UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Advant-e Corporation
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(Name of small business issuer in its charter)
Delaware 7371 88-0339012
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(State of jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or organization) Classification Code Number) Identification No.)
2680 Indian Ripple Rd. Dayton, OH 45440 Telephone number: 937-429-4288
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(Address and telephone number of principal executive offices)
2680 Indian Ripple Rd. Dayton, OH 45440
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(Address of principal place of business or intended principal place of
business)
Jason Wadzinski, President
Advant-e Corporation
2680 Indian Ripple Rd.
Dayton, OH 45440
(937) 429-4288
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(Name, address and telephone number of agent for service)
Copies to:
Barbara L. Sager, Esq.
134 Westpark Road
Centerville, OH 45459
(937) 657-6768
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this
Registration Statement
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If 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,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Proposed
Title of Amount Proposed Maximum Amount of
Securities to be Maximum Aggregate Registration
To be Registered Registered Price per Share Offering Price Fee
---------------- ---------- --------------- -------------- ------------
Common stock, 1,752,040 $1.40(1) $2,522,937 $198.44
$.001 par value
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(1) Estimated solely for purposes of calculating the amount of
the registration fee pursuant to Rule 457(c) of the Securities
Act of 1933 (the "Securities Act"). The registration fee is
calculated on the basis of the average of the closing bid and ask
prices for our common stock as quoted on the Over-the-Counter
Bulletin Board on November 28, 2003.
THE REGISTRANT HEREBY AGREES TO AMEND THIS REGISTRATION STATEMENT ON
SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES
THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS SUBJECT TO COMPLETION OR
AMENDMENT. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION 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 AN OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OF QUALIFICATION UNDER THE
SECURITIES LAWS OF THAT STATE.
PROSPECTUS
SUBJECT TO COMPLETION DATED DECEMBER 1, 2003
ADVANT-E CORPORATION
1,752,040 COMMON SHARES, $.001 PAR VALUE
The registration statement of which this prospectus is a part relates to the
offer and sale of up to 1,752,040 shares of common stock, par value $.001,
for sale by certain security holders.
We are registering for resale of common stock for certain security holders and
We will only receive proceeds to the extent that outstanding warrants are
exercised. All other shares being registered will be issued upon conversion of
outstanding Convertible Subordinated Notes, and we will derive no proceeds from
the conversion of subsequent resale of such shares. The shares to be
registered for sale by selling security holders will be issued as a result of
the issuance of Convertible Subordinated Notes convertible into a maximum of
732,040 common shares; as a result of the exercise of warrants that were
issued in connection with the same Convertible Subordinated Notes for a maximum
of 1,000,000 shares; and as a result of an agreement for services rendered for
a maximum of 20,000 common shares.
The Company has retained no underwriter to assist in selling the common
shares.
The Company's common shares are traded on the over-the-counter Bulletin
Board under the symbol "AVEE."
THE PURCHASE OF THE COMMON SHARES INVOLVES A HIGH DEGREE OF RISK AND
POTENTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 6 AND DILUTION
ON PAGE 20.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED
IF THIS PROPSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this preliminary prospectus is December 1, 2003.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, ANY SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US OR ANY OTHER PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY OR ITS SUBSIDIARY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO ANY
PERSON IN ANY STATE WHERE SUCH OFFER WOULD BE UNLAWFUL.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM
THAT CONTAINED IN THIS PROSPECTUS. THE SELLING SECURITY HOLDERS ARE OFFERING
TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN
JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED.
