of its increasingly large and sophisticated base of clients, the Company must hire and retain additional personnel. The Company routinely recruits personnel who have significant technical knowledge, and offers such personnel ongoing professional training. Additionally, in connection with the commencement of new projects, the Company routinely hires temporary employees to satisfy increased demand for personnel. The Company believes that the utilization of temporary employees provides it with an opportunity to evaluate the skills and knowledge of such persons and maximize the utilization of its resources by determining that long term demand for additional personnel is sufficient prior to hiring such persons as permanent employees. Expand its marketing and sales efforts through enhanced cross marketing of its service offerings. The Company believes that the goodwill it has established with its existing clients and subscribers provides it with enhanced opportunities to cross market the broad range of services offered by the Company. The Company intends to continue expanding its services to be better able to offer to its existing and prospective clients and subscribers the increasing array of computer networking, programming, applications development and Internet services which are becoming available. Industry Overview The computer networking, Internet and information technology industries are dynamic and rapidly changing. Both business and consumer use of computer networks and the Internet are growing quickly and hardware and software companies are increasingly creating new applications and technologies to more fully and easily exploit the potential opportunities created by the Internet. This evolving landscape provides opportunities for enterprises to develop platforms and specialized services to take advantage of new markets and clients. The Company believes that the utilization of Internet and Intranet technology by businesses and organizations has resulted in significant changes in computing environments as such entities move from SNA, mainframes and dedicated lines to TCP/IP, Web servers and the Internet and virtual private networks. The Company believes that the migration from one model to another creates increased opportunities for outsourcing service providers such as the Company. Internet Services. Use of on-line services is expected to grow dramatically through the year 2000 and beyond. Business and organizational use of the Internet is expected to rise significantly as a result of the availability of on-line services that fully exploit the Internet's commercial applications and growth in consumer usage. Notwithstanding the growth in usage of on-line services, consolidation in the Internet services providers market is also anticipated as smaller Internet service providers are acquired by medium- to larger-size Internet service 24 providers and other related companies offering Internet access services. An industry source has predicted that worldwide revenue for commercial Internet access services, exclusive of hosting, security and global planning will have reached $1.5 billion in 1997 and will exceed $15 billion by the year 2000. Systems Integration. The market for systems integration design and consulting services is growing simultaneously with the growth of on-line services. An industry source has predicted that the market for Internet software and hardware, on-premises equipment and services will grow from $2.7 billion in 1995 to approximately $20 billion by the year 2000. An Intranet is a network that is virtually identical to the Internet, except that access to such network is private and not available to users outside the network. Intranets are commonly used by enterprises to allow personnel better access to proprietary information and to allow collaborative work-sharing among users at different or remote locations. An industry source projects that the number of Intranet users will increase from 18 million in 1997 to 133 million users in 2001. As Intranet applications become more complex, systems integrators are expected to play a critical role in resolving system wide issues including those related to the integration of legacy databases and systems and enterprise business processes. Programming and Applications Development. The Company believes that the market for programming and applications development is also growing in connection with the growth in computer networking and Internet services. New programming and applications have assisted and exploited the growth of Internet and Intranet usage. The four key areas of Internet software and applications development are: (i) browser software enabling the retrieval of information or use of communication service, (ii) server software allowing enhancement and retrieval of information as well as uses of communication services, (iii) development/authoring tools to provide better products for both creators/authors and programmers, and (iv) back-end process and database companies that are able to meet the demands for classification and distribution of information. Company Services Systems Integration The Company provides a broad range of systems integration services, including network planning, design, implementation, operations, optimization, consulting and training. Network Planning. Network planning focuses on providing clients with strategic and tactical reviews of their current network operations and future network requirements. Network planning services provided by the Company encompass a number of critical planning elements including: (i) defining client business requirements; (ii) developing strategic information architectures; (iii) performing network baseline audits; (iv) preparing capacity plans for the physical network, logical transport and services; (v) selecting preferred technologies; and (vi) conducting network security audits and planning. Network Design. Network design includes services that assist in the design of physical, logical and operational information infrastructures. These services involve detailing the network specifications and implementation tactics necessary to achieve clients' business objectives. To accomplish this task, the Company generates a set of work papers that identify the specific technologies to be used and the manner in which such technologies will be configured and implemented. These work papers also provide an analysis of the manner in which new technology will be integrated with the client's existing hardware and software and the manner in which such integrated components will be managed on an ongoing basis. Examples of network design services offered by the Company include: (i) life-cycle planning; (ii) developing future technology integration plans; (iii) defining functional requirements; (iv) developing multi-vendor integration plans; (v) preparing technical design documentation; (vi) developing engineering specifications and documents; (vii) preparing specifications in connection with requests for proposals or other make/buy criteria; and (viii) providing detailed component purchasing lists. Network Implementation. Network implementation includes high value-added network services such as IP addressing and router configuration, as well as traditional system integrator functions such as hardware and software installation and procurement. To serve its clients' networking needs, the Company maintains affiliation and reseller arrangements with various hardware and software vendors, including Hewlett Packard Co., Cisco Systems, and MicroAge, Inc. The Company customizes an implementation plan for each client, which may include the following activities: (i) project management; (ii) integrating new hardware and software products and systems; (iii) building network operations and management centers; (iv) re-configuring and upgrading network elements, systems and facilities; and (v) implementing installation documentation, conformance testing and compliance certification. 25 Network Operations. Network operations includes ongoing tasks necessary to keep the client's network fully operational. The Company provides network operations services to a range of clients, including those with client/server networks running both Internet (TCP/IP) and workgroup (Novell and Microsoft) protocols intermingled with existing (SNA) networks. The Company performs specific operations activities in accordance with individual client requirements only after analyzing the client's existing operating practices. Examples of network operation activities undertaken by the Company include: (i) network administration, including management of user accounts, service levels, and client administrative practices; (ii) network utilization analysis, involving ongoing measurement of network activity against established network baselines; (iii) ongoing management of documentation, including physical assets, policies and procedures; (iv) network trouble shooting, involving fault detection, isolation, repair and restoration; (v) alarm management, including setting alarm levels, cross-correlation, problem diagnosis and dispatch of service resources; (vi) network backup, including design and supervision of backup processes and policies and exercise of disaster recovery procedures; and (vii) routine moves, additions, and changes to network elements, infrastructure and services. Network Optimization. Network optimization involves maximizing a client's rate of return on network investments through such means as reduction of operating costs and increases in network utilization. Optimization is closely related to each of the other phases of network development. Optimization services may be long term in nature, address issues such as cost containment and utilization and are often designed to optimize local area network infrastructures. Network optimization services offered by the Company can also be packaged as discrete projects, designed to present alternatives for optimization of workgroup, departmental, building or campus network investments. Additionally, the Company can provide assistance to clients in optimizing "logical" networks, by addressing a protocol, service or application operating in the larger context of the client's network. Examples of network optimization services provided by the Company include: (i) recommendations for efficient allocation of bandwidth; (ii) network traffic analysis, identification of bottlenecks and recommendations for change; (iii) network process re-engineering; and (iv) knowledge transfer to client operations personnel on topics such as basic practices, or operations of network management tools and stations. Consulting. Consulting consists of providing businesses and organizations with detailed reports and recommendations regarding any or all aspects of their network operations, from a review of the entire network to an audit of a particular protocol. Consulting services provided by the Company are closely related to network optimization and include: (i) security audits and protocol recommendations; (ii) disaster recovery plan audit and protocol recommendations; (iii) network programming and applications; (iv) network cost audits; and (v) strategic plan development. Training. Training services are provided to businesses and organizations seeking information and guidance with respect to the manner in which such entities may effectively utilize computer networks, the Internet and other information technology prior to the time such businesses make investments of capital, time and/or personnel. The Company also offers customized educational programs that are designed to provide an opportunity for an entity to conceptualize and determine how computer networks and the Internet can best be utilized to serve the entity's needs. Additionally, the Company assists organizations that need technical support in establishing and maintaining internal network operations. Training services offered by the Company include: (i) Internet strategy development; (ii) basic Internet consulting; (iii) one-on-one Internet training for executives; and (iv) group training for non-computer professionals. Programming and Applications Development Programming for Intranet and Internet applications requires knowledge of several different programming languages. These include PERL scripting and UNIX, Windows NT, C++, JAVA, HTML and customized database and applications programming. The Company maintains a full range of network and applications programming expertise to: (i) ensure that clients' networks and applications are specifically tailored to meet their requirements; (ii) develop and maintain clients' Web-sites; (iii) provide clients with technical assistance; (iv) provide consulting services; and (v) ensure the secure and continuous running of the Company's Internet hosting and access networks. Examples of programming and applications development services provided by the Company include customized applications development, web-site development and maintenance and chat room hosting and development. Customized Applications Development. Customized application development includes services such as: Oracle and Microsoft Access database development of full-featured "shopping cart" style on-line catalogs to 26 enhance Web-sites and Intranets; and Distance Learning and on-line trading applications development. Distance Learning applications allow businesses and organizations to distribute course material, administer training evaluations, and manage employee-student status from a single (or multiple) location via the Internet or an Intranet. Distance Learning also allows for a globally deployed, instantaneously up-datable, training management system. Distance Learning applications development incorporates the latest technologies in Internet programming development, including integration of desk-top virtual reality, streaming audio/video segments and database applications that track employee-student status and performance. On-line trading applications allow a brokerage client to review stock quotations and account positions, manage portfolios and place trade orders through the brokerage's Web-site. Web-Site Development and Maintenance. Web-site development involves the design and development of a client's Web-site production. Working with clients and outside graphic designers and programmers, the Company designs, creates and maintains multi-media, interactive Web-sites for its clients, using the latest applications and development tools, such as Oracle and Cold Fusion. Chat-Room Hosting and Development. "Chat" allows geographically disbursed people to conduct meetings and hold forums on-line via the Internet. The "chat" hosting and development services provided by the Company include both public "chat-rooms," which allow anyone with access to the Internet to participate in the discussion, and private "chat-rooms," to which access is limited by security protocols. Private "chat-rooms" are routinely used by businesses and organizations to conduct private, secure meetings via the Internet or Intranets. Internet Services The Company provides a broad range of Internet services, including T-3 and T-1 service, dedicated leased lines, dial-up services and hosting services. Internet Access. The Internet access options offered by the Company to its subscribers include: (i) 56 kbps, T-1 and T-3 service; (ii) integrated services digital networks (ISDN); (iii) dedicated modems for SLIP/PPP access; and (iv) dial-up accounts. The Company's high-speed, digital communications network provides business and consumer subscribers with direct access to the full range of Internet applications and resources, including global electronic mail, the Web, USENET news groups, chat-rooms and file transfer protocols. Hosting. Internet hosting is a multi-media Internet service that permits clients to have a continued presence on the Web directly through the Company's high-speed servers and a T-3 telecommunications line. Hosting services provided by the Company include virtual hosting and co-location. Virtual hosting allows a client's Web-site (which may be hosted on either a UNIX or NT server platform) to be connected to the Internet via the Company's NOC. Co-location permits a client's Internet content to be hosted on a dedicated server located at the Company's NOC which server is either owned by or leased by the Company to the client. Co-location at the Company eliminates or substantially reduces the capital investments a client would otherwise be required to make to purchase and manage necessary hardware, software and network operations and eliminates certain of the client's security concerns associated with connection of the client's private network(s) to a Web server. Network Infrastructure The Company facilitates access to the Internet by means of a regional telecommunications network consisting of high-speed dedicated telecommunications links (including a T-3 and multiple T-1 links), computer hardware and software, one physical and nine virtual POPs in locations throughout the northern New Jersey and New York City metropolitan area, and the NOC which securely houses the Company's backend server and is the point of interconnectivity of the Company's T-3 line and T-1 lines which are leased from Bell Atlantic and WorldCom. The Company's POPs, external interconnect links and NOC are interconnected by a robust, router-based TCP/IP network which includes interconnection of POPs via a T-1 rate facility. Physical local loop connectivity is provided over fault tolerant SONET fiber facilities and diverse-route conventional facilities. The Company maintains one high-bandwidth path to the Internet with UUNet. Each physical POP includes network access server (dial-access terminal server) hardware, a router and leased-line interface equipment. The virtual POPs are 27 local telephone numbers (outside of the local calling area of the physical POPs) through which calls are aggregated by a local exchange carrier or other service provider prior to transfer to the Company via a dedicated trunk route. For clients located in geographic areas not serviced by either a physical or virtual POP, the Company provides worldwide remote access to its network through Ipass, a consortium of regional Internet service providers. The availability of Ipass remote access permits the Company to provide high quality worldwide Internet access to its clients while permitting it to benefit from the economies of scale attributable to a regional network. The Company operates numerous application specific server systems to provide assist-functionality for client applications and to support Web-site hosting and other business services. The Company has made and expects to continue to make significant investments in its computing hardware which includes Pentium PC and BSDI UNIX servers (running Windows NT and BSDI UNIX). To efficiently and effectively serve its clients and subscribers, the Company utilizes two types of operating systems. The Internet Services network (dial-access consumer, e-mail, news and consumer Web) utilizes UNIX for its scalability and security features, while business clients are served through either of UNIX or Microsoft-based technologies. The Company is currently dependent upon Bell Atlantic and WorldCom to provide leased telecommunication lines on a cost-effective and continuous basis and on UUNET to provide Internet access. In accordance with industry custom, the Company does not maintain interconnect agreements with these suppliers. The temporary discontinuation or termination of service to the Company by any of these suppliers, would result in interruptions in the Company's provision of service to its clients which would adversely affect its business. The Company expects to use a portion of the proceeds of this offering to purchase additional software to upgrade its network and network component management capabilities. Such software will enhance the Company's ability to monitor its routers, switches and other network and server components, and provide "real time" identification of service outages and delays. Certain other software purchases will allow the Company to analyze its network functionality from the viewpoint of a subscriber, measuring such factors as the ability to dial-in without blockage, speed and reliability of authentification, and availability and adequacy of the servers and connectivity. By testing these factors objectively and quantitatively, the Company believes that it will be better able to monitor the adequacy of its existing service and provide proactive trending reports for use in planning future system expansion. Technical Support The Company believes that reliable technical support is critical to retaining existing and attracting new clients and subscribers. Currently, the Company provides (i) live telephone assistance, (ii) e-mail-based assistance, (iii) help sites and Internet guide files on the Company's Web-site, and (iv) printed reference material. The Company intends to use a portion of the proceeds of this offering to enhance its monitoring of the network by increasing staffing at its NOC and making technical personnel available to its clients and subscribers 24 hours a day, seven days a week. Sales and Marketing The Company's sales and marketing strategy is driven by the Company's ability to offer its clients comprehensive computer consulting and Internet related services ranging from Internet access, Web-site development and hosting to computer networking, systems consultation, integration and management. The Company's marketing efforts are primarily focused on large- and medium-sized businesses and organizations, and to a lesser extent, on small businesses and consumers. The Company utilizes both direct and third-party distribution channels to market its services. The Company plans to increase its print and radio advertising and enlarge its sales staff in existing and new geographic markets. The Company also intends to hire a Director of Marketing, whose responsibilities will include overseeing and developing existing and new marketing strategies. The Company intends to use a portion of the proceeds of this offering to effectuate such plans. The Company currently employs three full-time sales people, with two assigned to the northern New Jersey and New York City metropolitan area and one assigned to the Washington, D.C. metropolitan area. The Company believes that the technical knowledge of its executive officers and network engineers enhance the efforts of its sales staff and enables the Company to develop sales proposals meeting the specific needs and budgets of its prospective clients. The Company also conducts sales and marketing activities from an office maintained by the Company in Huntsville, Alabama. 28 The Company's marketing efforts principally involve print, radio and direct mailing in areas within the geographic scope of the Company's network. The Company believes that its ability to expand its print, radio and targeted direct mailings, will be important factors in its ability to continue to expand its business and compete effectively. The Company also generates sales leads through referrals from clients, responses to request for proposals, referrals from other computer consulting businesses and Internet service providers, the Company's own Web-site and associated links and industry seminars and trade shows. In addition, the Company believes it has significant opportunities to cross-sell its various services to its existing client base. As a result of the continued extension of services offered by the Company, including systems integration and programming and applications development, the Company has been able to offer its clients a wider range of solutions and capitalize on opportunities which it previously outsourced. Utilizing a portion of the proceeds of this offering, the Company intends to implement marketing and advertising campaigns that focus on the Company's broad range of computer consulting and Internet related services which the Company believes enables it to provide turnkey solutions for its clients. Clients The Company's clients during the year ended December 31, 1997 included Aetna; Mobil; Black & Decker Corp.; TRW, Inc.; Bell Atlantic; Unilever; SAIC; the City of Fairfax, Virginia; certain units of the U.S. Department of Defense and The Archdiocese of New York (Catholic Healthcare Network). As of the date of this Prospectus, the Company has in excess of 3,300 dial-up subscribers, the majority of which are consumers, in the northern New Jersey and New York City metropolitan area. The Company is dependent on a limited number of clients for a substantial portion of its revenues. For the year ended December 31, 1997, the Company's largest clients, Aetna (which engaged the Company in October 1997) and Mobil, accounted for approximately 54.2% and 5.2%, respectively, of the Company's revenues. Revenues derived from the Company's consulting contracts are generally non-recurring in nature. The Company's contract with Aetna provides for the Company to render services pursuant to purchase orders, each of which constitutes a separate contractual commitment by Aetna. As of the date of this Prospectus, the Company has not received any purchase orders from Aetna for work to be performed subsequent to April 30, 1998. Non-renewal or termination of the Company's contract with Aetna or the failure by Aetna to issue additional purchase orders to the Company under the existing contract would have a material adverse effect on the Company. There can be no assurance that the Company will obtain additional contracts for projects similar in scope to those previously obtained, that the Company will be able to retain existing clients or attract new clients or that the Company will not remain largely dependent on a limited client base which may continue to account for a substantial portion of the Company's revenues. Competition The markets for the Company's services are highly competitive. The Company believes that competition in the systems integration and programming and applications development consulting market is based upon quality of service, responsiveness to client demands, the number and availability of qualified engineers and programmers, price, project management capability, technical expertise, size and reputation. Additionally, the Company further believes that competition in the Internet services market is primarily based upon quality of service; access to local POPs; range of services; technical support; and experience. The Company competes with numerous large companies that have substantially greater market presence and financial, technical, marketing and other resources than the Company, including (i) large information technology consulting and service providers and application software firms such as Andersen Consulting, Cambridge Technology Partners, Electronic Data Systems Corporation and American Management Systems; (ii) international, national, regional and commercial Internet service providers such as Performance Systems International, Inc., Digex, Inc. and UUNET; (iii) established on-line services companies such as America Online, Inc. and Prodigy Service Company; (iv) computer hardware and software and other technology companies such as IBM and Microsoft Corp.; (v) national long distance carriers such as AT&T Corp., MCI Communications Corp. and Sprint Corp. and regional telephone companies, including Bell Atlantic, and cable operators; and (vi) major accounting 29 firms. Many of the Company's competitors have announced plans to expand their service offerings and increase their focus on the computer networking and Internet related services' markets. As a result, competition is expected to intensify for highly skilled network engineers, programmers and technicians. As a result of increased competition, the Company also expects to encounter significant pricing pressure, which in turn could result in significant reductions in the average selling price of the Company's services. There can be no assurance that the Company will be able to offset the effects of any such price reductions through an increase in the number of clients, higher revenue from enhanced services, cost reductions, or otherwise. In addition, the Company believes that continuing consolidation in the Internet services market could result in increased price and other competition in the industry. Increased price or other competition could make it difficult for the Company to gain additional clients and subscribers and could have a material adverse effect on the Company. There can be no assurance that the Company will be able to compete successfully. Employees As of April 15, 1998, the Company had 49 full-time employees, including four executive officers, five programmers, 25 network engineers and technicians, seven persons devoted exclusively to providing technical support to clients, three persons dedicated to sales and marketing activities and five administrative personnel. In connection with the anticipated expansion of its operations and network and the growth of its client and subscriber base, the Company expects to use a portion of the proceeds of this offering to hire additional network engineers, programmers and technical personnel to enable the Company to more effectively monitor the network by physically staffing its NOC 24 hours a day, seven days a week and better respond to client demands for service and technical support. Such skilled personnel are currently in high demand. There can be no assurance that the Company will be able to successfully recruit, hire and retain such personnel. None of the Company's employees are represented by a labor union and the Company is not a party to any collective bargaining agreement. The Company believes that its employee relations are good. To maximize the utilization of its resources and evaluate the skills and knowledge of certain prospective employees, the Company routinely hires temporary personnel to satisfy increased demand for personnel in connection with the commencement of new projects. As of April 15, 1998, the Company had 15 temporary employees in its service. Properties The Company serves its clients through its corporate headquarters and NOC, each located in Cedar Knolls, New Jersey, and its regional offices located in Fairfax, Virginia, and Huntsville, Alabama, as well as its network of nine POPs located throughout the northern New Jersey and New York City metropolitan area. The Company's corporate headquarters and NOC are located in a 9,830 square foot leased facility in Cedar Knolls. The lease extends through March 31, 2003 and provides for monthly rental payments in the amount of $12,954, subject to increase in proportion to facility operating costs. The Company's Huntsville office is located in a 1,800 square foot facility pursuant to a lease which extends through December 31, 2001. The monthly rental payment for such space is $1,500 which amount is paid through the rendering by the Company of services to the lessor. The Company believes that the terms of the lease are no less favorable than those that could have been obtained from an unaffiliated third party. The Company's regional office in Fairfax is located in a 170 square foot leased facility. The lease, originally for a one-year term, expires May 1998. The monthly rental payment under the Fairfax lease is $275. The Company does not expect to renew this lease upon its expiration or seek other space in the Fairfax area. In addition to its office space, the Company currently leases the site at which its physical POP is located. In consideration of space to locate its physical POP, the Company provides Internet access services to the lessor. The Company believes that it would be readily able to locate other space in which to house its corporate headquarters and NOC, regional offices and its physical POP if any leased space currently being utilized were to become unavailable. 30 Legal Proceedings In January 1998, the Company became aware of a threatened suit for breach of contract and wrongful termination on the basis of race and gender discrimination in connection with its dismissal of an employee in December 1997. The claimant has asserted that she is entitled to the full amount of compensation payable under a two year employment agreement between the claimant and the Company. The employment agreement has a two-year term and provides for the payment by the Company of an annual salary in the amount of $38,000. The claimant is seeking an amount equivalent to six months salary, plus attorneys' fees of $1,000, aggregating $20,000 in settlement of the matter. There can be no assurance that this matter will be resolved in a manner favorable to the Company. In February 1998, the Company became aware of a threatened suit for damages and expenses allegedly incurred by an individual and other persons and/or companies that the individual claims to represent resulting from the Company's termination of a subscriber's Internet access service. The claimant also alleges that the Company's termination of service was a violation of the claimant's civil rights. The claimant seeks an unspecified amount of expenses and damages. There can be no assurance that this matter will be resolved in a manner favorable to the Company. 31 MANAGEMENT Executive Officers and Directors The directors and executive officers of the Company are as follows:
Name Age Position ---- --- -------- Nicholas R. Loglisci, Jr. .......... 36 President, Chief Operating Officer and Director Clark D. Frederick ................. 35 Chief Technical Officer and Director Frank R. Altieri, Jr. .............. 31 Chief Information Officer and Director Brian W. Seidman ................... 35 General Counsel and Secretary Jeffrey E. Brenner ................. 50 Chief Financial Officer John J. Brighton ................... 55 Director Susan Holloway Torricelli .......... 52 Director Barrett N. Wissman ................. 35 Director
Nicholas R. Loglisci. Mr. Loglisci, a founder of the Company, has served as the Company's President and Chief Operating Officer and as a director since the Company's inception in February 1995. Prior to founding the Company, Mr. Loglisci was employed by Allen Telecom Group from June 1994 to June 1995 as the New York Metropolitan Area Sales Manager. From November 1990 to June 1994, Mr. Loglisci was employed in a variety of sales, marketing and management positions with Motorola, Inc. Prior to his corporate experience, Mr. Loglisci served as an officer in the U.S. Army from May 1985 to July 1990. Mr. Loglisci is a graduate of both the U.S. Army's Airborne and Ranger schools. Mr. Loglisci holds a B.S. in Engineering from the United States Military Academy and an M.B.A. from New York University's Stern School of Business. Clark D. Frederick. Mr. Frederick, a founder of the Company, has served as the Company's Chief Technical Officer and as a director since the Company's inception. Prior to founding the Company, Mr. Frederick was employed from June 1991 to April 1995 by Bell Atlantic where he was responsible for designing and managing Bell Atlantic's first Center for Networked Multimedia. Mr. Frederick was also responsible for managing Bell Atlantic's Business Development Task Force and coordinating research activities for video dial tone and Internet access technologies. Prior to his corporate experience, Mr. Frederick served as an officer in the U.S. Army from May 1985 to June 1991. Mr. Frederick holds a B.S. in Aerospace Engineering from the United States Military Academy and a Masters in Information Systems from the University of Southern California. Frank R. Altieri, Jr. Mr. Altieri has been Chief Information Officer and a director of the Company since joining the Company in April 1996. From 1993 to 1996, Mr. Altieri was the President of Interactive Networks, an Internet service provider which was acquired by the Company in April 1996. From 1989 to 1993, Mr. Altieri served as the Management Information Systems Director for Nutronic Circuit Co., Inc. Brian W. Seidman. Mr. Seidman has served as the General Counsel and Secretary, and was a director of the Company from inception to February 1998. From February 1994 to present, Mr. Seidman has also been of counsel to the law firm of Seidman, Silverman and Seidman. From March 1993 to January 1994, Mr. Seidman served as counsel to the New York State Senate Transportation Committee. During 1992, Mr. Seidman served as a legislative assistant to U.S. Representative Ron Wyden and also served as counsel to the U.S. House of Representatives Small Business Committee Subcommittee on Regulation Business, Opportunity and Technology. From November 1989 to December 1991 Mr. Seidman was associated with the law firm of Cahill, Gordon and Reindel and from October 1988 to November 1989 Mr. Seidman was associated with the law firm of Cadwalader, Wickersham and Taft. Mr. Seidman holds a Bachelor of Arts in Political Science from Colgate University, summa cum laude, and a J.D. from the Harvard Law School. Jeffrey E. Brenner. Mr. Brenner has been the Chief Financial Officer of the Company since March 1998. From January 1985 to March 1998, Mr. Brenner served as a Senior Vice President and as Chief Financial 32 Officer of Database America Companies, Inc., a corporation providing direct marketing, information and computer services. Prior to joining Database America Companies, Inc., Mr. Brenner served as Director of Financial Administration from 1981 to 1985 and as Controller from 1974 to 1980 of Automatic Data Processing (ADP). Mr. Brenner holds a B.B.A. in Finance and Marketing from George Washington University. John J. Brighton. Mr. Brighton has agreed to become a director of the Company upon the consummation of this offering. Since October 1997, Mr. Brighton has served as Chief Information Officer, Information Technology of Aetna. From July 1996 to October 1997, Mr. Brighton served as the Co-Chief Information Officer, Information Technology of Aetna. Prior to the merger of Aetna and U.S. Healthcare, Inc., Mr. Brighton served from 1994 to 1996 as Chief Information Officer of U.S. Healthcare, Inc. From September 1984 to November 1994, Mr. Brighton served as the Vice President-Information Processing of Bell Atlantic. Mr. Brighton holds a B.S. in Business Administration from Seton Hall University and an M.B.A. from St. John's University. Susan Holloway Torricelli. Ms. Torricelli has agreed to become a director of the Company upon the consummation of this offering. Since 1988, Ms. Torricelli has been the President of the Susan Holloway Torricelli Company, a consulting firm providing development and financial management, governmental affairs, media relations and special event consulting services. Ms. Torricelli holds a B.A. in English and Spanish from the University of Oklahoma. Barrett N. Wissman. Mr. Wissman has agreed to become a director of the Company upon the consummation of this offering. Since January, 1993, Mr. Wissman has served as a Managing Director of the general partner of HW Partners, an investment firm. From 1987 to December 1992, Mr. Wissman served as Chief Executive Officer of Athena Products Corporation, an international manufacturer of chemicals and household consumer products. Mr. Wissman holds a B.S. in Economics and Political Science from Yale University, cum laude, and an M.A. from Southern Methodist University. The Company intends to appoint an additional outside director within 30 days following the consummation of this offering. All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Executive officers are elected by the Board of Directors to hold office for such term as may be prescribed by the Board of Directors. The Company has agreed, for a period of five years from the date of this Prospectus, if so requested by the Underwriter, to nominate and use its best efforts to elect a designee of the Underwriter as a director of the Company or, at the Underwriter's option, as a non-voting adviser to the Company's Board of Directors. The Company's officers, directors and principal stockholders have agreed to vote their shares of Common Stock in favor of such designee. The Underwriter has not yet exercised its right to designate such a person. Committees Prior to the date of this Prospectus, the Board of Directors intends to establish a Compensation Committee and Audit Committee. The Compensation Committee will be responsible for reviewing the compensation for all officers and directors of the Company and reviewing general policy matters relating to the compensation and benefits of all employees. The Committee will also administer the 1998 Stock Option Plan. The Audit Committee will be responsible for recommending to the Board of Directors the annual engagement of a firm of independent accountants and for reviewing with the independent accountants the scope and results of audits, the internal accounting controls of the Company and audit practices and professional services rendered to the Company by the independent accountants. Directors' Compensation Directors who are officers or employees of the Company receive no additional compensation for service as members of the Board of Directors or committees thereof. Directors are reimbursed for their reasonable expenses in connection with attendance at meetings of the Board of Directors. All directors who are not employees of the Company (the "Eligible Directors") are eligible to participate in the 1998 Stock Option Plan. Upon the consummation of this offering and subsequently upon the initial election of an Eligible Director, such directors will be granted an option to purchase 10,000 shares of Common Stock (the "Initial Options"). The Initial Options will become exercisable in full on the first anniversary of the date of grant. In addition, immediately after the annual 33 meeting of stockholders of the Company, each Eligible Director elected or reelected at such meeting will receive an option to purchase 3,000 shares of Common Stock (the "Annual Options"). The Initial Options and Annual Options have a term of ten years and an exercise price payable in cash or shares of Common Stock. The exercise price for the Initial Options granted on the date of consummation of this offering will be equal to the initial public offering price of the shares offered hereby. The exercise price of additional Initial Options and the Additional Options granted after the Common Stock is quoted on Nasdaq will be equal to the market price of the Common Stock on the date of grant. Outside directors will receive such additional compensation for their service as the Board of Directors may determine from time to time. Executive Compensation The following table sets forth the aggregate compensation paid to the Company's President and Chief Operating Officer, Chief Technical Officer and Chief Information Officer for the year ended 1997. During 1997, none of the Company's executive officers received compensation, including bonuses, in excess of $100,000. Summary Compensation Table
Annual Compensation ------------------------------------------- Other Name and Principal Position Year Salary Bonus Compensation(1) - --------------------------- ------ ---------- ----------- ---------------- Nicholas R. Loglisci, Jr. ............ 1997 $53,000 $ 15,000 $3,600 President and Chief Operating Officer Clark D. Frederick ................... 1997 $53,000 $ 15,000 $3,600 Chief Technical Officer Frank R. Altieri, Jr. ................ 1997 $53,000 $ 15,000 $3,600 Chief Information Officer
- ------------ (1) Represents payment of automobile allowances. Employment Agreements In April 1998, the Company entered into four-year employment agreements with each of Messrs. Loglisci, Frederick and Altieri, pursuant to which Mr. Loglisci is employed as the Company's President and Chief Operating Officer, Mr. Frederick is employed as the Company's Chief Technical Officer and Mr. Altieri is employed as the Company's Chief Information Officer. Pursuant to the employment agreements, each executive is entitled to compensation consisting of an annual base salary in the amount of $90,000, a bonus based on the achievement of certain performance criteria, including the profitability of the Company and a monthly automobile allowance. Each executive is also subject to certain non-competition, confidentiality and disclosure of invention obligations pursuant to the employment agreement. In April 1998, the Company entered into a four-year employment agreement with Mr. Brenner pursuant to which Mr. Brenner is employed as the Company's Chief Financial Officer. Pursuant to the employment agreement, Mr. Brenner is entitled to compensation (subject to annual review) consisting of an initial annual base salary in the amount of $125,000, a bonus based on the achievement of certain performance criteria, including profitability of the Company, and a monthly automobile allowance. On the date Mr. Brenner entered into the employment agreement, the Company granted to Mr. Brenner options to purchase 40,000 shares of Common Stock at an exercise price equal to the initial public offering price of the shares sold in this offering and the Company agreed to grant to Mr. Brenner an award of 20,000 shares of restricted stock. In the event Mr. Brenner's employment is terminated for any reason, Mr. Brenner will be entitled to receive compensation accrued and unpaid as of the date of termination. In the event Mr. Brenner is terminated by the Company for other than cause, or there is a change in control of the Company, the Company will be required to pay Mr. Brenner his annual base salary for a period of one year after termination and options and restricted stock then held by Mr. Brenner will automatically vest. Mr. Brenner is also subject to certain non-competition, confidentiality and disclosure of inventions obligations pursuant to the employment agreement. 34 1998 Stock Option Plan In March 1998, the directors and stockholders of the Company approved the 1998 Stock Option Plan, pursuant to which employees of the Company are eligible to receive incentive stock options and officers, directors, employees and consultants of the Company are eligible to receive non-qualified stock options to purchase up to an aggregate of 330,000 shares of Common Stock. With respect to incentive stock options, the 1998 Stock Option Plan provides that the exercise price of each such option must be at least equal to 100% of the fair market value of the Common Stock on the date of grant (110% in the case of stockholders who, at the time the option is granted, own more than 10% of the outstanding Common Stock), and requires that all such options have an expiration date not later than that date which is one day before the tenth anniversary of the date of the grant (or the fifth anniversary of the date of grant in the case of 10% stockholders). However, with certain limited exceptions, in the event that the option holder ceases to be employed by the Company, or engages in or is involved with any business similar to that of the Company, such option holder's incentive options immediately terminate. Pursuant to the provisions of the 1998 Stock Option Plan, the aggregate fair market value, determined as of the date(s) of grant, for which incentive stock options are first exercisable by an option holder during any one calendar year cannot exceed $100,000. With respect to non-qualified stock options, the 1998 Stock Option Plan requires that the exercise price of all such options be at least equal to 100% of the fair market value of the Common Stock on the date such option is granted and requires that all such options have an expiration date not later than that date which is one day before the tenth anniversary of the date of the grant of such option. As of the date of this Prospectus, options to purchase 132,750 shares of Common Stock, including the 40,000 shares covered by options granted to Mr. Brenner, have been granted under the 1998 Stock Option Plan. Limitation of Liability and Indemnification Section 145 of the DGCL contains provisions entitling the Company's directors and officers to indemnification from judgments, fines, amounts paid in settlement and reasonable expenses (including attorney's fees) as the result of an action or proceeding in which they may be involved by reason of having been a director or officer of the Company. In its Restated Certificate of Incorporation, the Company has included a provision that limits, to the fullest extent now or hereafter permitted by the DGCL, the personal liability of its directors to the Company or its stockholders for monetary damages arising from a breach of their fiduciary duties as directors, Under the DGCL as currently in effect, this provision limits a director's liability except where such director (i) breaches his duty of loyalty to the Company or its stockholders, (ii) fails to act in good faith or engages in intentional misconduct or a knowing violation of law, (iii) authorizes payment of an unlawful dividend or stock purchase or redemption as provided in Section 174 of the DGCL, or (iv) obtains an improper personal benefit. This provision does not prevent the Company or its stockholders from seeking equitable remedies, such as injunctive relief or rescission. If equitable remedies are found not to be available to stockholders in any particular case, stockholders may not have any effective remedy against actions taken by directors that constitute negligence or gross negligence. The Restated Certificate of Incorporation also includes provisions to the effect that (subject to certain exceptions) the Company shall, to the maximum extent permitted from time to time under the DGCL, indemnify, and upon request shall advance expenses to, any director or officer to the extent that such indemnification and advancement of expenses is permitted under the DGCL, as it may from time to time be in effect. In addition, the Bylaws require the Company to indemnify, to the fullest extent permitted by law, any director, officer, employee or agent of the Company for acts which such person reasonably believes are not in violation of the Company's corporate purposes as set forth in the Restated Certificate of Incorporation. At present, the DGCL provides that, in order to be entitled to indemnification, an individual must have acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the Company's best interests. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or other persons controlling the Company pursuant to the foregoing provisions, the Company has been advised that in the opinion of the Securities and Exchange Commission (the "Commission"), such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. 35 PRINCIPAL STOCKHOLDERS The following table sets forth certain information known to the Company, as of the date of this Prospectus and as adjusted to reflect the sale by the Company of 1,200,000 shares offered hereby, with respect to the beneficial ownership of shares of Common Stock by (i) each person who is known by the Company to be the beneficial owner of more than five percent of the outstanding shares of Common Stock, (ii) each director or person who has agreed to become a director of the Company and (iii) all executive officers and directors of the Company as a group.