TABLE OF CONTENTS
Prospectus Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Disclosure regarding forward-looking statements . . . . . . . . . . . . . . .16
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Determination of Offering Price . . . . . . . . . . . . . . . . . . . . . . .18
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Selling Security Holders. . . . . . . . . . . . . . . . . . . . . . . . . . .21
Plan of Distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Directors, Executive Officers, Promoters and Control Persons. . . . . . . . .24
Security Ownership of Certain Beneficial Owners and Management. . . . . . . .25
Description of Securities . . . . . . . . . . . . . . . . . . . . . . . . . .26
Interests of Named Experts and Counsel. . . . . . . . . . . . . . . . . . . .27
Disclosure of Commission Position of Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Certain Relationships and Related Transactions. . . . . . . . . . . . . . . .28
Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Management's Discussion and Analysis of Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . .48
Market for Common Equity and Related Shareholder Matters. . . . . . . . . . .48
Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Where You Can Find Additional Information . . . . . . . . . . . . . . . . . .50
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . F-1
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52
Indemnification of Directors and Officers . . . . . . . . . . . . . . . . . .52
Other Expenses of Issuance and Distribution . . . . . . . . . . . . . . . . .53
Recent Sales of Unregistered Securities . . . . . . . . . . . . . . . . . . .53
Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
Undertakings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
PROSPECTUS SUMMARY
This prospectus contains statements about our future operations, which involve
risks and uncertainties. Our actual results could differ in important ways
from our anticipated future operations, due to many factors, including "Risk
Factors," beginning on page 6, and other factors. We have attempted to
summarize only the most significant aspects of the prospectus. You should be
aware that this Prospectus Summary does not contain all the information that
may be important to you. You should read the entire prospectus, especially
"Risk Factors" and the Consolidated Financial Statements and Notes, before
deciding to invest in the Company's common shares.
The Company (Advant-e Corporation and its wholly-owned subsidiary, Edict
Systems, Inc.)
2
The Company provides business-to-business electronic commerce products and
services focusing primarily on supply chain connectivity. The Company
provides high-quality, cost-effective solutions which give the Company's
customers the ability to leverage technology to improve their businesses.
The Company provides software and Internet-based solutions to small and medium
sized suppliers (often called "spokes") of large companies allowing them to
satisfy the Electronic Commerce requirements (most often electronic data
interchange (EDI) requirements) of their customers. Advant-e provides services
to large companies (often called "hubs") to enable them to maximize their
current supply chain Electronic Commerce investments by increasing the number
of suppliers who can conduct business with them electronically. The Company
provides consultative services for its customers, generally small and medium
sized suppliers to large buying organizations wherein it acts as a liaison
between the buyers and their suppliers to interface with the buyer on behalf
of the Company's customers.
The Company, through its operating subsidiary Edict Systems, has been a
provider of Electronic Data Interchange (EDI) and Electronic Commerce products
and services since 1990. Our company is comprised of 4 principal business
products/services. These are:
* Web-EDI - web-based supply chain solution for the grocery and other
industries (GroceryEC.com, RetailEC.com, MfgEC.com, CPGSupplierEC.com,
web-edi.com, etc.)
* EnterpriseEC - Internet-based Electronic Business Transaction Network
Services
* Formula_One - EDI software and Bar Code Label Modules (legacy software
products)
* Value-Added Applications--Internet-based solutions that enhance the value
of electronic commerce capabilities
Many small and medium size companies have resisted doing Electronic Commerce
and Electronic Data Interchange (EDI) with their business partners due to many
factors, but primarily due to high cost and low transaction volume. By
leveraging the economy and ubiquitousness of the Internet, our Internet-based
solutions have minimal technological requirements (access to Internet and a
web browser), and are cost effective. EDI and other business technologies have
proven to be valuable tools to reduce cost, increase accuracy, shorten supply
lead times, insure product availability, and increase customer satisfaction.
Advant-e Corporation (formerly Twilight Products, Ltd.) was incorporated in the
State of Delaware on March 9, 1994. On April 10, 2000, Twilight acquired all
of the issued and outstanding shares of Edict Systems, Inc. ("Edict"), an Ohio
company incorporated in September of 1994. Immediately following the Merger,
the shareholders of Edict owned approximately 81% of the issued and outstanding
common stock of Twilight and the Directors and Officers of Edict became the
Directors and Officers of Twilight. On August 6, 2000, Advant-e formally
changed its name from "Twilight Productions Ltd." to "Advant-e Corporation".
As a result, the Company is now comprised of Advant-e Corporation and its
wholly-owned and sole operating subsidiary, Edict Systems, Inc.