Percentage of Outstanding Shares Number of Shares of of Common Stock Beneficially Owned Name and Address Common Stock ----------------------------------- of Beneficial Owner(1) Beneficially Owned(2) Before Offering After Offering - ---------------------- ----------------------- ----------------- --------------- Nicholas R. Loglisci, Jr. ............... 371,435 20.1 12.1 Clark D. Frederick(3) ................... 371,435 20.1 12.1 Frank R. Altieri, Jr. ................... 371,435 20.1 12.1 Brian W. Seidman(4) ..................... 92,858 5.0 3.0 Jeffrey E. Brenner ...................... -- -- -- John J. Brighton ........................ -- -- -- Barrett N. Wissman (5) .................. 12,218 * * Susan Holloway Torricelli ............... -- -- -- All directors and executive officers as a group (8 persons) ...................... 1,219,381 65.9% 39.6%
- ------------ * Less than 1%. (1) Unless otherwise indicated, the address of each beneficial owner is 2 Ridgedale Avenue, Suite 350, Cedar Knolls, New Jersey 07927. (2) Unless otherwise indicated, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. A person is deemed to be the beneficial owner of securities which may be acquired by such person within 60 days from the date of this Prospectus upon the exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that the warrants, options or convertible securities that are held by such person (but not those held by any other person) and which are exercisable or convertible within 60 days of the date of this Prospectus, have been exercised. (3) Mr. Frederick and Carla Frederick own these shares of Common Stock as joint tenants. (4) Consists of shares of Common Stock owned of record by Sycamore Equities, Inc. Mr. Seidman is the President and sole stockholder of Sycamore Equities, Inc. The address of each of Sycamore Equities, Inc. and Mr. Seidman is 600 Third Avenue, New York, New York 10016. (5) Represents shares of Common Stock issuable upon exercise of Warrants beneficially owned by Mr. Wissman. Mr. Wissman's address is 1601 Elm Street, Suite 4000, Dallas, Texas 75201. 36 CERTAIN TRANSACTIONS In connection with the Company's acquisition of Interactive Networks in April 1996, the Company issued 371,435 shares of Common Stock to Frank R. Altieri, Jr., Chief Information Officer and a director of the Company, and 6,109 shares of Common Stock to his father, Frank R. Altieri, Sr., in exchange for all of the issued and outstanding capital stock of Interactive Networks. Also in connection with the Company's acquisition of Interactive Networks, certain bank indebtedness was personally guaranteed by Messrs. Altieri and Loglisci. At December 31, 1997, the outstanding amount of such indebtedness was $12,000. Messrs. Loglisci, Altieri and Frederick are personal guarantors of the obligations of the Company arising under certain equipment lease agreements. The original aggregate amount of guaranteed capital lease obligations was $186,965. At December 31, 1997, the aggregate amount of guaranteed capital lease obligations was $105,000. In connection with the 1995 Financing, Nicholas R. Loglisci, Sr., the father of Nicholas R. Loglisci, Jr., and Steven Loglisci, the brother of Nicholas R. Loglisci, Jr., each purchased $10,000 principal amount of the 1995 Notes and 4,887 shares of Common Stock. The Company intends to use a portion of the proceeds of this offering to repay all the outstanding indebtedness arising under the 1995 Notes, including the 1995 Notes held by Mr. Loglisci, Sr. and Mr. Steven Loglisci. In connection with the 1996 Financing, Mr. Loglisci, Sr., Mr. Steven Loglisci, Terri Frederick, the sister of Clark D. Frederick, Jeanne Frederick, the sister of Clark D. Frederick, Patsy and Jennifer Loglisci, the uncle and aunt of Nicholas R. Loglisci, Jr., Joseph Altieri, the brother of Frank R. Altieri, Jr. and Gloria and Irving Seidman, the parents of Brian W. Seidman, purchased 3,665; 30,545; 1,222; 1,222; 3,054; 1,222 and 2,443 shares of Common Stock, respectively, at a price of $3.27 per share. In connection with the 1997 Financing, Mr. Steven Loglisci, Mr. Frank R. Altieri, Sr., and Barrett N. Wissman purchased 1997 Notes in the original principal amount of $18,750, $25,000 and $50,000, respectively, and received Warrants to purchase 4,624, 6,108 and 12,218 shares of Common Stock, respectively, at an exercise price of $3.54 per share. The Company intends to use a portion of the proceeds of this offering to repay the 1997 Notes, including the 1997 Notes held by Mr. Steven Loglisci, Mr. Altieri, Sr. and Mr. Wissman. To facilitate the acquisition of certain computer equipment, Messrs. Loglisci, Frederick and Altieri periodically advanced personal funds to the Company. Funds advanced to the Company by Messrs. Loglisci, Frederick and Altieri amounted to $43,105, $272,212 and $5,300, respectively, during the year ended December 31, 1996 and $46,054, $349,874 and $7,750, respectively, during the year ended December 31, 1997. The advanced funds were repaid to each of the executives without interest. Each of Messrs. Loglisci, Frederick and Altieri have advised the Company that he does not intend to make advances to the Company subsequent to the consummation of this offering. Since the inception of the Company, Sycamore Equities, Inc., a company wholly-owned by Brian W. Seidman, General Counsel and Secretary of the Company, has rendered management consulting services to the Company. The fees incurred by the Company for such services were $16,000 and $14,000 during the years ended December 31, 1996 and 1997, respectively. Any future transactions between the Company and its officers will be on terms no less favorable than could be obtained from unaffiliated third parties and approved by a majority of the independent and disinterested members of the Board of Directors. 37 DESCRIPTION OF SECURITIES The authorized capital of the Company consists of 12,000,000 shares, of which 11,000,000 shares are Common Stock, and 1,000,000 shares are designated as Preferred Stock. As of the date of this Prospectus, 1,849,237 shares of Common Stock are currently issued and outstanding and no shares of Preferred Stock have been issued or are outstanding. The Common Stock is held of record by 54 stockholders. Upon consummation of this offering, there will be 3,074,237 shares of Common Stock outstanding and no shares of Preferred Stock outstanding. Preferred Stock The Board of Directors is authorized, without further action by the stockholders, to issue 1,000,000 shares of Preferred Stock from time to time in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption prices and liquidation preferences and the number of shares constituting and the designation of any such series. The rights and terms relating to any new series of Preferred Stock could adversely affect the voting power or other rights of the holders of Common Stock. Additionally, such Preferred Stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Common Stock The holders of Common Stock are entitled to one vote for each share held of record in the election of directors and with respect to all other matters to be voted on by stockholders. Holders of shares of Common Stock do not have cumulative voting rights. Therefore, the holders of more than 50% of such shares voting for the election of directors can elect all of the directors. The holders of Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors out of legally available funds. In the event of liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining available for distribution after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the Common Stock. Holders of shares of Common Stock, as such, have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to the Common Stock. 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 issued. All of the shares of Common Stock currently outstanding are duly authorized, validly issued, fully paid and non-assessable. Warrants There are currently outstanding 48,872 Warrants, each to purchase one share of Common Stock at an exercise price of $3.54 per share. The Warrants were issued in October 1997 in connection with the 1997 Financing. The Warrants, which expire on October 31, 2000, are currently exercisable. The investors in the 1997 Financing have been granted certain registration rights relating to the shares of Common Stock issuable upon exercise of the Warrants. See "-- Registration Rights." Registration Rights The holders of 305,451 shares of Common Stock issued in connection with the 1996 Financing (the "Registrable Shares") are currently entitled to certain piggyback rights with respect to the registration of such shares under the Securities Act. Holders of 271,246 of such shares have waived their registration rights in connection with this offer and no holder of such shares is participating in this offering. Additionally, following the consummation of this offering, the holders of 48,872 shares of Common Stock issuable upon exercise of the Warrants will be entitled to piggyback rights with respect to the registration of such shares under the Securities Act. Whenever the Company proposes to register any of its securities under the Securities Act for its own account or for the account of other security holders, the Company shall be required to promptly notify the holders of each of the Registrable Shares and the Warrant Shares of the proposed registration and include all Registrable Shares and Warrant Shares which such holders may request to be included in such registration, subject to 38 certain limitations (a "Piggyback Registration"). The holders of the Registrable Shares and the Warrants have agreed not to request registration of sell or otherwise dispose of the Registrable Shares or the shares of Common Stock issuable upon exercise of the Warrants for a period of 12 months following the date of this Prospectus. In connection with this offering, the Company has agreed to grant to the Underwriter certain demand and piggyback registration rights in connection with the 120,000 shares of Common Stock issuable upon exercise of the Underwriter's Warrants. See "Underwriting." Transfer Agent and Registrar The transfer agent and registrar for the Common Stock is Continental Stock Transfer & Trust Company, whose address is Two Broadway, New York, New York 10004. SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of this offering, the Company will have 3,074,237 shares of Common Stock issued and outstanding of which the 1,200,000 shares offered hereby will be freely tradeable without restriction or further registration under the Securities Act, except for any shares purchased by an "affiliate of the Company" (in general, a person who has a controlling position with regard to the Company), which will be subject to the resale limitations of Rule 144 promulgated under the Securities Act. All of the remaining 1,874,237 shares of Common Stock which will be outstanding upon the consummation of this offering are "restricted securities," as that term is defined under Rule 144 promulgated under the Securities Act. Subject to the contractual restrictions described below, 1,701,927 shares of Common Stock will be eligible for sale pursuant to Rule 144 commencing 90 days following the date of this Prospectus, 147,310 shares will become eligible for sale pursuant to Rule 144 on January 31, 1999 and 25,000 shares will become eligible for sale pursunt to Rule 144 on the first anniversary of the date of consummation of this offering. The holders of 1,548,102 of such shares (and holders of 48,872 shares issuable upon the exercise of the Warrants) have agreed not to (i) sell or otherwise dispose of such shares or (ii) exercise any rights held by such holders to cause the Company to register any shares of Common Stock for sale pursuant to the Securities Act, in each case, for a period of twelve months from the date of this Prospectus without the Underwriter's prior written consent. In general, under Rule 144, as currently in effect, any person (or persons whose shares are aggregated), including an affiliate of the Company who, has owned restricted shares of Common Stock beneficially for at least one year is entitled to sell, within any three month period, such number of shares that does not exceed the greater of 1% of the then outstanding shares of the issuer's common stock or the average weekly trading volume during the four calendar weeks preceding such sale, provided, that, certain public information about the issuer as required by Rule 144 is then available and the seller complies with certain other requirements. A person who is not an affiliate, has not been an affiliate within three months prior to sale and has beneficially owned the restricted securities for at least two years is entitled to sell such shares under Rule 144 without regard to any of the limitations described above. Prior to this offering, there has been no public market for the Common Stock and no prediction can be made as to the effect, if any, that market sales of Common Stock or the availability of such shares for sale will have on the market price prevailing from time to time. Nevertheless, the possibility that substantial amounts of Common Stock may be sold in the public market may adversely affect prevailing market prices for the Common Stock and could impair the Company's ability to raise capital through the sale of its equity securities. 39 UNDERWRITING Whale Securities Co., L.P. (the "Underwriter") has agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase the 1,200,000 shares of Common Stock offered hereby from the Company. The Underwriter is committed to purchase and pay for all of the shares of Common Stock offered hereby if any of such securities are purchased. The shares of Common Stock are being offered by the Underwriter, subject to prior sale, when, as and if delivered to and accepted by the Underwriter and subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriter has advised the Company that it proposes to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus. The Underwriter may allow certain dealers who are member of the National Association of Securities Dealers, Inc. (the "NASD") concessions, not in excess of $. per share, of which not in excess of $. per share may be reallowed to other dealers who are members of the NASD. The Company has granted to the Underwriter an option, exercisable for 45 days following the date of this Prospectus, to purchase up to 180,000 additional shares at the public offering price set forth on the cover page of this Prospectus, less underwriting discounts and commissions. The Underwriter may exercise this option in whole or, from time to time, in part, solely for the purpose of covering over-allotments, if any, made in connection with the sale of the shares offered hereby. The Company has agreed to pay to the Underwriter a non-accountable expense allowance equal to 3% of the gross proceeds derived from the sale of the shares offered hereby, including any securities sold pursuant to the Underwriter's over-allotment option, $50,000 of which has been paid as of the date of this Prospectus. The Company has also agreed to pay all expenses in connection with qualifying the shares offered hereby for sale under the laws of such states as the Underwriter may designate, including expenses of counsel retained for such purpose by the Underwriter. The Company has agreed to sell to the Underwriter and its designees, for an aggregate of $100, warrants (the "Underwriter's Warrants") to purchase up to 120,000 shares of Common stock at an exercise price of $8.10 per share (135% of the public offering price per share). The Underwriter's Warrants may not be sold, transferred, assigned or hypothecated for one year following the date of this Prospectus, except to the offices and partners of the Underwriter and members of the selling group, and are exercisable at any time and from time to time, in whole or in part, during the five-year period following the date of this Prospectus (the "Warrant Exercise Term"). During the Warrant Exercise Term, the holders of the Underwriter's Warrants are given, at nominal cost, the opportunity to profit from a rise in the market price of the Common Stock. To the extent that the Underwriter's Warrants are exercised, dilution to the interests of the Company's stockholders will occur. Further, the terms upon which the Company will be able to obtain additional equity capital may be adversely affected, since the holders of the Underwriter's Warrants can be expected to exercise them at a time when the Company would, in all likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided in the Underwriter's Warrants. Any profit realized by the Underwriter on the sale of the Underwriter's Warrants, the underlying shares of Common Stock or the underlying warrants, or the shares of Common Stock issuable upon exercise of such underlying warrants, may be deemed additional underwriting compensation. The Underwriter's Warrants contain a cashless exercise provision. Subject to certain limitations and exclusions, the Company has agreed that, upon the request of the holders of the majority of the Underwriter's Warrants, the Company will (at its own expense), on one occasion during the Warrant Exercise term, register the Underwriter's Warrants and the securities underlying the Underwriter's Warrants under the Securities Act and that it will include the Underwriter's Warrants and all such underlying securities in any appropriate registration statement which is filed by the Company under the Securities Act during the seven years following the date of this Prospectus. The Company has agreed, for a period of five years from the date of this Prospectus, if so requested by the Underwriter, to nominate and use its best efforts to elect a designee of the Underwriter as a director of the Company or, at the Underwriter's option, as a non-voting adviser to the Company's Board of Directors. The Company's officers, directors and principal stockholders have agreed to vote their shares of Common Stock in favor of such designee. The Underwriter has not yet exercised its right to designate such a person. 40 The Company has agreed to retain the Underwriter as a financial consultant for a period of two years following the consummation of this offering. The consulting agreement will provide that the Underwriter will be entitled to receive a finder's fee in the event the Underwriter originates a financing, merger, acquisition, joint venture or other transaction to which the Company is a party. All of the Company's officers, directors and securityholders have agreed not to sell or otherwise dispose of any of their securities for a period of twelve months from the date of this Prospectus without the Underwriter's prior written consent. The Underwriter has informed the Company that it does not expect sales of the securities offered hereby to discretionary accounts to exceed 1% of the shares offered hereby. The Company has agreed to indemnify the Underwriter against certain civil liabilities, including liabilities under the Securities Act. Prior to this offering there has been no public market for the Common Stock. Accordingly, the initial public offering price of the Common Stock will be determined by negotiation between the Company and the Underwriter and may not necessarily be related to the Company's asset value, net worth or other established criteria of value. Factors to be considered in determining such price include the Company's financial condition and prospects, an assessment of the Company's management, market prices of similar securities of comparable publicly-traded companies, certain financial and operating information of companies engaged in activities similar to those of the Company and the general condition of the securities market. In order to facilitate the offering, the Underwriter may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriter may over-allot in connection with the offering, creating a short position in the Common Stock for its own account. In addition, to cover over-allotments or to stabilize the price of the Common stock, the Underwriter may bid for, and purchase, shares of Common Stock in the open market. The Underwriter may also reclaim selling concessions allowed to a dealer for distributing the Common Stock in the offering, if the Underwriter repurchases previously distributed Common Stock in transactions to cover short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriter is not required to engage in these activities, and may end any of these activities at any time. LEGAL MATTERS Certain legal matters with respect to the validity of the securities offered hereby will be passed upon for the Company by Kelley Drye & Warren LLP, New York, New York and Stamford, Connecticut. Tenzer Greenblatt LLP, New York, New York, has acted as counsel for the Underwriter in connection with this offering. EXPERTS The 1997 financial statements of the Company and Entelechy included in this Prospectus and in the Registration Statement on Form SB-2 filed by the Company with the Commission (together with all amendments thereto, the "Registration Statement") have been audited by BDO Seidman, LLP, independent certified public accountants, to the extent and for the periods set forth in their reports appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of said firm as experts in auditing and accounting. The 1996 financial statements of the Company included in this Prospectus and in the Registration Statement have been audited by Milgrom Galuskin Balmuth & Company, Certified Public Accountants, P.C. to the extent and for the period set forth in their report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. 41 AVAILABLE INFORMATION As of the effective date of the Registration Statement of which this Prospectus forms a part, the Company will become subject to the reporting requirements of the Exchange Act and in accordance therewith, will file reports, proxy statements and other information with the Commission. The Company intends to furnish its stockholders with annual reports containing audited financial statements and such other periodic reports as the Company deems appropriate or as may be required by law. The Company has filed with the Commission the Registration Statement with respect to the securities offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits filed therewith, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Shares offered hereby, reference is hereby made to the Registration Statement and to the exhibits filed therewith. Statements contained in this Prospectus regarding the content of any contract or other document referred to are not necessarily complete and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement is hereby qualified in its entirety by such reference. The Registration Statement, including all exhibits thereto, may be inspected without charge at the principal office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such material may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, upon the payment of prescribed fees. Additionally, the Commission maintains a site on the World Wide Web at http://www.sec.gov. The Registration Statement, including all exhibits and schedules thereto, and such other reports and information filed by the Company with the Commission may be accessed electronically by means of the Commission's Web-site. 42 INDEX TO FINANCIAL STATEMENTS
Page ----- IBS INTERACTIVE, INC. Reports of Independent Certified Public Accountants ...................................... F-2 Balance Sheets as of December 31, 1996 and 1997 .......................................... F-4 Statements of Operations for the years ended December 31, 1996 and 1997 .................. F-5 Statements of Cash Flows for the years ended December 31, 1996 and 1997 .................. F-6 Statements of Stockholders' Equity for the years ended December 31, 1996 and 1997 ........ F-7 Notes to Financial Statements ............................................................ F-8 ENTELECHY INC. Report of Independent Certified Public Accountants ....................................... F-18 Balance Sheet as of December 31, 1997 ................................................... F-19 Statement of Operations and Accumulated Deficit for the year ended December 31, 1997 .... F-20 Statement of Cash Flows for the year ended December 31, 1997 ............................ F-21 Notes to Financial Statements ........................................................... F-22 PRO FORMA FINANCIAL STATEMENTS Pro Forma Condensed Statement of Operations for the year ended December 31, 1997 (unaudited) ............................................................................. F-24 Pro Forma Condensed Balance Sheet as of December 31, 1997 (unaudited) .................... F-25 Notes to Pro Forma Unaudited Condensed Financial Statements .............................. F-26
F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors IBS Interactive, Inc. We have audited the accompanying balance sheet of IBS Interactive, Inc. (formerly known as Internet Broadcasting System, Inc.) as of December 31, 1997 and the related statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IBS Interactive, Inc. as of December 31, 1997 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. BDO Seidman, LLP Woodbridge, New Jersey February 27, 1998 (April 21, 1998 as to the last paragraph of Note 14) F-2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors IBS Interactive, Inc. We have audited the accompanying balance sheet of IBS Interactive, Inc. (formerly known as Internet Broadcasting System, Inc.) as of December 31, 1996 and the related statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IBS Interactive, Inc. as of December 31, 1996 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Milgrom, Galuskin, Balmuth & Company Certified Public Accountants, P.C. Edison, New Jersey March 31, 1997 (April 21, 1998 as to the last paragraph of Note 14) F-3 IBS INTERACTIVE, INC. BALANCE SHEETS DECEMBER 31, 1996 AND 1997
December 31, ------------------------------- 1996 1997 ------------- --------------- ASSETS Current Assets: Cash ................................................................... $ 179,000 $ 95,000 Accounts receivable (net of allowance for doubtful accounts of $6,000 in 1996 and $66,000 in 1997)................................ 310,000 1,636,000 Prepaid expenses ....................................................... 3,000 -- Deferred tax asset ..................................................... 1,000 50,000 ---------- ----------- Total Current Assets ................................................. 493,000 1,781,000 Property and equipment, net ............................................. 364,000 518,000 Intangible assets ....................................................... 6,000 56,000 Deferred tax asset ...................................................... 72,000 -- Deferred offering costs ................................................. -- 45,000 Other assets ............................................................ -- 51,000 ---------- ----------- TOTAL ASSETS ............................................................ $ 935,000 $ 2,451,000 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: 1997 Notes ............................................................. $ -- $ 200,000 Notes payable, current portion ......................................... 11,000 107,000 Capital lease obligation, current portion .............................. 4,000 42,000 Accounts payable ....................................................... 33,000 145,000 Accrued salaries and related expenses .................................. -- 71,000 Accrued project costs .................................................. 29,000 305,000 Deferred revenue ....................................................... -- 238,000 Accrued interest payable ............................................... 6,000 14,000 Income taxes payable ................................................... -- 25,000 Other current liabilities .............................................. 17,000 67,000 ---------- ----------- Total Current Liabilities ............................................ 100,000 1,214,000 Notes payable, less current portion ..................................... 107,000 -- Long term capital lease obligation ...................................... 7,000 64,000 Deferred tax liabilities ................................................ -- 34,000 ---------- ----------- Total Liabilities ....................................................... 214,000 1,312,000 ---------- ----------- Commitments and contingencies (Note 9) Stockholders' Equity: Preferred Stock -- $.01 par value; authorized 1,000,000 shares, none issued and outstanding .......................................... -- -- Common Stock -- $.01 par value; authorized 11,000,000 shares, issued and outstanding 1,679,975 shares -- 1996 and 1,701,967 shares -- 1997 17,000 17,000 Additional paid in capital ............................................. 1,088,000 1,214,000 Common Stock -- subscription receivable ................................ (54,000) -- Unearned compensation .................................................. (47,000) (7,000) Accumulated deficit .................................................... (283,000) (85,000) ---------- ----------- Total Stockholders' Equity ............................................. 721,000 1,139,000 ---------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................. $ 935,000 $ 2,451,000 ========== ===========
See accompanying notes to financial statements. F-4 IBS INTERACTIVE, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
December 31, ----------------------------- 1996 1997 ------------- ------------- Revenues .............................................. $1,023,000 $2,741,000 Cost of Services ...................................... 650,000 1,099,000 ---------- ---------- Gross Profit .......................................... 373,000 1,642,000 Operating Expenses: Selling, general and administrative .................. 670,000 1,296,000 Amortization of intangible assets .................... 1,000 12,000 ---------- ---------- 671,000 1,308,000 ---------- ---------- Operating income (loss) ............................... (298,000) 334,000 Interest expense ..................................... 11,000 37,000 Other expense, net ................................... 1,000 15,000 ---------- ---------- Income (loss) before income taxes ..................... (310,000) 282,000 Income tax benefit (provision) ........................ 59,000 (84,000) ---------- ---------- Net income (loss) ..................................... $ (251,000) $ 198,000 ========== ========== Earnings (loss) per share Basic and Diluted .................................... $ (.17) $ .12 ========== ========== Weighted average number of common stock and equivalents Basic ................................................ 1,507,047 1,692,850 ========== ========== Diluted .............................................. 1,507,047 1,721,664 ========== ==========
See accompanying notes to financial statements. F-5 IBS INTERACTIVE, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
December 31, -------------------------------- 1996 1997 -------------- --------------- Cash Flows from Operating Activities: Net income (loss) ...................................... $ (251,000) $ 198,000 Adjustments to Reconcile Net Income (Loss) to Net Cash Used in Operating Activities: Depreciation and amortization .......................... 105,000 184,000 Non cash interest expense .............................. -- 24,000 Bad debt provisions .................................... 21,000 60,000 Non cash compensation .................................. 33,000 40,000 Deferred taxes ......................................... (59,000) 57,000 Changes in operating assets and liabilities: Accounts receivable .................................... (322,000) (1,386,000) Prepaid expenses ....................................... 5,000 3,000 Other assets ........................................... -- (16,000) Accounts payable and accrued expenses .................. 48,000 488,000 Deferred revenue ....................................... -- 238,000 Income taxes payable ................................... -- 25,000 Other .................................................. 14,000 7,000 ---------- ------------ Net Cash Used in Operating Activities ................ (406,000) (78,000) ---------- ------------ Cash Flows from Investing Activities: Capital expenditures -- property and equipment ......... (355,000) (154,000) Assets acquisitions .................................... (5,000) (75,000) ---------- ------------ Net Cash Used in Investing Activities ................ (360,000) (229,000) ---------- ------------ Cash Flows from Financing Activities: Repayments of notes payable ............................ (15,000) (11,000) Repayment of stockholder loans ......................... (2,000) -- Issuance of 1997 Notes ................................. -- 200,000 Sales of common stock .................................. 927,000 74,000 Deferred offering costs ................................ -- (25,000) Payments of capital lease obligations .................. (3,000) (15,000) ---------- ------------ Net Cash Provided by Financing Activities ............ 907,000 223,000 ---------- ------------ Net increase (decrease) in Cash ......................... 141,000 (84,000) Cash, at Beginning of Year .............................. 38,000 179,000 ---------- ------------ Cash, at End of Year .................................... $ 179,000 $ 95,000 ========== ============
See accompanying notes to financial statements. F-6 IBS INTERACTIVE, INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
Common Stock ------------------------ Number Additional of Paid in Shares Amount Capital ------------ ---------- ------------ Balance -- January 1, 1996 ............. 977,440 $10,000 $ -- Shares issued for cash, February 1996 ......................... 1,221 -- 1,000 Shares issued for compensation ......... 24,436 -- 80,000 Shares issued in connection with pooling of interests, April 1996 ...... 377,536 4,000 30,000 Shares issued in connection with Private Placement ..................... 299,342 3,000 977,000 Amortization of shares issued as compensation .......................... -- -- -- Net loss ............................... -- -- -- ------- ------- ---------- Balance -- December 31, 1996 ........... 1,679,975 17,000 1,088,000 Shares issued in connection with acquisitions .......................... 15,883 -- 52,000 Payment of common stock subscription receivable ............... -- -- -- Amortization of shares issued as compensation .......................... -- -- -- Shares issued in connection with Private Placement ................ 6,109 -- 20,000 Issuance of warrants associated with 1997 Notes ............................ -- -- 54,000 Net income ............................. Balance -- December 31, 1997 ........... 1,701,967 $17,000 $1,214,000 ========= ======= ========== Total Unearned Subscription Accumulated Stockholders' Compensation Receivable Deficit Equity -------------- -------------- ------------- -------------- Balance -- January 1, 1996 ............. $ -- $ -- $ (39,000) $ (29,000) Shares issued for cash, February 1996 ......................... -- -- -- 1,000 Shares issued for compensation ......... (80,000) -- -- -- Shares issued in connection with pooling of interests, April 1996 ...... -- -- 7,000 41,000 Shares issued in connection with Private Placement ..................... -- (54,000) -- 926,000 Amortization of shares issued as compensation .......................... 33,000 -- -- 33,000 Net loss ............................... -- -- (251,000) (251,000) --------- ---------- ---------- ----------- Balance -- December 31, 1996 ........... (47,000) (54,000) (283,000) 721,000 Shares issued in connection with acquisitions .......................... -- -- -- 52,000 Payment of common stock subscription receivable ............... -- 54,000 -- 54,000 Amortization of shares issued as compensation .......................... 40,000 -- -- 40,000 Shares issued in connection with Private Placement ................ -- -- -- 20,000 Issuance of warrants associated with 1997 Notes ............................ -- -- -- 54,000 Net income ............................. 198,000 198,000 ---------- ----------- Balance -- December 31, 1997 ........... $ (7,000) $ -- $ (85,000) $ 1,139,000 ========= ========== ========== ===========
See accompanying notes to financial statements. F-7 IBS Interactive, Inc. Notes to Financial Statements NOTE 1 -- BACKGROUND IBS Interactive, Inc. (the "Company") provides a broad range of computer networking, programming, applications development and Internet services primarily to businesses and organizations. The Company was incorporated under the name Internet Broadcasting System, Inc. and changed its name to IBS Interactive, Inc. on February 27, 1998. The Company, a Delaware corporation, has its main administrative office in New Jersey with regional offices in Virginia and Alabama (see Note 14). The Company contemplates filing a registration statement with the Securities and Exchange Commission in April 1998 relating to an initial public offering of 1,200,000 shares of its common stock. Certain prior year amounts have been reclassified to conform to the current year's presentation. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Revenue is recognized as services are provided to clients and subscribers. In the event that there are significant performance obligations yet to be fulfilled on consulting projects, revenue recognition is deferred until such conditions are removed. For the years ended December 31, 1996 and 1997, the Company recognized revenues of $0 and $252,000, respectively, on projects in process. Such unbilled amounts are included in accounts receivable, net, at December 31, 1997. Stock Based Compensation With respect to common stock issued to employees, the Company follows the provisions of APB Opinion No. 25 Accounting for Stock Issued to Employees in accounting and measuring compensation expense related to employee stock grants. Warrants The fair values ascribed to the warrants that were granted in connection with the 1997 Notes (see Note 6) are capitalized and amortized, as interest expense, over the expected life of the underlying debt. Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Valuation allowances are established against deferred tax assets when management concludes that the realization of such deferred tax assets cannot be considered more likely than not. Financial Instruments and Concentrations Financial instruments which potentially subject the Company to credit risk consist primarily of a concentration of unsecured trade accounts receivables. At December 31, 1996, two customers accounted for 61% and 13%, respectively, of total net accounts receivable. At December 31, 1997 a single customer accounted for 93% of total net accounts receivable. F-8 IBS Interactive, Inc. Notes to Financial Statements -- (Continued) NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- (Continued) The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. The Company maintains allowances for potential credit losses and such losses have been within management's expectations. The Company maintains cash balances at a single bank. Accounts at the bank are insured by an agency of the Federal government up to $100,000. The Company maintains substantially all of the fixed assets utilized in providing Internet access to clients at one location. Sources of Supplies and Vendors The Company relies on two telephone companies to provide data communications services and one company to provide Internet access services to customers. Although management believes alternative telecommunications facilities could be found in a timely manner, any disruption or termination of these services could have an adverse effect on operating results. Although the Company attempts to maintain multiple vendors for required product, its modems, terminal servers, and high-performance routers, which are important components of its network, are each currently acquired from limited sources. In addition, some of the Company's suppliers have limited resources and production capacity. If the suppliers are unable to meet the Company's needs as it builds out its network infrastructure, then delays and increased costs in the expansion of the Company's network infrastructure could result, which could have an adverse effect on operating results. Property and Equipment Property and equipment, largely comprising network equipment, is depreciated over a three year life using the straight line method. Long-Lived Assets The Company has adopted SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for Long-lived Assets to be Disposed of. In accordance with SFAS No. 121, the carrying values of long-lived assets are periodically reviewed by the Company and impairments would be recognized if the expected future operating non-discounted cash flows derived from an asset were less than its carrying value. Intangible Assets Intangible assets are composed primarily of customer lists and other intangibles arising from various acquisitions. Such values are amortized over five year lives. Deferred Offering Costs Costs incurred in connection with the Company's contemplated initial public offering of its common stock have been capitalized. Such costs will be charged to stockholders' equity upon successful completion of the offering or charged to operations if the offering is not completed. Estimated Fair Values of Financial Instruments The carrying amounts reported in the balance sheets for accounts receivable, accounts payable, accrued liabilities and notes payable approximate fair value because of the immediate or short-term maturity of these financial instruments. F-9 IBS Interactive, Inc. Notes to Financial Statements -- (Continued) NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Earnings (Loss) Per Share In 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share. SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes the dilutive effects of options. Basic earnings per share has been computed using the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is very similar to the fully diluted earnings per share. The Company's diluted earnings (loss) per share includes the effect, if any, of unissued shares underlying warrants, computed using the treasury stock method. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Many of the Company's estimates and assumptions used in the financial statements relate to the Company's ability to deliver state of the art technical services, which are subject to competitive market and technology changes. It is reasonably possible that changes may occur in the near term that would affect management's estimates with respect to the values of intangibles and fixed assets. Effects of Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued two new disclosure standards. SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, establishes standards for the way that public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. SFAS Nos. 130 and 131 are effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Because of the relatively recent issuance of these standards, management has been unable to fully evaluate the impact, if any, it may have on future financial statement disclosures. Results of operations and financial position, however, will be unaffected by implementation of these standards. NOTE 3 -- BUSINESS COMBINATIONS (ALSO SEE NOTE 14) Interactive Networks, Inc. On April 7, 1996, the Company acquired Interactive Networks, Inc. ("Interactive Networks"), a local Internet service provider, in a business combination accounted for as a pooling of interests, through an exchange of 377,536 shares of the Company's common stock for all of the issued and outstanding shares of Interactive Networks. Accordingly, the accompanying 1996 financial statements are based on the assumption that the Company and Interactive Networks were combined for the full year. F-10 IBS Interactive, Inc. Notes to Financial Statements -- (Continued) NOTE 3 -- BUSINESS COMBINATIONS (ALSO SEE NOTE 14) -- (Continued) Summarized results of operations of the Company and Interactive Networks for the period from January 1, 1996 through April 7, 1996, the date of the business combination, are as follows: Company Interactive Networks ------------- -------------------- Net Sales ....................... $ 29,000 $ 53,000 Net (Loss) ...................... $ (30,000) $ (2,000) Mordor International On May 31, 1996, the Company acquired substantially all the assets of Mordor International ("Mordor"), an Internet service provider, in a business combination accounted for as a purchase. The purchase price of $20,000 was allocated to equipment and intangible assets. The results of operations of Mordor are included in the accompanying financial statements from the acquisition date forward. With respect to this acquisition, the results of operations from January 1, 1996 through the acquisition date were not material and accordingly, pro forma operating results are not presented. AllNet Technology Services, Inc. On March 1, 1997, the Company acquired certain assets of AllNet Technology Services, Inc. ("AllNet"), an Internet service provider, in exchange for $75,000 of cash and 15,883 shares of Company common stock in a business combination accounted for as a purchase. The fair value of the shares issued in connection with the acquisition approximated $52,000 and was based, in part, on the fair market value of shares sold in the Company's 1996 private placement of common stock (see Note 7). Of the total purchase price of $127,000, $65,000 was allocated to equipment and the balance was assigned to various intangible assets. The results of operations of AllNet are included in the accompanying financial statements from the acquisition date forward. With respect to this acquisition, the results of operations from January 1, 1997 through the acquisition date were not material and accordingly, pro forma operating results are not presented. NOTE 4 -- PROPERTY AND EQUIPMENT Major classes of property and equipment, net, consist of the following: December 31, ----------------------------- 1996 1997 ------------- ------------- Network equipment ...................... $ 485,000 $ 807,000 Office equipment and fixtures .......... 15,000 17,000 ---------- ---------- 500,000 824,000 Less: accumulated depreciation ......... (136,000) (306,000) ---------- ---------- $ 364,000 $ 518,000 ========== ========== At December 31, 1996 and 1997, equipment subject to capital leases, less accumulated depreciation, amounted to $12,000 and $104,000, respectively. Depreciation expense for the years ended December 31, 1996 and 1997 amounted to $105,000 and $170,000, respectively, which includes depreciation of equipment subject to capital lease agreements of $2,000 and $19,000, respectively. F-11 IBS Interactive, Inc. Notes to Financial Statements -- (Continued) NOTE 5 -- INTANGIBLE ASSETS Intangible assets, net, are comprised of the following: December 31, -------------------------- 1996 1997 ----------- ------------ Customer List .......................... $ 5,000 $ 67,000 Organizational Costs ................... 2,000 2,000 -------- --------- 7,000 69,000 Less: accumulated amortization ......... (1,000) (13,000) -------- --------- $ 6,000 $ 56,000 ======== ========= Amortization expense was $1,000 and $12,000 for the years ended December 31, 1996 and 1997, respectively. NOTE 6 -- BORROWINGS 1997 Notes On October 31, 1997, the Company entered into a series of 1997 financing agreements with eight individual investors (collectively, the "1997 Notes"). The 1997 Notes bear interest at the rate of 8% and are payable in full on the earlier of: (a) the closing of the Company's contemplated initial public offering of common stock, (b) the closing of a private placement of the Company's equity securities that result in net proceeds to the Company of at least $1 million, or (c) October 1999. Due to the Company's contemplated initial public offering (see Note 14), such debt has been classified as current in the accompanying December 31, 1997 balance sheet. The loan agreement relating to the 1997 Notes imposes limitations on the Company's ability to sell, transfer, dispose or exchange assets, and requires the Company to comply with certain operational and financial covenants. At December 31, 1997 the Company was in compliance with such covenants. The outstanding principal balance of the 1997 Notes amounted to $200,000 at December 31, 1997. In connection with the issuance of the 1997 Notes, investors also received warrants to purchase up to 48,872 shares of the Company's common stock at an exercise price of $3.54 per share through October 2000 (see Note 7). The Company has capitalized the fair value ascribed to the warrant ($54,000), which includes a value reflective of the excess of the expected initial public offering price over the exercise price, and is amortizing such amount over the expected life of the 1997 Notes. Interest expense for the year ended December 31, 1997, including the amortization of the value ascribed to warrants, totaled $22,000. The effective interest rate on the 1997 Notes, which includes the amortization of the value of the warrants, approximates 68% per annum. Other Debt In 1995, the Company issued three-year promissory notes in the original aggregate principal amount of $100,000 of which notes with an aggregate original principal amount of $95,000 remained outstanding at December 31, 1996 and 1997. These notes bear interest at a rate of 6% and are payable in July 1998. Interest expense for each of the years ended December 31, 1996 and 1997 amounted to $6,000. Bank borrowings assumed in connection with the acquisition of Interactive Networks bear interest at the rate of 10% and are payable in December 1998. Outstanding borrowings assumed from Interactive Networks amounted to $23,000 and $12,000 as of December 31, 1996 and 1997. Such borrowings are secured by the Company's assets. Interest expense for each of the years ended December 31, 1996 and 1997 amounted to $2,000. F-12 IBS Interactive, Inc. Notes to Financial Statements -- (Continued) NOTE 6 -- BORROWINGS -- (Continued) Capital Leases The Company leases certain equipment in the normal course of operations which are accounted for as capital leases. Outstanding obligations at December 31, 1996 and 1997 totaled $11,000 and $105,000, respectively. Interest expense related to such agreements was $2,000 and $7,000 for the years ended December 31, 1996 and 1997, respectively. Guarantees Certain executive officers, who are also stockholders of the Company, have provided, at no cost to the Company, personal guarantees of certain obligations of the Company. The amount of obligations subject to these guarantees totaled $117,000 at December 31, 1997. The value ascribed to such guarantees is not considered material. Debt and Lease Maturities At December 31, 1997, aggregate required principal payments, including the present value of amounts owed under capital leases, are as follows: Year Ended December 31, Amount ----------------------- --------- 1998 ........................................ $349,000 1999 ........................................ 43,000 2000 ........................................ 21,000 -------- Total .................................... $413,000 ======== NOTE 7 -- STOCKHOLDERS' EQUITY Capital Stock At December 31, 1997, 48,872 shares of common stock were reserved for the exercise of warrants. Private Placement During 1996 and 1997 the Company sold 299,342 and 6,109 shares of common stock for net proceeds of approximately $926,000 and $20,000 respectively. At December 31, 1996, a subscription receivable of $54,000 was owed to the Company. Such amount was received in January 1997. Warrants As discussed in Note 6, the 1997 Note investors also received warrants to purchase up to 48,872 shares of the Company's common stock. The 1997 Note investors may exercise the warrants at any time until October 31, 2000 at an exercise price of $3.54 per share. At the option of the 1997 Note investors, the warrant exercise price may be paid through: (a) cash payments, (b) the conversion of the unpaid principal and interest on the 1997 Notes, or (c) a combination of (a) and (b). Stock Award In February 1996, the Company entered into an employment agreement with an individual which provided for compensation that included the issuance of 24,436 shares of common stock to be issued ratably over a two year period. Compensation expense associated with such shares (computed using the per share price of the 1996 private placement) was $33,000 and $40,000 for the years ended December 31, 1996 and 1997, respectively. At December 31, 1997, the related unearned compensation was $7,000. F-13 IBS Interactive, Inc. Notes to Financial Statements -- (Continued) NOTE 8 -- TAXES (Provisions) benefits for Federal and state income taxes consist of the following:
Year ended December 31, --------------------------- 1996 1997 ----------- ------------- Current Federal ...................................... $ -- $ (21,000) State ........................................ -- (6,000) -------- ---------- -- (27,000) Deferred Federal ...................................... 37,000 (29,000) State ........................................ 22,000 (28,000) -------- ---------- 59,000 (57,000) -------- ---------- Total income tax benefit (provision) ......... $ 59,000 $ (84,000) ======== ==========
Differences between the Federal statutory rate and the Company's effective tax rate are as follows: Year Ended December 31, ----------------------------- 1996 1997 ------------ -------------- Statutory rate .................. $ 105,000 $ (96,000) State taxes, net ................ 22,000 (20,000) Non-deductible expenses ......... (1,000) (31,000) Valuation allowance ............. (76,000) 76,000 Other, net ...................... 9,000 (13,000) --------- ---------- $ 59,000 $ (84,000) ========= ========== Deferred tax assets (liabilities) arise from the following temporary differences and are classified as follows:
December 31, -------------------------- 1996 1997 ----------- ------------ Deferred Tax Asset, Current: Accounts receivable allowances .............. $ 1,000 $ 26,000 Net operating loss carryforwards ............ -- 2,000 Other assets ................................ -- 20,000 Other, net .................................. -- 2,000 --------- -------- $ 1,000 $ 50,000 ========= ======== Deferred Tax Asset (Liabilities), Non-Current: Net operating loss carryforwards ........... $ 145,000 $ -- Other assets ............................... 3,000 -- Property and equipment ..................... -- (34,000) Valuation allowance ........................ (76,000) -- --------- -------- $ 72,000 ($ 34,000) ========= ========
NOTE 9 -- COMMITMENTS AND CONTINGENCIES Legal Matters The Company is currently evaluating the status of certain threatened legal claims. Management presently believes that the disposition of such claims, which have been recently alleged, will not, individually or in the aggregate, have a material adverse effect on the Company's financial position, results of operations and liquidity. F-14 IBS Interactive, Inc. Notes to Financial Statements -- (Continued) NOTE 9 -- COMMITMENTS AND CONTINGENCIES -- (Continued) Operating Leases The Company leases facilities and equipment under operating leases and subleases expiring through December 2002. Some of the leases have renewal options and most contain provisions for passing through certain incremental costs. Future net minimum annual rental payments under noncancelable leases are as follows: 1998 $140,000 1999 155,000 2000 155,000 2001 155,000 2002 and thereafter 310,000 -------- Total minimum lease payments ........... $915,000 ======== Total rental expense for the years ended December 31, 1996 and 1997 was approximately $18,000 and $49,000, respectively. Employment Agreements The Company has entered into employment contracts with certain officers and employees which provide for minimum annual salaries to be paid over specified terms. Future commitments for such payments which includes amounts for employment contracts executed through February 27, 1998, are as follows: Year Ended December 31, Amount ----------------------- ------ 1998 .................................. $1,113,000 1999 .................................. 983,000 2000 .................................. 625,000 2001 .................................. 240,000 2002 .................................. 131,000 ---------- Total .............................. $3,092,000 ========== NOTE 10 -- RELATED PARTY TRANSACTIONS (ALSO SEE NOTE 14) At December 31, 1996 and 1997, the Company's stockholders held promissory notes issued in 1995 by the Company in the aggregate principal amount of $95,000. These notes bear interest at the rate of 6% per annum. Interest expense for each of the years ended December 31, 1996 and 1997 amounted to $6,000. Certain relatives of the Company's executive officers are also 1997 Note investors. The terms of such borrowings are comparable with those afforded to other investors (see Note 6). Outstanding balances at December 31, 1997 amounted to $43,750. An entity whose stockholder is also a stockholder of the Company provides management consulting services to the Company. Fees for such services amounted to $16,000 and $14,000 for the years ended December 31, 1996 and 1997, respectively. NOTE 11 -- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes are as follows: 1996 1997 ---- ---- Interest .................................. $5,000 $7,000 Income Taxes .............................. -- 2,000 In 1996, the Company acquired fixed assets of approximately $34,000, financed through incurring liabilities. In 1997, the Company acquired certain assets through the issuance of common stock valued at $52,000. In 1997, the Company acquired $95,000 of equipment subject to capital lease obligations. F-15 IBS Interactive, Inc. Notes to Financial Statements -- (Continued) NOTE 12 -- MAJOR CLIENTS OF THE COMPANY One client generated 54% of the Company's revenues for the year ended December 31, 1997. One consulting project for this same client generated 45% of the Company's revenues in the year ended December 31, 1997. Two clients generated 29% and 15% of the Company's revenues for the year ended December 31, 1996. NOTE 13 -- SEGMENT INFORMATION The Company's major businesses are Systems Integration and Programming and Applications Development and Internet Services. Financial information for the Company's segments are as follows:
Systems Integration and Programming Year Ended and Applications Internet December 31, 1996 Development Services ----------------- ---------------- -------- Revenues .................................. $ 438,000 $ 585,000 Cost of Services .......................... 347,000 303,000 ---------- ---------- Gross Profit .............................. 91,000 282,000 Selling, General & Administrative ......... 281,000 389,000 Amortization of intangible assets ......... -- 1,000 ---------- ---------- Operating Income (Loss) ................... $ (190,000) $ (108,000) ========== ========== Allocated Assets .......................... $ 382,000 $ 553,000 ========== ========== Year Ended December 31, 1997 ----------------- Revenues .................................. $1,750,000 $ 991,000 Cost of services .......................... 208,000 891,000 ---------- ---------- Gross Profit .............................. 1,542,000 100,000 Selling, General & Administrative ......... 515,000 781,000 Amortization of intangible assets ......... -- 12,000 ---------- ---------- Operating Income (Loss) ................... $1,027,000 $ (693,000) ========== ========== Allocated Assets .......................... $1,706,000 $ 745,000 ========== ==========
NOTE 14 -- SUBSEQUENT EVENTS Acquisitions In January 1998, the Company acquired certain assets of JDT WebwerX LLC, a business providing programming and applications development and Internet access services in exchange for $35,000 of cash. On January 31, 1998, the Company acquired all of the issued and outstanding capital stock of Entelechy, Inc. ("Entelechy"), in exchange for 277,434 shares of Company common stock in a business combination accounted for as a purchase. The Company issued 147,310 shares at closing, and will issue a total of 130,124 shares ( the "Contingent Shares") ratably on each of the first, second and third anniversary of the acquisition closing date. The issuance of such shares is contingent upon the former Entelechy stockholders, to whom such shares are issuable, remaining in the continuous employ of the Company. The purchase price of Entelechy will be established based upon the value of shares issued at closing. The Company's final determination of the Entelechy purchase price is subject to the completion of various valuations, analyses and closing adjustments. The values ascribed to the Contingent Shares (assuming that the former Entelechy stockholders remain employees of the Company) will result in a charge to operations as such shares are earned through the Company's year ending December 31, 2001. The Company estimates that the charges to operations will approximate $180,000, $197,000, $197,000 and $17,000 in the years ending December 31, 1998, 1999, 2000 and 2001, respectively. During the year ended December 31, 1997, approximately $42,000 of the Company's cost of services related to services provided by Entelechy. At December 31, 1997, accounts payable included approximately $38,000 owed to Entelechy. F-16 IBS Interactive, Inc. Notes to Financial Statements -- (Continued) NOTE 14 -- SUBSEQUENT EVENTS -- (Continued) Entelechy had an outstanding note of $150,000 to a relative of one of Entelechy's principals. The note does not bear interest and is automatically convertible into 25,000 shares of the Company's common stock, upon the consummation of the Company's contemplated initial public offering. The following summarized, unaudited pro forma information for the year ended December 31, 1997 assumes that the acquisition of Entelechy had occurred on January 1, 1997: Unaudited --------- Net Revenues ............................ $3,065,000 Operating Loss .......................... (67,000) Net Loss ................................ $ (113,000) ========== Loss per Share: Basic and Diluted ...................... $ (.06) ========== The pro forma operating results reflect estimated pro forma adjustments for the amortization of intangibles ($156,000) and compensation expense ($197,000) related to the issuance of the Contingent Shares over a one year period. Pro forma results of operations information is not necessarily indicative of the results of operations that would have occurred had the acquisition been consummated at the beginning of 1997, or of future results of the combined companies. Capital Stock On March 10, 1998, the Company effected an approximate 1,029-for-1 stock split and on April 21, 1998, an approximate 1.9-for-1 stock split. All share and per share data have been restated for all periods presented to reflect the splits. On March 10, 1998 the Company's Board of Directors approved an increase in the number of shares of authorized capital stock to 12,000,000, of which 1,000,000 shares were designated as "blank check" preferred stock and 11,000,000 shares were designated as common stock. On March 10, 1998 the Board of Directors approved the Company's 1998 Stock Option Plan. Under the terms of this plan, the Company has reserved 330,000 shares of common stock for future grants. An additional 20,000 shares of common stock have been reserved for a restricted stock award to an officer of the Company. F-17 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Management Entelechy, Inc. Huntsville, Alabama We have audited the accompanying balance sheet of Entelechy, Inc. as of December 31, 1997, and the related statements of operations and accumulated deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Entelechy, Inc. as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. BDO Seidman, LLP Woodbridge, New Jersey March 14, 1998 F-18 Entelechy, Inc. Balance Sheet December 31, 1997 ASSETS Current: Cash .................................................................................. $ 28 Accounts receivable ................................................................... 70,284 ---------- Total Current Assets ............................................................... 70,312 Property and equipment, net ............................................................ 31,497 Other assets ........................................................................... 227 ---------- TOTAL ASSETS ....................................................................... $ 102,036 ========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable ...................................................................... $ 62,897 Demand note payable, net .............................................................. 148,883 ---------- Total Current Liabilities .......................................................... 211,780 ---------- Commitments (Note 5) Stockholders' deficit: Common stock -- no par value; authorized 227 shares, issued and outstanding 227 shares 227 Accumulated deficit ................................................................... (109,971) ---------- Total Stockholders' Deficit ........................................................ (109,744) ---------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ........................................ $ 102,036 ==========
See accompanying notes to financial statements. F-19 Entelechy, Inc. Statement of Operations and Accumulated Deficit For the Year Ended December 31, 1997 Revenues ............................................. $ 366,158 Cost of Services ..................................... 299,400 ---------- Gross Profit ......................................... 66,758 Selling, general and administrative expenses ......... 114,310 ---------- Operating loss ....................................... (47,552) Interest expense ..................................... (13,067) Other expense, net ................................... (188) ---------- Net loss ............................................. (60,807) Accumulated deficit, beginning of year ............... (49,164) ---------- Accumulated deficit, end of year ..................... $ (109,971) ========== See accompanying notes to financial statements. F-20 Entelechy, Inc. Statement of Cash Flows For the Year Ended December 31, 1997 Cash Flows from Operating Activities: Net loss .................................................................. $ (60,807) Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: Depreciation ............................................................ 26,154 Non-cash interest expense ............................................... 12,768 Changes in operating assets and liabilities: Accounts receivable .................................................... (65,524) Other assets ........................................................... 13,873 Other .................................................................. (773) Accounts payable ....................................................... 54,400 --------- Net Cash Used in Operating Activities ................................ (19,909) --------- Cash Flows from Investing Activities: Capital expenditures -- property and equipment ............................ (1,350) --------- Net decrease in cash ....................................................... (21,259) Cash, at Beginning of Year ................................................. 21,287 --------- Cash, at End of Year ....................................................... $ 28 ========= Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest ................................................................ $ 299 ========= Income taxes ............................................................ $ -- =========
See accompanying notes to financial statements. F-21 ENTELECHY, INC. Notes to Financial Statements 1. Organization and Nature of Business Entelechy, Inc. (the "Company") provides computer networking, programming and applications development consulting services primarily to commercial businesses and governmental agencies. The Company, an Alabama corporation, was incorporated on August 22, 1995. On January 31, 1998, a Stock Purchase Agreement (the "Agreement") was entered into between the Company and IBS Interactive, Inc. ("IBS"), whereby IBS acquired 100% of the Company's outstanding capital stock and the Company's operations will be merged into those of IBS. Accordingly, the accompanying financial statements do not reflect a remeasurement of the carrying values ascribed to the Company's assets and liabilities to fair values. To effect the acquisition, IBS has issued 147,310 shares of its common stock at closing and will issue a total of 130,124 shares of common stock ratably on each of the first, second and third anniversary dates of the acquisition closing date. The issuance of the 130,124 shares is contingent upon the former Company stockholders remaining in the employ of IBS. The values ascribed to these shares (assuming that the former Company stockholders remain employees of IBS) will result in a charge to IBS' operations as such shares are earned through IBS' year ending December 31, 2001. The final purchase price of the Company is subject to the completion of various analyses and closing adjustments. 2. Summary of Significant Accounting Policies Revenue Recognition Revenue is recognized as services are provided to clients. Income Taxes The Company has elected and the stockholders have consented, under the applicable provisions of the Internal Revenue Code and applicable state code, to report its income for Federal and state income tax purposes as an "S" corporation. Under those provisions, the stockholders receive the benefit for the income tax effect of their respective share of the Company's net loss. Accordingly, no benefit has been recorded for Federal and state income taxes in the accompanying financial statements. Financial Instruments and Concentrations Financial instruments which potentially subject the Company to credit risk consist primarily of a concentration of unsecured trade accounts receivables. At December 31, 1997, two customers accounted for 54% and 44%, respectively, of total net accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. The allowance for doubtful accounts at December 31, 1997 was $0. Property and Equipment Property and equipment are stated at cost, reduced by a reserve for accumulated depreciation. Depreciation is provided under the straight line method based upon the following useful lives: Computer equipment ...................................... 3 years Furniture and fixtures .................................. 7 years Office equipment ........................................ 5 years Estimated Fair Values of Financial Instruments The carrying values reported in the accompanying balance sheet for accounts receivable, accounts payable and demand note payable approximate fair value because of the immediate or short-term maturity of these financial instruments. F-22 ENTELECHY, INC. Notes to Financial Statements -- (Continued) 2. Summary of Significant Accounting Policies -- (Continued) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 3. Property and Equipment Major classes of property and equipment, net, consist of the following: December 31, 1997 ------------------ Computer equipment ...................... $ 75,965 Office equipment and fixtures ........... 5,979 --------- 81,944 Less: Accumulated depreciation .......... (50,447) --------- $ 31,497 ========= Depreciation expense for the year ended December 31, 1997 amounted to $26,154. 4. Demand Note Payable The Company has a non-interest bearing demand note with a relative of a Company stockholder. The face amount of the demand note is $150,000 and the Company has discounted the face value of the note, using an implicit rate of 9%, to reflect an imputed interest expense over the period that the note is expected to be outstanding. The unamortized discount at December 31, 1997 is $1,117. Interest expense for the year ended December 31, 1997 was $12,768. The demand note will automatically convert into 25,000 of IBS common stock upon the consummation of IBS' contemplated initial public offering of its common stock. 5. Commitments The Company leases its premises under an arrangement with a third party in which the Company provides certain consulting services to the lessor in return for use of the facility. The fair values ascribed to the services and rent approximate $18,000 per year. There is no commitment to fund minimum annual rental payments under this leasing arrangement. 6. Related Party Transactions During the year ended December 31, 1997, approximately $42,000 of the Company's revenues were derived from IBS. At December 31, 1997, accounts receivable included approximately $38,000 owed by IBS. Salary expense for three company officers, who are also stockholders, totalled $144,000 for the year ended December 31, 1997. 7. Major Clients Three clients generated 41%, 25% and 11% (IBS) of the Company's revenues for the year ended December 31, 1997. F-23 IBS INTERACTIVE, INC. Pro Forma Unaudited Condensed Statement of Operations For the Year Ended December 31, 1997 The accompanying pro forma unaudited condensed statement of operations for the year ended December 31, 1997 is based upon the historical financial statements of IBS Interactive, Inc. ("IBS") and Entelechy, Inc. ("Entelechy") adjusted to give effect to the acquisition of Entelechy by IBS (accounted for as a purchase), as if such acquisition had occurred on January 1, 1997. The accompanying pro forma unaudited condensed balance sheet as of December 31, 1997, is based upon the historical financial statements of IBS and Entelechy, adjusted to give effect to the acquisition of Entelechy by IBS, as if such acquisition had occurred on December 31, 1997. The pro forma unaudited condensed statement of operations and balance sheet data are not necessarily indicative of the results that would have been obtained if the acquisition of Entelechy by IBS had occurred on the date indicated or for any future period or date. The pro forma unaudited adjustments give effect to available information and assumptions that the Company believes are reasonable. The pro forma unaudited condensed financial information should be read in conjunction with the historical financial statements of IBS and Entelechy and notes thereto. See Management's Discussion and Analysis of Financial Condition and Results of Operations.
IBS Entelechy Eliminations & Historical Historical Adjustments Pro Forma -------------- ------------ ------------------- ------------- Revenues .................................... $2,741,000 $ 366,000 $ (42,000)(d) $3,065,000 Cost of Services ............................ 1,099,000 299,000 (42,000)(d) 1,356,000 ---------- --------- ---------- ---------- Gross Profit ................................ 1,642,000 67,000 1,709,000 Selling, general and administrative ......... 1,296,000 115,000 1,411,000 Amortization of intangible assets ........... 12,000 156,000(a) 168,000 Compensation expense -- Entelechy ........... 197,000(b) 197,000 ---------- --------- ---------- ---------- Operating income (loss) ..................... 334,000 (48,000) (353,000) (67,000) Other expense, net .......................... (52,000) (13,000) (65,000) ---------- --------- ---------- ---------- Income (loss) before income taxes ........... 282,000 (61,000) (353,000) (132,000) Income tax (provision) benefit .............. (84,000) 103,000(c) 19,000 ---------- --------- ---------- ---------- Net income (loss) ........................... $ 198,000 $ (61,000) $ (250,000) $ (113,000) ========== ========= ========== ==========
F-24 IBS INTERACTIVE, INC. Pro Forma Unaudited Condensed Balance Sheet December 31, 1997
IBS Entelechy Eliminations & Historical Historical Adjustments Pro Forma ------------ ----------------- ------------------- ------------ Cash ....................................... $ 95,000 $ 95,000 Accounts receivable, net ................... 1,636,000 $ 70,000 $ (38,000)(f) 1,668,000 Other current assets ....................... 50,000 50,000 ---------- ---------- ---------- ---------- Total Current Assets ..................... 1,781,000 70,000 (38,000) 1,813,000 ---------- ---------- ---------- ---------- Property and equipment ..................... 518,000 32,000 550,000 Intangible assets .......................... 56,000 -- 780,000(e) 836,000 Other non current assets ................... 96,000 96,000 ---------- ---------- ---------- ---------- TOTAL ASSETS ............................. $2,451,000 $ 102,000 $ 742,000 $3,295,000 ========== ========== ========== ========== Notes payable, current ..................... $ 307,000 $ 149,000 $ 456,000 Capital lease obligations, current ......... 42,000 42,000 Other current liabilities .................. 865,000 63,000 $ (38,000)(f) 890,000 ---------- ---------- ---------- ---------- 1,214,000 212,000 (38,000) 1,388,000 ---------- ---------- ---------- ---------- Non current liabilities .................... 98,000 98,000 ---------- ---------- ---------- ---------- TOTAL LIABILITIES ........................ 1,312,000 212,000 1,486,000 ---------- ---------- ---------- ---------- Stockholders' Equity (Deficit) ............. 1,139,000 (110,000) 780,000(e) 1,809,000 ---------- ---------- ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................... $2,451,000 $ 102,000 $ 742,000 $3,295,000 ========== ========== ========== ==========
F-25 Notes to Pro Forma Unaudited Condensed Financial Statements Adjustments to reflect the acquisition of Entelechy by IBS, as if it had occurred as of January 1, 1997, are as follows: (a) Amortization of intangible assets arising from the acquisition amounting to $156,000; such amount is amortized over an estimated useful life of five years. (b) Recognition of compensation expense related to the issuance of contingent shares of IBS common stock on the first anniversary date of the acquisition. The issuance of such shares is contingent upon the former Entelechy stockholders remaining in the employ of IBS. (c) Relates to a tax benefit (utilizing an effective tax rate of 40%) recognized on adjustment (b) and a tax benefit recognized for the loss generated by Entelechy during the year ended December 31, 1997. Entelechy was recognized as an S Corporation for Federal and State income tax purposes prior to the acquisition. (d) Elimination of transactions between IBS and Entelechy. Adjustments to reflect the Entelechy acquisition, as if it had occurred as of December 31, 1997, are as follows: (e) The value ascribed to Company shares issued ($670,000) plus the net liability assumed ($110,000) resulted in an intangible asset of $780,000. Entelechy's stockholders' deficit ($110,000) has been eliminated in recording the acquisition. (f) Elimination of December 31, 1997 balances between IBS and Entelechy. F-26 =============================================================================== No dealer, salesperson or other person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with this offering and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or the Underwriter. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this Prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which such offer or solicitation is not authorized or is unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any time subsequent to the date hereof. ----------------------------------- TABLE OF CONTENTS Page --------- Prospectus Summary ....................... 3 Risk Factors ............................. 6 Use of Proceeds .......................... 14 Dilution ................................. 16 Dividend Policy .......................... 17 Capitalization ........................... 17 Selected Financial Data .................. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations ............................ 19 Business ................................. 24 Management ............................... 33 Principal Stockholders ................... 37 Certain Transactions ..................... 38 Description of Securities ................ 39 Shares Eligible for Future Sale .......... 40 Underwriting ............................. 41 Legal Matters ............................ 42 Experts .................................. 42 Available Information .................... 43 Index to Financial Statements ............ F-1 ----------------------------------- Until _____________, 1998 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a Prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions. =============================================================================== =============================================================================== [LOGO] 1,200,000 Shares IBS INTERACTIVE, INC. Common Stock --------------- Prospectus --------------- Whale Securities Co., L.P. , 1998 =============================================================================== PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers. As permitted by Section 145 of the Delaware General Corporation Law ("DGL"), the Company's Certificate of Incorporation (the "Certificate") provides that to the fullest extent permitted by the DGL no Director shall be personally liable to the Company or any stockholder for monetary damages for breach of fiduciary duty as a Director, except for liability: (i) arising from payment of dividends or approval of a stock purchase in violation of Section 174 of the DGL; (ii) for any breach of the duty of loyalty to the Company or its stockholders; (iii) for acts or omissions not in good faith or which involve intentional misconduct of a knowing violation of law; or (iv) for any action from which the Director derived an improper personal benefit. While the Certificate provides protection from awards for monetary damages for breaches of the duty of care, it does not eliminate the Director's duty of care. Accordingly, the Certificate will not affect the availability of equitable remedies, such as an injunction, based on a Director's breach of the duty of care. The provisions of the Certificate described above apply to officers of the Company only if they are Directors of the Company and are acting in their capacity as Directors, and does not apply to officers of the Company who are not Directors. In addition, the Company's By-Laws provide that the Company shall indemnify its officers and Directors, employees and agents, to the fullest extent permitted by the DGL. Under the GCL, directors and officers as well as employees and individuals may be indemnified against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with specified actions, suits or proceedings, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation as a derivative action) if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. Reference is made to Section 7 of the form of Underwriting Agreement (filed as Exhibit 1.1 to this Registration Statement) for the respective agreement of each of the Company and the Underwriter to indemnify each other against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act") and to provide contribution in circumstances where indemnification is unavailable. INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT, IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN SUCH ACT AND IS THEREFORE UNENFORCEABLE. Item 25. Other Expenses of Issuance and Distribution. The expenses in connection with the issuance and distribution of the securities being registered hereby will be borne by the Company. Securities and Exchange Commission Registration Fee .............. $ 2,730 NASD Filing Fee .................................................. 1,256 Transfer Agent and Registrar Fee ................................. 2,500 NASDAQ SmallCap Listing Fee ...................................... 6,000 Boston Stock Exchange Listing Fee ................................ 7,500 Printing and Engraving Costs* .................................... 100,000 Legal Fees and Expenses* ......................................... 150,000 Accounting Fees and Expenses* .................................... 150,000 Blue Sky Filing Fees and Expenses (including legal fees) ......... 40,000 Miscellaneous* ................................................... 25,014 -------- Total ........................................................... $485,000 ========
- ------------ * Estimated II-1 Item 26. Recent Sales of Unregistered Securities. Described below are all securities (giving effect to an approximate 1,029-to-1 split of the Common Stock effective in March 1998 and an approximate 1.187-to-1 split of the Common Stock effective in April 1998) which have been issued by the Company since February 28, 1995 (the date of the Company's inception) in transactions not involving public offerings. There were no underwriting discounts or commissions paid in connection with the issuance of any such securities. Since its inception in February 1995, Registrant has issued securities in transactions not involving public offerings, as follows: (a) May 1, 1995 - In connection with the initial capitalization of the Company, in reliance upon Securities Act ss.4(2), the Company issued 371,435 shares of Common Stock to each of Nicholas R. Loglisci, Jr., President, Chief Operating Officer and Director, and Clark D. Frederick, Chief Technical Officer and Director and Carla Frederick, as joint tenants; 92,858 shares to Sycamore Equities Inc., an entity wholly-owned by Brian W. Seidman, General Counsel, Secretary and former Director; and 92,858 shares to Steven Loglisci, an accredited investor resulting in net proceeds to the Company in the amount of $10,000. (b) August 1995 - 48,870 shares of Common Stock to 9 sophisticated investors, in reliance upon Securities Act ss.4(2) in connection with an offer of 20 units, each unit consisting of 2,443 shares of Common Stock and a promissory note in the original principal amount of $5,000, totaling $100,000. (c) February 1996 - 1,221 shares of Common Stock, in reliance upon Securities Act ss.4(2), to an accredited investor. (d) March 9, 1996 - in reliance upon Securities Act ss.4(2), 377,536 shares of Common Stock exchanged for all of the issued and outstanding common stock of Interactive Networks, Inc. (e) From May 1996 to January 1997 - 305,451 shares of Common Stock, totaling $1,000,000 to 12 accredited and 19 sophisticated investors in reliance upon Securities Act ss.4(2). (f) February 26, 1996 - an award of 24,436 shares of restricted Common Stock in reliance upon Rule 701 of the Securities Act. (g) July 18, 1997 - 15,883 shares of Common Stock issued, in reliance upon Securities Act ss.4(2), to two sophisticated investors in connection with the purchase by the Company of substantially all the assets of AllNet Technology Services, Inc. (h) October 31, 1997 - warrants to purchase 48,872 shares of Common Stock, issued in reliance upon Securities Act ss.4(2), to eight accredited investors in connection with the issuance to such investors of promissory notes made by the Company in the aggregate original principal amount of $200,000. No brokers or underwriters were included in any of the above issuances. All certificates for the shares of Common Stock so issued bear restrictive legends. All certificates for the shares of Common Stock so issued bear restrictive legends. II-2 Item 27. Exhibits. The following is a list of all Exhibits filed as a part of this Registration Statement.
Exhibit Number Exhibit - -------- ------- 1.1 Form of Underwriting Agreement. 1.2 Form of Underwriter's Warrant Agreement. 3.1 Restated Certificate of Incorporation of the Company.* 3.2 Restated By-Laws of the Company, as amended. 4.1 Specimen form of certificate evidencing the shares of Common Stock of the Company. 4.6 See Exhibit numbers 3.1 and 3.2 for provisions of the Restated Certificate of Incorporation and Restated By-Laws of the Company, as amended, defining the rights of the holders of Common Stock. 5.1 Opinion of Kelley Drye & Warren LLP (including the consent of such firm) as to the validity of the securities being offered. 10.1 Form of 6% Promissory Note, dated as of June 30, 1995 made by the Company.* 10.2 Form of Registration Rights Agreement, dated as of May 6, 1997 between the Company and the holders of certain shares of Common Stock.* 10.3 Form of 8% Promissory Note, dated as of October 31, 1997.* 10.4 Form of Warrant to Purchase Shares of Stock, dated as of October 31, 1997.* 10.5 Form of Employment Agreement, dated as of April __, 1998, between the Company and Nicholas R. Loglisci, Jr.+ 10.6 Form of Employment Agreement, dated as of April __, 1998, between the Company and Clark D. Frederick.+ 10.7 Form of Employment Agreement, dated as of April __, 1998, between the Company and Frank Altieri, Jr.+ 10.8 Form of Employment Agreement, dated as of April __, 1998 between the Company and Jeffrey Brenner.+ 10.9 Stock Purchase Agreement, dated as of April 1, 1996, between the Company and Interactive Networks, Inc.* 10.10 Asset Purchase Agreement, dated as of May 31, 1996, between the Company and Chris Mauritz.* 10.11 Asset Purchase Agreement, dated as of March 1, 1997, between the Company and AllNet Tech- nology Services, Inc.* 10.12 Stock Purchase Agreement, dated as of January 31, 1998, between the Company and Entelechy, Inc. and the stockholders of Entelechy, Inc. named therein.* 10.13 Asset Purchase Agreement, dated as of January 1, 1998, between the Company and JDT WebwerX LLC, as amended.* 10.14 IBS Interactive, Inc. 1998 Stock Option Plan.+ 10.15 Omitted. 10.16 Commercial Sublease, dated as of May 5, 1997, between the Company and Information Systems & Communications, Inc., in connection with the Company's premises in Fairfax, Virginia.* 10.17 Second Lease Modification Agreement, dated as of March 3, 1998, by and among the Company and EI, 2 Ridgedale Avenue, Inc. and Hanover Park for Industry, in connection with the Com- pany's premises in Cedar Knolls, New Jersey.* 10.18 Letter Agreement, dated as of October 21, 1997 between the Company and EI Realty in connec- tion with the Company's premises in Cedar Knolls, New Jersey.* 10.19 Lease Agreement, dated as of May 1, 1997 by and between the Company and Iron Investment Corp. and Hanover Park for Industry, in connection with the Company's premises in Cedar Knolls, New Jersey.* 10.20 Network Services Contract, dated as of December 27, 1996, between the Company and the Catholic Healthcare Network.* 10.21 Professional Service Agreement Consulting, dated as of October 23, 1997, between Aetna Life Insurance Company and the Company.* 10.22 Lease Agreement, dated as of January 31, 1998, between the Company and R&G International, in connection with the Company's premises in Huntsville, Alabama.* 16.1 Letter dated April 22, 1998 from Milgrom Galuskin Balmuth & Company, Certified Public Accountants, P.C.
II-3
Exhibit Number Exhibit - -------- ------- 23.1 Consent of Kelley Drye & Warren LLP (included in Exhibit 5.1). 23.2 Consent of BDO Seidman, LLP. 23.3 Consent of Milgrom Galuskin Balmuth & Company, Certified Public Accountants, P.C. 23.4 Consent of John J. Brighton* 23.5 Consent of Barrett N. Wissman* 23.6 Consent of Susan Holloway Torricelli* 23.7 Consent of BDO Seidman, LLP 24.1 Power of Attorney (included on page II-5).* 27.1 Financial Data Schedule.
- ------------ * Previously filed. + Management contract or compensatory plan or arrangement. Item 28. Undertakings. The Registrant will provide to the Underwriter at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that, in the opinion of the Securities and Exchange Commission (the "Commission"), such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. For the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. For purposes of determining any liability under the Securities Act, the Registrant hereby undertakes (i) to treat the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule 497(h) under the Securities Act as part of this Registration Statement as of the time it was declared effective, and (ii) to treat each post-effective amendment that contains a form of prospectus as a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the Town of Cedar Knolls, New Jersey, on April 23, 1998. IBS INTERACTIVE, INC. By: /s/ Nicholas R. Loglisci, Jr. ------------------------------ Nicholas R. Loglisci, Jr. President and Chief Operating Officer POWER OF ATTORNEY In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Nicholas R. Loglisci, Jr. President and Chief Operating Officer April 23, 1998 ------------------------------- (Principal Executive Officer and Principal Nicholas R. Loglisci, Jr. Financial and Accounting Officer) Director * Chief Technical Officer and Director April 23, 1998 ------------------------------- Clark D. Frederick * Chief Information Officer and Director April 23, 1998 ------------------------------- Frank R. Altieri, Jr. By: /s/ Nicholas R. Loglisci, Jr. -------------------------------- Nicholas R. Loglisci, Jr. Attorney-in-Fact
II-5
EXHIBIT INDEX Exhibit Number Exhibit Page - -------- ------- ---- 1.1 Form of Underwriting Agreement. 1.2 Form of Underwriter's Warrant Agreement. 3.1 Restated Certificate of Incorporation of the Company.* 3.2 Restated By-Laws of the Company, as amended. 4.1 Specimen form of certificate evidencing the shares of Common Stock of the Company. 4.6 See Exhibit numbers 3.1 and 3.2 for provisions of the Restated Certificate of Incorporation and Second Amended and Restated By-Laws of the Company defining the rights of the holders of Common Stock. 5.1 Opinion of Kelley Drye & Warren LLP (including the consent of such firm) as to the validity of the securities being offered. 10.1 Form of 6% Promissory Note, dated as of June 30, 1995 made by the Company.* 10.2 Form of Registration Rights Agreement, dated as of May 6, 1997 between the Company and the holders of certain shares of Common Stock.* 10.3 Form of 8% Promissory Note, dated as of October 31, 1997.* 10.4 Form of Warrant to Purchase Shares of Stock, dated as of October 31, 1997.* 10.5 Form of Employment Agreement, dated as of April __, 1998, between the Company and Nicholas R. Loglisci, Jr.+ 10.6 Form of Employment Agreement, dated as of April __, 1998, between the Company and Clark D. Frederick.+ 10.7 Form of Employment Agreement, dated as of April __, 1998, between the Company and Frank Altieri, Jr.++ 10.8 Form of Employment Agreement, dated as of April __, 1998 between the Company and Jeffrey Brenner.+ 10.9 Stock Purchase Agreement, dated as of April 1, 1996, between the Company and Interactive Networks, Inc.* 10.10 Asset Purchase Agreement, dated as of May 31, 1996, between the Company and Chris Mauritz.* 10.11 Asset Purchase Agreement, dated as of March 1, 1997, between the Company and AllNet Tech- nology Services, Inc.* 10.12 Stock Purchase Agreement, dated as of January 31, 1998, between the Company and Entelechy, Inc. and the stockholders of Entelechy, Inc. named therein.* 10.13 Asset Purchase Agreement, dated as of January 1, 1998, between the Company and JDT WebwerX LLC, as amended.* 10.14 IBS Interactive, Inc. 1998 Stock Option Plan.+ 10.15 Omitted. 10.16 Commercial Sublease, dated as of May 5, 1997, between the Company and Information Systems & Communications, Inc., in connection with the Company's premises in Fairfax, Virginia.* 10.17 Second Lease Modification Agreement, dated as of March 3, 1998, by and among the Company and EI, 2 Ridgedale Avenue, Inc. and Hanover Park for Industry, in connection with the Com- pany's premises in Cedar Knolls, New Jersey.* 10.18 Letter Agreement, dated as of October 21, 1997 between the Company and EI Realty in connec- tion with the Company's premises in Cedar Knolls, New Jersey.* 10.19 Lease Agreement, dated as of May 1, 1997 by and between the Company and Iron Investment Corp. and Hanover Park for Industry, in connection with the Company's premises in Cedar Knolls, New Jersey.* 10.20 Network Services Contract, dated as of December 27, 1996, between the Company and the Catholic Healthcare Network.* 10.21 Professional Service Agreement Consulting, dated as of October 23, 1997, between Aetna Life Insurance Company and the Company.* 10.22 Lease Agreement, dated as of January 31, 1998, between the Company and R&G International, in connection with the Company's premises in Huntsville, Alabama.* 16.1 Letter dated April 22, 1998 from Milgrom Galuskin Balmuth & Company, Certified Public Accountants, P.C.
Exhibit Number Exhibit Page - -------- ------- ---- 23.1 Consent of Kelley Drye & Warren LLP (included in Exhibit 5.1). 23.2 Consent of BDO Seidman, LLP. 23.3 Consent of Milgrom Galuskin Balmuth & Company, Certified Public Accountants, P.C. 23.4 Consent of John J. Brighton* 23.5 Consent of Barrett N. Wissman* 23.6 Consent of Susan Holloway Torricelli* 23.7 Consent of BDO Seidman, LLP 24.1 Power of Attorney (included on page II-5).* 27.1 Financial Data Schedule.