In 2001 the Company issued seven 15% Convertible Subordinated Notes of which
four are outstanding at December 1, 2003 in the principal amount of $250,000.
3
The Notes may be converted at the note holders' option at maturity in the
principal amount plus any accrued interest into the Company's common stock at a
price of $1.06 per common share. The Notes have outstanding warrants whereby
the note holders can acquire 675,000 shares of the Company's common stock at a
price of $1.205 per common share. In addition, warrants for the acquisition of
75,000 common shares are reserved for future issuance to a note holder. The
warrants expire on several dates in 2005.
In 2002 the Company issued six 10% Convertible Subordinated Notes that
currently are outstanding in the principal amount of $250,000. The Notes may
be converted at the note holders' option at maturity in the principal amount
plus any accrued interest into the Company's common stock at a price of $1.10
per common share, and have attached warrants whereby the note holders can
acquire up to 250,000 common shares of the Company at a price of $1.25 per
common share. These warrants expire on September 27, 2005.
In 2001 the Company granted warrants to an unrelated third party for the
purchase of 20,000 shares of the Company's stock at $1.48 per share,
exercisable through June 25, 2006.
Effective November 14, 2003 a holder of the Company's 15% Convertible
Subordinated Notes in the principal amount of $250,000 agreed to convert the
principal amount of the note into 235,849 shares of the Company's common stock.
The Company expects to issue up to a maximum of 1,752,040 common shares,
resulting from the possible conversion of the Notes and exercise of the
warrants by the selling security holders. The total proceeds to the Company,
assuming the exercise of all warrants is $1,245,850; the Company will realize
no proceeds from the conversion of the Notes.
The principal executive offices of both Advant-e Corporation and Edict Systems,
Inc. are located at 2680 Indian Ripple Rd., Dayton, Ohio 45440. The Company's
telephone number is 937-429-4288. Edict Systems, Inc. is the sole and wholly-
owned subsidiary of Advant-e Corporation.
The Offering
Number of shares of common stock
currently outstanding 5,661,002
Number of shares of common stock
offered by selling shareholders 1,752,040
Proceeds to the Company Up to $1,229,850, net of estimated
offering expenses, if all warrants
are exercised
Expenses We estimate the expenses associated
with this offering to be:
SEC filing fee $ 1,000
NASD filing fee 1,000
Printing 2,000
Blue Sky 2,000
4
Legal 5,000
Accounting 2,000
Transfer agent 1,000
Edgar 1,000
Miscellaneous 1,000
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Total $ 16,000
======
Use of Proceeds Proceeds from the exercise of the
warrants will be used mainly for
general corporate purposes, marketing,
and product development. The Company
will not receive any proceeds from the
conversion of the convertible
subordinated notes.
Plan of Distribution The offering of the Company's shares
of common stock is being made by the
selling security holders. Sales of the
Company's common stock may be made by
the selling shareholders in the open
market or in privately negotiated
transactions and at fixed or
negotiated prices.
Risk factors Investment in the Company's common
stock involves a high degree of risk,
including the risk that investors could
lose their entire cash investment. For
a discussion of risk factors you should
consider before buying shares of our
common stock, see the section entitled
"Risk Factors" beginning on page 6.
Dividend Policy We do not intend to pay dividends on
our common stock. We plan to retain
any earnings in the foreseeable future
in the operations of the business to
help fund future growth.
Plan of offering There is no underwriter for this
offering.
Selected Financial Data
The following selected financial data is derived from the Company's financial
statements included elsewhere in this prospectus and should be read in
conjunction with the more detailed financial statements, including notes
thereto, appearing elsewhere in this prospectus and should also be read
in conjunction with the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The financial information
as of December 31, 2002 and for the year then ended has been derived from the
financial statements audited by J. D. Cloud & Co. L.L.P. The financial
5
information for the year ended December 31, 2001 has been derived from the
financial statements audited by Battelle & Battelle LLP. The financial
information as of September 30, 2003 and for the nine month periods ended
September 30, 2003 and 2002 has been derived from unaudited financial
statements prepared by management.
Balance sheet data: December 31, 2002 September 30, 2003
(Unaudited)
----------------- ------------------
Total Assets $ 1,235,986 1,200,153
Total Liabilities 1,213,353 1,145,181
Shareholders' Equity 22,633 54,972
Statement of Operations data: Year Ended Nine months Ended
December 31 September 30
--------------------- ------------------
2002 2001 2003 2002
---- ---- ---- ----
Revenues $ 2,008,389 1,185,318 2,124,351 1,441,097
Operating Expenses 2,342,189 1,364,529 2,072,582 1,578,720
--------- --------- --------- ---------
Income (loss) before taxes (333,800) (179,211) 51,769 (137,623)
Income tax (benefit) ( 26,266) ( 17,582) 19,430 8,610
-------- -------- ------ -------
Net income (loss) $ (307,534) (161,629) 32,339 (146,233)
======= ======= ====== =======
RISK FACTORS
An investment in the common shares offered by this prospectus is speculative
and involves a high degree of risk, including the risk factors described below.
In addition to the other information presented in this prospectus, each
prospective investor should carefully consider the following risk factors
inherent in and affecting our business and this offering before making an
investment decision. Each of the following risks could have a material adverse
effect on the business, financial condition or operating results of the
Company. In such a case, the trading price of common stock would probably
decline, and investors may lose all or part of their investment.
RISKS RELATED TO OUR FINANCIAL CONDITION
THE COMPANY HAS A RECENT HISTORY OF OPERATING LOSSES INCLUDING LOSSES IN FISCAL
1999 ($434,776), IN FISCAL 2000 ($485,256), IN FISCAL 2001, ($161,629), IN
FISCAL 2002 ($307,534), AND FOR THE SIX MONTHS ENDED JUNE 30, 2003 ($75,803).
THE COMPANY COULD INCUR LOSSES AGAIN IN THE FORESEEABLE FUTURE. Such losses
could result from large investment in capital resources for enhancing existing
products and services and for new products and services, large investments in
sales and marketing efforts, continued declines in revenues for our legacy
software product line, and potential declines in revenues from the Company's
primary revenue source, GroceryEC.com. The Company's future profitability
depends, in part, on the success of its product development efforts; the
acceptance of its business model by targeted customers; and its sales and
marketing activities.
6
Although the Company reported a profit for the third quarter of 2003, the
success of the Company's business model depends upon potential customers
being attracted to and using its Internet-based electronic commerce products
and services. This business model is not yet fully proven. Several factors,
including customer acceptance, retailer arrangements, competitive factors and
our ability to successfully develop and market our products, make it impossible
to predict when or whether we will generate sufficient revenue to sustain
long-term profitability. Consequently, we may never achieve sufficient
revenues or profitability, and even if we do, we may not sustain or increase
profitability on a quarterly or an annual basis in the future. Our ability to
continue in business could be jeopardized if we are not able to achieve and
sustain positive cash flow or profitability or if we are not able to obtain
necessary financing on satisfactory terms.
THE COMPANY'S REVENUES COULD DECREASE AS IT CONTINUES ITS TRANSITION FROM ITS
HISTORICAL SOFTWARE BUSINESS MODEL TO A TRANSACTION-BASED BUSINESS MODEL. The
Company has been transitioning, and will continue to transition, its business
model to focus on providing customers with the ability to process their
electronic commerce documents via the Internet for fees based on the number
and/or size of the transactions. The Company expects that this model will
provide an increase in recurring revenues, but it has also resulted in a
decrease in licensing and sales revenue the Company receives from its software
products, which would have normally been offered to potential customers.
Under the new model, the Company provides transaction services wherein
customers pay for transactions that they process. The Company believes that
this service will allow its customers to receive, transmit, and process
electronic commerce documents without having to bear significant up-front
software and on-going third-party network expenditures. Any failure in the
Company's ability to implement and grow its Internet-based services could have
a material adverse affect on the Company's business and financial results. In
addition, the Company's business and financial results could also suffer if
revenue from increased volume experienced by existing and new customers does
not make up for the loss in revenue from the decrease in the per-customer
amount of licensing fees and other charges for its software products.