- ------------ * Previously filed. + Management contract or compensatory plan or arrangement. EX-1.1 2 EXHIBIT 1.1 IBS INTERACTIVE, INC. 1,200,000 Shares of Common Stock (No Par Value) UNDERWRITING AGREEMENT Whale Securities Co., L.P. New York, New York 650 Fifth Avenue ___________, 1998 New York, NY 10019 Dear Sirs: IBS Interactive, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to Whale Securities Co., L.P. (the "Underwriter") 1,200,000 shares of common stock, $.01 par value (the "Offered Shares"), which Offered Shares are presently authorized but unissued shares of the common stock, no par value (individually, a "Common Share" and collectively the "Common Shares"), of the Company. In addition, the Underwriter, in order to cover over-allotments in the sale of the Offered Shares, may purchase up to an aggregate of 180,000 Common Shares (the "Optional Shares"; the Offered Shares and the Optional Shares are hereinafter sometimes collectively referred to as the "Shares"). The Shares are described in the Registration Statement, as defined below. The Company also proposes to issue and sell to the Underwriter for its own account and the accounts of its designees, warrants to purchase an aggregate of 120,000 Common Shares at an exercise price of $____ per share (the "Underwriter's Warrants"), which sale will be consummated in accordance with the terms and conditions of the form of Underwriter's Warrant filed as an exhibit to the Registration Statement (as hereinafter defined). The Company hereby confirms its agreement with the Underwriter as follows: 1. Purchase and Sale of Offered Shares. On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company hereby agrees to sell the Offered Shares to the Underwriter, and the Underwriter agrees to purchase the Offered Shares from the Company, at a purchase price of $_______ per share. The Underwriter plans to offer the Shares to the public at a public offering price of $___ per Offered Share. 2. Payment and Delivery. (a) Payment for the Offered Shares will be made to the Company by wire transfer or certified or official bank check or checks payable to its order in New York Clearing House funds, at the offices of the Underwriter, Whale Securities Co., L.P., 650 Fifth Avenue, New York, New York 10019, against delivery of the Offered Shares to the Underwriter. Such payment and delivery will be made at______, New York City time, on the third business day following the Effective Date (the fourth business day following the Effective Date in the event that trading of the Offered Shares commences on the day following the Effective Date), the date and time of such payment and delivery being herein called the "Closing Date." The certificates representing the Offered Shares to be delivered will be in such denominations and registered in such names as the Underwriter may request not less than two full business days prior to the Closing Date, and will be made available to the Underwriter for inspection, checking and packaging at the office of the Company's transfer agent or correspondent in New York City, _________________________, _____________________ not less than one full business day prior to the Closing Date. (b) On the Closing Date, the Company will sell the Underwriter's Warrants to the Underwriter or to the designees of the Underwriter limited to officers and partners of the Underwriter, members of the selling group and/or their officers, directors or partners (collectively, the "Underwriter's Designees"). The Underwriter's Warrants will be in the form of, and in accordance with, the provisions of the Underwriter's Warrant attached as an exhibit to the Registration Statement. The aggregate purchase price for the Underwriter's Warrants is $100. The Underwriter's Warrants will be restricted from sale, transfer, assignment or hypothecation for a period of one year from the Effective Date, except to the Underwriter's Designees. Payment for the Underwriter's Warrant Agreement will be made to the Company by check or checks payable to its order on the Closing Date against delivery of the certificates representing the Underwriter's Warrants. The certificates representing the Underwriter's Warrants will be in such denominations and such names as the Underwriter may request prior to the Closing Date. 3. Option to Purchase Optional Shares. (a) For the purposes of covering any overallotments in connection with the distribution and sale of the Offered Shares as contemplated by the Prospectus, the Underwriter is hereby granted an option to purchase all or any part of the Optional Shares from the Company. The purchase price to be paid for the Optional Shares will be the same price per Optional Share as the price per Offered Share set forth in Section 1 hereof. The option granted hereby may be exercised by the Underwriter as to all or any part of the Optional Shares at any time within 45 days after the Effective Date. The Underwriter will not be under any obligation to purchase any Optional Shares prior to the exercise of such option. (b) The option granted hereby may be exercised by the Underwriter by giving oral notice to the Company, which must be confirmed by a letter, telex or telegraph setting forth the number of Optional Shares to be purchased, the date and time for delivery of and payment for the Optional Shares to be purchased and stating that the Optional Shares referred to therein are to be used for the purpose of covering over-allotments in connection with the distribution and sale of the Offered Shares. If such notice is given prior to the Closing Date, the date set forth therein for such delivery and payment will not be earlier than either two full business days thereafter or the Closing Date, whichever occurs later. If such notice is given on or after the Closing Date, the date set forth therein for such delivery and payment will not be earlier than two full business days thereafter. In either event, the date so set forth will not be more than 15 full business days after the date of such notice. The date and time set forth in such notice is herein called the "Option Closing Date." Upon exercise of such option, the Company will become obligated to convey to the Underwriter, and, subject to the terms and conditions set forth in Section 3(d) hereof, the Underwriter will become obligated to purchase, the number of Optional Shares specified in such notice. -2- (c) Payment for any Optional Shares purchased will be made to the Company by wire transfer or certified or official bank check or checks pay-able to its order in New York Clearing House funds, at the office of the Underwriter, against delivery of the Optional Shares purchased to the Underwriter. The certificates representing the Optional Shares to be delivered will be in such denominations and registered in such names as the Underwriter requests not less than two full business days prior to the Option Closing Date, and will be made available to the Underwriter for inspection, checking and packaging at the aforesaid office of the Company's transfer agent or correspondent not less than one full business day prior to the Option Closing Date. (d) The obligation of the Underwriter to purchase and pay for any of the Optional Shares is subject to the accuracy and completeness (as of the date hereof and as of the Option Closing Date) of and compliance in all material respects with the representations and warranties of the Company herein, to the accuracy and completeness of the statements of the Company or its officers made in any certificate or other document to be delivered by the Company pursuant to this Agreement, to the performance in all material respects by the Company of its obligations hereunder, to the satisfaction by the Company of the conditions, as of the date hereof and as of the Option Closing Date, set forth in Section 3(b) hereof, and to the delivery to the Underwriter of opinions, certificates and letters dated the Option Closing Date substantially similar in scope to those specified in Section 5, 6(b), (c), (d) and (e) hereof, but with each reference to "Offered Shares" and "Closing Date" to be, respectively, to the Optional Shares and the Option Closing Date. 4. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the Underwriter that: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full power and authority, corporate and other, to own or lease and operate, as the case may be, its properties, whether tangible or intangible, and to conduct its business as described in the Registration Statement and to execute, deliver and perform this Agreement and the Underwriter's Warrant Agreement and to consummate the transactions contemplated hereby and thereby. The Company is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions wherein such qualification is necessary and failure so to qualify could have a material adverse effect on the financial condition, results of operations, business or properties of the Company. The Company has no subsidiaries. (b) This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company, and each of the Underwriter's Warrant Agreement and the Consulting Agreement described in Section 5(t) hereof (the "Consulting Agreement"), when executed and delivered by the Company on the Closing Date, will be the valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. The execution, delivery and performance of this Agreement, the Consulting Agreement and the Under- writer's Warrant Agreement by the Company, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms of this Agreement, the Consulting Agreement and the Underwriter's Warrant Agreement have been duly authorized by all necessary corporate action and do not and will not, with or without the giving of notice or the lapse of time, or both, (i) result in any violation of the Certificate of Incorporation or By-Laws, each as amended, of the Company; (ii) result in a breach of or conflict with any of the terms or provisions of, or constitute -3- a default under, or result in the modification or termination of, or result in the creation or imposition of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company pursuant to any indenture, mortgage, note, contract, commitment or other agreement or instrument to which the Company is a party or by which the Company or any of its properties or assets is or may be bound or affected; (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its properties or business; or (iv) have any effect on any permit, certification, registration, approval, consent order, license, franchise or other authorization (collectively, the "Permits") necessary for the Company to own or lease and operate its properties and to conduct its business or the ability of the Company to make use thereof. (c) No Permits of any court or governmental agency or body, other than under the Securities Act of 1933, as amended (the "Act"), the Regulations (as hereinafter defined) and applicable state securities or Blue Sky laws, are required (i) for the valid authorization, issuance, sale and delivery of the Shares to the Underwriter, and (ii) the consummation by the Company of the transactions contemplated by this Agreement, the Consulting Agreement or the Underwriter's Warrant Agreement. (d) The conditions for use of a registration statement on Form SB-2 set forth in the General Instructions to Form SB-2 have been satisfied with respect to the Company, the transactions contemplated herein and in the Registration Statement. The Company has prepared in conformity with the requirements of the Act and the rules and regulations (the "Regulations") of the Securities and Exchange Commission (the "Commission") and filed with the Commission a registration statement (File No. 333-_______) on Form SB-2 and has filed one or more amendments thereto, covering the registration of the Shares and the Warrant Shares under the Act, including the related preliminary prospectus or preliminary prospectuses (each thereof being herein called a "Preliminary Prospectus") and a proposed final prospectus. Each Preliminary Prospectus was endorsed with the legend required by Item 501(a)(5) of Regulation S-B of the Regulations and, if applicable, Rule 430A of the Regulations. Such registration statement including any documents incorporated by reference therein and all financial schedules and exhibits thereto, as amended at the time it becomes effective, and the final prospectus included therein are herein, respectively, called the "Registration Statement" and the "Prospectus," except that, (i) if the prospectus filed by the Company pursuant to Rule 424(b) of the Regulations differs from the Prospectus, the term "Prospectus" will also include the prospectus filed pursuant to Rule 424(b), and (ii) if the Registration Statement is amended or such Prospectus is supplemented after the date the Registration Statement is declared effective by the Commission (the "Effective Date") and prior to the Option Closing Date, the terms "Registration Statement" and "Prospectus" shall include the Registration Statement as amended or supplemented. (e) Neither the Commission nor, to the best of the Company's knowledge, any state regulatory authority has issued any order preventing or suspending the use of any Preliminary Prospectus or has instituted or, to the best of the Company's knowledge, threatened to institute any proceedings with respect to such an order. (f) The Registration Statement when it becomes effective, the Prospectus (and any amendment or supplement thereto) when it is filed with the Commission pursuant to Rule 424(b), and both documents as of the Closing Date and the Option Closing Date, referred to below, will contain all statements which are required to be stated therein in accordance with the Act and the Regulations and will -4- in all material respects conform to the requirements of the Act and the Regulations, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, on such dates, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that this representation and warranty does not apply to statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company in connection with the Registration Statement or Prospectus or any amendment or supplement thereto by the Underwriter expressly for use therein. (g) The Company had at the date or dates indicated in the Prospectus a duly authorized and outstanding capitalization as set forth in the Registration Statement and the Prospectus. Based on the assumptions stated in the Registration Statement and the Prospectus, the Company will have on the Closing Date the adjusted stock capitalization set forth therein. Except as set forth in the Registration Statement or the Prospectus, on the Effective Date and on the Closing Date, there will be no options to purchase, warrants or other rights to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell shares of the Company's capital stock or any such warrants, convertible securities or obligations. Except as set forth in the Prospectus, no holders of any of the Company's securities has any rights, "demand," "piggyback" or otherwise, to have such securities registered under the Act. (h) The descriptions in the Registration Statement and the Prospectus of contracts and other documents are accurate and present fairly the information required to be disclosed, and there are no contracts or other documents required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement under the Act or the Regulations which have not been so described or filed as required. (i) BDO Seidman, LLP, the accountants who have certified certain of the financial statements filed and to be filed with the Commission as part of the Registration Statement and the Prospectus, are independent public accountants within the meaning of the Act and Regulations. The financial statements and schedules and the notes thereto filed as part of the Registration Statement and included in the Prospectus are complete, correct and present fairly the financial position of the Company as of the dates thereof, and the results of operations and changes in financial position of the Company for the periods indicated therein, all in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved except as otherwise stated in the Registration Statement and the Prospectus. The selected financial data set forth in the Registration Statement and the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited and unaudited financial statements included in the Registration Statement and the Prospectus. (j) The Company has filed with the appropriate federal, state and local governmental agencies, and all appropriate foreign countries and political subdivisions thereof, all tax returns, including franchise tax returns, which are required to be filed or has duly obtained extensions of time for the filing thereof and has paid all taxes shown on such returns and all assessments received by it to the extent that the same have become due; and the provisions for income taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid foreign and domestic taxes, whether or not disputed, and for all periods to and -5- including the dates of such financial statements. Except as disclosed in writing to the Underwriter, the Company has not executed or filed with any taxing authority, foreign or domestic, any agreement extending the period for assessment or collection of any income taxes and is not a party to any pending action or proceeding by any foreign or domestic governmental agency for assessment or collection of taxes; and no claims for assessment or collection of taxes have been asserted against the Company. (k) The outstanding Common Shares and outstanding options and warrants to purchase Common Shares have been duly authorized and validly issued. The outstanding Common Shares are fully paid and nonassessable. The outstanding options and warrants to purchase Common Shares constitute the valid and binding obligations of the Company, enforceable in accordance with their terms. None of the outstanding Common Shares or options or warrants to purchase Common Shares has been issued in violation of the preemptive rights of any shareholder of the Company. None of the holders of the outstanding Common Shares is subject to personal liability solely by reason of being such a holder. The offers and sales of the outstanding Common Shares and outstanding options and warrants to purchase Common Shares were at all relevant times either registered under the Act and the applicable state securities or Blue Sky laws or exempt from such registration requirements. The authorized Common Shares and outstanding options and warrants to purchase Common Shares conform to the descriptions thereof contained in the Registration Statement and Prospectus. Except as set forth in the Registration Statement and the Prospectus, on the Effective Date and the Closing Date, there will be no outstanding options or warrants for the purchase of, or other outstanding rights to purchase, Common Shares or securities convertible into Common Shares. (l) No securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by, or under common control with the Company within the three years prior to the date hereof, except as disclosed in the Registration Statement. (m) The issuance and sale of the Shares have been duly authorized and, when the Shares have been issued and duly delivered against payment therefor as contemplated by this Agreement, the Shares will be validly issued, fully paid and nonassessable, and the holders thereof will not be subject to personal liability solely by reason of being such holders. The Shares will not be subject to preemptive rights of any shareholder of the Company. (n) The issuance and sale of the Common Shares issuable upon exercise of the Underwriter's Warrants have been duly authorized and, when such Common Shares have been duly delivered against payment therefor, as contemplated by the Underwriter's Warrant Agreement, such Common Shares will be validly issued, fully paid and nonassessable. Holders of Common Shares issuable upon the exercise of the Underwriter's Warrants will not be subject to personal liability solely by reason of being such holders. Neither the Underwriter's Warrants nor the Common Shares issuable upon exercise thereof will be subject to preemptive rights of any shareholder of the Company. The Common Shares issuable upon exercise of the Underwriter's Warrants have been duly reserved for issuance upon exercise of the Underwriter's Warrants in accordance with the provisions of the Underwriter's Warrant Agreement. The Underwriter's Warrants conform to the descriptions thereof contained in the Registration Statement and the Prospectus. -6- (o) The Company is not in violation of, or in default under, (i) any term or provision of its Certificate of Incorporation or By-Laws, each as amended; (ii) any material term or provision or any financial covenants of any indenture, mortgage, contract, commitment or other agreement or instrument to which it is a party or by which it or any of its property or business is or may be bound or affected; or (iii) any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of the Company's properties or business. The Company owns, possesses or has obtained all governmental and other (including those obtainable from third parties) Permits, necessary to own or lease, as the case may be, and to operate its properties, whether tangible or intangible, and to conduct the business and operations of the Company as presently conducted and all such Permits are outstanding and in good standing, and there are no proceedings pending or, to the best of the Company's knowledge, threatened, or any basis therefor, seeking to cancel, terminate or limit such Permits. (p) Except as set forth in the Prospectus, there are no claims, actions, suits, proceedings, arbitrations, investigations or inquiries before any governmental agency, court or tribunal, domestic or foreign, or before any private arbitration tribunal, pending, or, to the best of the Company's knowledge, threatened against the Company or involving the Company's properties or business which, if determined adversely to the Company would, individually or in the aggregate, result in any material adverse change in the financial position, shareholders' equity, results of operations, properties, business, management or affairs of the Company or which question the validity of the capital stock of the Company or this Agreement or of any action taken or to be taken by the Company pursuant to, or in connection with, this Agreement; nor, to the best of the Company's knowledge, is there any basis for any such claim, action, suit, proceeding, arbitration, investigation or inquiry. There are no outstanding orders, judgments or decrees of any court, governmental agency or other tribunal naming the Company and enjoining the Company from taking, or requiring the Company to take, any action, or to which the Company or the Company's properties or business is bound or subject. (q) Neither the Company nor any of its affiliates has incurred any liability for any finder's fees or similar payments in connection with the transactions herein contemplated. (r) The Company owns or possesses adequate and enforceable rights to use all patents, patent applications, trademarks, service marks, copyrights, rights, trade secrets, confidential information, processes and formulations used or proposed to be used in the conduct of its business as described in the Prospectus (collectively the "Intangibles"); to the best of the Company's knowledge, the Company has not infringed and is not infringing upon the rights of others with respect to the Intangibles; and the Company has not received any notice of conflict with the asserted rights of others with respect to the Intangibles which could, singly or in the aggregate, materially adversely affect its business as presently conducted or the prospects, financial condition or results of operations of the Company and the Company knows of no basis therefor; and, to the best of the Company's knowledge, no others have infringed upon the Intangibles of the Company. (s) Since the respective dates as of which information is given in the Registration Statement and the Prospectus and the Company's latest financial statements, the Company has not incurred any material liability or obligation, direct or contingent, or entered into any material transaction, whether or not incurred in the ordinary course of business, and has not sustained any material loss or interference with its business from fire, storm, explosion, flood or other casualty, whether or not covered -7- by insurance, or from any labor dispute or court or governmental action, order or decree; and since the respective dates as of which information is given in the Registration Statement and the Prospectus, there have not been, and prior to the Closing Date referred to below there will not be, any changes in the capital stock or any material increases in the long-term debt of the Company or any material adverse change in or affecting the general affairs, management, financial condition, shareholders' equity, results of operations or prospects of the Company, otherwise than as set forth or contemplated in the Prospectus. (t) The Company does not own any real property. The Company has good title to all personal property (tangible and intangible) owned by it, free and clear of all security interests, charges, mortgages, liens, encumbrances and defects, except such as are described in the Registration Statement and Prospectus or such as do not materially affect the value or transferability of such property and do not interfere with the use of such property made, or proposed to be made, by the Company. The leases, licenses or other contracts or instruments under which the Company leases, holds or is entitled to use any property, real or personal, are valid, subsisting and enforceable only with such exceptions as are not material and do not interfere with the use of such property made, or proposed to be made, by the Company, and all rentals, royalties or other payments accruing thereunder which became due prior to the date of this Agreement have been duly paid, and neither the Company, nor, to the best of the Company's knowledge, any other party is in default thereunder and, to the best of the Company's knowledge, no event has occurred which, with the passage of time or the giving of notice, or both, would constitute a default thereunder. The Company has not received notice of any violation of any applicable law, ordinance, regulation, order or requirement relating to its owned or leased properties. The Company has adequately insured its properties against loss or damage by fire or other casualty and maintains, in adequate amounts, such other insurance as is usually maintained by companies engaged in the same or similar businesses located in its geographic area. (u) Each contract or other instrument (however characterized or described) to which the Company is a party or by which its property or business is or may be bound or affected and to which reference is made in the Prospectus has been duly and validly executed, is in full force and effect in all material respects and is enforceable against the parties thereto in accordance with its terms, and none of such contracts or instruments has been assigned by the Company, and neither the Company, nor, to the best of the Company's knowledge, any other party, is in default thereunder and, to the best of the Company's knowledge, no event has occurred which, with the lapse of time or the giving of notice, or both, would constitute a default thereunder. None of the material provisions of such contracts or instruments violates any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court having jurisdiction over the Company or any of its assets or businesses, including, without limitation, those relating to the regulation of the Internet connectivity industry. (v) The employment, consulting, confidentiality and non-competition agreements between the Company and its officers, employees and consultants, described in the Registration Statement, are binding and enforceable obligations upon the respective parties thereto in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws or arrangements affecting creditors' rights generally and subject to principles of equity. -8- (w) Except as set forth in the Prospectus, the Company has no employee benefit plans (including, without limitation, profit sharing and welfare benefit plans) or deferred compensation arrangements that are subject to the provisions of the Employee Retirement Income Security Act of 1974. (x) To the best of the Company's knowledge, no labor problem exists with any of the Company's employees or is imminent which could adversely affect the Company. (y) The Company has not, directly or indirectly, at any time (i) made any contributions to any candidate for political office, or failed to disclose fully any such contribution in violation of law or (ii) made any payment to any state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments or contributions required or allowed by applicable law. The Company's internal accounting controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended. (z) The Shares have been approved for listing on the Nasdaq SmallCap Market. (aa) The Company has provided to Tenzer Greenblatt LLP, counsel to the Underwriter ("Underwriter's Counsel"), all agreements, certificates, correspondence and other items, documents and information requested by such counsel's Corporate Review Memorandum dated November 11, 1997. Any certificate signed by an officer of the Company and delivered to the Underwriter or to Underwriter's Counsel shall be deemed to be a representation and warranty by the Company to the Underwriter as to the matters covered thereby. 5. Certain Covenants of the Company. The Company covenants with the Underwriter as follows: (a) The Company will not at any time, whether before the Effective Date or thereafter during such period as the Prospectus is required by law to be delivered in connection with the sales of the Shares by the Underwriter or a dealer, file or publish any amendment or supplement to the Registration Statement or Prospectus of which the Underwriter has not been previously advised and furnished a copy, or to which the Underwriter shall object in writing. (b) The Company will use its best efforts to cause the Registration Statement to become effective and will advise the Underwriter immediately, and, if requested by the Underwriter, confirm such advice in writing, (i) when the Registration Statement, or any post-effective amendment to the Registration Statement or any supplemented Prospectus is filed with the Commission; (ii) of the receipt of any comments from the Commission; (iii) of any request of the Commission for amendment or supplementation of the Registration Statement or Prospectus or for additional information; and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any Preliminary Prospectus, or of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the initiation of any proceedings for any of such purposes. The Company will use its best efforts to prevent the -9- issuance of any such stop order or of any order preventing or suspending such use and to obtain as soon as possible the lifting thereof, if any such order is issued. (c) The Company will deliver to the Underwriter, without charge, from time to time until the Effective Date, as many copies of each Preliminary Prospectus as the Underwriter may reasonably request, and the Company hereby consents to the use of such copies for purposes permitted by the Act. The Company will deliver to the Underwriter, without charge, as soon as the Registration Statement becomes effective, and thereafter from time to time as requested, such number of copies of the Prospectus (as supplemented, if the Company makes any supplements to the Prospectus) as the Underwriter may reasonably request. The Company has furnished or will furnish to the Underwriter two signed copies of the Registration Statement as originally filed and of all amendments thereto, whether filed before or after the Registration Statement becomes effective, two copies of all exhibits filed therewith and two signed copies of all consents and certificates of experts. (d) The Company will comply with the Act, the Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder so as to permit the continuance of sales of and dealings in the Offered Shares and in any Optional Shares which may be issued and sold. If, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event occurs as a result of which the Registration Statement and Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it shall be necessary to amend or supplement the Registration Statement and Prospectus to comply with the Act or the regulations thereunder, the Company will promptly file with the Commission, subject to Section 5(a) hereof, an amendment or supplement which will correct such statement or omission or which will effect such compliance. (e) The Company will furnish such proper information as may be required and otherwise cooperate in qualifying the Shares for offering and sale under the securities or Blue Sky laws relating to the offering in such jurisdictions as the Underwriter may reasonably designate, provided that no such qualification will be required in any jurisdiction where, solely as a result thereof, the Company would be subject to service of general process or to taxation or qualification as a foreign corporation doing business in such jurisdiction. (f) The Company will make generally available to its security holders, in the manner specified in Rule 158(b) under the Act, and deliver to the Underwriter and Underwriter's Counsel as soon as practicable and in any event not later than 45 days after the end of its fiscal quarter in which the first anniversary date of the effective date of the Registration Statement occurs, an earning statement meeting the requirements of Rule 158(a) under the Act covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement. (g) For a period of five years from the Effective Date, the Company will deliver to the Underwriter and to Underwriter's Counsel on a timely basis (i) a copy of each report or document, including, without limitation, reports on Forms 8-K, 10-C, 10-K (or 10-K SB), 10-Q (or 10-Q SB) and 10-C and exhibits thereto, filed or furnished to the Commission, any securities exchange or the National Association of Securities Dealers, Inc. (the "NASD") on the date each such report or document is so filed or furnished; (ii) as soon as practicable, copies of any reports or communications (financial or other) of -10- the Company mailed to its security holders; (iii) as soon as practicable, a copy of any Schedule 13D, 13G, 14D-1 or 13E-3 received or prepared by the Company from time to time; (iv) monthly statements setting forth such information regarding the Company's results of operations and financial position (including balance sheet, profit and loss statements and data regarding outstanding purchase orders) as is regularly prepared by management of the Company; and (v) such additional information concerning the business and financial condition of the Company as the Underwriter may from time to time reasonably request and which can be prepared or obtained by the Company without unreasonable effort or expense. The Company will furnish to its shareholders annual reports containing audited financial statements and such other periodic reports as it may determine to be appropriate or as may be required by law. (h) Neither the Company nor any person that controls, is controlled by or is under common control with the Company will take any action designed to or which might be reasonably expected to cause or result in the stabilization or manipulation of the price of the Common Shares. (i) If the transactions contemplated by this Agreement are consummated, the Underwriter shall retain the $50,000 previously paid to it, and the Company will pay or cause to be paid the following: all costs and expenses incident to the performance of the obligations of the Company under this Agreement, including, but not limited to, the fees and expenses of accountants and counsel for the Company; the preparation, printing, mailing and filing of the Registration Statement (including financial statements and exhibits), Preliminary Prospectuses and the Prospectus, and any amendments or supplements thereto; the printing and mailing of the Selected Dealer Agreement, the issuance and delivery of the Shares to the Underwriter; all taxes, if any, on the issuance of the Shares; the fees, expenses and other costs of qualifying the Shares for sale under the Blue Sky or securities laws of those states in which the Shares are to be offered or sold, including fees and disbursements of counsel in connection therewith, and including those of such local counsel as may have been retained for such purpose; the filing fees incident to securing any required review by the NASD and either the Boston Stock Exchange or Pacific Stock Exchange; the cost of printing and mailing the "Blue Sky Survey", the cost of furnishing to the Underwriter copies of the Registration Statement, Preliminary Prospectuses and the Prospectus as herein provided; the costs of placing "tombstone advertisements" in any publications which may be selected by the Underwriter; and all other costs and expenses incident to the performance of the Company's obligations hereunder which are not otherwise specifically provided for in this Section 5(i). In addition, at the Closing Date or the Option Closing Date, as the case may be, the Underwriter will deduct from the payment for the Offered Shares or any Optional Shares three percent (3%) of the gross proceeds of the offering (less the sum of $50,000 previously paid to the Underwriter), as payment for the Underwriter's nonaccountable expense allowance relating to the transactions contemplated hereby, which amount will include the fees and expenses of Underwriter's Counsel (other than the fees and expenses of Underwriter's Counsel relating to Blue Sky qualifications and registrations, which, as provided for above, shall be in addition to the three percent (3%) nonaccountable expense allowance and shall be payable directly by the Company to Underwriter's Counsel on or prior to the Closing Date). (j) If the transactions contemplated by this Agreement or related hereto because the Company decides not to proceed with the offering for any reason or because the Underwriter decides not to proceed with the offering as a result of a breach by the Company of its representations, warranties or covenants in the Agreement or as a result of adverse changes in the affairs of the Company, then the -11- Company will be obligated to reimburse the Underwriter for its accountable out-of-pocket expenses up to the sum of $75,000, inclusive of $50,000 previously paid to the Underwriter by the Company. In all cases other than those set forth in the preceding sentence, if the Company or the Underwriter decide not to proceed with the offering, the Company will only be obligated to reimburse the Underwriter for its accountable out-of-pocket expenses up to $50,000, and inclusive of $50,000 previously paid to the Underwriter by the Company. In no event, however, will the Underwriter, in the event the offering is terminated, be entitled to retain or receive more than an amount equal to its actual accountable out-of-pocket expenses. (k) The Company intends to apply the net proceeds from the sale of the Shares for the purposes set forth in the Prospectus. The Company will file with the Commission all required reports on Form S-R in accordance with the provisions of Rule 463 promulgated under the Act and will provide a copy of each such report to the Underwriter and its counsel. (l) During the period of twelve (12) months from the date hereof, neither the Company nor any of its officers, directors or security holders, will offer for sale or sell or otherwise dispose of, directly or indirectly, any securities of the Company, in any manner whatsoever, whether pursuant to Rule 144 of the Regulations or otherwise, except that, notwithstanding the foregoing, a group of securityholders beneficially owning less than one percent (1%) of the outstanding Common Stock, individually, and less than five percent (5%) of the outstanding Common Stock, in the aggregate (such securityholders being referred herein as "Minority Shareholders") may be excluded from the provisions of this clause, and no holder of registration rights relating to buy securities of the Company will exercise any such registration rights, in either case, without the prior written consent of the Underwriter. In addition, during the period of twelve (12) months following the foregoing lock-up period, no securityholder beneficially owning five percent (5%) or more of the outstanding Common Stock of the Company (each a "Principal") may, without the Underwriter's prior written consent, sell any of its shares of Common Stock during any three (3) month period in excess of the amount that the Principal would be allowed to sell if it were deemed an "affiliate" of the Company and its Shares were deemed "restricted", as those terms are defined in Rule 144 promulgated under the Act, i.e., in general, no more than the greater of (a) one percent (1%) of the then outstanding Shares of Common Stock and (b) the average weekly trading volume of the Common stock during the four calendar weeks preceding such sale. The Company will deliver to the Underwriter the agreement of its officers, directors and securityholders to such effect prior to the Closing Date. (m) The Company will not file any registration statement relating to the offer or sale of any of the Company's securities, including any registration statement on Form S-8, during the twelve (12) months from the Effective Date, without the Underwriter's prior written consent. (n) The Company maintains and will continue to maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. -12- (o) The Company will use its best efforts to maintain the listing of the Shares on NASDAQ and, if so qualified, list the Shares, and maintain such listing for so long as qualified, on the NASDAQ National Market System. (p) The Company will, concurrently with the Effective Date, register the class of equity securities of which the Shares are a part under Section 12(g) of the Exchange Act and the Company will maintain such registration for a minimum of five (5) years from the Effective Date. (q) Subject to the sale of the Offered Shares, the Underwriter and its successors will have the right to designate a nominee for election, at its or their option, either as a member of or a non-voting advisor to the Board of Directors of the Company (which Board, during such period, shall be comprised of either five (5) persons or seven (7) persons and a majority of the members of which Board must, during such period, be persons not otherwise affiliated with the Company), and the Company will use its best efforts to cause such nominee to be elected and continued in office as a director of the Company or as such advisor until the expiration of five (5) years from the Effective Date. Each of the Company's current officers, directors and shareholders agrees to vote all of the Common Shares owned by such person or entity so as to elect and continue in office such nominee of the Underwriter. Following the election of such nominee as a director or advisor, such person shall receive no more or less compensation than is paid to other non-officer directors of the Company for attendance at meetings of the Board of Directors of the Company and shall be entitled to receive reimbursement for all reasonable costs incurred in attending such meetings including, but not limited to, food, lodging and transportation. The Company agrees to indemnify and hold such director or advisor harmless, to the maximum extent permitted by law, against any and all claims, actions, awards and judgments arising out of his service as a director or advisor and, in the event the Company maintains a liability insurance policy affording coverage for the acts of its officers and directors, to include such director or advisor as an insured under such policy. The rights and benefits of such indemnification and the benefits of such insurance shall, to the extent possible, extend to the Underwriter insofar as it may be or may be alleged to be responsible for such director or advisor. If the Underwriter does not exercise its option to designate a member of or advisor to the Company's Board of Directors, the Underwriter shall nonetheless have the right to send a representative (who need not be the same individual from meeting to meeting) to observe each meeting of the Board of Directors. The Company agrees to give the Underwriter notice of each such meeting and to provide the Underwriter with an agenda and minutes of the meeting no later than it gives such notice and provides such items to the directors. (r) [INTENTIONALLY OMITTED] -13- (s) The Underwriter and its successors will have a right of first refusal for a period of three (3) years from the Effective Date to purchase for the Underwriter's account and/or to sell for the account of the Company's officers, directors and security holders any securities sold pursuant to Rule 144 under the Act. Each of the Company's officers, directors and security holders agrees to consult with the Underwriter with regard to any such sales and will offer the Underwriter the exclusive opportunity to purchase or sell such securities on terms at least as favorable to such holders as they can secure elsewhere. If the Underwriter fails to accept in writing any such proposal for sale by such holders within three business days after receipt of a notice containing such proposal, then the Underwriter shall have no claim or right with respect to any such sales contained in any such notice. If, thereafter, such proposal is modified in any material respect, such holders shall adopt the same procedure as with respect to the original proposal. (t) The Company agrees to employ the Underwriter or a designee of the Underwriter as a financial consultant on a non-exclusive basis for a period of two (2) years from the Closing Date, pursuant to a separate written consulting agreement between the Company and the Underwriter and/or such designee (the "Consulting Agreement") which Consulting Agreement shall provide that the Company will pay the Underwriter a finder's fee in the event that the Underwriter originates a financing, merger, acquisition, joint venture or other transaction to which the Company is a party. The Company further agrees to deliver a duly and validly executed copy of said Consulting Agreement, in form and substance acceptable to the Underwriter, on the Closing Date. (u) The Company shall retain a transfer agent for the Common Shares, reasonably acceptable to the Underwriter, for a period of three (3) years from the Effective Date. In addition, for a period of three (3) years from the Effective Date, the Company, at its own expense, shall cause such transfer agent to provide the Underwriter, if so requested in writing, with copies of the Company's daily transfer sheets, and, when requested by the Underwriter, a current list of the Company's securityholders, including a list of the beneficial owners of securities held by a depository trust company and other nominees. (v) The Company hereby agrees, at its sole cost and expense, to supply and deliver to the Underwriter and Underwriter's Counsel, within a reasonable period from the date hereof, four bound volumes, including the Registration Statement, as amended or supplemented, all exhibits to the Registration Statement, the Prospectus and all other underwriting documents. -14- (w) The Company shall, as of the date hereof, have applied for listing in Standard & Poor's Corporation Records Service (including annual report information) or Moody's Industrial Manual (Moody's OTC Industrial Manual not being sufficient for these purposes) and shall use its best efforts to have the Company listed in such manual and shall maintain such listing for a period of five years from the Effective Date. (x) For a period of five (5) years from the Effective Date, the Company shall provide the Underwriter, on a not less than annual basis, with internal forecasts setting forth projected results of operations for each quarterly and annual period in the two (2) fiscal years following the respective dates of such forecasts. Such forecasts shall be provided to the Underwriter more frequently than annually if prepared more frequently by management, and revised forecasts shall be prepared and provided to the Underwriter when required to reflect more current information, revised assumptions or actual results that differ materially from those set forth in the forecasts. (y) For a period of five (5) years from the Effective Date, or until such earlier time as the Common Shares are listed on the New York Stock Exchange or the American Stock Exchange, the Company shall cause its legal counsel to provide the Underwriter with a list, to be updated at least annually, of those states in which the Common Shares may be traded in non-issuer transactions under the Blue Sky laws of the 50 states. (z) For a period of three (3) years from the Effective Date, the Company shall continue to retain BDO Seidman, LLP (or such other nationally recognized accounting firm acceptable to the Underwriter) as the Company's independent public accountants. (aa) For a period of five (5) years from the Effective Date, the Company, at its expense, shall cause its then independent certified public accountants, as described in Section 5(z) above, to review (but not audit) the Company's financial statements for each of the first three fiscal quarters prior to the announcement of quarterly financial information, the filing of the Company's 10-Q (or 10-QSB) quarterly report (or other equivalent report) and the mailing of quarterly financial information to shareholders. (ab) For a period of twenty-five (25) days from the Effective Date, the Company will not issue press releases or engage in any other publicity without the Underwriter's prior written consent, other than normal and customary releases issued in the ordinary course of the Company's business or those releases required by law. (ac) The Company will not increase or authorize an increase in the compensation of its five (5) most highly paid employees greater than those increases provided for in their employment agreements with the Company in effect as of the Effective Date and disclosed in the Registration Statement, without the Underwriter's prior written consent, for a period of three (3) years following the Effective Date. (ad) For a period of three (3) years from the Effective Date, the Company will promptly submit to the Underwriter copies of accountant's management reports and similar correspondence between the Company's accountants and the Company. -15- (ae) For a period of three (3) years from the Effective Date, the Company will not offer or sell any of its securities pursuant to Regulation S promulgated under the Act without the prior written consent of the Underwriter. (af) For a period of five (5) years from the Effective Date, the Company will provide to the Underwriter ten day's written notice prior to any issuance by the Company or its subsidiaries of any equity securities or securities exchangeable for or convertible into equity securities of the Company, except for (i) shares of Common Stock issuable upon exercise of currently outstanding options and warrants or conversion of currently outstanding convertible securities and (ii) options available for future grant pursuant to any stock option plan in effect on the Effective Date and the issuance of shares of Common Stock upon the exercise of such options. (ag) Prior to the Effective Date and for a period of three (3) years thereafter, the Company will retain a financial public relations firm reasonably acceptable to the Underwriter. (ah) For a period of five (5) years from the Effective Date, the Company will cause its Board of Directors to meet, either in person or telephonically, a minimum of four (4) times per year and will hold a shareholder's meeting at least once per annum. 