THE COMPANY'S CAPITAL RESOURCES MAY BE INSUFFICIENT TO FUND IMPLEMENTATION OF
ITS PRODUCTS AND SERVICES AND MARKETING ITS ADVANTAGES TO POTENTIAL USERS.
Substantial funds are required to complete the Company's planned product
development efforts and expand its sales and marketing activities. The Company
expects that existing capital resources along with cash flows generated from
its current activities will be adequate to fund its operations, but the Company
cannot guarantee that this will be the case. The Company's future capital
requirements and the adequacy of available funds will depend on numerous
factors, including the successful marketing of existing products; and progress
in product development efforts to enhance and generate new products and
services; the ability to target additional vertical industries for the
Company's products and services; and the growth and success of effective sales
and marketing activities.
If funds generated from the Company's operations, together with its existing
capital are insufficient to meet current or planned operating requirements, the
Company will have to obtain additional funds through equity or debt financing.
The Company does not have any committed sources of additional financing, and it
7
cannot provide assurance that additional funding, if necessary, will be
available on acceptable terms, if at all. If adequate funds are not available,
the Company may have to delay, scale-back or eliminate certain aspects of its
operations. Therefore, the inability to obtain adequate funds could have a
material adverse impact on its business, financial condition and results of
operations.
INABILITY TO OBTAIN FUTURE CAPITAL. As of the date of this filing, the Company
had cash in the amount of approximately $200,000. The Company anticipates that
it may need to raise additional funds if its operations do not generate
anticipated revenues. If the Company is unable to obtain necessary additional
financing, its business may suffer. It cannot be assured that any additional
financing will be available on reasonable terms or at all. In addition, the
Company may need to raise additional funds sooner if it attempts to expand more
rapidly or if competitive pressures or technological changes are greater than
anticipated. Even if the Company is able to obtain additional financing, the
Company may subsequently need to raise additional funds if it does not sustain
profitability.
The Company at October 31, 2003 has outstanding $750,000 of Convertible
Subordinated Notes plus approximately $57,898 accrued interest on those Notes.
The Company has completed negotiations with most holders of its Convertible
Subordinated Notes, and is currently negotiating with certain other holders of
its subordinated notes to obtain extensions of the due dates of the Notes,
which were primarily due in the third quarter of 2003 or which are due in the
fourth quarter of 2003. Substantially all of the note holders agreed to extend
the maturity dates of their notes to January 5, 2004 provided the Company pays
all accrued interest before due dates ranging from September 22, 2003 to
December 17, 2003. The Company, to date, has made all such interest payments.
Effective on November 14, 2003, a holder of the Company's 15% Convertible
Subordinated Notes in the principal amount of $250,000 agreed to convert the
principal amount of the Note into 235,849 shares of the Company's common stock.
Management also expects that, if the Company's financial and operating results
in the last two quarters of 2003 are satisfactory to the note holders, some, if
not all, of the remaining note holders may further extend the maturity dates,
convert the Notes into the Company's common stock pursuant to the note
agreements, or modify the terms of the notes. In addition, the Company is
pursuing additional sources of capital to replace the Convertible Subordinated
Notes in the event that the note holders request payment.
THE COMPANY'S FINANCIAL POSITION IS CHARACTERIZED BY CURRENT DEBT. As of
September 30, 2003 as indicated by the Company's balance sheet included with
this Form S-B2 Registration Statement, the Company was capitalized primarily by
current debt.
RISKS RELATED TO OUR BUSINESS
THE COMPANY'S LIMITED OPERATING EXPERIENCE MAY CAUSE IT TO MISJUDGE ITS MARKETS
OR NEEDS. Although the Company has been providing software and solutions for
the electronic commerce market since 1990, its involvement in Internet-based
products and services has been a much more recent development. Its initial
Internet product has been in operation for approximately three and one-half
(3-1/2) years. Accordingly, the Company has limited operating history in this
environment. An investor in Common Stock must consider the risks,
8
uncertainties, expenses and difficulties frequently encountered by companies in
their early stages of development.
THE COMPANY MAY BE UNABLE TO IMPLEMENT ITS BUSINESS STRATEGY. Although the
Company believes its strategy can be successful, there are many reasons why it
may be unable to implement it, including the Company's inability to deploy its
products and services on a large scale due to software development, information
technology infrastructure, or other problems; to attract a sufficiently large
audience of users to its Internet-based electronic commerce network; to
increase awareness of its brand; to strengthen customer loyalty; to continue to
develop and improve its products; to continue to develop and upgrade its
technology; and to attract, retain and motivate qualified personnel.
THE COMPANY MAY BE UNSUCCESSFUL AT MANAGING ITS GROWTH. The Company believes
its business model has the potential for rapid growth. This growth could place
a significant strain on management and operations, including sales, marketing,
customer support, research and development, finance and administrative
operations. Achieving and maintaining profitability during a growth period
will depend, among other things, on the Company's ability to successfully
expand its products, services and markets and to manage its operations
effectively. Difficulties in managing growth, including difficulties in
obtaining and retaining talented management and other personnel could have a
material adverse affect on the Company's business and financial results.
THE COMPANY HAS INTRODUCED SEVERAL ELECTRONIC COMMERCE B2B PRODUCTS, AND MARKET
ACCEPTANCE OF THESE PRODUCTS IS CRITICAL TO THE COMPANY'S SUCCESS. The Company
is currently marketing EnterpriseEC, GroceryEC, RetailEC, LogisticsEC and
ManufacturingEC and other products. As of October 31, 2003 approximately 2,700
customers were utilizing these products. Broad and timely acceptance of the
Company's recently introduced products, which is critical to its future
success, is subject to a number of significant risks. These risks include the
ability to successfully market and sell these products; the products' ability
to support large numbers of customers; the need to enhance the features and
services of the Company's products; and the need to significantly expand
internal resources to support planned growth of these products.
Although the Company expects to derive a significant portion of its long-term
future revenue from its electronic commerce products and services, the pricing
and revenue models for these products are ever changing in a fluid market
environment. If these products do not achieve the level of market acceptance
anticipated at a satisfactory pricing level, the Company's business and
financial results would suffer.
Our success depends highly upon our achieving broad market acceptance of our
products and services. Market acceptance requires, among other things, that
we:
* educate potential customers on the benefits of our products
* commit a substantial amount of human and financial resources to secure
strategic partnerships and relationships
* develop internal sales, marketing and support activities to customers
There can be no assurance that we will be able to achieve any or all of these
objectives, and thus obtain sufficient acceptance of our products to achieve
9
profitable operations. Potential customers may perceive nominal benefit
from our products and services. As a result, potential customers may not
value, and may be unwilling to pay for our products. We also do not have
established brand images, nor do we expect to spend significant marketing
expenses to build and promote brand images. If our products do not achieve
broad market acceptance, we may not be able to continue operating in our
business or operate at sufficient levels or profitability.
SYSTEM ENHANCEMENTS, UPGRADES AND OTHER FACTORS COULD CAUSE SERVICE
DISRUPTIONS OF INTERNET-BASED PRODUCTS. As the Company enhances and upgrades
its Internet-based products and services, customers could suffer temporary
service interruptions. Other factors, such as unauthorized intervention and
access into the Company's servers may also cause system delays or denials of
service. The Company has and will continue to take steps to ensure that such
disruptions do not occur, and that any disruptions that do occur are
insignificant. However, any problems not resolved in a timely manner could
negatively affect the Company's business and financial results.
IF THE COMPANY ACQUIRES OTHER COMPANIES, IT MAY NOT BE ABLE TO EFFECTIVELY
INTEGRATE THEM. Currently, there are no plans to acquire any other companies,
but it may be deemed advantageous to the Company's growth to do so. If the
Company is unable to effectively integrate any acquired company, the results
could negatively affect the Company's business and financial results.