6. Conditions of the Underwriter's Obligation to Purchase Shares from the Company. The obligation of the Underwriter to purchase and pay for the Offered Shares which it has agreed to purchase from the Company is subject (as of the date hereof and the Closing Date) to the accuracy of and compliance in all material respects with the representations and warranties of the Company herein, to the accuracy of the statements of the Company or its officers made pursuant hereto, to the performance in all material respects by the Company of its obligations hereunder, and to the following additional conditions: (a) The Registration Statement will have become effective not later than ___.M., New York City time, on the day following the date of this Agreement, or at such later time or on such later date as the Underwriter may agree to in writing; prior to the Closing Date, no stop order suspending the effectiveness of the Registration Statement will have been issued and no proceedings for that purpose will have been initiated or will be pending or, to the best of the Underwriter's or the Company's knowledge, will be contemplated by the Commission; and any request on the part of the Commission for additional information will have been complied with to the satisfaction of Underwriter's Counsel. (b) At the time that this Agreement is executed and at the Closing Date, there will have been delivered to the Underwriter a signed opinion of Kelley Drye & Warren LLP, counsel for the Company ("Company Counsel"), dated as of the date hereof or the Closing Date, as the case may be (and any other opinions of counsel referred to in such opinion of Company Counsel or relied upon by Company Counsel in rendering their opinion), reasonably satisfactory to Underwriter's Counsel, to the effect that: (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full power and authority, corporate and other, and with all Permits necessary to own or lease, as the case may be, and operate its properties, whether tangible or intangible, and to conduct its business as described in the Registration Statement. -16- The Company is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions wherein such qualification is necessary and failure so to qualify could have a material adverse effect on the financial condition, results of operations, business or properties of the Company. To the best of Company Counsel's knowledge, the Company has no subsidiaries. (ii) The Company has full power and authority, corporate and other, to execute, deliver and perform this Agreement, the Consulting Agreement and the Underwriter's Warrant Agreement and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement, the Consulting Agreement and the Underwriter's Warrant Agreement by the Company, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms of this Agreement, the Consulting Agreement and the Underwriter's Warrant Agreement have been duly authorized by all necessary corporate action, and this Agreement and each of the Consulting Agreement and the Underwriter's Warrant Agreement has been duly executed and delivered by the Company. This Agreement is (assuming for the purposes of this opinion that it is valid and binding upon the other party thereto) and, when executed and delivered by the Company on the Closing Date, each of the Consulting Agreement and the Underwriter's Warrant Agreement will be, valid and binding obligations of the Company, enforceable in accordance with their respective terms, subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the rights of creditors generally and the discretion of courts in granting equitable remedies and except that enforceability of the indemnification provisions set forth in Section 7 hereof and the contribution provisions set forth in Section 8 hereof may be limited by the federal securities laws or public policy underlying such laws. (iii) The execution, delivery and performance of this Agreement, the Consulting Agreement and the Underwriter's Warrant Agreement by the Company, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms of this Agreement, the Consulting Agreement and the Underwriter's Warrant Agreement do not, and will not, with or without the giving of notice or the lapse of time, or both, (A) result in a violation of the Certificate of Incorporation or By-Laws, each as amended, of the Company, (B) result in a breach of or conflict with any terms or provisions of, or constitute a default under, or result in the modification or termination of, or result in the creation or imposition of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company pursuant to any indenture, mortgage, note, contract, commitment or other material agreement or instrument to which the Company is a party or by which the Company or any of the Company's properties or assets are or may be bound or affected; (C) violate any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of the Company's properties or business; or (D) have any effect on any Permit necessary for the Company to own or lease and operate its properties or conduct its business or the ability of the Company to make use thereof. (iv) To the best of Company Counsel's knowledge, no Permits of any court or governmental agency or body (other than under the Act, the Regulations and applicable state securities or Blue Sky laws) are required for the valid authorization, issuance, sale and delivery of the Shares or the Underwriter's Warrants to the Underwriter, and the consummation by the Company of the transactions contemplated by this Agreement, the Consulting Agreement or the Underwriter's Warrant Agreement. -17- (v) The Registration Statement has become effective under the Act; to the best of Company Counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending, threatened or contemplated under the Act or applicable state securities laws. (vi) The Registration Statement and the Prospectus, as of the Effective Date, and each amendment or supplement thereto as of its effective or issue date (except for the financial statements and other financial data included therein or omitted therefrom, as to which Company Counsel need not express an opinion) comply as to form in all material respects with the requirements of the Act and Regulations and the conditions for use of a registration statement on Form SB-2 have been satisfied by the Company. (vii) The descriptions in the Registration Statement and the Prospectus of statutes, regulations, government classifications, contracts and other documents (including opinions of such counsel); and the response to Item 13 of Form SB-2 have been reviewed by Company Counsel, and, based upon such review, are accurate in all material respects and present fairly the information required to be disclosed, and there are no material statutes, regulations or government classifications, or, to the best of Company Counsel's knowledge, material contracts or documents, of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement, which are not so described or filed as required. None of the material provisions of the contracts or instruments described above violates any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court having jurisdiction over the Company or any of its assets or business, including, without limitation, those relating to the Internet connectivity industry. (viii) The outstanding Common Shares and outstanding options and warrants to purchase Common Shares have been duly authorized and validly issued. The outstanding Common Shares are fully paid and nonassessable. The outstanding options and warrants to purchase Common Shares constitute the valid and binding obligations of the Company, enforceable in accordance with their terms. None of the outstanding Common Shares or options or warrants to purchase Common Shares has been issued in violation of the preemptive rights of any shareholder of the Company. None of the holders of the outstanding Common Shares is subject to personal liability solely by reason of being such a holder. The offers and sales of the outstanding Common Shares and outstanding options and warrants to purchase Common Shares were at all relevant times either registered under the Act and the applicable state securities or Blue Sky laws or exempt from such registration requirements. The authorized Common Shares and outstanding options and warrants to purchase Common Shares conform to the descriptions thereof contained in the Registration Statement and Prospectus. To the best of Company Counsel's knowledge, except as set forth in the Prospectus, no holders of any of the Company's securities has any rights, "demand", "piggyback" or otherwise, to have such securities registered under the Act. (ix) The issuance and sale of the Shares have been duly authorized and, when the Shares have been issued and duly delivered against payment therefor as contemplated by this Agreement, the Shares will be validly issued, fully paid and nonassessable, and the holders thereof will not be subject to personal liability solely by reason of being such holders. The Shares are not subject -18- to preemptive rights of any shareholder of the Company. The certificates representing the Shares are in proper legal form. (x) The issuance and sale of the Common Shares issuable upon exercise of the Underwriter's Warrants have been duly authorized and, when such Common Shares have been duly delivered against payment therefor, as contemplated by the Underwriter's Warrant Agreement, such Common Shares will be validly issued, fully paid and nonassessable. Holders of Common Shares issuable upon exercise of the Underwriter's Warrants will not be subject to personal liability solely by reason of being such holders. Neither the Underwriter's Warrants nor the Common Shares issuable upon exercise thereof will be subject to preemptive rights of any shareholder of the Company. The Warrant Shares issuable upon exercise of the Underwriter's Warrants have been duly reserved for issuance upon exercise of the Underwriter's Warrants in accordance with the provisions of the Underwriter's Warrant Agreement. The Underwriter's Warrants conform to the descriptions thereof in the Registration Statement and Prospectus. (xi) Upon delivery of the Offered Shares to the Underwriter against payment therefor as provided in this Agreement, the Underwriter (assuming it is a bona fide purchaser within the meaning of the Uniform Commercial Code) will acquire good title to the Offered Shares, free and clear of all liens, encumbrances, equities, security interests and claims. (xii) Assuming that the Underwriter exercises the over-allotment option to purchase any of the Optional Shares and makes payment therefor in accordance with the terms of this Agreement, upon delivery of the Optional Shares to the Underwriter hereunder, the Underwriter (assuming it is a bona fide purchaser within the meaning of the Uniform Commercial Code) will acquire good title to such Optional Shares, free and clear of any liens, encumbrances, equities, security interests and claims. (xiii) To the best of Company Counsel's knowledge, there are no claims, actions, suits, proceedings, arbitrations, investigations or inquiries before any governmental agency, court or tribunal, foreign or domestic, or before any private arbitration tribunal, pending or threatened against the Company or involving the Company's properties or business, other than as described in the Prospectus, such description being accurate, and other than litigation incident to the kind of business conducted by the Company which, individually and in the aggregate, is not material. (xiv) The Company owns or possesses adequate and enforceable rights to use all patents, patent applications, trademarks, service marks, copyrights, rights, trade secrets, confidential information, processes and formulations used or proposed to be used in the conduct of its business as described in the Prospectus (collectively the "Intangibles"); to the best of Company Counsel's knowledge, the Company has not infringed and is not infringing with the rights of others with respect to the Intangibles; and, to the best of Company Counsel's knowledge, the Company has not received any notice that it has or may have infringed, is infringing upon or is conflicting with the asserted rights of others with respect to the Intangibles which might, singly or in the aggregate, materially adversely affect its business, results of operations or financial condition and such counsel is not aware of any licenses with respect to the Intangibles which are required to be obtained by the Company. -19- (xv) Company Counsel has participated in reviews and discussions in connection with the preparation of the Registration Statement and the Prospectus, and in the course of such reviews and discussions and such other investigation as Company Counsel deemed necessary, no facts came to its attention which lead it to believe that (A) the Registration Statement (except as to the financial statements and other financial data contained therein, as to which Company Counsel need not express an opinion), on the Effective Date, contained any untrue statement of a material fact required to be stated therein or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or that (B) the Prospectus (except as to the financial statements and other financial data contained therein, as to which Company Counsel need not express an opinion) contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The opinion letter delivered pursuant to this Section 6(b) shall state that any opinion given therein qualified by the phrase "to the best of our knowledge" is being given by Company Counsel after due investigation of the matters therein discussed. (c) At the Closing Date, there will have been delivered to the Underwriter a signed opinion of Underwriter's Counsel, dated as of the Closing Date, to the effect that the opinions delivered pursuant to Section 6(b) hereof appear on their face to be appropriately responsive to the requirements of this Agreement, except to the extent waived by the Underwriter, specifying the same, and with respect to such related matters as the Underwriter may require. (d) At the Closing Date (i) the Registration Statement and the Prospectus and any amendments or supplements thereto will contain all material statements which are required to be stated therein in accordance with the Act and the Regulations and will conform in all material respects to the requirements of the Act and the Regulations, and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) since the respective dates as of which information is given in the Registration Statement and the Prospectus, there will not have been any material adverse change in the financial condition, results of operations or general affairs of the Company from that set forth or contemplated in the Registration Statement and the Prospectus, except changes which the Registration Statement and the Prospectus indicate might occur after the Effective Date; (iii) since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall have been no material transaction, contract or agreement entered into by the Company, other than in the ordinary course of business, which would be required to be set forth in the Registration Statement and the Prospectus, other than as set forth therein; and (iv) no action, suit or proceeding at law or in equity will be pending or, to the best of the Company's knowledge, threatened against the Company which is required to be set forth in the Registration Statement and the Prospectus, other than as set forth therein, and no proceedings will be pending or, to the best of the Company's knowledge, threatened against the Company before or by any federal, state or other commission, board or administrative agency wherein an unfavorable decision, ruling or finding would materially adversely affect the business, property, financial condition or results of operations of the Company, other than as set forth in the Registration Statement and the Prospectus. At the Closing Date, there will be delivered to the Underwriter a certificate signed by the Chairman of the Board or the President or a Vice President -20- of the Company, dated the Closing Date, evidencing compliance with the provisions of this Section 6(d) and stating that the representations and warranties of the Company set forth in Section 4 hereof were accurate and complete in all material respects when made on the date hereof and are accurate and complete in all material respects on the Closing Date as if then made; that the Company has performed all covenants and complied with all conditions required by this Agreement to be performed or complied with by the Company prior to or as of the Closing Date; and that, as of the Closing Date, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or, to the best of his knowledge, are contemplated or threatened. In addition, the Underwriter will have received such other and further certificates of officers of the Company as the Underwriter or Underwriter's Counsel may reasonably request. (e) At the time that this Agreement is executed and at the Closing Date, the Underwriter will have received a signed letter from BDO Seidman LLP, dated the date such letter is to be received by the Underwriter and addressed to it, confirming that it is a firm of independent public accountants within the meaning of the Act and Regulations and stating that: (i) insofar as reported on by them, in their opinion, the financial statements of the Company included in the Prospectus comply as to form in all material respects with the applicable accounting requirements of the Act and the applicable Regulations; (ii) on the basis of procedures and inquiries (not constituting an examination in accordance with generally accepted auditing standards) consisting of a reading of the unaudited interim financial statements of the Company, if any, appearing in the Registration Statement and the Prospectus and the latest available unaudited interim financial statements of the Company, if more recent than that appearing in the Registration Statement and Prospectus, inquiries of officers of the Company responsible for financial and accounting matters as to the transactions and events subsequent to the date of the latest audited financial statements of the Company, and a reading of the minutes of meetings of the shareholders, the Board of Directors of the Company and any committees of the Board of Directors, as set forth in the minute books of the Company, nothing has come to their attention which, in their judgment, would indicate that (A) during the period from the date of the latest financial statements of the Company appearing in the Registration Statement and Prospectus to a specified date not more than three business days prior to the date of such letter, there have been any decreases in net current assets or net assets as compared with amounts shown in such financial statements or decreases in net sales or increases in total or per share net loss compared with the corresponding period in the preceding year or any change in the capitalization or long-term debt of the Company, except in all cases as set forth in or contemplated by the Registration Statement and the Prospectus, and (B) the unaudited interim financial statements of the Company, if any, appearing in the Registration Statement and the Prospectus, do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Regulations or are not fairly presented in conformity with generally accepted accounting principles and practices on a basis substantially consistent with the audited financial statements included in the Registration Statement or the Prospectus; and (iii) they have compared specific dollar amounts, numbers of shares, numerical data, percentages of revenues and earnings, and other financial information pertaining to the Company set forth in the Prospectus (with respect to all dollar amounts, numbers of shares, percentages and other financial information contained in the Prospectus, to the extent that such amounts, numbers, percentages and information may be derived from the general accounting records of the Company, and excluding any questions requiring an interpretation by legal counsel) with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter, and found them to be in agreement. -21- (f) There shall have been duly tendered to the Underwriter certificates representing the Offered Shares to be sold on the Closing Date. (g) The NASD shall have indicated that it has no objection to the underwriting arrangements pertaining to the sale of the Shares by the Underwriter. (h) No action shall have been taken by the Commission or the NASD the effect of which would make it improper, at any time prior to the Closing Date or the Option Closing Date, as the case may be, for any member firm of the NASD to execute transactions (as principal or as agent) in the Shares, and no proceedings for the purpose of taking such action shall have been instituted or shall be pending, or, to the best of the Underwriter's or the Company's knowledge, shall be contemplated by the Commission or the NASD. The Company represents at the date hereof, and shall represent as of the Closing Date or Option Closing Date, as the case may be, that it has no knowledge that any such action is in fact contemplated by the Commission or the NASD. (i) The Company meets the current and any existing and proposed criteria for inclusion of the Shares in Nasdaq. (j) All proceedings taken at or prior to the Closing Date or the Option Closing Date, as the case may be, in connection with the authorization, issuance and sale of the Shares shall be reasonably satisfactory in form and substance to the Underwriter and to Underwriter's Counsel, and such counsel shall have been furnished with all such documents, certificates and opinions as they may request for the purpose of enabling them to pass upon the matters referred to in Section 6(c) hereof and in order to evidence the accuracy and completeness of any of the representations, warranties or statements of the Company, the performance of any covenants of the Company, or the compliance by the Company with any of the conditions herein contained. (k) As of the date hereof, the Company will have delivered to the Underwriter the written undertakings of its officers, directors and securityholders and/or registration rights holders, as the case may be, to the effect of the matters set forth in Sections 5(l), (q), (r) and (s). If any of the conditions specified in this Section 6 have not been fulfilled, this Agreement may be terminated by the Underwriter on notice to the Company. 7. Indemnification. (a) The Company agrees to indemnify and hold harmless the Underwriter, each officer, partner, employee and agent of the Underwriter, and each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from and against any and all losses, claims, damages, expenses or liabilities, joint or several (and actions in respect thereof), to which they or any of them may become subject under the Act or under any other statute or at common law or otherwise, and, except as hereinafter provided, will reimburse the Underwriter and each such person, if any, for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions, whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained (i) in the Registration Statement, in any -22- Preliminary Prospectus or in the Prospectus (or the Registration Statement or Prospectus as from time to time amended or supplemented) or (ii) in any application or other document executed by the Company, or based upon written information furnished by or on behalf of the Company, filed in any jurisdiction in order to qualify the Shares under the securities laws thereof (hereinafter "application"), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein not misleading, in light of the circumstances under which they were made, unless such untrue statement or omission was made in such Registration Statement, Preliminary Prospectus, Prospectus or application in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by the Underwriter or any such person through the Underwriter expressly for use therein; provided, however, that the indemnity agreement contained in this Section 7(a) with respect to any Preliminary Prospectus will not inure to the benefit of the Underwriter (or to the benefit of any other person that may be indemnified pursuant to this Section 7(a)) if (A) the person asserting any such losses, claims, damages, expenses or liabilities purchased the Shares which are the subject thereof from the Underwriter or other indemnified person; (B) the Underwriter or other indemnified person failed to send or give a copy of the Prospectus to such person at or prior to the written confirmation of the sale of such Shares to such person; and (C) the Prospectus did not contain any untrue statement or alleged untrue statement or omission or alleged omission giving rise to such cause, claim, damage, expense or liability. (b) The Underwriter agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from and against any and all losses, claims, damages, expenses or liabilities, joint or several (and actions in respect thereof), to which they or any of them may become subject under the Act or under any other statute or at common law or otherwise, and, except as hereinafter provided, will reimburse the Company and each such director, officer or controlling person for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions, whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained (i) in the Registration Statement, in any Preliminary Prospectus or in the Prospectus (or the Registration Statement or Prospectus as from time to time amended or supplemented) or (ii) in any application (including any application for registration of the Shares under state securities or Blue Sky laws), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein not misleading, in light of the circumstances under which they were made, but only insofar as any such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by the Underwriter expressly for use therein. (c) Promptly after receipt of notice of the commencement of any action in respect of which indemnity may be sought against any indemnifying party under this Section 7, the indemnified party will notify the indemnifying party in writing of the commencement thereof, and the indemnifying party will, subject to the provisions hereinafter stated, assume the defense of such action (including the employment of counsel satisfactory to the indemnified party and the payment of expenses) insofar as such action relates to an alleged liability in respect of which indemnity may be sought against the indemnifying party. After notice from the indemnifying party of its election to assume the defense of such claim or action, the indemnifying party shall no longer be liable to the indemnified party under this Section 7 for -23- any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if, in the reasonable judgment of the indemnified party or parties, it is advisable for the indemnified party or parties to be represented by separate counsel, the indemnified party or parties shall have the right to employ a single counsel to represent the indemnified parties who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the indemnified parties thereof against the indemnifying party, in which event the fees and expenses of such separate counsel shall be borne by the indemnifying party. Any party against whom indemnification may be sought under this Section 7 shall not be liable to indemnify any person that might otherwise be indemnified pursuant hereto for any settlement of any action effected without such indemnifying party's consent, which consent shall not be unreasonably withheld. 8. Contribution. To provide for just and equitable contribution, if (i) an indemnified party makes a claim for indemnification pursuant to Section 7 hereof (subject to the limitations thereof) and it is finally determined, by a judgment, order or decree not subject to further appeal, that such claim for indemnification may not be enforced, even though this Agreement expressly provides for indemnification in such case; or (ii) any indemnified or indemnifying party seeks contribution under the Act, the Exchange Act, or otherwise, then the Company (including, for this purpose, any contribution made by or on behalf of any director of the Company, any officer of the Company who signed the Registration Statement and any controlling person of the Company) as one entity and the Underwriter (including, for this purpose, any contribution by or on behalf of each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, partner, employee and agent of the Underwriter) as a second entity, shall contribute to the losses, liabilities, claims, damages and expenses whatsoever to which any of them may be subject, so that the Underwriter is responsible for the proportion thereof equal to the percentage which the underwriting discount per Share set forth on the cover page of the Prospectus represents of the initial public offering price per Share set forth on the cover page of the Prospectus and the Company is responsible for the remaining portion; provided, however, that if applicable law does not permit such allocation, then, if applicable law permits, other relevant equitable considerations such as the relative fault of the Company and the Underwriter in connection with the facts which resulted in such losses, liabilities, claims, damages and expenses shall also be considered. The relative fault, in the case of an untrue statement, alleged untrue statement, omission or alleged omission, shall be determined by, among other things, whether such statement, alleged statement, omission or alleged omission relates to information supplied by the Company or by the Underwriter, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement, alleged statement, omission or alleged omission. The Company and the Underwriter agree that it would be unjust and inequitable if the respective obligations of the Company and the Underwriter for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages and expenses or by any other method of allocation that does not reflect the equitable considerations referred to in this Section 8. No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee and agent of the Underwriter will have the same rights to contribution as the Under-writer, and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who has signed the Registration Statement and each director of the Company -24- will have the same rights to contribution as the Company, subject in each case to the provisions of this Section 8. Anything in this Section 8 to the contrary notwithstanding, no party will be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 8 is intended to supersede, to the extent permitted by law, any right to contribution under the Act or the Exchange Act or otherwise available. 9. Survival of Indemnities, Contribution, Warranties and Representations. The respective indemnity and contribution agreements of the Company and the Underwriter contained in Sections 7 and 8 hereof, and the representations and warranties of the Company contained herein shall remain operative and in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of the Underwriter, the Company or any of its directors and officers, or any controlling person referred to in said Sections, and shall survive the delivery of, and payment for, the Shares. 10. Termination of Agreement. (a) The Company, by written or telegraphic notice to the Underwriter, or the Underwriter, by written or telegraphic notice to the Company, may terminate this Agreement prior to the earlier of (i) 11:00 A.M., New York City time, on the first full business day after the Effective Date; or (ii) the time when the Underwriter, after the Registration Statement becomes effective, releases the Offered Shares for public offering. The time when the Underwriter "releases the Offered Shares for public offering" for the purposes of this Section 10 means the time when the Underwriter releases for publication the first newspaper advertisement, which is subsequently published, relating to the Offered Shares, or the time when the Underwriter releases for delivery to members of a selling group copies of the Prospectus and an offering letter or an offering telegram relating to the Offered Shares, whichever will first occur. (b) This Agreement, including without limitation, the obligation to purchase the Shares and the obligation to purchase the Optional Shares after exercise of the option referred to in Section 3 hereof, are subject to termination in the absolute discretion of the Underwriter, by notice given to the Company prior to delivery of and payment for all the Offered Shares or such Optional Shares, as the case may be, if, prior to such time, any of the following shall have occurred: (i) the Company withdraws the Registration Statement from the Commission or the Company does not or cannot expeditiously proceed with the public offering; (ii) the representations and warranties in Section 4 hereof are not materially correct or cannot be complied with; (iii) trading in securities generally on the New York Stock Exchange or the American Stock Exchange will have been suspended; (iv) limited or minimum prices will have been established on either such Exchange; (v) a banking moratorium will have been declared either by federal or New York State authorities; (vi) any other restrictions on transactions in securities materially affecting the free market for securities or the payment for such securities, including the Offered Shares or the Optional Shares, will be established by either of such Exchanges, by the Commission, by any other federal or state agency, by action of the Congress or by Executive Order; (vii) trading in any securities of the Company shall have been suspended or halted by any national securities exchange, the NASD or the Commission; (viii) there has been a materially adverse change in the condition (financial or otherwise), prospects or obligations of the Company; (ix) the Company will have sustained a material loss, whether or not insured, by reason of fire, flood, accident or other calamity; (x) any action has been taken by the government of the United States or any department or agency thereof which, in the judgment -25- of the Underwriter, has had a material adverse effect upon the market or potential market for securities in general; or (xi) the market for securities in general or political, financial or economic conditions will have so materially adversely changed that, in the judgment of the Underwriter, it will be impracticable to offer for sale, or to enforce contracts made by the Underwriter for the resale of, the Offered Shares or the Optional Shares, as the case may be. (c) If this Agreement is terminated pursuant to Section 6 hereof or this Section 10 or if the purchases provided for herein are not consummated because any condition of the Underwriter's obligations hereunder is not satisfied or because of any refusal, inability or failure on the part of the Company to comply with any of the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company shall be unable to or does not perform all of its obligations under this Agreement, the Company will not be liable to the Underwriter for damages on account of loss of anticipated profits arising out of the transactions covered by this Agreement, but the Company will remain liable to the extent provided in Sections 5(j), 7, 8 and 9 of this Agreement. 11. Information Furnished by the Underwriter to the Company. It is hereby acknowledged and agreed by the parties hereto that for the purposes of this Agreement, including, without limitation, Sections 4(f), 7(a), 7(b) and 8 hereof, the only information given by the Underwriter to the Company for use in the Prospectus are the statements set forth in the last sentence of the last paragraph on the cover page, the statement appearing in the last paragraph on page __ with respect to stabilizing the market price of Shares, the information in the __ paragraph on page __ with respect to concessions and reallowances, and the information in the ___ paragraph on page ___ with respect to the determination of the public offering price, as such information appears in any Preliminary Prospectus and in the Prospectus. 12. Notices and Governing Law. All communications hereunder will be in writing and, except as otherwise provided, will be delivered at, or mailed by certified mail, return receipt requested, or telegraphed to, the following addresses: if to the Underwriter, to Whale Securities Co., L.P., Attention:______________ William G. Walters, 650 Fifth Avenue, New York, New York 10019, with a copy to Tenzer Greenblatt LLP, Attention: Robert J. Mittman, Esq., 405 Lexington Avenue, New York, New York 10174; if to the Company, addressed to it at IBS Interactive, Inc., Attention: Nicholas R. Loglisci, Jr., President, 2 Ridgedale Avenue, Suite 350, Cedar Knolls, New Jersey 07927, with a copy to Kelley Drye & Warren LLP, Attention: John T. Capetta, Esq., Two Stanford Plaza, 281 Tresser Boulevard, Stamford, Connecticut 06901. This Agreement shall be deemed to have been made and delivered in New York City and shall be governed as to validity, interpretation, construction, effect and in all other respects by the internal laws of the State of New York. The Company (1) agrees that any legal suit, action or proceeding arising out of or relating to this Agreement shall be instituted exclusively in New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, (2) waives any objection which the Company may have now or hereafter to the venue of any such suit, action or proceeding, and (3) irrevocably consents to the jurisdiction of the New York State Supreme Court, County of New York, and the United States District Court for the Southern District of New York in any such suit, action or proceeding. The Company further agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the New York State Supreme Court, County of New York, or in the United States District Court for -26- the Southern District of New York and agrees that service of process upon the Company mailed by certified mail to the Company's address shall be deemed in every respect effective service of process upon the Company, in any such suit, action or proceeding. 13. Parties in Interest. This Agreement is made solely for the benefit of the Underwriter, the Company and, to the extent expressed, any person controlling the Company or the Underwriter, each officer, partner, employee and agent of the Underwriter, the directors of the Company, its officers who have signed the Registration Statement, and their respective executors, administrators, successors and assigns, and, no other person will acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" will not include any purchaser of the Shares from the Underwriter, as such purchaser. If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement between the Company and the Underwriter in accordance with its terms. Very truly yours, IBS INTERACTIVE, INC. By:_______________________ Name: Title: Confirmed and accepted in New York, N.Y., as of the date first above written: WHALE SECURITIES CO., L.P. By: Whale Securities Corp., General Partner By:_________________ Name: Title: -27- EX-1.2 3 EXHIBIT 1.2 WARRANT AGREEMENT dated as of ______ __, 1998 between IBS Interactive, Inc., a Delaware corporation with executive offices located at 2 Ridgedale Avenue, Cedar Knolls, New Jersey 07927 (the "Company"), and Whale Securities Co., L.P., with executive offices located at 650 Fifth Avenue, New York, New York 10019 (hereinafter referred to as the "Underwriter"). W I T N E S S E T H: WHEREAS, the Company proposes to issue to the Underwriter warrants (the "Warrants") to purchase up to 120,000 (as such number may be adjusted from time to time pursuant to Article 8 of this Agreement) shares (the "Shares") of common stock, $.01 par value (the "Common Stock"), of the Company; and WHEREAS, the Underwriter has agreed, pursuant to the underwriting agreement (the "Underwriting Agreement") dated ____________, 1998 between the Underwriter and the Company, to act as the underwriter in connection with the Company's proposed public offering (the "Public Offering") of 1,200,000 shares of Common Stock (the "Public Shares") at an initial public offering price of $6.00 per Public Share; and WHEREAS, the Warrants issued pursuant to this Agreement are being issued by the Company to the Underwriter or to its designees who are officers and partners of the Underwriter or to members of the selling group participating in the distribution of the Public Shares to the public in the Public Offering and/or their respective directors, officers or partners (collectively, the "Designees"), in consideration for, and as part of the Underwriter's compensation in connection with, the Underwriter acting as the Underwriter pursuant to the Underwriting Agreement; NOW, THEREFORE, in consideration of the premises, the payment by the Underwriter to the Company of ONE HUNDRED DOLLARS ($100.00), the agreements herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Grant. The Underwriter, and/or the Designees are hereby granted the right to purchase, at any time until 5:00 P.M., New York time, on _______, 2003 (the "Warrant Exercise Term"), up to 120,000 fully-paid and non-assessable Shares at an initial exercise price (subject to adjustment as provided in Article 8 hereof) of $6.60 per Share. 2. Warrant Certificates. The warrant certificates delivered and to be delivered pursuant to this Agreement (the "Warrant Certificates") shall be in the form set forth in Exhibit A attached hereto and made a part hereof, with such appropriate insertions, omissions, substitutions and other variations as required or permitted by this Agreement. 3. Exercise of Warrant. 3.1. Cash Exercise. The Warrants initially are exercisable at a price of $6.60 per Share, payable in cash or by check to the order of the Company, or any combination thereof, subject to adjustment as provided in Article 8 hereof. Upon -2- surrender of the Warrant Certificate with the annexed Form of Election to Purchase duly executed, together with payment of the Exercise Price (as hereinafter defined) for the Shares purchased, at the Company's principal offices (currently located at 2 Ridgedale Avenue, Suite 350, Cedar Krolls, New Jersey 07927) the registered holder of a Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a certificate or certificates for the Shares so purchased. The purchase rights represented by each Warrant Certificate are exercisable at the option of the Holder thereof, in whole or in part (but not as to fractional Shares). In the case of the purchase of less than all the Shares purchasable under any Warrant Certificate, the Company shall cancel said Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate of like tenor for the balance of the Shares purchasable thereunder. 3.2. Cashless Exercise. At any time during the Warrant Exercise Term, the Holder may, at the Holder's option, exchange, in whole or in part, the Warrants represented by such Holder's Warrant Certificate (a "Warrant Exchange"), into the number of Shares determined in accordance with this Section 3.2, by surrendering such Warrant Certificate at the principal office of the Company or at the office of its transfer agent, accompanied by a notice stating such Holder's intent to effect such exchange, the number of Warrants to be so exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the date specified in the Notice of Exchange or, if later, the date the -3- Notice of Exchange is received by the Company (the "Exchange Date"). Certificates for the Shares issuable upon such Warrant Exchange and, if applicable, a new Warrant Certificate of like tenor representing the Warrants which were subject to the surrendered Warrant Certificate and not included in the Warrant Exchange, shall be issued as of the Exchange Date and delivered to the Holder within three (3) days following the Exchange Date. In connection with any Warrant Exchange, the Holder shall be entitled to subscribe for and acquire (i) the number of Shares (rounded to the next highest integer) which would, but for the Warrant Exchange, then be issuable pursuant to the provision of Section 3.1 above upon the exercise of the Warrants specified by the Holder in its Notice of Exchange (the "Total Number") less (ii) the number of Shares equal to the quotient obtained by dividing (a) the product of the Total Number and the existing Exercise Price (as hereinafter defined) by (b) the Market Price (as hereinafter defined) of a Public Share on the day preceding the Warrant Exchange. "Market Price" at any date shall be deemed to be the last reported sale price, or, in case no such reported sales takes place on such day, the average of the last reported sale prices for the last three (3) trading days, in either case as officially reported by the principal securities exchange on which the Common Stock is listed or admitted to trading or as reported in the NASDAQ National market System, or, if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted on the NASDAQ National Market System, the closing bid price as furnished by (i) the National Association of Securities Dealers, Inc. through NASDAQ -4- or (ii) a similar organization if NASDAQ is no longer reporting such information. 4. Issuance of Certificates. Upon the exercise of the Warrants, the issuance of certificates for the Shares purchased shall be made forthwith (and in any event within three (3) business days thereafter) without charge to the Holder thereof including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall (subject to the provisions of Article 5 hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Warrant Certificates and the certificates repre senting the Shares shall be executed on behalf of the Company by the manual or facsimile signature of the present or any future Chairman or Vice Chairman of the Board of Directors, Chief Executive Officer or President or Vice President of the Company under its corporate seal reproduced thereon, attested to by the manual or facsimile signature of the present or any future Secretary or Assistant Secretary of the Company. Warrant -5- Certificates shall be dated the date of execution by the Company upon initial issuance, division, exchange, substitution or transfer. Upon exercise, in part or in whole, of the Warrants, certificates representing the Shares shall bear a legend substantially similar to the following: "The securities represented by this certificate have not been registered for purposes of public distribution under the Securities Act of 1933, as amended (the "Act"), and may not be offered or sold except (i) pursuant to an effective registration statement under the Act, (ii) to the extent applicable, pursuant to Rule 144 under the Act (or any similar rule under such Act relating to the disposition of securities), or (iii) upon the delivery by the holder to the Company of an opinion of counsel, reasonably satisfactory to counsel to the Company, stating that an exemption from registration under such Act is available." 5. Restriction on Transfer of Warrants. The Holder of a Warrant Certificate, by the Holder's acceptance thereof, covenants and agrees that the Warrants are being acquired as an investment and not with a view to the distribution thereof, and that the Warrants may not be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or in part, for a period of one (1) year from the date hereof, except to the Designees. 6. Price. 6.1. Initial and Adjusted Exercise Price. The initial exercise price of each Warrant shall be $6.60 per Share. The adjusted exercise price per Share shall be the price which shall result from time to time from any and all adjustments of the -6- initial exercise price per Share in accordance with the provisions of Article 8 hereof. 6.2. Exercise Price. The term "Exercise Price" herein shall mean the initial exercise price or the adjusted exercise price, depending upon the context. 7. Registration Rights. 7.1. Registration Under the Securities Act of 1933. None of the Warrants or Shares have been registered for purposes of public distribution under the Securities Act of 1933, as amended (the "Act"). 7.2. Registrable Securities. As used herein the term "Registrable Security" means each of the Warrants, the Shares and any shares of Common Stock issued upon any stock split or stock dividend in respect of such Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Act and disposed of pursuant thereto, (ii) registration under the Act is no longer required for the subsequent public distribution of such security or (iii) it has ceased to be outstanding. The term "Registrable Securities" means any and/or all of the securities falling within the foregoing definition of a "Registrable Security." In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of "Registrable Security" as is appropriate in -7- order to prevent any dilution or enlargement of the rights granted pursuant to this Article 7. 7.3. Piggyback Registration. If, at any time during the seven years following the effective date of the Public Offering, the Company proposes to prepare and file one or more post-effective amendments to the registration statement filed in connection with the Public Offering or any new registration statement or post-effective amendments thereto covering equity or debt securities of the Company, or any such securities of the Company held by its shareholders (in any such case, other than in connection with a merger, acquisition or pursuant to Form S-8 or successor form), (for purposes of this Article 7, collectively, the "Registration Statement"), it will give written notice of its intention to do so by registered mail ("Notice"), at least thirty (30) business days prior to the filing of each such Registration Statement, to all holders of the Registrable Securities. Upon the written request of such a holder (a "Requesting Holder"), made within twenty (20) business days after receipt of the Notice, that the Company include any of the Requesting Holder's Registrable Securities in the proposed Registration Statement, the Company shall, as to each such Requesting Holder, use its best efforts to effect the registration under the Act of the Registrable Securities which it has been so requested to register ("Piggyback Registration"), at the Company's sole cost and expense and at no cost or expense to the Requesting Holders. -8- 7.4. Demand Registration. (a) At any time during the Warrant Exercise Term, any "Majority Holder" (as such term is defined in Section 7.4(d) below) of the Registrable Securities shall have the right (which right is in addition to the piggyback registration rights provided for under Section 7.3 hereof), exercisable by written notice to the Company (the "Demand Registration Request"), to have the Company prepare and file with the Securities and Exchange Commission (the "Commission"), on one occasion, at the sole expense of the Company (except as provided in Section 7.5(b) hereof), a Registration Statement and such other documents, including a prospectus, as may be necessary (in the opinion of both counsel for the Company and counsel for such Majority Holder), in order to comply with the provisions of the Act, so as to permit a public offering and sale of the Registrable Securities by the holders thereof. The Company shall use its best efforts to cause the Registration Statement to become effective under the Act, so as to permit a public offering and sale of the Registrable Securities by the holders thereof. Once effective, the Company will use its best efforts to maintain the effectiveness of the Registration Statement until the earlier of (i) the date that all of the Registrable Securities have been sold or (ii) the date that the holders of the Registrable Securities receive an opinion of counsel to the Company that all of the Registrable Securities may be freely traded (without limitation or restriction as to quantity or timing and without registration under the Act) under Rule 144(k) promulgated under the Act or otherwise. -9- (b) The Company covenants and agrees to give written notice of any Demand Registration Request to all holders of the Registrable Securities within ten (10) business days from the date of the Company's receipt of any such Demand Registration Request. After receiving notice from the Company as provided in this Section 7.4(b), holders of Registrable Securities may request the Company to include their Registrable Securities in the Registration Statement to be filed pursuant to Section 7.4(a) hereof by notifying the Company of their decision to have such securities included within ten (10) days of their receipt of the Company's notice. (c) The term "Majority Holder" as used in Section 7.4 hereof shall mean any holder or any combination of holders of Registrable Securities, if included in such holders' Registrable Securities are that aggregate number of shares of Common Stock (including Shares already issued and Shares issuable pursuant to the exercise of outstanding Warrants) as would constitute a majority of the aggregate number of Shares (including Shares already issued and Shares issuable pursuant to the exercise of outstanding Warrants) included in all the Registrable Securities. 7.5. Covenants of the Company With Respect to Registration. The Company covenants and agrees as follows: (a) In connection with any registration under Section 7.4 hereof, the Company shall file the Registration Statement as expeditiously as possible, but in any event no later than twenty (20) days following receipt of any demand therefor, -10- shall use its best efforts to have any such Registration Statement declared effective at the earliest possible time, and shall furnish each holder of Registrable Securities such number of prospectuses as shall reasonably be requested. (b) The Company shall pay all costs, fees and expenses (other than underwriting fees, discounts and nonaccountable expense allowance applicable to the Registrable Securities and the fees and expenses of counsel retained by the holders of Registrable Securities) in connection with all Registration Statements filed pursuant to Sections 7.3 and 7.4(a) hereof including, without limitation, the Company's legal and accounting fees, printing expenses, and blue sky fees and expenses. (c) The Company will take all necessary action which may be required in qualifying or registering the Registrable Securities included in the Registration Statement for offering and sale under the securities or blue sky laws of such states as are reasonably requested by the holders of such securities. (d) The Company shall indemnify any holder of the Registrable Securities to be sold pursuant to any Registration Statement and any underwriter or person deemed to be an underwriter under the Act and each person, if any, who controls such holder or underwriter or person deemed to be an underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become -11- subject under the Act, the Exchange Act or otherwise, arising from such registration statement to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriter as set forth in Section 7 of the Underwriting Agreement and to provide for just and equitable contribution as set forth in Section 8 of the Underwriting Agreement. (e) Any holder of Registrable Securities to be sold pursuant to a registration statement, and such Holder's successors and assigns, shall severally, and not jointly, indemnify, the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such holder, or such Holder's successors or assigns, for specific inclusion in such Registration Statement to the same extent and with the same effect as the provisions pursuant to which the Underwriter has agreed to indemnify the Company as set forth in Section 7 of the Underwriting Agreement and to provide for just and equitable contribution as set forth in Section 8 of the Underwriting Agreement. (f) Nothing contained in this Agreement shall be construed as requiring any Holder to exercise the Warrants held -12- by such Holder prior to the initial filing of any registration statement or the effectiveness thereof. (g) If the Company shall fail to comply with the provisions of this Article 7, the Company shall, in addition to any other equitable or other relief available to the holders of Registrable Securities, be liable for any or all incidental, special and consequential damages sustained by the holders of Registrable Securities, requesting registration of their Registrable Securities. (h) The Company shall promptly deliver copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the Registration Statement to each holder of Registrable Securities included for such registration in such Registration Statement pursuant to Section 7.3 hereof or Section 7.4 hereof requesting such correspondence and memoranda and to the managing underwriter, if any, of the offering in connection with which such Holder's Registrable Securities are being registered and shall permit each holder of Registrable Securities and such underwriter to do such reasonable investigation, upon reasonable advance notice, with respect to information contained in or omitted from the Registration Statement as it deems reasonably necessary to comply with applicable securities laws or rules of the National Association of Securities Dealers, Inc. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and -13- independent auditors, all to such reasonable extent and at such reasonable times and as often as any such holder of Registrable Securities or underwriter shall reasonably request. 8. Adjustments of Exercise Price and Number of Shares. 8.1. Computation of Adjusted Price. In case the Company shall at any time after the date hereof pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, then upon such dividend or distribution the Exercise Price in effect immediately prior to such dividend or distribution shall forthwith be reduced to a price determined by dividing: (a) an amount equal to the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution multiplied by the Exercise Price in effect immediately prior to such dividend or distribution, by (b) the total number of shares of Common Stock outstanding immediately after such issuance or sale. For the purposes of any computation to be made in accordance with the provisions of this Section 8.1, the Common Stock issuable by way of dividend or other distribution on any stock of the Company shall be deemed to have been issued immediately after the opening of business on the date following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution. 8.2. Subdivision and Combination. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Exercise Price shall forthwith be -14- proportionately decreased in the case of subdivision or increased in the case of combination. 8.3. Adjustment in Number of Shares. Upon each adjustment of the Exercise Price pursuant to the provisions of this Article 8, the number of Shares issuable upon the exercise of each Warrant shall be adjusted to the nearest full number by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of Shares issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 8.4. Reclassification, Consolidation, Merger, etc. In case of any reclassification or change of the outstanding shares of Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in the case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in any reclassification or change of the outstanding shares of Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or in the case of a sale or conveyance to another corporation of the property of the Company as an entirety, the Holders shall thereafter have the right to purchase the kind and number of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance as if the Holders were the owners of the shares of Common Stock -15- underlying the Warrants immediately prior to any such events at a price equal to the product of (x) the number of shares of Common Stock issuable upon exercise of the Holder's Warrants and (y) the Exercise Price in effect immediately prior to the record date for such reclassification, change, consolidation, merger, sale or conveyance as if such Holders had exercised the Warrants. 8.5. Determination of Outstanding Shares of Common Stock. The number of shares of Common Stock at any one time outstanding shall include the aggregate number of shares of Common Stock issued and the aggregate number of shares of Common Stock issuable upon the exercise of options, rights, warrants and upon the conversion or exchange of convertible or exchangeable securities. 8.6. Dividends and Other Distributions with Respect to Outstanding Securities. In the event that the Company shall at any time prior to the exercise of all Warrants make any distribution of its assets to holders of its Common Stock as a liquidating or a partial liquidating dividend, then the holder of Warrants who exercises its Warrants after the record date for the determination of those holders of Common Stock entitled to such distribution of assets as a liquidating or partial liquidating dividend shall be entitled to receive for the Warrant Price per Warrant, in addition to each share of Common Stock, the amount of such distribution (or, at the option of the Company, a sum equal to the value of any such assets at the time of such distribution as determined by the Board of Directors of the Company in good faith) which would have been payable to such holder had he been the holder -16- of record of the Common Stock receivable upon exercise of his Warrant on the record date for the determination of those entitled to such distribution. At the time of any such dividend or distribution, the Company shall make appropriate reserves to ensure the timely performance of the provisions of this Subsection 8.6. 8.7. Subscription Rights for Shares of Common Stock or Other Securities. In the case that the Company or an affiliate of the Company shall at any time after the date hereof and prior to the exercise of all the Warrants issue any rights, warrants or options to subscribe for shares of Common Stock or any other securities of the Company or of such affiliate to all the shareholders of the Company, the Holders of unexercised Warrants on the record date set by the Company or such affiliate in connection with such issuance of rights, warrants or options shall be entitled, in addition to the shares of Common Stock or other securities receivable upon the exercise of the Warrants, to receive such rights, warrants or options shall be entitled, in addition to the shares of Common Stock or other securities receivable upon the exercise of the Warrants, to receive such rights at the time such rights, warrants or options that such Holders would have been entitled to receive had they been, on such record date, the holders of record of the number of whole shares of Common Stock then issuable upon exercise of their outstanding Warrants (assuming for purposes of this Section 8.7), that the exercise of the Warrants is permissible immediately upon issuance). -17- 9. Exchange and Replacement of Warrant Certificates. Each Warrant Certificate is exchangeable without expense, upon the surrender thereof by the registered Holder at the principal executive office of the Company, for a new Warrant Certificate of like tenor and date representing in the aggregate the right to purchase the same number of securities in such denominations as shall be designated by the Holder thereof at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Warrant Certificate, if mutilated, the Company will make and deliver a new Warrant Certificate of like tenor, in lieu thereof. 10. Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of Shares, nor shall it be required to issue scrip or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of Shares. 11. Reservation and Listing of Securities. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of the Warrants, such number -18- of shares of Common Stock as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all Shares issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any shareholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon the exercise of the Warrants to be listed on or quoted by NASDAQ or listed on such national securities exchange, in the event the Common Stock is listed on a national securities exchange. 