PRODUCTS MAY NOT BE ACCEPTED BY THE MARKET. To date, the Company has
experienced success on a limited basis for its FORMULA_ONE, BCLM, EnterpriseEC,
GroceryEC and other Web EDI products.
The FORMULA_ONE product, although initially available as a DOS program in 1992
and later available to segments of its customer base in Microsoft Windows, has
had limited success due primarily to the Company's insufficient expenditures on
sales and marketing efforts and the Company's lack of sufficient capital.
The BCLM products have had limited success because they require, in most cases,
the customer's use of FORMULA_ONE.
The Company's first Web EDI product, GroceryEC.com, has been successful, but
the Company's other products, including EnterpriseEC and other Web EDI products
which have only been recently introduced to the marketplace, have been far less
successful due primarily to longer than expected development time, insufficient
expenditures on sales and marketing efforts and the Company's lack of
sufficient capital.
THE COMPANY HAS LIMITED SALES AND MARKETING EXPERIENCE. A major thrust of the
Company's strategy is to make potential customers aware of its products, their
features and benefits. This will require sales and marketing expertise.
However, the Company's current sales and marketing staff is small compared to
competitors. Although the Company intends to identify and recruit employees
with sales and marketing experience, it may be unable to do so and may
therefore be unable to successfully establish and maintain a significant sales
and marketing organization.
THE COMPANY'S ABILITY TO RECRUIT AND RETAIN SKILLED EMPLOYEES. The Company is
substantially dependent on the continued services and performance of its
10
President and current employees. In addition, the Company believes it will
need to expand significantly its product development, marketing and customer
service staffs. Competition for employees in the Company's industry is
intense. If the Company is unable to attract, assimilate and retain highly
qualified employees, management may not be able to effectively manage the
business, explore opportunities and respond to competitive challenges. As a
result, the Company's business and financial results would suffer. Many
competitors may be able to offer more lucrative compensation packages that
include stock options and other stock-based compensation and higher-profile
employment opportunities.
INABILITY TO COMPETE SUCCESSFULLY AGAINST COMPANIES OFFERING SIMILAR FUNCTIONS.
A large number of companies compete with us for customers, electronic commerce
transactions and other sources of on-line revenue. We face significant
competition in the markets in which we offer our products from competitors that
also offer high quality products. In addition, management expects that new
competitors will attempt to enter the market and that existing competitors will
improve the performance of their current products or introduce new products or
new technologies that provide improved performance characteristics. New
product introductions by our competitors could cause a significant decline in
sales or loss of market acceptance of our existing products and future
products. The number of companies offering B2B e-commerce services is large
and increasing at a rapid rate. The Company believes that competition for B2B
e-commerce products and services will continue to increase as the Internet
develops as a communication and commercial medium. Although the Company
believes its products and marketing strategy are unique, the Company directly
and indirectly competes for customers with numerous Internet and non-Internet
businesses, including traditional Value Added Networks (Sterling Commerce,
Inovis, IBM, GXS, Easylink, etc.); Internet VANs (Internet Commerce
Corporation, SPS Commerce, etc.); and web-based B2B e-commerce companies (EB2B
Inc., SPS, Inovis, GXS, etc.). Most of our competitors are well established,
better known, and significantly larger, with substantially greater technical,
marketing, and financial resources than we have. The greater resources of many
of our competitors may permit them to respond more rapidly than we can to
changes in technology. As a result, many of the products and services we offer
are developed and offered by other companies in the industry.
Many of these potential competitors are likely to enjoy substantial competitive
advantages compared to the Company, including the ability to offer a wider
array of products and services, larger production and technical staffs, greater
name recognition, larger marketing budgets and resources, larger customer and
user bases and substantially greater financial, technical and other resources.
Our ability to compete in the market will depend upon a number of factors
including the success of our marketing efforts and our continued ability to
secure and maintain ongoing relationships with companies in the industries we
serve. We expect to compete based upon the quality, reliability, flexibility
and the ease of use of our products. We also expect to compete on value
relative to the features our products offer.