12. Notices to Warrant Holders. Nothing contained in this Agreement shall be construed as conferring upon the Holder or Holders the right to vote or to consent or to receive notice as a shareholder in respect of any meetings of shareholders for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of the Warrants and their exercise, any of the following events shall occur: (a) the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting -19- treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; or (d) reclassification or change of the outstanding shares of Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in any reclassification or change of the outstanding shares of Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or a sale or conveyance to another corporation of the property of the Company as an entirety is proposed; or -20- (e) The Company or an affiliate of the Company shall propose to issue any rights to subscribe for shares of Common Stock or any other securities of the Company or of such affiliate to all the shareholders of the Company; then, in any one or more of said events, the Company shall give written notice to the Holder or Holders of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, options or warrants, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend or distribution, or the issuance of any convertible or exchangeable securities or subscription rights, options or warrants, or any proposed dissolution, liquidation, winding up or sale. 13. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made when delivered, or mailed by registered or certified mail, return receipt requested: (a) If to a registered Holder of the Warrants, to the address of such Holder as shown on the books of the Company; or -21- (b) If to the Company, to the address set forth in Section 3 of this Agreement or to such other address as the Company may designate by notice to the Holders. 14. Supplements and Amendments. The Company and the Underwriter may from time to time supplement or amend this Agreement without the approval of any Holders of Warrant Certificates in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Underwriter may deem necessary or desirable and which the Company and the Underwriter deem not to adversely affect the interests of the Holders of Warrant Certificates. 15. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company and the Holders inure to the benefit of their respective successors and assigns hereunder. 16. Termination. This Agreement shall terminate at the close of business on __________, 2006. Notwithstanding the foregoing, this Agreement will terminate on any earlier date when all Warrants have been exercised and all the Shares issuable upon exercise of the Warrants have been resold to the public; provided, however, that the provisions of Section 7 shall survive any termination pursuant to -22- this Section 16 until the close of business on _________, 2009. 17. Governing Law. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said State. 18. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Underwriter and any other registered holder or holders of the Warrant Certificates, Warrants or the Shares any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive benefit of the Company and the Underwriter and any other holder or holders of the Warrant Certificates, Warrants or the Shares. 19. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. -23- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. [SEAL] IBS INTERACTIVE, INC. By:___________________________ Name: Title: Attest: __________________ WHALE SECURITIES CO., L.P. By: Whale Securities Corp., General Partner By:______________________ Name: Title: -24- EXHIBIT A THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED FOR PURPOSES OF PUBLIC DISTRIBUTION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE ON OR BEFORE 5:00 P.M., NEW YORK TIME, _________, 2003 No. W- 120,000 Warrants WARRANT CERTIFICATE This Warrant Certificate certifies that Whale Securities Co., L.P. or registered assigns, is the registered holder of 120,000 Warrants to purchase, at any time until 5:00 P.M. New York City time on ________, 2003 ("Expiration Date"), up to 100,000 fully-paid and non-assessable shares ("Shares") of common stock, no par value (the "Common Stock"), of IBS Interactive, Inc., a Delaware corporation (the "Company"), at the initial exercise price, subject to adjustment in certain events (the "Exercise Price"), of $6.60 per Share upon surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the warrant agreement dated as of ____________, 1998 between the Company and Whale Securities Co., L.P. (the "Warrant Agreement"). Payment of the Exercise Price may be made in cash, or by certified or official bank check in New York Clearing House funds payable to the order of the Company, or any combination thereof. No Warrant may be exercised after 5:00 P.M., New York City time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, shall thereafter be void. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to in a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. The Warrant Agreement provides that upon the occurrence of certain events, the Exercise Price and the type and/or number of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair, the rights of the holder as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant Agreement, without any charge except for any tax, or other governmental charge imposed in connection therewith. Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of unexercised Warrants. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal. Dated: ___________, 1998 IBS INTERACTIVE, INC. [SEAL] By:__________________________ Name: Title: Attest: ________________________ [FORM OF ELECTION TO PURCHASE] The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase _________ shares of Common Stock and herewith tenders in payment for such securities cash or a certified or official bank check payable in New York Clearing House Funds to the order of IBS Interactive, Inc. in the amount of $ , all in accordance with the terms hereof. The undersigned requests that a certificate for such securities be registered in the name of ___________________________________________________ __ , whose address is __________________, and that such Certificate be delivered to __________________, whose address is _____________. Dated: Signature:_________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) ________________________________ ________________________________ (Insert Social Security or Other Identifying Number of Holder) [FORM OF ASSIGNMENT] (To be executed by the registered holder if such holder desires to transfer the Warrant Certificate.) FOR VALUE RECEIVED___________________________________________ hereby sells, assigns and transfers unto _______________________________________________________________________________ (Please print name and address of transferee) this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________, Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution. Dated: Signature:_________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) ________________________________ ________________________________ (Insert Social Security or Other Identifying Number of Holder) EX-3.2 4 EXHIBIT 3.2 RESTATED BY-LAWS OF IBS INTERACTIVE, INC. (formerly known as Internet Broadcasting System, Inc.) As Amended April 21, 1998 ARTICLE I Stockholders SECTION 1. Annual Meeting. The annual meeting of the stockholders of the Corporation for the purpose of electing Directors and for the transaction of such other business as may be properly brought before the meeting shall be held on such date, at such time and at such place within or without the State of Delaware as may be designated by the Board of Directors or if no date and time are so fixed, at 10:00 a.m. on the first Friday in June of each year at the principal executive office of the Corporation at 10:00 a.m. SECTION 2. Special Meetings. Except as otherwise provided by statute or in the Corporation's Restated Certificate of Incorporation, as such certificate of incorporation may be from time to time hereafter modified, amended or supplemented (the "Restated Certificate"), a special meeting of the stockholders of the Corporation may be called at any time by the Board of Directors, the President or stockholders holding at least ten percent of the outstanding shares of stock in the Corporation that would be entitled to vote at a regularly scheduled meeting of the Corporation's stockholders. Any special meeting of the stockholders shall be held on such date, at such time and at such place within or without the State of Delaware as the Board of Directors or the officer calling the meeting may designate. SECTION 3. Notice of Meetings. Written notice of each meeting of the stockholders, which shall state the place, date and hour of the meeting and, in case of a special meeting, the purpose or purposes for which it is called, shall be given, not less than ten (10) nor more than sixty (60) days before the date of such meeting, either personally or by mail, to each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, postage prepaid, directed to the stockholder at the address of such stockholder as it appears on the records of the Corporation. Whenever notice is required to be given, a written waiver thereof signed by the stockholder entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a stockholder at a meeting shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. If, at any meeting of stockholders, action is proposed to be taken which would, if taken, entitle stockholders to perfect appraisal rights with respect to their shares of the Corporation's capital stock, the notice of meeting shall include a statement to that effect and such notice shall comply with the requirements specified in Section 262 of the General Corporation Law of the State of Delaware. SECTION 4. Quorum. At any meeting of the stockholders, the holders of a majority in number of the total outstanding shares of stock of the Corporation entitled to vote at such meeting, present in person or represented by proxy, shall constitute a quorum of the stockholders for all purposes, unless the representation of a larger number of shares shall be required by law, by the Restated Certificate or by these By-Laws, in which case the representation of the number of shares so required shall constitute a quorum; provided, that, at 2 any meeting of the stockholders at which the holders of any class of stock of the Corporation shall be entitled to vote separately as a class, the holders of a majority in number of the total outstanding shares of such class, present in person or represented by proxy, shall constitute a quorum for purposes of such class vote unless the representation of a larger number of shares of such class shall be required by law, by the Restated Certificate or by these By-Laws. SECTION 5. Adjourned Meetings. Whether or not a quorum shall be present in person or represented at any meeting of the stockholders, the holders of a majority in number of the shares of stock of the Corporation present in person or represented by proxy and entitled to vote at such meeting may adjourn from time to time; provided, however, that if the holders of any class of stock of the Corporation are entitled to vote separately as a class upon any matter at such meeting, any adjournment of the meeting in respect of action by such class upon such matter shall be determined by the holders of a majority of the shares of such class present in person or represented by proxy and entitled to vote at such meeting. At the adjourned meeting, the stockholders or the holders of any class of stock entitled to vote separately as a class, as the case may be, may transact any business which might have been transacted by them at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. SECTION 6. Organization. At each meeting of the stockholders, the Chief Operating Officer of the Corporation, or such officer's absence or inability to act, the President of the Corporation, or in such officer's absence or inability to act, a Vice President shall call all meetings of the stockholders to order, and shall act as chairman of such meetings. In the absence of each of the Chief Operating Officer, the President and each of the Vice Presidents, the holders of a majority in number of the shares 3 of stock of the Corporation present in person or represented by proxy and entitled to vote at such meeting shall elect a Chairman. The Secretary of the Corporation shall act as Secretary of all meetings of the stockholders; but in the absence of the Secretary, the chairman of the meeting may appoint any person to act as secretary of the meeting. SECTION 7. Voting. Except as otherwise provided in the Restated Certificate or by law, each stockholder shall be entitled to one vote for each share of the capital stock of the Corporation registered in the name of such stockholder upon the books of the Corporation. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for him by proxy. Any such proxy shall be delivered to the secretary of such meeting at or prior to the time designated in the order of business for so delivering such proxies. Except as otherwise provided by law, every proxy shall be revocable at the pleasure of the stockholder executing it. No such proxy shall be voted or acted upon after three years from its date unless the proxy provides for a longer period. Unless required by law or determined by the chairman of the meeting to be advisable, the vote on any matter need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting or by such stockholder's proxy if there can be such proxy, and shall state the number of shares voted. Except as otherwise provided by law or by the Restated Certificate, Directors shall be elected by a plurality of the votes cast at a meeting of stockholders by the stockholders entitled to vote in the election and, whenever any corporate action other than the election of Directors is to be taken, it shall be authorized by a majority of the votes cast at a meeting of stockholders by the stockholders entitled to vote thereon. 4 Shares of the capital stock of the Corporation belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes. SECTION 8. List of Stockholders. It shall be the duty of the Secretary of the Corporation to prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of stockholders entitled to vote at such meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held, for the ten (10) days next preceding the meeting, to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, and shall be produced and kept at the time and place of the meeting during the whole time thereof and subject to the inspection of any stockholder who may be present. SECTION 9. Inspectors. The Board of Directors, in advance of any meeting of stockholders, shall appoint one or more inspectors to act at such meeting or any adjournment thereof and to make a written report thereon. The Board of Directors may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at the meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall ascertain the number of shares of each kind, class or series of stock outstanding and the voting 5 power of each, determine the number of shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting or any stockholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, question or matter determined by them and shall execute a certificate of any fact found by them. No Director or nominee for the office of Director shall act as an inspector of an election of Directors. Inspectors need not be stockholders. SECTION 10. Business Brought Before an Annual Meeting. At an annual meeting of stockholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before the meeting of stockholders. To be properly brought before an annual meeting of stockholders, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder who was a stockholder of record at the time of giving of the notice provided for in this section, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 10. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice must be delivered to or mailed and received by the Corporation's Secretary at the principal executive offices of the Corporation, not less than one hundred twenty (120) days prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that in 6 the event that the date of the annual meeting of stockholders is changed by more than thirty (30) days from such anniversary date, notice by the stockholder to be timely must be so received no later than the close of business on the tenth (10) day following the day on which notice of the date of the meeting was mailed. A stockholder's notice to the Corporation's Secretary shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a Director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business sought to be brought before the meeting; (c) the name and address, as such appear on the Corporation's books, of the stockholder proposing such nominee or business and any other stockholders known by such stockholder to be supporting such nominee or proposal; (d) the class and number of shares of the Corporation which, on the date of such stockholder's notice, are beneficially owned by such stockholder and by any other stockholders known by such stockholder to be supporting such nominee or proposal; and (e) any material interest of the stockholder in such business. Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at an annual meeting of stockholders except in accordance with the procedures set forth in this Section 10. The chairman of the annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the 7 provisions of this Section 10 and if the chairman should so determine, the chairman shall so declare at the meeting and any such business not properly brought before such meeting shall not be transacted. ARTICLE II Board of Directors SECTION 1. General Powers. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors. The Board of Directors may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by statute, the Restated Certificate or these By-laws directed or required to be done by the stockholders. SECTION 2. Number and Qualifications. The Board of Directors shall consist of not less than three (3) nor more than nine (9) Directors. Directors need not be stockholders. The Board of Directors, by the affirmative vote of a majority of the entire Board of Directors, may increase the number of Directors to a number not exceeding fifteen (15). Vacancies occurring by reason of any such increase shall be filled in accordance with Section 4 of this Article II. The Board of Directors, by the vote of a majority of the entire Board of Directors, may decrease the number of Directors to a number not less than three (3) but any such decrease shall not affect the term of office of any Director. SECTION 3. Classes, Election and Term of Office. Except for Directors elected to fill vacancies, all Directors shall be elected at the annual meeting of stockholders and shall be nominated in accordance with the provisions of Section 5 of this Article. Directors elected to fill vacancies shall be appointed and elected in accordance with the provisions of Section 4 of this Article. At each meeting of stockholders for the election of Directors at which a quorum is present, the persons receiving the greatest number of votes, up to the number of Directors to be elected, shall be the Directors. Each Director shall hold office until his successor is elected and qualified, or until his 8 earlier resignation by written notice to the Secretary of the Corporation, or until his removal from office. SECTION 4. Removal, Vacancies and Additional Directors. The stockholders may, by the affirmative vote of the holders of at least a majority of the issued and outstanding shares of the Corporation's capital stock entitled to vote with respect to the election of Directors, at any special meeting, the notice of which shall state that it is called for that purpose, remove, with or without cause, any Director and fill the vacancy in accordance with these By-laws; provided, however, that whenever any Director shall have been elected by the holders of any class of stock of the Corporation voting separately as a class pursuant to statute or the provisions of the Restated Certificate, such Director may be removed and the vacancy filled only by the holders of that class of stock voting separately as a class. Vacancies caused by any removal, or any vacancy caused by the death or resignation of any Director or for any other reason, and any newly created directorship resulting from any increase in the authorized number of Directors, shall be filled by the affirmative vote of a majority of the Directors then in office, although less than a quorum, and if there shall be no Directors then in office, such vacancy or newly created directorship shall be filled by holders of at least a majority of the shares of the Corporation's capital stock entitled to vote with respect to the election of Directors, and any Director so elected to fill such vacancy or any newly created directorship shall hold office for a term that shall expire at the first annual meeting of stockholders following such appointment or until the earlier resignation or removal of the Director. When one (1) or more Directors shall resign from the Board of Directors effective at a future date, a majority of the Directors then in office, including those who have so resigned, shall have power to fill such vacancy or 9 vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office until the first annual meeting of stockholders following such appointment or until the earlier resignation or removal of the Director. SECTION 5. Nominations. (a) Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who was a stockholder of record at the time of giving of the notice provided for in these By-laws, who is entitled to vote for the election of Directors at the meeting and who shall have complied with each of the notice procedures set forth in Article I, Section 10 and all applicable requirements of the Exchange Act and the Rules and Regulations promulgated thereunder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. (b) No person shall be eligible to serve as a Director of the Corporation unless nominated in accordance with the procedures set forth in these By-laws. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these By-laws, and if the chairman should so declare, the defective nomination shall be disregarded. SECTION 6. Place of Meeting. The Board of Directors may hold its meetings in such place or places in or outside the State of Delaware as the Board of Directors may from time to time determine or as specified in the notice of any such meeting. 10 SECTION 7. Annual Meeting. The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business as soon as practicable after each annual meeting of the stockholders, on the same day and at the same place where such annual meeting of stockholders shall be held. Notice of such meeting need not be given. Such meeting may be held at any other time or place, within or without the State of Delaware, which shall be specified in a notice thereof given as hereinafter provided in Section 10 of this Article II. SECTION 8. Regular Meetings. Regular meetings of the Board of Directors shall be held monthly at the principal executive office of the Corporation, or at such other place as the Board of Directors may determine. No notice shall be required for any regular meeting of the Board of Directors held at the principal executive office of the Corporation. A copy of every resolution fixing or changing the time or place of regular meetings shall be delivered to every Director at least five (5) days before the first meeting held pursuant thereto. SECTION 9. Special Meetings. Special meetings of the Board of Directors shall be held whenever called by direction of the President, or by any two (2) of the Directors then in office. SECTION 10. Notice of Meetings. Notice of the day, hour and place of holding of each special meeting (and each annual or regular meeting for which notice shall be required) shall be given by mailing the same at least five (5) days before the meeting or by causing the same to be transmitted by telegraph, cable or wireless at least one (1) day before the meeting to each Director. Unless otherwise indicated in the notice thereof, any and all business other than an amendment of these By-Laws may be transacted at any special meeting, and an amendment of these By-Laws may be acted upon if the notice of the meeting shall have stated that the amendment of these By-Laws is one (1) of the purposes of the meeting. At any meeting at which every Director shall be present, even 11 though without any notice, any business may be transacted, including the amendment of these By-Laws. A written waiver of notice, signed by a Director entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance by a Director at a meeting shall constitute a waiver of notice of such meeting, except when the Director attends a meeting for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 11. Quorum. Subject to the provisions of Section 4 of this Article II, a majority of the members of the Board of Directors in office (but in no case less than one-third of the total number of Directors) shall constitute a quorum for the transaction of business and the vote of the majority of the Directors present at any meeting of the Board of Directors at which a quorum is present shall be the act of the Board of Directors. If at any meeting of the Board of Directors there is less than a quorum present, a majority of those present may adjourn the meeting from time to time. Notice of the time and place of any such adjourned meeting shall be given to the Directors who were not present at the time of the adjournment and, unless such time and place were announced at the meeting at which the adjournment was taken, to the other Directors. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. The Directors shall act only as a board and the individual Directors shall have no power as such. SECTION 12. Organization. At all meetings of the Board of Directors, a chairman shall be elected from the Directors present to preside at such meeting. The Secretary of the Corporation shall act as Secretary of all meetings of the Directors. In the absence of the Secretary, the Chairman may appoint any person to act as secretary of the meeting. 12 SECTION 13. Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one (1) or more committees, each committee to consist of one (1) or more of the Directors of the Corporation. The Board of Directors may designate one (1) or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided by resolution passed by a majority of the whole Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and the affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; except that no such committee shall have the power or authority in reference to amending the Restated Certificate, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or an amendment to these By-Laws; and unless such resolution, these By-Laws, or the Restated Certificate expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Each committee shall keep written minutes of its proceedings and shall report such minutes to the Board of Directors when required. SECTION 14. Conference Telephone Meetings. Unless otherwise restricted by the Restated Certificate or by these By-Laws, the members of the Board of 13 Directors or any committee designated by the Board, may participate in a meeting of the Board of Directors or such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time, and such participation shall constitute presence in person at such meeting. SECTION 15. Consent of Directors or Committee in Lieu of Meeting. Unless otherwise restricted by the Restated Certificate or by these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee, as the case may be. SECTION 16. Compensation. The amount, if any, that each Director shall be entitled to receive as compensation for such Director's services as such shall be fixed from time to time by resolution of the Board of Directors. Directors, who are not employees of the Corporation, shall be entitled to receive reimbursement from the Corporation for reasonable travel expenses in connection with their attendance at any meeting of the Board of Directors. ARTICLE III Officers SECTION 1. Officers. The officers of the Corporation shall be a President, a Chief Operating Officer, a Chief Technical Officer, a Chief Information Officer, a Chief Financial Officer, one (1) or more Vice Presidents, a General Counsel, and a Secretary, and such additional officers, if any, as shall be elected by the Board of Directors pursuant to the provisions of Section 10 of this Article III. The President, the Chief Operating Officer, the Chief Technical Officer, the Chief Information Officer, one (1) or more Vice Presidents, and the Secretary 14 shall be elected by the Board of Directors at its first meeting after each annual meeting of the stockholders. The failure to hold such election shall not of itself terminate the term of office of any officer. All officers shall hold office at the pleasure of the Board of Directors. Any officer may resign at any time upon written notice to the Corporation. Officers may, but need not, be Directors. Any number of offices may be held by the same person. All officers, agents and employees of the Corporation shall be subject to removal, with or without cause, at any time by the Board of Directors. The removal of an officer without cause shall be without prejudice to his contract rights, if any. The election or appointment of an officer shall not of itself create contract rights. All agents and employees other than officers elected by the Board of Directors shall also be subject to removal, with or without cause, at any time by the officers appointing them. Any vacancy caused by the death of any officer, such officer's resignation, his removal, or otherwise, may be filled by the Board of Directors, and any officer so elected shall hold office at the pleasure of the Board of Directors for the unexpired portion of the term of office which shall be vacant. In addition to the powers and duties of the officers of the Corporation as set forth in these By-Laws, each officer shall have such authority and shall perform such duties as from time to time may be determined by the Board of Directors. SECTION 2. Powers and Duties of the Chief Operating Officer. The Chief Operating Officer, subject to the control of the Board of Directors, shall have general responsibility for the business and affairs of the Corporation. In the absence of the Chairman of the Board, the Chief Operating Officer shall preside at all meetings of each of the stockholders and the Board of Directors and he shall have such 15 other powers and duties as may be assigned to or required of such officer from time to time by the Board of Directors or these By-Laws. SECTION 3. Powers and Duties of the President. Unless otherwise determined by the Board of Directors, the President, subject to the control of the Board of Directors, shall perform all duties and services incident to the office of President. In the absence of the Chairman of the Board and the Chief Operating Officer, the President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors. In addition, the President shall have such other powers and perform such other duties as may from time to time be assigned to him by these By-Laws or by the Board of Directors. SECTION 4. Powers and Duties of the Chief Technical Officer. The Chief Technical Officer shall perform all duties incident to the office of Chief Technical Officer and shall have such powers and perform such other duties as may from time to time be assigned to such office by these By-Laws or by the Board of Directors. SECTION 5. Powers and Duties of the Chief Information Officer. The Chief Information Officer shall perform all duties incident to the office of Chief Information Officer and shall have such powers and perform such other duties as may from time to time be assigned to such officer by these By-Laws or by the Board of Directors. SECTION 6. Powers and Duties of the General Counsel. The General Counsel shall perform all duties incident to the office of General Counsel and shall have such powers and perform such other duties as may from time to time be assigned to such office by these By-Laws or by the Board of Directors, the Chief Operating Officer or the President. SECTION 7. Powers and Duties of the Chief Financial Officer. The Chief Financial Officer shall have responsibility for all financial and accounting matters, including supervisory responsibilities for any Treasurer and any Assistant Treasurer of the Corporation, shall perform all duties incident to the office of Chief Financial Officer and shall have such powers and perform such other duties as may from 16 time to time be assigned to such office by these By-Laws or by the Board of Directors, the Chief Operating Officer or the President. SECTION 8. Powers and Duties of the Vice Presidents. Each Vice President shall perform all duties incident to the office of Vice President and shall have such powers and perform such other duties as may from time to time be assigned to such office by these By-Laws or by the Board of Directors, the Chief Operating Officer or the President. SECTION 9. Powers and Duties of the Secretary. The Secretary shall: (i) keep minutes of all meetings of the Board of Directors and minutes of all meetings of the stockholders in books provided for that purpose; (ii) attend to the giving or serving of all notices of the Corporation; (iii) have custody of the corporate seal of the Corporation and shall affix the seal to all stock certificates of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; (iv) have charge of the stock certificate books, transfer books and stock ledgers and such other books and papers as the Board of Directors, Chief Operating Officer or the President shall direct; (v) cause the books, reports, statements, certificates and other documents and records required by law to be kept and filed to be properly kept and filed all of which shall at all reasonable times be open to the examination of any Director, upon application, at the office of the Corporation during business hours; (vi) perform all duties incident to the office of Secretary; and (vii) have such other powers and 17 perform such other duties as may from time to time be assigned to the Secretary by these By-Laws or the Board of Directors, the Chief Operating Officer or the President. SECTION 10. Additional Officers. The Board of Directors may from time to time elect such other officers (who may but need not be Directors), including a Treasurer, a Controller, and one or more Assistant Treasurers, Assistant Secretaries and Assistant Controllers, as the Board of Directors may deem advisable, and such officers shall have such authority and shall perform such duties as may from time to time be assigned to them by the Board of Directors, the Chief Operating Officer or the President. The Board of Directors may from time to time by 18 resolution delegate to any Assistant Treasurer or Assistant Treasurers any of the powers or duties herein assigned to the Treasurer; and may similarly delegate to any Assistant Secretary or Assistant Secretaries any of the powers or duties herein assigned to the Secretary. SECTION 11. Giving of Bond by Officers. All officers of the Corporation, if required to do so by the Board of Directors, shall furnish bonds to the Corporation for the faithful performance of their duties, in such penalties and with such conditions and security as the Board of Directors shall require. SECTION 12. Voting Upon Stocks. Unless otherwise ordered by the Board of Directors, the Chief Operating Officer, the President or any Vice President shall have full power and authority on behalf of the Corporation to attend and to act and to vote, or in the name of the Corporation to execute proxies to vote, at any meetings of stockholders of any corporation in which the Corporation may hold stock, and at any such meetings shall possess and may exercise, in person or by proxy, any and all rights, powers and privileges incident to the ownership of such stock. The Board of Directors may from time to time, by resolution, confer like powers upon any other person or persons. SECTION 13. Compensation of Officers. The compensation of the officers of the Corporation for their services as such officers shall be fixed from time to time by the Board of Directors or a committee thereof; provided, however, that the Board of Directors or a committee thereof may delegate to the Chief Operating Officer the power to fix the compensation of all other officers. An officer of the Corporation shall not be prevented from receiving compensation by reason of the fact that such officer is or was a Director of the Corporation, but any such officer who shall also be a Director (except in the event there is only one (1) Director of the Corporation) shall not have any vote in the determination of the compensation to be paid to him. 19 ARTICLE IV Stock-Seal-Fiscal Year SECTION 1. Certificates Representing Shares of Stock. The certificates representing shares of stock of the Corporation shall be in such form, not inconsistent with the Restated Certificate, as shall be approved by the Board of Directors. All certificates certifying the kind, class or series and number of shares of the Corporation's capital stock owned by such holder shall be signed by the Chairman of the Board, Chief Operating Officer, President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and shall not be valid unless so signed. Any or all of the signatures on the certificate may be a facsimile. In case any officer or officers who shall have signed any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be issued and delivered as though the person or persons who signed such certificate or certificates had not ceased to be such officer or officers of the Corporation. All certificates representing shares of stock shall be consecutively numbered as the same are issued. The name of the person owning the shares represented thereby with the number of such shares and the date of issue thereof shall be entered on the books of the Corporation. Except as hereinafter provided, all certificates surrendered to the Corporation for transfer shall be cancelled, and no new certificates shall be issued until former certificates for the same number of shares have been surrendered and cancelled. 20 SECTION 2. Lost, Stolen or Destroyed Certificates. Whenever a person owning a certificate representing shares of stock of the Corporation alleges that it has been lost, stolen or destroyed, he shall file in the office of the Corporation an affidavit setting forth, to the best of his knowledge and belief, the time, place and circumstances of the loss, theft or destruction, and, if required by the Board of Directors, a bond of indemnity or other indemnification sufficient in the opinion of the Board of Directors to indemnify the Corporation and its agents against any claim that may be made against it or them on account of the alleged loss, theft or destruction of any such certificate or the issuance of a new certificate in replacement therefor. Thereupon the Corporation may cause to be issued to such person a new certificate in replacement for the certificate alleged to have been lost, stolen or destroyed. Anything herein to the contrary notwithstanding, the Corporation in its absolute discretion may refuse to issue any new certificate, except pursuant to judicial proceedings under the laws of the State of Delaware. SECTION 3. Transfer of Shares; Registered Stockholders. Transfers of shares of stock of the Corporation shall be made on the stock records of the Corporation only upon authorization by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and on surrender of the certificate or certificates for such shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person in whose name any share or shares stand on the record of stockholders as the owner of such share or shares for all purposes, including, without limitation, the rights to receive dividends or other distributions, and to vote as such owner, and the Corporation may hold any such stockholder of record liable for calls and assessments and the Corporation 21 shall not be bound to recognize any equitable or legal claim to or interest in any such share or shares on the part of any other person whether or not it shall have express or other notice thereof. Whenever any transfers of shares shall be made for collateral security and not absolutely, and both the transferor and transferee request the Corporation to do so, such fact shall be stated in the entry of the transfer. SECTION 4. Regulations. The Board of Directors shall have power and authority to make such rules and regulations not inconsistent with these By-Laws as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. The Board of Directors may appoint or authorize any officer or officers to appoint, one (1) or more transfer agents and one (1) or more registrars and may require all certificates for shares of stock to bear the signature or signatures of any of them. SECTION 5. Record Date. In order that the Corporation may determine the stockholders entitled to (i) notice of or to vote at any meeting of stockholders or any adjournment thereof, (ii) receive payment of any dividend or other distribution or allotment of any rights, (iii) exercise any rights in respect of any change, conversion or exchange of stock or (iv) for the purpose of any other lawful action, as the case may be, the Board of Directors may fix, in advance, a record date, which shall (i) not be more than sixty (60) nor less than ten (10) days before the date of such meeting, (ii) not be more than ten (10) days after the date upon which the resolution fixing the record date for consent to corporate action in writing is adopted by the Board of Directors and (iii) not be more than sixty (60) days prior to any other action. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and the record date for 22 determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 6. Dividends. Subject to the provisions of the Restated Certificate, the Board of Directors shall have power to declare and pay dividends upon shares of stock of the Corporation, but only out of funds available for the payment of dividends as provided by law. Any dividends declared upon the stock of the Corporation shall be payable subject to the provisions of the Restated Certificate on such date or dates as the Board of Directors shall determine. If the date fixed for the payment of any dividend shall in any year fall upon a legal holiday, then the dividend payable on such date shall be paid on the next day not a legal holiday. SECTION 7. Corporate Seal. The Board of Directors shall provide a suitable seal, which shall be circular in form, bear the name of the Corporation and shall include the words and numbers "Corporate Seal", "Delaware" and the year of incorporation. The seal shall be kept in the custody of the Secretary. A duplicate seal may be kept and be used by any officer of the Corporation designated by the Board, the Chief Operating Officer or the President. SECTION 8. Fiscal Year. The fiscal year of the Corporation shall be such fiscal year as the Board of Directors from time to time by resolution shall determine. ARTICLE V Miscellaneous Provisions SECTION 1. Execution of Contracts. Except as otherwise required by statute, the Restated Certificate or these By-Laws, any contract or other instrument may be executed and delivered in the name and on behalf of the 23 Corporation by each of the President, the Chief Operating Officer, the Chief Financial Officer, the Chief Technical Officer and the Chief Information Officer, or by such officer or officers (including any assistant officer) of the Corporation as the Board of Directors may from time to time direct. Such authority may be general or confined to specific instances as the Board of Directors may determine. Unless authorized by the Board of Directors or expressly permitted by these By-Laws, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it peculiarly liable for any purpose or to any amount. SECTION 2. Checks, Notes, etc. All checks, drafts, bills of exchange, acceptances, notes or other obligations or orders for the payment of money out of the funds of the Corporation shall be signed and, if so required by the Board of Directors, countersigned by such officers of the Corporation and/or other persons as shall from time to time be designated by the Board of Directors or pursuant to authority delegated by the Board of Directors. Checks, drafts, bills of exchange, acceptances, notes, obligations and orders for the payment of money made payable to the Corporation may be endorsed for deposit to the credit of the Corporation with a duly authorized depositary by the Chief Financial Officer and/or such other officers or persons as shall from time to time be designated by the Chief Financial Officer. SECTION 3. Loans. No loans and no renewals of loans for more than Two Hundred Fifty Thousand Dollars ($250,000) shall be contracted on behalf of the Corporation except as authorized by the Board of Directors. When authorized so to do, any officer or agent of the Corporation may effect loans and advances for the Corporation from any bank, trust company or other institution or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other evidences of indebtedness 24 of the Corporation. When authorized so to do, any officer or agent of the Corporation may pledge, hypothecate or transfer, as security for the payment of any and all loans, advances, indebtedness and liabilities of the Corporation, any and all stocks, securities and other personal property at any time held by the Corporation, and to that end may endorse, assign and deliver the same. Such authority may be general or confined to specific instances. SECTION 4. Offices Outside of Delaware. The registered office and registered agent of the Corporation will be as specified in the Restated Certificate. Except as otherwise required by the laws of the State of Delaware, the Corporation may have an office or offices and keep its books, documents and papers outside of the State of Delaware at such place or places as from time to time may be determined by the Board of Directors, the Chief Operating Officer or the President. SECTION 5. Indemnification of Directors, Officers and Employees. The Corporation shall, to the fullest extent permitted by applicable law from time to time in effect, indemnify any and all persons who may serve or who have served at any time as Directors or officers of the Corporation, or who at the request of the Corporation may serve or at any time have served as directors or officers of another corporation (including subsidiaries of the Corporation) or of any partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, from and against any and all of the expenses, liabilities or other matters referred to in or covered by said law. Such indemnification shall continue as to a person who has ceased to be a Director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. The Corporation may also indemnify any and all other persons whom it shall have power to indemnify under any applicable law from time to time in effect to the extent authorized by the Board of Directors 25 and permitted by law. The indemnification provided by this Section 5 shall not be deemed exclusive of any other rights to which any person may be entitled under any provision of the Restated Certificate, these By-Laws, agreement, vote of stockholders or disinterested Directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. For purposes of this Section 5, the term "Corporation" shall include constituent corporations referred to in Subsection (h) of the Section 145 of the General Corporation Law of the State of Delaware (or any similar provision of applicable law at the time in effect). SECTION 6. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any person who is or was a Director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, against any such expense, liability or loss asserted against it or such person and incurred by it or such person, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. SECTION 7. Voting as Stockholder. Unless otherwise determined by resolution of the Board of Directors, the Chief Operating Officer, President or any Vice President shall have full power and authority on behalf of the Corporation to attend any meeting of stockholders of any corporation in which the Corporation may hold stock, and to act, vote (or execute proxies to vote) and exercise in person or by proxy all other rights, powers and privileges incident to the ownership of such stock. Such officers acting on behalf of the Corporation shall have full power and authority to execute any instrument expressing consent to or dissent from any action of any such corporation without 26 a meeting. The Board of Directors may by resolution from time to time confer such power and authority upon any other person or persons. SECTION 8. Construction. In the event of any conflict between the provisions of these By-Laws as in effect from time to time and the provisions of the Restated Certificate as in effect from time to time, the provisions of such Restated Certificate shall be controlling. ARTICLE VI Amendments These By-Laws and any amendment thereof may be altered, amended or repealed, or new By-Laws may be adopted, by the Board of Directors at any regular or special meeting by the affirmative vote of a majority of all of the members of the Board, provided, that in the case of any special meeting at which all of the members of the Board are not present, the notice of such meeting shall have stated that the amendment of these By-Laws was one of the purposes of the meeting. These By-Laws and any amendment thereof, including the By-Laws adopted by the Board of Directors, may be altered, amended or repealed and other By-Laws may be adopted by the holders of a majority of the total outstanding stock of the Corporation entitled to vote at any annual meeting or at any special meeting, provided, that in the case of any special meeting, notice of such proposed alteration, amendment, repeal or adoption is included in the notice of the meeting and further provided, that any alteration, modification or repeal to each of Article I, Sections 2, 3 and 10 and Article II, Sections 4 and 5 of these By-Laws shall require the affirmative vote of holders of at least 67% of the issued and outstanding shares of the Corporation's capital stock entitled to vote thereon. 27 ARTICLE VII Severability The provisions of these By-Laws shall be separable each from any and all other provisions of these By-Laws, and if any such provision shall be adjudged to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof, or the powers granted to this Corporation by the Restated Certificate or these By-Laws. 28 EX-4.1 5 EXHIBIT 4.1 EXHIBIT 4.1 IBS INTERACTIVE, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE IB COMMON STOCK CUSIP 44923E 10 1 PAR VALUE $.01 PER SHARE SEE REVERSE FOR CERTAIN DEFINITIONS This Certifies that is the record holder of FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OF IBS INTERACTIVE, INC. (the "Corporation"), a Delaware corporation. The shares represented by this certificate are transferable only on the stock transfer books of the Corporation by the holder of record hereof, or by the holder's duly authorized attorney or legal representative, upon the surrender of this certificate properly endorsed. This certificate is not valid until countersigned and registered by the Corporation's Transfer Agent and Registrar. IN WITNESS WHEREOF, the Corporation has caused this certificate to be executed by the facsimile signatures of its duly authorized officers and has caused a facsimile of its corporate seal to be hereunto affixed. Dated: Countersigned and Registered: CONTINENTAL STOCK TRANSFER & TRUST COMPANY (JERSEY CITY, NJ) Transfer Agent and Registrar By Authorized Signature /s/ Brian Seidman /s/ Nicholas R. Loglisci, Jr. SECRETARY PRESIDENT AND CHIEF OPERATING OFFICER IBS INTERACTIVE, INC. CORPORATE SEAL 1995 DELAWARE IBS INTERACTIVE, INC. THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL, OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF OF THE CORPORATION AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. SUCH REQUEST SHALL BE MADE TO THE CORPORATION AT ITS PRINCIPAL OFFICE. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - ...........Custodian.............. (Cust) (Minor) TEN ENT - as tenants by the entireties under Uniform Gifts to Minors JT TEN - as joint tenants with right Act............................... of survivorship and not as (State) tenants in common UNIF TRF MIN ACT - ...........Custodian.............. (Cust) (Minor) Act............................... (State)
Additional abbreviations may also be used though not in the above list. For value received, ___________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ---------------------------------------- | | ---------------------------------------- - ------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Shares - --------------------------------------------------------------------- of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney - ------------------------------------------------------------------- to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ------------------- ----------------------------------------------------- NOTICE: THE SIGNATURES TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAMES AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed: By ----------------------------------------------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO RULE 17Ad-15 PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. KEEP THIS CERTIFICATE IN A SAFE PLACE. IF LOST, STOLEN, MUTILATED OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE. EX-5.1 6 EXHIBIT 5.1 April 23, 1998 IBS Interactive, Inc. 2 Ridgedale Avenue, Suite 350 Cedar Knolls, NY 07927 Re: Registration Statement on Form SB-2 (File No. 333-47741) relating to 1,200,000 shares of Common Stock ----------------------------------------------------------------- Ladies and Gentlemen: We have acted as special counsel to IBS Interactive, Inc., a Delaware corporation (the "Company"), in connection with the proposed public offering of 1,200,000 shares (the "Firm Shares") of the Company's common stock, $0.01 par value (the "Common Stock"), and up to an additional 180,000 shares (the "Option Shares") of Common Stock subject to an over-allotment option granted to the underwriter of such public offering. The Firm Shares and the Option Shares are hereinafter referred to collectively as the "Shares." The Company has filed a Registration Statement on Form SB-2 (File No. 333-47741) (as amended, the "Registration Statement"), with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Act of 1933, as amended (the "Act"), with respect to the public offering of the Shares. As such counsel, you have requested our opinion as to the matters described herein relating to the issuance of Shares. In connection with this opinion, we have examined and relied upon copies, certified or otherwise identified to our satisfaction, of: (i) the Company's Restated Certificate of Incorporation and Restated By-Laws, as amended to date; (ii) the minute books and other records of corporate proceedings of the Company through the date hereof as made available to us by officers of the Company; and (iii) an executed copy of the Registration Statement, and each amendment thereto through the date hereof, together with the exhibits and schedules thereto, in the form filed with the Commission; and we have reviewed such matters of law and fact deemed necessary by us to deliver the within opinion. For purposes of this opinion we have assumed the authenticity of all documents submitted to us as originals, the conformity to originals of copies, and the authenticity of the IBS Interactive, Inc. April 23, 1998 Page 2 originals of such copies. We have also assumed the legal capacity of all natural persons, the genuineness of all signatures on all documents examined by us, the authority of such persons signing on behalf of the parties thereto other than the Company and the due authorization, execution and delivery of all documents by the parties thereto other than the Company. As to certain factual matters, we have relied upon statements and representations of officers and other representatives of the Company. Based upon and subject to the foregoing assumptions and the further limitations set forth below, it is our opinion that the Shares have been duly authorized and, when issued and paid for as contemplated by the Registration Statement, will be validly issued, fully paid and non-assessable. This opinion is limited to the specific issues addressed herein, and no opinion may be inferred or implied beyond that expressly stated herein. We assume no obligation to revise or supplement this opinion should the corporate laws of the State of Delaware or the federal laws of the United States be changed by legislative action, judicial decision or otherwise. We hereby consent to the filing of this letter as an exhibit to the Registration Statement and to the reference to our firm under the heading "Legal Matters" in the Registration Statement. In giving such consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission promulgated thereunder. This opinion is furnished to you in connection with the filing of the Registration Statement and is not to be used, circulated, quoted or otherwise relied upon for any other purpose. Very truly yours, KELLEY DRYE & WARREN LLP By: /s/ John T. Capetta --------------------- A Member of the Firm EX-10.5 7 EXHIBIT 10.5 EMPLOYMENT AGREEMENT AGREEMENT dated as of April [ ], 1998 between IBS Interactive, Inc., a Delaware corporation (the "Company") with its corporate offices at 2 Ridgedale Avenue, Suite 350, Cedar Knolls, New Jersey 07927, and Nicholas R. Loglisci, Jr. (the "Executive") residing at 76 Fairview Avenue, Tarrytown, New York 10591. RECITALS 1. The Executive is currently employed by the Company pursuant to an Employment Agreement dated June 1, 1995 (the "Current Agreement"). 2. In connection with an initial public offering of the Company's Common Stock (the "IPO"), the parties hereto desire to terminate the Current Agreement and provide for the continued employment of the Executive upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment; Term; Military Leave. (a) Employment Subject to the terms and conditions set forth herein, the Company agrees to employ and Executive agrees to serve as the Company's President and Chief Operating Officer to perform such services, including but not limited to managing the Company's day-to-day operations, sales and marketing activities and strategic planning, and have such powers and authority as are specified in the Company's Restated By-Laws, as in effect from time to time, or assigned to the Executive by the Company's Board of Directors, provided, that, the same is not inconsistent with such position. Executive agrees that he will use his full business time to promote the interests of the Company and its affiliates and to fulfill his duties hereunder. Nothing in this Agreement shall however preclude Executive from engaging, so long as, in the reasonable determination of the Company's Board of Directors, such activities do not interfere with the execution of his duties and responsibilities hereunder, in charitable and community affairs, from managing any passive investment made by the Executive in publicly traded equity securities or other property (provided, that, no such investment may exceed 5% of the equity of any entity, without the prior approval of the Company's Board of Directors) or from serving, subject to the prior approval of the Company's Board of Directors, as a member of boards of directors or as a trustee of any other corporation, association or entity. For purposes of the preceding sentence, any approval of the Company's Board of Directors required herein shall not be unreasonably withheld. (b) Term. Unless sooner terminated pursuant to Section 3, the term of Executive's employment pursuant to this Agreement shall commence on the effective date (the "Effective Date") of the registration statement filed with the Securities and Exchange Commission relating to the IPO and shall continue thereafter for a period of four years or such earlier date as may be specified in a written notice (the "Termination Notice") delivered by either the Company or Executive to the other party that this Agreement shall terminate on a date not less than one year subsequent to the delivery of the Termination Notice. Each of the Company and Executive agree that on the Effective Date, the Current Agreement will be superseded by this Agreement. This Agreement shall automatically renew for one (1) successive four (4) year period; provided, however, that this Agreement shall expire on the fourth anniversary of the Effective Date if either the Company or Executive has given the other party hereto written notice at least six (6) months prior to such date that this Agreement will not be renewed. (c) Military Leave. Executive, as a former officer in the armed services of the United States of America shall be entitled to all the protection and benefits afforded by any laws relating to any future compulsory military service to which Executive may be called, and this Agreement shall be deemed subject to the provisions of any such law. Upon the submission to the Company of proof of having been called for military service, Executive will be granted a leave of absence for the duration of such service. This Section shall not be applicable if Executive voluntarily seeks military service. 2. Compensation. During the employment term under this Agreement, the Company shall compensate the Executive as follows: (a) Base Salary. Subject to adjustment as set forth below, the Company will pay Executive an annual salary at a rate of Ninety Thousand Dollars ($90,000) per year, payable in substantially equal monthly installments, or more frequently in accordance with Company's usual payroll policy. On each anniversary of the Effective Date, the Executive's then existing base salary will automatically increase at the rate of 10% per year and in the discretion of the Compensation Committee (or Board of Directors, if at the time there shall be no Compensation Committee) at such additional rate or amounts as the Compensation Committee shall deem appropriate. Any such increases granted in the discretion of the Compensation Committee will be retroactive to the beginning of the then current fiscal year. The Company will review annually the Executive's performance and compensation. (b) Performance Bonus. The Executive shall be entitled to such bonus compensation as the Compensation Committee deems appropriate. Such bonus compensation shall be based, in part, on the achievement of performance criteria established by the Compensation Committee, which will include criteria relating to the profitability of the Company. (c) Benefits. Executive will be eligible to participate in all benefit programs of the Company which are in effect for its senior executive personnel and, to the extent available to executive personnel, its employees generally from time to time. (d) Vacation. Executive will be entitled each year to vacation for a period or periods not inconsistent with the normal policy of Company in effect from time to time, but in any event not less than twenty vacation days each year and to such holidays as may be customarily afforded to its employees by the Company, during which periods the Executive's compensation shall be paid in full. 2 (e) Reimbursement of Expenses. (i) All reasonable travel and entertainment expenses incurred by Executive in the course of fulfilling this Agreement or otherwise promoting the Company and its business shall be reimbursed by the Company. Such reimbursement shall be made to the Executive promptly following submission to the Company of receipts and other documentation of such expenses reasonably satisfactory to the Company. (ii) In addition to the expenses reimbursable pursuant to paragraph (i) above, the Company shall also pay to Executive a monthly allowance of $400 for automobile expenses, provided, however, that the Company shall be entitled to withhold from such allowance, any amounts required to be withheld by applicable federal, state or local tax laws. 3. Termination. (a) Death and Legal Incapacity. Executive's employment hereunder shall terminate upon the Executive's death or legal incapacity. (b) Disability. Executive's employment hereunder may be terminated by the Company in the event of Executive's physical or mental incapacity or inability to perform his duties as contemplated under this Agreement for a period of at least one hundred twenty (120) consecutive days. (c) For Cause. Executive's employment hereunder may be terminated by the Company upon the occurrence of any of the following events: (i) Executive's intentional breach of any provision hereof, which breach shall not have been cured within 20 days after written notice thereof from the Company (or cure commenced within said 20 day period if said breach is not curable within said 20 day period) which breach has a material adverse effect on the Company; (ii) Executive's intentional violation of any other duty or obligation owed by Executive to the Company which violation shall not have been cured within 20 days after written notice thereof from the Company (or cure commenced within said 20 day period if said violation is not curable within said 20 day period) which violation has a material adverse effect on the Company. (iii) Executive is convicted or pleads guilty or nolo contendre to any felony (other than traffic violation) or any crime involving fraud, dishonesty or misappropriation; (iv) Executive willfully fails to perform and discharge his duties hereunder in a competent manner and such failure shall continue for a period in excess of 20 days after written notice thereof specifying the failures is given by the Company to the Executive. 3 (v) Executive willfully engages in misconduct that causes material harm to the Company and such misconduct shall continue for a period in excess of 20 days after written notice thereof specifying such misconduct and the resulting harm is given by the Company to the Executive. (d) Consent of Directors. Termination of this Agreement by the Company for reasons other than: (i) for cause or (ii) Executive's death, legal capacity or disability must be approved by a vote of 2/3 of the members of the Company's Board of Directors. (e) For Good Reason. Executive may immediately terminate his employment hereunder for good reason ("Good Reason") in the event: (i) The Company assigns to Executive any duties or responsibilities inconsistent with Section 1, which assignment is not withdrawn within 20 business days after Executive's notice to the Company of his reasonable objection thereto; or (ii) The Company breaches any material provision of this Agreement and such breach and the effects thereof are not remedied by the Company within 20 business days after Executive's notice to the Company of the existence of such breach. (f) Effect of Termination. (i) If the Company terminates this Agreement for reasons other than for cause, or Executive's death, legal incapacity or disability or Executive terminates this Agreement for Good Reason, the obligations of Executive under this Agreement will terminate except that the covenants contained in Section 4(a) shall continue indefinitely. In such event, for a period of one (1) year after the date of Executive's termination, the Company shall pay Executive, in accordance with customary payroll procedures, Executive's base salary as then in effect. Additionally, any and all options, warrants or other securities awarded to Executive pursuant to the Company's 1998 Stock Option Plan or any other similar plan shall, as of the date of Executive's termination, immediately vest and become exercisable and all such options, warrants or other securities shall remain exercisable by Executive for the duration of the period during which the options, warrants or other securities would have remained exercisable if Executive had remained employed by the Company. (ii) Except as otherwise provided herein, if Executive's employment is terminated for any reason other than for cause, Good Reason or Executive's death, legal incapacity or disability, the obligations under this Agreement will terminate except that the covenants contained in Section 4(a) shall continue indefinitely and the covenants contained in Section 4(d) shall continue until the first anniversary of the date of Executive's termination. In such event, Executive shall be entitled to receive only the compensation hereunder accrued and unpaid as of the date of Executive's termination. 4 (iii) No amount payable to Executive pursuant to this Agreement shall be subject to mitigation due to Executive's acceptance or availability of other employment. 4. Restrictive Covenants; Non-Competition Executive in consideration of his employment hereunder agrees as follows: (a) Except as otherwise permitted hereby, or by the Company's Board of Directors, Executive shall treat as confidential and not communicate or divulge to any other person or entity any information related to the Company or its affiliates or the business, affairs, prospects, financial condition or ownership of the Company or any of its affiliates (the "Information") acquired by Executive from the Company or the Company's other employees or agents, except (i) as may be required to comply with legal proceedings (provided, that, prior to such disclosure in legal proceedings Executive notifies the Company and reasonably cooperates with any efforts by the Company to limit the scope of such disclosure or to obtain confidential treatment thereof by the court or tribunal seeking such disclosure) or (ii) while employed by the Company, as Executive reasonably believes necessary in performing his duties. Executive shall use the Information only in connection with the performance of his duties hereunder, and not otherwise for his benefit or the benefit of any other person or entity. For the purposes of this Agreement, Information shall include, but not be limited to, any confidential information concerning clients, subscribers, marketing, business and operational methods of the Company or its affiliates and its and its affiliates' clients, subscribers, contracts, financial or other data, technical data or any other confidential or proprietary information possessed, owned or used by the Company. Excluded from the Executive's obligations of confidentiality is any part of such Information that: (i) was in the public domain prior to the date of commencement of Executive's employment with the Company or (ii) enters the public domain other than as a result of Executive's breach of this covenant. This Section (4)(a) shall survive the expiration or termination of the other provisions of this Agreement. (b) Executive shall fully disclose to the Company all Inventions (which for purposes hereof shall be deemed to mean all discoveries, concepts, and ideas, whether or not patentable, including, but not limited to, processes, methods, formulas, and techniques, as well as improvements thereof or know-how related thereto) concerning or relating to the business conducted by the Company and concerning any present or prospective activities of the Company which are published, made or conceived by Executive, in whole or in part, during Executive's employment with the Company. (c) Executive shall make applications in due form for United States letters patent and foreign letters patent on such Inventions at the request of the Company and at its expense, but without additional compensation to the Executive. Executive further agrees that any and all such Inventions shall be the absolute property of Company or its designees. Executive shall assign to the Company all of Executive's right, title and interest in any and all Inventions, execute any and all instruments and do any and all acts necessary or desirable in connection with any such application for letters patent or to establish and perfect in the Company the entire right, title, and interest in such Inventions, 5 patent applications, or patents, and shall execute any instrument necessary or desirable in connection with any continuations, renewals, or reissues thereof or in the conduct of any related proceedings or litigation. (d) During Executive's employment with the Company and for a period of one (1) year after the earlier of the expiration date of this Agreement or the termination of Executive's employment hereunder by the Company for cause or by Executive (other than for Good Reason): (i) Executive will not, in any geographical area within which the Company is, at the time of Executive's termination or during the term of Executive's employment, marketing its products or services or conducting other business activities, directly or indirectly, engage in, own or control an interest in (except as a passive investor in publicly held companies and except for investments held at the date hereof) or act as an officer, director, or employee of, or consultant or adviser to, any firm, corporation or institution directly or indirectly competition with or engaged in a business including the provision of services substantially similar to that conducted by the Company at the time of Executive's termination or during the term of Executive's employment with the Company; and (ii) Executive will not recruit or hire any employee of the Company, or otherwise induce such employee to leave the employment of the Company, to become an employee of or otherwise be associated with Executive or any company or business with which Executive is or may become associated. 5. Change of Control. In the event of a Change of Control, as hereinafter defined, the following provisions shall apply: (a) If, immediately upon a Change of Control or at any time within one (1) year thereafter, Executive is no longer employed by the Company (or any entity to which this Agreement may be assigned in connection with such Change of Control) for any reason other than (i) for cause or (ii) Executive's death, legal incapacity or disability, Executive shall be entitled to receive, within 10 days after the termination date, a lump sum payment ("Change of Control Payment") equal to the amount of Executive's annual base salary then in effect plus any other amounts accrued and unpaid as of the date of termination. Notwithstanding the foregoing, if Executive shall so request, any Change of Control Payment may be paid to Executive in substantially equal monthly installments, or more frequently in accordance with the Company's usual payroll policy. (b) For purposes of this Section 5, a "Change of Control" shall mean any transaction or series of transactions (including, without limitation, a tender offer, merger or consolidation) the result of which is that any "person" or "group" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Principals and their Related Parties (as such terms are defined herein) or an entity controlled by each of the Principals and their Related Parties, becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Securities Exchange Act of 1934) of more than 50 percent (50%) of the total aggregate voting power of all classes of the Company's outstanding voting stock and/or 6 warrants or options to acquire such voting stock, calculated on a fully diluted basis or (b) during any period of two consecutive calendar years, individuals who at the beginning of such period constituted the Company's Board of Directors (together with any new directors whose election by stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors then in office unless such majority of the directors then in office has been elected or nominated for election by the Principals or their Related Parties or any entity controlled by each of the Principals or their Related Parties. For purposes hereof, (x) "Principals" means each of Nicholas R. Loglisci, Jr., Clark D. Frederick and Frank R. Altieri, Jr.; and (y) "Related Party" with respect to any Principal means (A) the spouse or immediate family member of such Principal or (B) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or persons beneficially holding an 80% or more controlling interest of which consists of such Principal and/or such other persons referred to in the immediately preceding clause (A). 6. No Violation. Executive warrants that the execution and delivery of this Agreement and the performance of his duties hereunder will not violate the terms of any other agreement to which he is a party or by which he is bound. Additionally, Executive warrants that Executive has not brought and will not bring to the Company or use in the performance of Executive's responsibilities at the Company any materials or documents of a former employer that are not generally available to the public, unless Executive has obtained express written authorization from the former employer for their possession and use. Executive represents that he is not and, since the commencement of Executive's employment with the Company has not been a party to any employment, proprietary information, confidentiality, or noncompetition agreement with any of Executive's former employers which remains in effect as the date hereof. The warranties set forth in this Section 6 shall survive the expiration or termination of the other provisions of this Agreement. 7. Breach by Executive. Both parties recognize that the services to be rendered under this Agreement by Executive are special, unique and extraordinary in character, and that in the event of the breach by Executive of the terms and conditions of this Agreement to be performed by him or in the event Executive performs services for any person, firm or corporation engaged in a competing line of business with Company, the Company shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, whether in law or in equity, to, by way of illustration and not limitation, obtain damages for any breach of this Agreement, or to enforce the specific performance thereof by Executive, or to enjoin Executive from competing with the Company or, performing services for himself or any such other person, firm or corporation. The Company may obtain an injunction restraining any such breach by Executive and no bond or other security shall be required in connection therewith. The Company and Executive each consent to the jurisdiction of the Superior Court of the State of New Jersey, located in Hackensack, New Jersey, and the United States Federal District Court for the District of New Jersey. 7 8. Miscellaneous. (a) This Agreement shall be binding upon and inure to the benefit of the Company, its successors, and assigns and may not be assigned by Executive. (b) This Agreement contains the entire agreement of the parties hereto and supersedes all prior or concurrent agreements, whether oral or written, relating to the subject matter hereof. This Agreement may be amended only by a writing signed by the party against whom enforcement is sought. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without regard to its conflicts of laws, rules or principles. (d) Any notices or other communications required or permitted hereunder shall be in writing and shall be deemed effective when delivered in person or, if mailed, on the date of deposit in the mails, postage prepaid, to the other party at the respective address of such party set forth herein or to such other address as shall have been specified in writing by either party to the other in accordance herewith. (e) The provisions of Sections 4(a) and 6 and the other provisions of this Agreement which by their terms contemplate survival of the termination of this Agreement, shall survive termination of this Agreement and be deemed to be independent covenants. (f) If any term or provision of this Agreement or its application to any person or circumstance is to any extent invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision shall be valid and enforced to the fullest extent permitted by law. (g) No delay or omission to exercise any right, power or remedy accruing to any party hereto shall impair any such right, power or remedy or shall be construed to be a waiver of or an acquiescence to any breach hereof. No waiver of any breach of this Agreement shall be deemed to be a waiver of any other breach of this Agreement theretofore or thereafter occurring. Any waiver of any provision hereof shall be effective only to the extent specifically set forth in the applicable writing. All remedies afforded under this Agreement to any party hereto, by law or otherwise, shall be cumulative and not alternative and shall not preclude assertion by any party hereto of any other rights or the seeking of any other rights or remedies against any other party hereto. 9. Indemnification The Company agrees to indemnify Executive to the fullest extent permitted by applicable law, as such law may be hereafter amended, modified or supplemented and to the fullest extent permitted by each of the Company's Restated Certificate of Incorporation and the Company's Restated By-laws, as 8 from time to time amended, modified or supplemented. The Company further agrees that Executive is entitled to the benefits of any directors and officers liability insurance policy, in accordance with the terms and conditions of that policy, if such a policy is maintained by the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first stated above. COMPANY IBS INTERACTIVE, INC. By:_____________________________ Name: Title: EXECUTIVE _____________________________ Nicholas R. Loglisci, Jr. 9 EX-10.6 8 EXHIBIT 10.6 EMPLOYMENT AGREEMENT AGREEMENT dated as of April [ ], 1998 between IBS Interactive, Inc., a Delaware corporation (the "Company") with its corporate offices at 2 Ridgedale Avenue, Suite 350, Cedar Knolls, New Jersey 07927, and Clark D. Frederick (the "Executive") residing at [ ]. RECITALS 1. The Executive is currently employed by the Company pursuant to an Employment Agreement dated June 1, 1995 (the "Current Agreement"). 2. In connection with an initial public offering of the Company's Common Stock (the "IPO"), the parties hereto desire to terminate the Current Agreement and provide for the continued employment of the Executive upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment; Term; Military Leave. (a) Employment Subject to the terms and conditions set forth herein, the Company agrees to employ and Executive agrees to serve as the Company's Chief Technical Officer to perform such services, including but not limited to managing the Company's Systems Integration and Programming and Applications Development services, new business development and strategic planning, and have such powers and authority as are specified in the Company's Restated By-laws, as in effect from time to time, or as may be assigned to the Executive by the Company's Board of Directors, provided, that, the same is not inconsistent with such position. Executive agrees that he will use his full business time to promote the interests of the Company and its affiliates and to fulfill his duties hereunder. Nothing in this Agreement shall however preclude Executive from engaging, so long as, in the reasonable determination of the Company's Board of Directors, such activities do not interfere with the execution of his duties and responsibilities hereunder, in charitable and community affairs, from managing any passive investment made by the Executive in publicly traded equity securities or other property (provided, that, no such investment may exceed 5% of the equity of any entity, without the prior approval of the Company's Board of Directors) or from serving, subject to the prior approval of the Company's Board of Directors, as a member of boards of directors or as a trustee of any other corporation, association or entity. For purposes of the preceding sentence, any approval of the Company's Board of Directors required herein shall not be unreasonably withheld. (b) Term. Unless sooner terminated pursuant to Section 3, the term of Executive's employment pursuant to this Agreement shall commence on the effective date (the "Effective Date") of the registration statement filed with the Securities and Exchange Commission relating to the IPO and shall continue thereafter for a period of four years or such earlier date as may be specified in a written notice (the "Termination Notice") delivered by either the Company or Executive to the other party that this Agreement shall terminate on a date not less than one year subsequent to the delivery of the Termination Notice. Each of the Company and Executive agree that on the Effective Date, the Current Agreement will be superseded by this Agreement. This Agreement shall automatically renew for one (1) successive four (4) year period; provided, however, that this Agreement shall expire on the fourth anniversary of the Effective Date if either the Company or Executive has given the other party hereto written notice at least six (6) months prior to such date that this Agreement will not be renewed. (c) Military Leave. Executive, as a former officer in the armed services of the United States of America shall be entitled to all the protection and benefits afforded by any laws relating to any future compulsory military service to which Executive may be called, and this Agreement shall be deemed subject to the provisions of any such law. Upon the submission to the Company of proof of having been called for military service, Executive will be granted a leave of absence for the duration of such service. This Section shall not be applicable if Executive voluntarily seeks military service. 2. Compensation. During the employment term under this Agreement, the Company shall compensate the Executive as follows: (a) Base Salary. Subject to adjustment as set forth below, the Company will pay Executive an annual salary at a rate of Ninety Thousand Dollars ($90,000) per year, payable in substantially equal monthly installments, or more frequently in accordance with Company's usual payroll policy. On each anniversary of the Effective Date, the Executive's then existing base salary will automatically increase at the rate of 10% per year and in the discretion of the Compensation Committee (or Board of Directors, if at the time there shall be no Compensation Committee) at such additional rate or amounts as the Compensation Committee shall deem appropriate. Any such increases granted in the discretion of the Compensation Committee will be retroactive to the beginning of the then current fiscal year. The Company will review annually the Executive's performance and compensation. (b) Performance Bonus. The Executive shall be entitled to such bonus compensation as the Compensation Committee deems appropriate. Such bonus compensation shall be based, in part, on the achievement of certain performance criteria established by the Compensation Committee, including criteria relating to the profitability of the Company. (c) Benefits. Executive will be eligible to participate in all benefit programs of the Company which are in effect for its senior executive personnel and, to the extent available to executive personnel, its employees generally from time to time. (d) Vacation. Executive will be entitled each year to vacation for a period or periods not inconsistent with the normal policy of Company in effect from time to time, but in any event not less than twenty vacation days each year and to such holidays as may be customarily afforded to its employees by the Company, during which periods the Executive's compensation shall be paid in full. 2 (e) Reimbursement of Expenses. (i) All reasonable travel and entertainment expenses incurred by Executive in the course of fulfilling this Agreement or otherwise promoting the Company and its business shall be reimbursed by the Company. Such reimbursement shall be made to the Executive promptly following submission to the Company of receipts and other documentation of such expenses reasonably satisfactory to the Company. (ii) In addition to the expenses reimbursable pursuant to paragraph (i) above, the Company shall also pay to Executive a monthly allowance of $400 for automobile expenses, provided, however, that the Company shall be entitled to withhold from such allowance, any amounts required to be withheld by applicable federal, state or local tax laws. 3. Termination. (a) Death and Legal Incapacity. Executive's employment hereunder shall terminate upon the Executive's death or legal incapacity. (b) Disability. Executive's employment hereunder may be terminated by the Company in the event of Executive's physical or mental incapacity or inability to perform his duties as contemplated under this Agreement for a period of at least one hundred twenty (120) consecutive days. (c) For Cause. Executive's employment hereunder may be terminated by the Company upon the occurrence of any of the following events: (i) Executive's intentional breach of any provision hereof, which breach shall not have been cured within 20 days after written notice thereof from the Company (or cure commenced within said 20 day period if said breach is not curable within said 20 day period) which breach has a material adverse effect on the Company; (ii) Executive's intentional violation of any other duty or obligation owed by Executive to the Company which violation shall not have been cured within 20 days after written notice thereof from the Company (or cure commenced within said 20 day period if said violation is not curable within said 20 day period) which violation has a material adverse effect on the Company. (iii) Executive is convicted or pleads guilty or nolo contendre to any felony (other than traffic violation) or any crime involving fraud, dishonesty or misappropriation; (iv) Executive willfully fails to perform and discharge his duties hereunder in a competent manner and such failure shall continue for a period in excess of 20 days after written notice thereof specifying the failures is given by the Company to the Executive. 3 (v) Executive willfully engages in misconduct that causes material harm to the Company and such misconduct shall continue for a period in excess of 20 days after written notice thereof specifying such misconduct and the resulting harm is given by the Company to the Executive. (d) Consent of Directors. Termination of this Agreement by the Company for reasons other than: (i) for cause or (ii) Executive's death, legal capacity or disability must be approved by a vote of 2/3 of the members of the Company's Board of Directors. (e) For Good Reason. Executive may immediately terminate his employment hereunder for good reason ("Good Reason") in the event: (i) The Company assigns to Executive any duties or responsibilities inconsistent with Section 1, which assignment is not withdrawn within 20 business days after Executive's notice to the Company of his reasonable objection thereto; or (ii) The Company breaches any material provision of this Agreement and such breach and the effects thereof are not remedied by the Company within 20 business days after Executive's notice to the Company of the existence of such breach. (f) Effect of Termination. (i) If the Company terminates this Agreement for reasons other than for cause, or Executive's death, legal incapacity or disability or Executive terminates this Agreement for Good Reason, the obligations of Executive under this Agreement will terminate except that the covenants contained in Section 4(a) shall continue indefinitely. In such event, for a period of one (1) year after the date of Executive's termination, the Company shall pay Executive, in accordance with customary payroll procedures, Executive's base salary as then in effect. Additionally, any and all options, warrants or other securities awarded to Executive pursuant to the Company's 1998 Stock Option Plan or any other similar plan shall, as of the date of Executive's termination, immediately vest and become exercisable and all such options, warrants or other securities shall remain exercisable by Executive for the duration of the period during which the options, warrants or other securities would have remained exercisable if Executive had remained employed by the Company. (ii) Except as otherwise provided herein, if Executive's employment is terminated for any reason other than for cause, Good Reason or Executive's death, legal incapacity or disability, the obligations under this Agreement will terminate except that the covenants contained in Section 4(a) shall continue indefinitely and the covenants contained in Section 4(d) shall continue until the first anniversary of the date of Executive's termination. In such event, Executive shall be entitled to receive only the compensation hereunder accrued and unpaid as of the date of Executive's termination. (iii) No amount payable to Executive pursuant to this Agreement shall be subject to mitigation due to Executive's acceptance or availability of other employment. 4 4. Restrictive Covenants; Non-Competition Executive in consideration of his employment hereunder agrees as follows: (a) Except as otherwise permitted hereby, or by the Company's Board of Directors, Executive shall treat as confidential and not communicate or divulge to any other person or entity any information related to the Company or its affiliates or the business, affairs, prospects, financial condition or ownership of the Company or any of its affiliates (the "Information") acquired by Executive from the Company or the Company's other employees or agents, except (i) as may be required to comply with legal proceedings (provided, that, prior to such disclosure in legal proceedings Executive notifies the Company and reasonably cooperates with any efforts by the Company to limit the scope of such disclosure or to obtain confidential treatment thereof by the court or tribunal seeking such disclosure) or (ii) while employed by the Company, as Executive reasonably believes necessary in performing his duties. Executive shall use the Information only in connection with the performance of his duties hereunder, and not otherwise for his benefit or the benefit of any other person or entity. For the purposes of this Agreement, Information shall include, but not be limited to, any confidential information concerning clients, subscribers, marketing, business and operational methods of the Company or its affiliates and its and its affiliates' clients, subscribers, contracts, financial or other data, technical data or any other confidential or proprietary information possessed, owned or used by the Company. Excluded from the Executive's obligations of confidentiality is any part of such Information that: (i) was in the public domain prior to the date of commencement of Executive's employment with the Company or (ii) enters the public domain other than as a result of Executive's breach of this covenant. This Section (4)(a) shall survive the expiration or termination of the other provisions of this Agreement. (b) Executive shall fully disclose to the Company all Inventions (which for purposes hereof shall be deemed to mean all discoveries, concepts, and ideas, whether or not patentable, including, but not limited to, processes, methods, formulas, and techniques, as well as improvements thereof or know-how related thereto) concerning or relating to the business conducted by the Company and concerning any present or prospective activities of the Company which are published, made or conceived by Executive, in whole or in part, during Executive's employment with the Company. (c) Executive shall make applications in due form for United States letters patent and foreign letters patent on such Inventions at the request of the Company and at its expense, but without additional compensation to the Executive. Executive further agrees that any and all such Inventions shall be the absolute property of Company or its designees. Executive shall assign to the Company all of Executive's right, title and interest in any and all Inventions, execute any and all instruments and do any and all acts necessary or desirable in connection with any such application for letters patent or to establish and perfect in the Company the entire right, title, and interest in such Inventions, patent applications, or patents, and shall execute any instrument necessary or desirable in connection with any continuations, renewals, or reissues thereof or in the conduct of any related proceedings or litigation. 5 (d) During Executive's employment with the Company and for a period of one (1) year after the earlier of the expiration date of this Agreement or the termination of Executive's employment hereunder by the Company for cause or by Executive (other than for Good Reason): (i) Executive will not, in any geographical area within which the Company is, at the time of Executive's termination or during the term of Executive's employment, marketing its products or services or conducting other business activities, directly or indirectly, engage in, own or control an interest in (except as a passive investor in publicly held companies and except for investments held at the date hereof) or act as an officer, director, or employee of, or consultant or adviser to, any firm, corporation or institution directly or indirectly competition with or engaged in a business including the provision of services substantially similar to that conducted by the Company at the time of Executive's termination or during the term of Executive's employment with the Company; and (ii) Executive will not recruit or hire any employee of the Company, or otherwise induce such employee to leave the employment of the Company, to become an employee of or otherwise be associated with Executive or any company or business with which Executive is or may become associated. 5. Change of Control. In the event of a Change of Control, as hereinafter defined, the following provisions shall apply: (a) If, immediately upon a Change of Control or at any time within one (1) year thereafter, Executive is no longer employed by the Company (or any entity to which this Agreement may be assigned in connection with such Change of Control) for any reason other than (i) for cause or (ii) Executive's death, legal incapacity or disability, Executive shall be entitled to receive, within 10 days after the termination date, a lump sum payment ("Change of Control Payment") equal to the amount of Executive's annual base salary then in effect plus any other amounts accrued and unpaid as of the date of termination. Notwithstanding the foregoing, if Executive shall so request, any Change of Control Payment may be paid to Executive in substantially equal monthly installments, or more frequently in accordance with the Company's usual payroll policy. (b) For purposes of this Section 5, a "Change of Control" shall mean any transaction or series of transactions (including, without limitation, a tender offer, merger or consolidation) the result of which is that any "person" or "group" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Principals and their Related Parties (as such terms are defined herein) or an entity controlled by each of the Principals and their Related Parties, becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Securities Exchange Act of 1934) of more than 50 percent (50%) of the total aggregate voting power of all classes of the Company's outstanding voting stock and/or warrants or options to acquire such voting stock, calculated on a fully diluted basis or (b) during any period of two consecutive calendar years, individuals who at the beginning of such period constituted the Company's Board of Directors (together with any new directors whose election by stockholders was approved by 6 a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors then in office unless such majority of the directors then in office has been elected or nominated for election by the Principals or their Related Parties or any entity controlled by each of the Principals or their Related Parties. For purposes hereof, (x) "Principals" means each of Nicholas R. Loglisci, Jr., Clark D. Frederick and Frank R. Altieri, Jr.; and (y) "Related Party" with respect to any Principal means (A) the spouse or immediate family member of such Principal or (B) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or persons beneficially holding an 80% or more controlling interest of which consists of such Principal and/or such other persons referred to in the immediately preceding clause (A). 6. No Violation. Executive warrants that the execution and delivery of this Agreement and the performance of his duties hereunder will not violate the terms of any other agreement to which he is a party or by which he is bound. Additionally, Executive warrants that Executive has not brought and will not bring to the Company or use in the performance of Executive's responsibilities at the Company any materials or documents of a former employer that are not generally available to the public, unless Executive has obtained express written authorization from the former employer for their possession and use. Executive represents that he is not and, since the commencement of Executive's employment with the Company has not been a party to any employment, proprietary information, confidentiality, or noncompetition agreement with any of Executive's former employers which remains in effect as the date hereof. The warranties set forth in this Section 6 shall survive the expiration or termination of the other provisions of this Agreement. 7. Breach by Executive. Both parties recognize that the services to be rendered under this Agreement by Executive are special, unique and extraordinary in character, and that in the event of the breach by Executive of the terms and conditions of this Agreement to be performed by him or in the event Executive performs services for any person, firm or corporation engaged in a competing line of business with Company, the Company shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, whether in law or in equity, to, by way of illustration and not limitation, obtain damages for any breach of this Agreement, or to enforce the specific performance thereof by Executive, or to enjoin Executive from competing with the Company or, performing services for himself or any such other person, firm or corporation. The Company may obtain an injunction restraining any such breach by Executive and no bond or other security shall be required in connection therewith. The Company and Executive each consent to the jurisdiction of the Superior Court of the State of New Jersey, located in Hackensack, New Jersey, and the United States Federal District Court for the District of New Jersey. 7 8. Miscellaneous. (a) This Agreement shall be binding upon and inure to the benefit of the Company, its successors, and assigns and may not be assigned by Executive. (b) This Agreement contains the entire agreement of the parties hereto and supersedes all prior or concurrent agreements, whether oral or written, relating to the subject matter hereof. This Agreement may be amended only by a writing signed by the party against whom enforcement is sought. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without regard to its conflicts of laws, rules or principles. (d) Any notices or other communications required or permitted hereunder shall be in writing and shall be deemed effective when delivered in person or, if mailed, on the date of deposit in the mails, postage prepaid, to the other party at the respective address of such party set forth herein or to such other address as shall have been specified in writing by either party to the other in accordance herewith. (e) The provisions of Sections 4(a) and 6 and the other provisions of this Agreement which by their terms contemplate survival of the termination of this Agreement, shall survive termination of this Agreement and be deemed to be independent covenants. (f) If any term or provision of this Agreement or its application to any person or circumstance is to any extent invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision shall be valid and enforced to the fullest extent permitted by law. (g) No delay or omission to exercise any right, power or remedy accruing to any party hereto shall impair any such right, power or remedy or shall be construed to be a waiver of or an acquiescence to any breach hereof. No waiver of any breach of this Agreement shall be deemed to be a waiver of any other breach of this Agreement theretofore or thereafter occurring. Any waiver of any provision hereof shall be effective only to the extent specifically set forth in the applicable writing. All remedies afforded under this Agreement to any party hereto, by law or otherwise, shall be cumulative and not alternative and shall not preclude assertion by any party hereto of any other rights or the seeking of any other rights or remedies against any other party hereto. 9. Indemnification The Company agrees to indemnify Executive to the fullest extent permitted by applicable law, as such law may be hereafter amended, modified or supplemented and to the fullest extent permitted by each of the Company's Restated Certificate of Incorporation and the Company's Restated By-Laws, as from time to time amended, modified or supplemented. The Company further agrees that Executive is entitled to the benefits of any directors and officers 8 liability insurance policy, in accordance with the terms and conditions of that policy, if such a policy is maintained by the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first stated above. COMPANY _______ IBS INTERACTIVE, INC. By:_____________________________ Name: Title: EXECUTIVE _________ ________________________________ Clark D. Frederick 9 EX-10.7 9 EXHIBIT 10.7 EMPLOYMENT AGREEMENT AGREEMENT dated as of April [ ], 1998 between IBS Interactive, Inc., a Delaware corporation (the "Company") with its corporate offices at 2 Ridgedale Avenue, Suite 350, Cedar Knolls, New Jersey 07927, and Frank R. Altieri, Jr. (the "Executive") residing at [ ]. RECITALS 1. The Executive is currently employed by the Company pursuant to an Employment Agreement dated April 1, 1996 (the "Current Agreement"). 2. In connection with an initial public offering of the Company's Common Stock (the "IPO"), the parties hereto desire to terminate the Current Agreement and provide for the continued employment of the Executive upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment; Term; Military Leave. (a) Employment Subject to the terms and conditions set forth herein, the Company agrees to employ and Executive agrees to serve as the Company's Chief Information Officer to perform such services, including but not limited to managing the Company's Internet services, including construction and operation of the Company's network, and have such powers and authority as are specified in the Company's Restated By-Laws, as in effect from time to time, or as may be assigned to the Executive by the Company's Board of Directors, provided, that, the same is not inconsistent with such position. Executive agrees that he will use his full business time to promote the interests of the Company and its affiliates and to fulfill his duties hereunder. Nothing in this Agreement shall however preclude Executive from engaging, so long as, in the reasonable determination of the Company's Board of Directors, such activities do not interfere with the execution of his duties and responsibilities hereunder, in charitable and community affairs, from managing any passive investment made by the Executive in publicly traded equity securities or other property (provided, that, no such investment may exceed 5% of the equity of any entity, without the prior approval of the Company's Board of Directors) or from serving, subject to the prior approval of the Company's Board of Directors, as a member of boards of directors or as a trustee of any other corporation, association or entity. For purposes of the preceding sentence, any approval of the Company's Board of Directors required herein shall not be unreasonably withheld. (b) Term. Unless sooner terminated pursuant to Section 3, the term of Executive's employment pursuant to this Agreement shall commence on the effective date (the "Effective Date") of the registration statement filed with the Securities and Exchange Commission relating to the IPO and shall continue thereafter for a period of four years or such earlier date as may be specified in a written notice (the "Termination Notice") delivered by either the Company or Executive to the other party that this Agreement shall terminate on a date not less than one year subsequent to the delivery of the Termination Notice. Each of the Company and Executive agree that on the Effective Date, the Current Agreement will be superseded by this Agreement. This Agreement shall automatically renew for one (1) successive four (4) year period; provided, however, that this Agreement shall expire on the fourth anniversary of the Effective Date if either the Company or Executive has given the other party hereto written notice at least six (6) months prior to such date that this Agreement will not be renewed. (c) Military Leave. Executive shall be entitled to all the protection and benefits afforded by any laws relating to any future compulsory military service to which Executive may be called and this Agreement shall be deemed subject to the provisions of any such law. Upon the submission to the Company of proof of having been called for military service, Executive will be granted a leave of absence for the duration of such service. This Section shall not be applicable if Executive voluntarily seeks military service. 2. Compensation. During the employment term under this Agreement, the Company shall compensate the Executive as follows: (a) Base Salary. Subject to adjustment as set forth below, the Company will pay Executive an annual salary at a rate of Ninety Thousand Dollars ($90,000) per year, payable in substantially equal monthly installments, or more frequently in accordance with Company's usual payroll policy. On each anniversary of the Effective Date, the Executive's then existing base salary will automatically increase at the rate of 10% per year and in the discretion of the Compensation Committee (or Board of Directors, if at the time there shall be no Compensation Committee) at such additional rate or amounts as the Compensation Committee shall deem appropriate. Any such increases granted in the discretion of the Compensation Committee will be retroactive to the beginning of the then current fiscal year. The Company will review annually the Executive's performance and compensation. (b) Performance Bonus. The Executive shall be entitled to such bonus compensation as the Compensation Committee deems appropriate. Such bonus compensation shall be based, in part, on the achievement of performance criteria established by the Compensation Committee, including criteria relating to the profitability of the Company. (c) Benefits. Executive will be eligible to participate in all benefit programs of the Company which are in effect for its senior executive personnel and, to the extent available to executive personnel, its employees generally from time to time. (d) Vacation. Executive will be entitled each year to vacation for a period or periods not inconsistent with the normal policy of Company in effect from time to time, but in any event not less than twenty vacation days each year and to such holidays as may be customarily afforded to its employees by the Company, during which periods the Executive's compensation shall be paid in full. 2 (e) Reimbursement of Expenses. (i) All reasonable travel and entertainment expenses incurred by Executive in the course of fulfilling this Agreement or otherwise promoting the Company and its business shall be reimbursed by the Company. Such reimbursement shall be made to the Executive promptly following submission to the Company of receipts and other documentation of such expenses reasonably satisfactory to the Company. (ii) In addition to the expenses reimbursable pursuant to paragraph (i) above, the Company shall also pay to Executive a monthly allowance of $400 for automobile expenses, provided, however, that the Company shall be entitled to withhold from such allowance, any amounts required to be withheld by applicable federal, state or local tax laws. 3. Termination. (a) Death and Legal Incapacity. Executive's employment hereunder shall terminate upon the Executive's death or legal incapacity. (b) Disability. Executive's employment hereunder may be terminated by the Company in the event of Executive's physical or mental incapacity or inability to perform his duties as contemplated under this Agreement for a period of at least one hundred twenty (120) consecutive days. (c) For Cause. Executive's employment hereunder may be terminated by the Company upon the occurrence of any of the following events: (i) Executive's intentional breach of any provision hereof, which breach shall not have been cured within 20 days after written notice thereof from the Company (or cure commenced within said 20 day period if said breach is not curable within said 20 day period) which breach has a material adverse effect on the Company; (ii) Executive's intentional violation of any other duty or obligation owed by Executive to the Company which violation shall not have been cured within 20 days after written notice thereof from the Company (or cure commenced within said 20 day period if said violation is not curable within said 20 day period) which violation has a material adverse effect on the Company. (iii) Executive is convicted or pleads guilty or nolo contendre to any felony (other than traffic violation) or any crime involving fraud, dishonesty or misappropriation; (iv) Executive willfully fails to perform and discharge his duties hereunder in a competent manner and such failure shall continue for a period in excess of 20 days after written notice thereof specifying the failures is given by the Company to the Executive. (v) Executive willfully engages in misconduct that causes material harm to the Company and such misconduct shall continue for a period in excess of 20 days after written notice thereof specifying such misconduct and the resulting harm is given by the Company to the Executive. 3 (d) Consent of Directors. Termination of this Agreement by the Company for reasons other than: (i) for cause or (ii) Executive's death, legal capacity or disability must be approved by a vote of 2/3 of the members of the Company's Board of Directors. (e) For Good Reason. Executive may immediately terminate his employment hereunder for good reason ("Good Reason") in the event: (i) The Company assigns to Executive any duties or responsibilities inconsistent with Section 1, which assignment is not withdrawn within 20 business days after Executive's notice to the Company of his reasonable objection thereto; or (ii) The Company breaches any material provision of this Agreement and such breach and the effects thereof are not remedied by the Company within 20 business days after Executive's notice to the Company of the existence of such breach. (f) Effect of Termination. (i) If the Company terminates this Agreement for reasons other than for cause, or Executive's death, legal incapacity or disability or Executive terminates this Agreement for Good Reason, the obligations of Executive under this Agreement will terminate except that the covenants contained in Section 4(a) shall continue indefinitely. In such event, for a period of one (1) year after the date of Executive's termination, the Company shall pay Executive, in accordance with customary payroll procedures, Executive's base salary as then in effect. Additionally, any and all options, warrants or other securities awarded to Executive pursuant to the Company's 1998 Stock Option Plan or any other similar plan shall, as of the date of Executive's termination, immediately vest and become exercisable and all such options, warrants or other securities shall remain exercisable by Executive for the duration of the period during which the options, warrants or other securities would have remained exercisable if Executive had remained employed by the Company. (ii) Except as otherwise provided herein, if Executive's employment is terminated for any reason other than for cause, Good Reason or Executive's death, legal incapacity or disability, the obligations under this Agreement will terminate except that the covenants contained in Section 4(a) shall continue indefinitely and the covenants contained in Section 4(d) shall continue until the first anniversary of the date of Executive's termination. In such event, Executive shall be entitled to receive only the compensation hereunder accrued and unpaid as of the date of Executive's termination. (iii) No amount payable to Executive pursuant to this Agreement shall be subject to mitigation due to Executive's acceptance or availability of other employment. 4 4. Restrictive Covenants; Non-Competition Executive in consideration of his employment hereunder agrees as follows: (a) Except as otherwise permitted hereby, or by the Company's Board of Directors, Executive shall treat as confidential and not communicate or divulge to any other person or entity any information related to the Company or its affiliates or the business, affairs, prospects, financial condition or ownership of the Company or any of its affiliates (the "Information") acquired by Executive from the Company or the Company's other employees or agents, except (i) as may be required to comply with legal proceedings (provided, that, prior to such disclosure in legal proceedings Executive notifies the Company and reasonably cooperates with any efforts by the Company to limit the scope of such disclosure or to obtain confidential treatment thereof by the court or tribunal seeking such disclosure) or (ii) while employed by the Company, as Executive reasonably believes necessary in performing his duties. Executive shall use the Information only in connection with the performance of his duties hereunder, and not otherwise for his benefit or the benefit of any other person or entity. For the purposes of this Agreement, Information shall include, but not be limited to, any confidential information concerning clients, subscribers, marketing, business and operational methods of the Company or its affiliates and its and its affiliates' clients, subscribers, contracts, financial or other data, technical data or any other confidential or proprietary information possessed, owned or used by the Company. Excluded from the Executive's obligations of confidentiality is any part of such Information that: (i) was in the public domain prior to the date of commencement of Executive's employment with the Company or (ii) enters the public domain other than as a result of Executive's breach of this covenant. This Section (4)(a) shall survive the expiration or termination of the other provisions of this Agreement. (b) Executive shall fully disclose to the Company all Inventions (which for purposes hereof shall be deemed to mean all discoveries, concepts, and ideas, whether or not patentable, including, but not limited to, processes, methods, formulas, and techniques, as well as improvements thereof or know-how related thereto) concerning or relating to the business conducted by the Company and concerning any present or prospective activities of the Company which are published, made or conceived by Executive, in whole or in part, during Executive's employment with the Company. (c) Executive shall make applications in due form for United States letters patent and foreign letters patent on such Inventions at the request of the Company and at its expense, but without additional compensation to the Executive. Executive further agrees that any and all such Inventions shall be the absolute property of Company or its designees. Executive shall assign to the Company all of Executive's right, title and interest in any and all Inventions, execute any and all instruments and do any and all acts necessary or desirable in connection with any such application for letters patent or to establish and perfect in the Company the entire right, title, and interest in such Inventions, patent applications, or patents, and shall execute any instrument necessary or desirable in connection with any continuations, renewals, or reissues thereof or in the conduct of any related proceedings or litigation. 5 (d) During Executive's employment with the Company and for a period of one (1) year after the earlier of the expiration date of this Agreement or the termination of Executive's employment hereunder by the Company for cause or by Executive (other than for Good Reason): (i) Executive will not, in any geographical area within which the Company is, at the time of Executive's termination or during the term of Executive's employment, marketing its products or services or conducting other business activities, directly or indirectly, engage in, own or control an interest in (except as a passive investor in publicly held companies and except for investments held at the date hereof) or act as an officer, director, or employee of, or consultant or adviser to, any firm, corporation or institution directly or indirectly competition with or engaged in a business including the provision of services substantially similar to that conducted by the Company at the time of Executive's termination or during the term of Executive's employment with the Company; and (ii) Executive will not recruit or hire any employee of the Company, or otherwise induce such employee to leave the employment of the Company, to become an employee of or otherwise be associated with Executive or any company or business with which Executive is or may become associated. 5. Change of Control. In the event of a Change of Control, as hereinafter defined, the following provisions shall apply: (a) If, immediately upon a Change of Control or at any time within one (1) year thereafter, Executive is no longer employed by the Company (or any entity to which this Agreement may be assigned in connection with such Change of Control) for any reason other than (i) for cause or (ii) Executive's death, legal incapacity or disability, Executive shall be entitled to receive, within 10 days after the termination date, a lump sum payment ("Change of Control Payment") equal to the amount of Executive's annual base salary then in effect plus any other amounts accrued and unpaid as of the date of termination. Notwithstanding the foregoing, if Executive shall so request, any Change of Control Payment may be paid to Executive in substantially equal monthly installments, or more frequently in accordance with the Company's usual payroll policy. (b) For purposes of this Section 5, a "Change of Control" shall mean any transaction or series of transactions (including, without limitation, a tender offer, merger or consolidation) the result of which is that any "person" or "group" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Principals and their Related Parties (as such terms are defined herein) or an entity controlled by each of the Principals and their Related Parties, becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Securities Exchange Act of 1934) of more than 50 percent (50%) of the total aggregate voting power of all classes of the Company's outstanding voting stock and/or warrants or options to acquire such voting stock, calculated on a fully diluted basis or (b) during any period of two consecutive calendar years, individuals who at the beginning of such period constituted the Company's Board of Directors (together with any new directors whose election by stockholders was approved by 6 a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors then in office unless such majority of the directors then in office has been elected or nominated for election by the Principals or their Related Parties or any entity controlled by each of the Principals or their Related Parties. For purposes hereof, (x) "Principals" means each of Nicholas R. Loglisci, Jr., Clark D. Frederick and Frank R. Altieri, Jr.; and (y) "Related Party" with respect to any Principal means (A) the spouse or immediate family member of such Principal or (B) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or persons beneficially holding an 80% or more controlling interest of which consists of such Principal and/or such other persons referred to in the immediately preceding clause (A). 6. No Violation. Executive warrants that the execution and delivery of this Agreement and the performance of his duties hereunder will not violate the terms of any other agreement to which he is a party or by which he is bound. Additionally, Executive warrants that Executive has not brought and will not bring to the Company or use in the performance of Executive's responsibilities at the Company any materials or documents of a former employer that are not generally available to the public, unless Executive has obtained express written authorization from the former employer for their possession and use. Executive represents that he is not and, since the commencement of Executive's employment with the Company has not been a party to any employment, proprietary information, confidentiality, or noncompetition agreement with any of Executive's former employers which remains in effect as the date hereof. The warranties set forth in this Section 6 shall survive the expiration or termination of the other provisions of this Agreement. 7. Breach by Executive. Both parties recognize that the services to be rendered under this Agreement by Executive are special, unique and extraordinary in character, and that in the event of the breach by Executive of the terms and conditions of this Agreement to be performed by him or in the event Executive performs services for any person, firm or corporation engaged in a competing line of business with Company, the Company shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, whether in law or in equity, to, by way of illustration and not limitation, obtain damages for any breach of this Agreement, or to enforce the specific performance thereof by Executive, or to enjoin Executive from competing with the Company or, performing services for himself or any such other person, firm or corporation. The Company may obtain an injunction restraining any such breach by Executive and no bond or other security shall be required in connection therewith. The Company and Executive each consent to the jurisdiction of the Superior Court of the State of New Jersey, located in Hackensack, New Jersey, and the United States Federal District Court for the District of New Jersey. 7 8. Miscellaneous. (a) This Agreement shall be binding upon and inure to the benefit of the Company, its successors, and assigns and may not be assigned by Executive. (b) This Agreement contains the entire agreement of the parties hereto and supersedes all prior or concurrent agreements, whether oral or written, relating to the subject matter hereof. This Agreement may be amended only by a writing signed by the party against whom enforcement is sought. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without regard to its conflicts of laws, rules or principles. (d) Any notices or other communications required or permitted hereunder shall be in writing and shall be deemed effective when delivered in person or, if mailed, on the date of deposit in the mails, postage prepaid, to the other party at the respective address of such party set forth herein or to such other address as shall have been specified in writing by either party to the other in accordance herewith. (e) The provisions of Sections 4(a) and 6 and the other provisions of this Agreement which by their terms contemplate survival of the termination of this Agreement, shall survive termination of this Agreement and be deemed to be independent covenants. (f) If any term or provision of this Agreement or its application to any person or circumstance is to any extent invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision shall be valid and enforced to the fullest extent permitted by law. (g) No delay or omission to exercise any right, power or remedy accruing to any party hereto shall impair any such right, power or remedy or shall be construed to be a waiver of or an acquiescence to any breach hereof. No waiver of any breach of this Agreement shall be deemed to be a waiver of any other breach of this Agreement theretofore or thereafter occurring. Any waiver of any provision hereof shall be effective only to the extent specifically set forth in the applicable writing. All remedies afforded under this Agreement to any party hereto, by law or otherwise, shall be cumulative and not alternative and shall not preclude assertion by any party hereto of any other rights or the seeking of any other rights or remedies against any other party hereto. 9. Indemnification The Company agrees to indemnify Executive to the fullest extent permitted by applicable law, as such law may be hereafter amended, modified or supplemented and to the fullest extent permitted by each of the Company's Restated Certificate of Incorporation and the Company's Restated By-Laws as from time to time amended, modified or supplemented. The Company further agrees that 8 Executive is entitled to the benefits of any directors and officers liability insurance policy, in accordance with the terms and conditions of that policy, if such a policy is maintained by the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first stated above. COMPANY IBS INTERACTIVE, INC. By:_____________________________ Name: Title: EXECUTIVE ________________________________ Frank R. Altieri, Jr. 9 EX-10.8 10 EXHIBIT 10.8 EMPLOYMENT AGREEMENT AGREEMENT dated as of April [ ], 1998 between IBS Interactive, Inc., a Delaware corporation (the "Company") with its corporate offices at 2 Ridgedale Avenue, Suite 350, Cedar Knolls, New Jersey 07927, and Jeffrey E. Brenner (the "Executive") residing at [ ]. RECITALS 1. The Company desires to employ Executive and the Executive has agreed to be employed as the Chief Financial Officer of the Company. 2. In connection with an initial public offering of the Company's Common Stock (the "IPO"), the parties hereto desire to provide for the employment of the Executive upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment; Term; Military Leave. (a) Employment Subject to the terms and conditions set forth herein, the Company agrees to employ and Executive agrees to serve as the Company's Chief Financial Officer to perform such services, and have such powers and authority as are specified in the Company's Restated By-Laws, as in effect from time to time, or assigned to the Executive by the Company's Board of Directors, provided, that, the same is not inconsistent with such position. Executive agrees that he will use his full business time to promote the interests of the Company and its affiliates and to fulfill his duties hereunder. Nothing in this Agreement shall however preclude Executive from engaging, so long as, in the reasonable determination of the Company's Board of Directors, such activities do not interfere with the execution of his duties and responsibilities hereunder, in charitable and community affairs, from managing any passive investment made by the Executive in publicly traded equity securities or other property (provided, that, no such investment may exceed 5% of the equity of any entity, without the prior approval of the Company's Board of Directors) or from serving, subject to the prior approval of the Company's Board of Directors, as a member of boards of directors or as a trustee of any other corporation, association or entity. For purposes of the preceding sentence, any approval of the Company's Board of Directors required herein shall not be unreasonably withheld. (b) Term. Unless sooner terminated pursuant to Section 3, the term of Executive's employment pursuant to this Agreement shall commence on the effective date (the "Effective Date") of the registration statement filed with the Securities and Exchange Commission relating to the IPO and shall continue thereafter for a period of four years or such earlier date as may be specified in a written notice (the "Termination Notice") delivered by either the Company or Executive to the other party that this Agreement shall terminate on a date not less than one year subsequent to the delivery of the Termination Notice. Each of the Company and Executive agree that on the Effective Date, the Current Agreement will be superseded by this Agreement. This Agreement shall automatically renew for one (1) successive four (4) year period; provided, however, that this Agreement shall expire on the fourth anniversary of the Effective Date if either the Company or Executive has given the other party hereto written notice at least six (6) months prior to such date that this Agreement will not be renewed. (c) Military Leave. Executive shall be entitled to all the protection and benefits afforded by any laws relating to any future compulsory military service to which Executive may be called and this Agreement shall be deemed subject to the provisions of any such law. Upon the submission to the Company of proof of having been called for military service, Executive will be granted a leave of absence for the duration of such service. This Section shall not be applicable if Executive voluntarily seeks military service. 2. Compensation. During the employment term under this Agreement, the Company shall compensate the Executive as follows: (a) Base Salary. Subject to adjustment as set forth below, the Company will pay Executive an annual salary at a rate of One Hundred Twenty Five Thousand Dollars ($125,000) per year, payable in substantially equal monthly installments, or more frequently in accordance with Company's usual payroll policy. On each anniversary of the Effective Date, the Executive's then existing base salary will be increased at such additional rate or amounts as the Compensation Committee (or Board of Directors, if at the time there shall be no Compensation Committee) shall deem appropriate. Any such increases granted in the discretion of the Compensation Committee will be retroactive to the beginning of the then current fiscal year. The Company will review annually the Executive's performance and compensation. (b) Performance Bonus. The Executive shall be entitled to such bonus compensation as the Compensation Committee deems appropriate. Such bonus compensation shall be based, in part, on the achievement of performance criteria established by the Compensation Committee, including criteria relating to the profitability of the Company. (c) On the date hereof, the Executive shall receive an award, pursuant to the Company's 1998 Stock Option Plan, of 40,000 options to purchase the Company's Common Stock. Additionally, the Executive shall receive an award of 20,000 shares of restricted Common Stock on May __, 1998. The shares of restricted Common Stock will vest ratably over a four year period commencing on the first anniversary of the date of this Agreement. (d) Benefits. Executive will be eligible to participate in all benefit programs of the Company which are in effect for its senior executive personnel and, to the extent available to executive personnel, its employees generally from time to time. (e) Vacation. Executive will be entitled each year to vacation for a period or periods not inconsistent with the normal policy of Company in effect from time to time, but in any event not less than twenty vacation days each year and to such holidays as may be customarily afforded to its employees by the Company, during which periods the Executive's compensation shall be paid in full. 2 (f) Reimbursement of Expenses. (i) All reasonable travel and entertainment expenses incurred by Executive in the course of fulfilling this Agreement or otherwise promoting the Company and its business shall be reimbursed by the Company. Such reimbursement shall be made to the Executive promptly following submission to the Company of receipts and other documentation of such expenses reasonably satisfactory to the Company. (ii) In addition to the expenses reimbursable pursuant to paragraph (i) above, the Company shall also pay to Executive a monthly allowance of $400 for automobile expenses, provided, however, that the Company shall be entitled to withhold from such allowance, any amounts required to be withheld by applicable federal, state or local tax laws. 3. Termination. (a) Death and Legal Incapacity. Executive's employment hereunder shall terminate upon the Executive's death or legal incapacity. (b) Disability. Executive's employment hereunder may be terminated by the Company in the event of Executive's physical or mental incapacity or inability to perform his duties as contemplated under this Agreement for a period of at least one hundred twenty (120) consecutive days. (c) For Cause. Executive's employment hereunder may be terminated by the Company upon the occurrence of any of the following events: (i) Executive's intentional breach of any provision hereof, which breach shall not have been cured within 20 days after written notice thereof from the Company (or cure commenced within said 20 day period if said breach is not curable within said 20 day period) which breach has a material adverse effect on the Company; (ii) Executive's intentional violation of any other duty or obligation owed by Executive to the Company which violation shall not have been cured within 20 days after written notice thereof from the Company (or cure commenced within said 20 day period if said violation is not curable within said 20 day period) which violation has a material adverse effect on the Company. (iii) Executive is convicted or pleads guilty or nolo contendre to any felony (other than traffic violation) or any crime involving fraud, dishonesty or misappropriation; (iv) Executive willfully fails to perform and discharge his duties hereunder in a competent manner and such failure shall continue for a period in excess of 20 days after written notice thereof specifying the failures is given by the Company to the Executive. 3 (v) Executive willfully engages in misconduct that causes material harm to the Company and such misconduct shall continue for a period in excess of 20 days after written notice thereof specifying such misconduct and the resulting harm is given by the Company to the Executive. (d) Consent of Directors. Termination of this Agreement by the Company for reasons other than: (i) for cause or (ii) Executive's death, legal capacity or disability must be approved by a vote of 2/3 of the members of the Company's Board of Directors. (e) For Good Reason. Executive may immediately terminate his employment hereunder for good reason ("Good Reason") in the event: (i) The Company assigns to Executive any duties or responsibilities inconsistent with Section 1, which assignment is not withdrawn within 20 business days after Executive's notice to the Company of his reasonable objection thereto; or (ii) The Company breaches any material provision of this Agreement and such breach and the effects thereof are not remedied by the Company within 20 business days after Executive's notice to the Company of the existence of such breach. (f) Effect of Termination. (i) If the Company terminates this Agreement for reasons other than for cause, or Executive's death, legal incapacity or disability or Executive terminates this Agreement for Good Reason, the obligations of Executive under this Agreement will terminate except that the covenants contained in Section 4(a) shall continue indefinitely. In such event, for a period of one (1) year after the date of Executive's termination, the Company shall pay Executive, in accordance with customary payroll procedures, Executive's base salary as then in effect. Additionally, any and all options, warrants or other securities awarded to Executive pursuant to the Company's 1998 Stock Option Plan or any other similar plan shall, as of the date of Executive's termination, immediately vest and become exercisable and all such options, warrants or other securities shall remain exercisable by Executive for the duration of the period during which the options, warrants or other securities would have remained exercisable if Executive had remained employed by the Company. (ii) Except as otherwise provided herein, if Executive's employment is terminated for any reason other than for cause, Good Reason or Executive's death, legal incapacity or disability, the obligations under this Agreement will terminate except that the covenants contained in Section 4(a) shall continue indefinitely and the covenants contained in Section 4(d) shall continue until the first anniversary of the date of Executive's termination. In such event, Executive shall be entitled to receive only the compensation hereunder accrued and unpaid as of the date of Executive's termination. 4 (iii) No amount payable to Executive pursuant to this Agreement shall be subject to mitigation due to Executive's acceptance or availability of other employment. 4. Restrictive Covenants; Non-Competition Executive in consideration of his employment hereunder agrees as follows: (a) Except as otherwise permitted hereby, or by the Company's Board of Directors, Executive shall treat as confidential and not communicate or divulge to any other person or entity any information related to the Company or its affiliates or the business, affairs, prospects, financial condition or ownership of the Company or any of its affiliates (the "Information") acquired by Executive from the Company or the Company's other employees or agents, except (i) as may be required to comply with legal proceedings (provided, that, prior to such disclosure in legal proceedings Executive notifies the Company and reasonably cooperates with any efforts by the Company to limit the scope of such disclosure or to obtain confidential treatment thereof by the court or tribunal seeking such disclosure) or (ii) while employed by the Company, as Executive reasonably believes necessary in performing his duties. Executive shall use the Information only in connection with the performance of his duties hereunder, and not otherwise for his benefit or the benefit of any other person or entity. For the purposes of this Agreement, Information shall include, but not be limited to, any confidential information concerning clients, subscribers, marketing, business and operational methods of the Company or its affiliates and its and its affiliates' clients, subscribers, contracts, financial or other data, technical data or any other confidential or proprietary information possessed, owned or used by the Company. Excluded from the Executive's obligations of confidentiality is any part of such Information that: (i) was in the public domain prior to the date of commencement of Executive's employment with the Company or (ii) enters the public domain other than as a result of Executive's breach of this covenant. This Section (4)(a) shall survive the expiration or termination of the other provisions of this Agreement. (b) Executive shall fully disclose to the Company all Inventions (which for purposes hereof shall be deemed to mean all discoveries, concepts, and ideas, whether or not patentable, including, but not limited to, processes, methods, formulas, and techniques, as well as improvements thereof or know-how related thereto) concerning or relating to the business conducted by the Company and concerning any present or prospective activities of the Company which are published, made or conceived by Executive, in whole or in part, during Executive's employment with the Company. (c) Executive shall make applications in due form for United States letters patent and foreign letters patent on such Inventions at the request of the Company and at its expense, but without additional compensation to the Executive. Executive further agrees that any and all such Inventions shall be the absolute property of Company or its designees. Executive shall assign to the Company all of Executive's right, title and interest in any and all Inventions, execute any and all instruments and do any and all acts necessary or desirable in connection with any such application for letters patent or to establish and perfect in the Company the entire right, title, and interest in such Inventions, 5 patent applications, or patents, and shall execute any instrument necessary or desirable in connection with any continuations, renewals, or reissues thereof or in the conduct of any related proceedings or litigation. (d) During Executive's employment with the Company and for a period of one (1) year after the earlier of the expiration date of this Agreement or the termination of Executive's employment hereunder by the Company for cause or by Executive (other than for Good Reason): (i) Executive will not, in any geographical area within which the Company is, at the time of Executive's termination or during the term of Executive's employment, marketing its products or services or conducting other business activities, directly or indirectly, engage in, own or control an interest in (except as a passive investor in publicly held companies and except for investments held at the date hereof) or act as an officer, director, or employee of, or consultant or adviser to, any firm, corporation or institution directly or indirectly competition with or engaged in a business including the provision of services substantially similar to that conducted by the Company at the time of Executive's termination or during the term of Executive's employment with the Company; and (ii) Executive will not recruit or hire any employee of the Company, or otherwise induce such employee to leave the employment of the Company, to become an employee of or otherwise be associated with Executive or any company or business with which Executive is or may become associated. 5. Change of Control. In the event of a Change of Control, as hereinafter defined, the following provisions shall apply: (a) If, immediately upon a Change of Control or at any time within one (1) year thereafter, Executive is no longer employed by the Company (or any entity to which this Agreement may be assigned in connection with such Change of Control) for any reason other than (i) for cause or (ii) Executive's death, legal incapacity or disability, Executive shall be entitled to receive, within 10 days after the termination date, a lump sum payment ("Change of Control Payment") equal to the amount of Executive's annual base salary then in effect plus any other amounts accrued and unpaid as of the date of termination. Notwithstanding the foregoing, if Executive shall so request, any Change of Control Payment may be paid to Executive in substantially equal monthly installments, or more frequently in accordance with the Company's usual payroll policy. (b) For purposes of this Section 5, a "Change of Control" shall mean any transaction or series of transactions (including, without limitation, a tender offer, merger or consolidation) the result of which is that any "person" or "group" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than the Principals and their Related Parties (as such terms are defined herein) or an entity controlled by each of the Principals and their Related Parties, becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Securities Exchange Act of 1934) of more than 50 percent (50%) of the total aggregate voting power of all classes of the Company's outstanding voting stock and/or 6 warrants or options to acquire such voting stock, calculated on a fully diluted basis or (b) during any period of two consecutive calendar years, individuals who at the beginning of such period constituted the Company's Board of Directors (together with any new directors whose election by stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors then in office unless such majority of the directors then in office has been elected or nominated for election by the Principals or their Related Parties or any entity controlled by each of the Principals or their Related Parties. For purposes hereof, (x) "Principals" means each of Nicholas R. Loglisci, Jr., Clark D. Frederick and Frank R. Altieri, Jr.; and (y) "Related Party" with respect to any Principal means (A) the spouse or immediate family member of such Principal or (B) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or persons beneficially holding an 80% or more controlling interest of which consists of such Principal and/or such other persons referred to in the immediately preceding clause (A). 6. No Violation. Executive warrants that the execution and delivery of this Agreement and the performance of his duties hereunder will not violate the terms of any other agreement to which he is a party or by which he is bound. Additionally, Executive warrants that Executive has not brought and will not bring to the Company or use in the performance of Executive's responsibilities at the Company any materials or documents of a former employer that are not generally available to the public, unless Executive has obtained express written authorization from the former employer for their possession and use. Executive represents that he is not and, since the commencement of Executive's employment with the Company has not been a party to any employment, proprietary information, confidentiality, or noncompetition agreement with any of Executive's former employers which remains in effect as the date hereof. The warranties set forth in this Section 6 shall survive the expiration or termination of the other provisions of this Agreement. 7. Breach by Executive. Both parties recognize that the services to be rendered under this Agreement by Executive are special, unique and extraordinary in character, and that in the event of the breach by Executive of the terms and conditions of this Agreement to be performed by him or in the event Executive performs services for any person, firm or corporation engaged in a competing line of business with Company, the Company shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, whether in law or in equity, to, by way of illustration and not limitation, obtain damages for any breach of this Agreement, or to enforce the specific performance thereof by Executive, or to enjoin Executive from competing with the Company or, performing services for himself or any such other person, firm or corporation. The Company may obtain an injunction restraining any such breach by Executive and no bond or other security shall be required in connection therewith. The Company and Executive each consent to the jurisdiction of the Superior Court of the State of New Jersey, located in Hackensack, New Jersey, and the United States Federal District Court for the District of New Jersey. 7 8. Miscellaneous. (a) This Agreement shall be binding upon and inure to the benefit of the Company, its successors, and assigns and may not be assigned by Executive. (b) This Agreement contains the entire agreement of the parties hereto and supersedes all prior or concurrent agreements, whether oral or written, relating to the subject matter hereof. This Agreement may be amended only by a writing signed by the party against whom enforcement is sought. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without regard to its conflicts of laws, rules or principles. (d) Any notices or other communications required or permitted hereunder shall be in writing and shall be deemed effective when delivered in person or, if mailed, on the date of deposit in the mails, postage prepaid, to the other party at the respective address of such party set forth herein or to such other address as shall have been specified in writing by either party to the other in accordance herewith. (e) The provisions of Sections 4(a) and 6 and the other provisions of this Agreement which by their terms contemplate survival of the termination of this Agreement, shall survive termination of this Agreement and be deemed to be independent covenants. (f) If any term or provision of this Agreement or its application to any person or circumstance is to any extent invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision shall be valid and enforced to the fullest extent permitted by law. (g) No delay or omission to exercise any right, power or remedy accruing to any party hereto shall impair any such right, power or remedy or shall be construed to be a waiver of or an acquiescence to any breach hereof. No waiver of any breach of this Agreement shall be deemed to be a waiver of any other breach of this Agreement theretofore or thereafter occurring. Any waiver of any provision hereof shall be effective only to the extent specifically set forth in the applicable writing. All remedies afforded under this Agreement to any party hereto, by law or otherwise, shall be cumulative and not alternative and shall not preclude assertion by any party hereto of any other rights or the seeking of any other rights or remedies against any other party hereto. 9. Indemnification The Company agrees to indemnify Executive to the fullest extent permitted by applicable law, as such law may be hereafter amended, modified or supplemented and to the fullest extent permitted by each of the Company's Restated Certificate of Incorporation and the Company's Restated By-Laws as from time to time amended, modified or supplemented. The Company further agrees that 8 Executive is entitled to the benefits of any directors and officers liability insurance policy, in accordance with the terms and conditions of that policy, if such a policy is maintained by the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first stated above. COMPANY IBS INTERACTIVE, INC. By:_____________________________ Name: Title: EXECUTIVE _________________________________ Jeffrey E. Brenner 9 EX-10.14 11 EXHHIBIT 10.14 Adopted and Effective as of March 10, 1998 1998 IBS INTERACTIVE, INC. STOCK OPTION PLAN 1998 IBS INTERACTIVE, INC. STOCK OPTION PLAN 1. Purpose. The purposes of the 1998 IBS Interactive, Inc. Stock Option Plan (the "Plan") are to advance the interests of IBS Interactive, Inc. ("IBS") and its stockholders by providing incentives and rewards to those individuals who are in a position to contribute to the long-term growth and profitability of IBS and any present or future subsidiaries and affiliates of IBS (collectively, the "Company"); to assist the Company in attracting, retaining and motivating highly qualified employees for the successful conduct of their business; and to make the Company's compensation program competitive with those of other similar employers. 2. Definitions. 2.1 "Award" means an award or grant made to a Participant under the Plan. 2.2 "Award Agreement" means the agreement provided in connection with an Award under the Plan. 2.3 "Award Date" means the date that an Award is made, as specified in the Award Agreement. 2.4 "Board" means the Board of Directors of IBS. 2.5 A "Change in Control" shall be deemed to occur in the event that any of the following circumstances have occurred: (i) Any "person" or "group" within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act (a) becomes the "beneficial owner", as defined in Rule 13d-3 under the Exchange Act, of 50% or more of the combined voting power of IBS's then outstanding securities, otherwise than through a transaction or series of related transactions arranged by, or consummated with the prior approval of, the Board of Directors of IBS (hereinafter referred to as the "Board") or (b) acquires by proxy or otherwise the right to vote 50% or more of the then outstanding voting securities of IBS, otherwise than through an arrangement or arrangements consummated with the prior approval of the Board for the election of directors, for any merger or consolidation of IBS or for any other matter or question. (ii) During any period of 24 consecutive months (not including any period prior to the adoption of this section), Present Directors and/or New Directors cease for any reason to constitute a majority of the Board. For purposes of the preceding sentence, "Present Directors" shall mean individuals who at the beginning of such consecutive 24 month period were members of the Board and "New Directors" shall mean any director whose election by the Board or whose nomination for election by IBS's stockholders was 2 approved by a vote of at least two-thirds of the directors then still in office who were Present Directors or New Directors. (iii) Consummation of (a) any consolidation or merger of IBS in which IBS is not the continuing or surviving corporation or pursuant to which shares of Stock would be converted into cash, securities or other property, other than a merger of IBS in which the holders of Stock immediately prior to the merger have the same proportion and ownership of common stock of the surviving corporation immediately after the merger or (b) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of IBS; provide, that, the divestiture of less than substantially all of the assets of IBS in one transaction or a series of related transactions, whether effected by sale, lease, exchange, spin-off, sale of the stock or merger of a subsidiary or otherwise, shall not constitute a Change in Control. For purposes of this Section 2.5, the rules of Section 318(a) of the Code and the regulations issued thereunder shall be used to determine stock ownership. 2.6 "Code" means the Internal Revenue Code of 1986, as now or hereafter amended. 2.7 "Committee" means the members of the Board appointed by the Board to administer the Plan pursuant to Section 4, or if no such Committee is appointed, the full Board. 2.8 "Disability" means a Participant's inability to engage in any substantial gainful activity because of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of 12 months or longer. A Participant shall not be considered to be disabled hereunder unless the Participant furnishes proof of the existence thereof in such form and manner, and at such times, as the Committee may require. 2.9 "Employee" means all employees of the Company, including officers of the Company, as well as officers of the Company who are also directors of the Company. 2.10 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 2.11 "Fair Market Value" for purposes of the Plan, unless otherwise required by any applicable provision of the Code or any regulation issued thereunder, means, as of any date, the mean of the high and low prices reported per share of Stock on the applicable date (i) as reported by the principal national securities exchange in the United States on which the Stock then traded or (ii) if not traded on any such national securities exchange, as quoted on the Nasdaq National Market or the Nasdaq SmallCap Market (collectively, the "Nasdaq Markets") (or, if the Stock has not been reported or quoted on such date, on the first day prior thereto on which the Stock was reported or traded). If the Stock is not readily tradable on a national securities exchange or a Nasdaq Market, its Fair Market Value shall be set in good faith by the Committee. 3 2.12 "Incentive Stock Option" or "ISO" means any Stock Option granted pursuant to this Plan which is designated in an Award Agreement as such by the Committee and which complies with Section 422 of the Code. 2.13 "Non-Qualified Stock Option" means any Stock Option granted pursuant to this Plan which is not an Incentive Stock Option. 2.14 "Option Price" means the purchase price of one share of Stock under a Stock Option. 2.15 "Settlement Date" means, with respect to any Stock Option that has been exercised in whole or in part, the date or dates upon which shares of Stock are to be delivered to the Participant and the Option Price therefor paid. 2.16 "Stock" means the Common Stock, par value $.01 per share, of IBS. 2.17 "Stock Option" or "Option" means an Award that entitles a Participant to purchase a share of Stock. 3. Participation. The participants in the Plan ("Participants") shall be (a) all Employees, (b) directors of the Company and (c) such other persons or entities which provide services to the Company which are selected to participate in the Plan by the Committee. 4. Administration. The Plan shall be administered by the Committee. Except as otherwise provided herein, the Committee shall have full power to: (i) interpret the Plan; (ii) determine who is eligible to be a Participant in the Plan; (iii) select Award recipients; (iv) set the terms and conditions of Awards; (v) establish administrative regulations to further the purpose of the Plan; and (vi) take any other action desirable or necessary to interpret, construe or implement properly the provisions of the Plan. All decisions and acts of the Committee shall be final and binding upon all Participants. 5. Awards. 5.1 Types of Awards. Awards are to be in the form of Stock Options. 5.2 Award Agreements. All Awards shall be made pursuant to Award Agreements between the Participant and the Company. Award Agreements shall set forth the details, conditions and limitations for each Award, which may include the term of the Award, the provisions applicable in the event the Participant's employment or service to the Company terminates, and the Company's authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind any Award. In addition, the Award Agreement may include provisions relating to control of the Company and future issuances by the Company of debt and equity securities, such as "drag along" rights, "tag along" rights, "lock up" or "holdback" provisions in connection with recapitalizations, reorganizations, acquisitions, divestitures, debt-financings, private placements 4 of the Company's securities, public offerings of the Company's securities and "voting agreement" provisions which the Company deems necessary or appropriate in good faith. The Award Agreements shall be in such form as the Committee approves from time to time. 5.3 Maximum Number of Shares Available. The total number of shares of Stock optioned or granted under the Plan shall not exceed 330,000 shares. If an Award expires unexercised or is forfeited, surrendered, cancelled, or settled in cash in lieu of Stock, shares of Stock previously set aside for such Awards shall be available for distribution in connection with future Awards. 5.4 Adjustment in the Event of Recapitalization, etc. In the event of any change in the outstanding shares of IBS by reason of any stock split, stock dividend, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change or in the event of any special distribution to the stockholders, the Committee shall make such equitable adjustments in the number of shares and prices per share applicable to Awards then outstanding and in the number of shares which are available thereafter for Awards as the Committee determines are necessary and appropriate. Any such adjustment shall be conclusive and binding for all purposes of the Plan. 6. Stock Options. 6.1 Grant of Award. Stock Options may be awarded to any Participant. Except as otherwise provided below, Awards of Stock Options shall be subject to such terms and conditions as are established by the Committee and set forth in the Award Agreement. The Committee shall determine with respect to each Award of Stock Options and designate in the Award Agreement whether a Participant is to receive Incentive Stock Options or Non-Qualified Stock Options. 6.2 Option Price. The exercise price of each share of Stock subject to a Stock Option shall be specified in the grant. Notwithstanding the foregoing, no Stock Option shall be awarded which has an exercise price less than the Fair Market Value of the Stock on the date of grant, if such grant date is subsequent to an initial public offering of Stock by the Company. Additionally, if the Participant to whom an ISO is granted owns, at the date of grant, more than ten percent (10%) of the combined voting power of the Company, the exercise price of the ISO subject to such grant shall be not less than one hundred ten percent (110%) of the Fair Market Value. 6.3 Vesting and Exercisability of Options. A Stock Option by its terms shall not be exercisable after such period as determined by the Committee, provided, that, in no event shall a Stock Option be exercisable after the expiration of ten (10) years from the date such option is granted, except than an ISO granted to a Participant who, at the date of grant, owns Stock representing more than ten percent (10%) of the combined voting power of the Participating Company shall by its terms not be exercisable after the expiration of more than five (5) years from the date such Option is granted. Subject to the preceding paragraph and except as otherwise provided herein, an Option shall be only exercisable by a Participant while the 5 Participant is actively employed by or providing service to the Company, except: (i) in the case of a Participant's death in which event an Option may be exercised by the executor or administrator of Participant's estate or Participant's distributee during the three (3) month period commencing on the date of Participant's death; (ii) during the three (3) month period commencing on the date of a Participant's Disability or termination of service or employment by the Company other than for cause; (iii) during the three (3) month period commencing on the date of the Participant's termination of service or employment, by the Participant or the Company, after a Change in Control, unless such termination of employment is for cause; or (iv) if the Committee decides that it is in the best interest of the Company to permit individual exceptions. For purposes hereof, cause shall mean: (i) the disclosure or misuse of confidential information or trade secrets; (ii) activities in violation of Company policies; (iii) the violation or breach of any material provision in any employment contract or agreement between a Participant and any Company; (iv) engaging in conduct relating to the Participant's service to or employment with the Company for which either criminal or civil penalties may be sought; and (v) engaging in activities which adversely affects or which are inimical, contrary or harmful to the interest of the Participating Company or its business operations. An Option may not be exercised pursuant to this paragraph after the expiration date of the Option. Notwithstanding the foregoing, an Incentive Stock Option may not be exercised more than 12 months after a Participant's employment terminates due to disability or three (3) months after such employment terminates for any other reason. 6.4 Exercise of Option. Subject to the terms and conditions hereof and the terms and conditions specified in the respective Award Agreement, an Option may be exercised with respect to part or all of the shares subject to the Option by giving written notice to the Company of the exercise of the Stock Option. The Option Price for the shares for which an Option is exercised shall be paid within ten business days after the date of exercise in cash, in whole shares of Stock, in a combination of cash and such shares of Stock, or in any other manner that the Committee may approve. The value of any share of Stock delivered in payment of the Option Price shall be its Fair Market Value on the date the Option is exercised. 6.5 Limitation Applicable to ISOs. The aggregate Fair Market Value of all shares of Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant in any one calendar year, under the Plan or any other stock option plan maintained by the Company, shall not exceed $100,000. The fair market value of such shares of Stock shall be the Fair Market Value on the date the related Stock Option is granted. 7. Settlement of Awards. At the Committee's discretion, Awards may be settled in cash, shares of Stock, or any combination thereof. The Committee may (i) require or permit Participants to defer the issuance or vesting of shares of Stock or the settlement of Awards in cash and (ii) provide that deferred settlements include the payment or crediting of interest on deferred amounts. 6 8. General Provisions. 8.1 Transferability of Awards. Awards under the Plan shall not be transferable otherwise than by will or the laws of descent and distribution, unless otherwise determined by the Committee. 8.2 Unfunded Plan. Nothing contained herein shall require the Company to segregate any monies from its general funds, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Participant for any year. 8.3 No Right to Employment. Participation in this Plan shall not affect the Company's right to discharge a Participant or constitute an agreement of employment between a Participant and the Company. 8.4 Rights as a Stockholder. Except as otherwise provided in any Award Agreement, a Participant shall have no rights as a stockholder of IBS until he or she becomes the holder of record of Stock. 8.5 Applicable Law. The validity, construction and effect of the Plan, and any actions taken or relating to the Plan, shall be determined in accordance with applicable federal law and the laws of the state in which the Company is incorporated. 8.6 Successors and Assigns. The Plan and any Award Agreement shall be binding on all successors and assigns of a Participant, including, without limitation, the estate of the Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant's creditors. 9. Amendment, Suspension, or Termination. The Board may suspend, terminate, or amend the Plan, including but not limited to such amendments as may be necessary or desirable resulting from changes in the federal income tax laws and other applicable laws, but may not, without approval by the holders of a majority of all outstanding shares entitled to vote on the subject at a meeting of stockholders of IBS, increase the total number of shares of Stock that may be optioned or granted under the Plan. 7 10. Tax Withholding. The Company shall have the right to (i) require that shares of Stock be withheld in an amount sufficient to satisfy withholding of any federal, state or local taxes required by law and (ii) take such other action as may be necessary or appropriate to satisfy any such withholding obligations. The Committee may determine the manner in which such tax withholding shall be satisfied. The date the Option is exercised shall be the date used for purposes of determining the Fair Market Value of the shares of Stock used to satisfy the required tax withholding. 11. Effective Date and Duration of the Plan. The Plan shall be effective on the date of the approval of the Plan by the holders of a majority of the issued and outstanding shares of Stock and shall terminate on the tenth anniversary of the effective date. The Plan shall be null and void and of no effect if the foregoing condition is not fulfilled, and in such event each Stock Option granted hereunder shall, notwithstanding any of the preceding provisions of the Plan, be null and void and of no effect. * * * * * 8 EX-16 12 EXHIBIT 16 [LETTERHEAD OF MILGROM GALUSKIN BALMUTH & COMPANY] Certified Public Accountants, P.C. April 22, 1998 Securities and Exchange Commission 450 5th Street Washington, D.C. 20549 Re: Change In Accountants for IBS Interactive, Inc. (formerly known as Internet Broadcasting Systems, Inc.) (the "Company") Ladies and Gentlemen: We were the Company's independent certified public accountants during the Company's fiscal year ended December 31, 1996 (the "Applicable Period"). We have been provided with a copy of the Prospectus which constitutes a part of the Registration Statement on Form SB-2 filed by the Company with the Commission and we agree with the disclosures relating to us made by the Company in the Prospectus under the caption "Experts." The appointment of BDO Seidman, LLP as the new independent accountants for the Company was precipitated by the proposed public offering and the Company desires BDO Seidman, LLP to be the Company's independent accountants going forward. No adverse opinion or disclaimer of opinion was included in our report nor was our opinion modified as to uncertainty, audit scope or accounting principles during the Applicable Period. During the Applicable Period, the Company did not have any disagreements with us as to matters of accounting principles or practices, financial statement disclosure or auditing scope or procedures which disagreement, if not resolved to the satisfaction of us, would have caused us to make reference to such disagreement in connection with our report. /s/ Milogrom Galuskin Balmuth & Company - --------------------------------------- Milogrom Galuskin Balmuth & Company Certified Public Accountants, P.C. EX-23.2 13 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS IBS Interactive, Inc. Cedar Knolls, New Jersey We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated February 27, 1998 (April 21, 1998 as to the last paragraph of Note 14) relating to the financial statements of IBS Interactive, Inc., which is contained in that Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ BDO SEIDMAN, LLP BDO SEIDMAN, LLP Woodbridge, New Jersey April 22, 1998 EX-23.3 14 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS IBS Interactive, Inc. Cedar Knolls, New Jersey We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated March 31, 1997 (April 21, 1998 as to the last paragraph of Note 14) relating to the financial statements of IBS Interactive, Inc., which is contained in that Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ Milgrom Galuskin Balmuth and Company Milgrom Galuskin Balmuth and Company Certified Public Accountants, P.C. Edison, New Jersey April 22, 1998 EX-23.7 15 EXHIBIT 23.7 EXHIBIT 23.7 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS IBS Interactive, Inc. Cedar Knolls, New Jersey We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated March 14, 1998 relating to the financial statements of Entelechy, Inc., which is contained in that Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ BDO SEIDMAN, LLP BDO SEIDMAN, LLP Woodbridge, New Jersey April 22, 1998 EX-27 16 FINANCIAL DATA SCHEDULE
5 0001057257 IBS INTERACTIVE, INC. U.S. 1,000 12-MOS DEC-31-1997 DEC-31-1997 1 95 0 1,702 (66) 0 50 824 (306) 2,451 1,214 0 0 0 14 1,125 2,451 2,741 2,741 1,099 1,308 15 0 37 282 84 0 0 0 0 198 .12 .12
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