To be competitive, the Company must respond promptly and effectively to the
challenges of technological change, evolving standards, and competitors'
innovations by continuing to enhance its products and services and to expand
its sales and marketing channels. Increased competition could result in loss
11
of market share, reduced prices or reduced margins, any of which could
adversely affect the Company's business. Competition is likely to increase
significantly as new companies enter the market and current competitors expand
their services.
GOVERNMENT REGULATION COULD ADVERSELY AFFECT THE COMPANY. The Company is
subject to government regulation. Laws and regulations have been or may be
adopted with respect to the Internet or other on-line services covering issues
such as user liability and privacy, copyright protection, and distribution.
The applicability to the Internet of existing laws in various jurisdictions
governing issues is uncertain and may take years to resolve. Demand for the
Company's products' features and services may be affected by additional
regulation of the Internet. Federal, State, or governments of foreign
countries may attempt to regulate the Company's transmissions, levy sales or
other taxes relating to the Company's activities or impose other restrictions
on the Company's services. The laws governing the Internet, however, remain
largely unsettled, even in areas where there has been some legislative action.
In addition, the growth and development of the market for B2B e-commerce may
prompt the adoption of more stringent laws, both in the United States and
abroad, that impose additional burdens on companies conducting business over
the Internet. The requirement that the Company comply with any new legislation
or regulation, or any unanticipated application or interpretation of existing
laws, may decrease the demand for the Company's services, increase the cost of
doing business or otherwise have a material adverse effect on the Company's
business, results of operations and financial condition.
INTERNET CAPACITY CONSTRAINTS MAY INHIBIT THE COMPANY'S SUCCESS. The Company's
success depends, in large part, on Internet access and the ability of the
Internet to accommodate rapidly increasing traffic. The Internet may not prove
to be a viable commercial medium because of inadequate development of the
necessary infrastructure (e.g., reliable network backbone), timely development
of complementary technologies, delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or increased government regulation. If the Internet continues to
experience significant growth in the number of users and the level of use, then
the Internet infrastructure may not be able to continue to support the demands
placed on it.
RISKS RELATED TO SYSTEMS OPERATION. The Company relies on the Internet and,
accordingly, depends upon the continuous, reliable and secure operation of
Internet servers and related hardware and software. Recently, several large
Internet commerce companies have suffered highly publicized system failures
that resulted in adverse reactions to their stock prices, significant negative
publicity and, in certain instances, litigation. Although agreements are in
place to host the Company's systems and provide bandwidth with suitable
precautions in place to prevent system failures and outages, it is likely that
the Company will also suffer service outages from time to time. To the extent
that the Company's service is interrupted, its users will be inconvenienced and
the Company's reputation may be diminished. Some of these outcomes could
directly result in a reduction in the Company's stock price, significant
negative publicity, a reduction in revenues, a loss of customers and a
potential for litigation. Although the Company anticipates that its computer
and communications hardware will be protected through physical and software
12
safeguards, they will still be vulnerable to fire, storm, flood, power loss,
telecommunications failures, physical or software break-ins and other similar
events. The Company does not currently have full redundancy for all of the
Company's computer and telecommunications facilities in separate geographic
locations to counter an area-wide catastrophe where the Company does business.
A catastrophic event could have a significant negative effect on the Company's
business, results of operations, and financial condition.
The Company also depends upon third parties to provide potential users with
web browsers and Internet and on-line services necessary for access to the
Company's services. It is possible that users will experience difficulties
with the Internet and other on-line services due to system failures, including
failures unrelated to the Company's systems. Any sustained disruption in
Internet access provided by third parties could have a material adverse effect
on the Company's business, results of operations and financial condition.
The Company also retains confidential customer information in the Company's
database. It is, therefore, critical that the Company's facilities and
infrastructure remain secure and that the facilities and infrastructure are
perceived by customers to be secure. Despite the implementation of measures in
the Internet industry, the Company's infrastructure is potentially vulnerable
to physical break-ins, computer viruses, programming errors or similar
disruptive problems. A material security breach could damage the Company's
reputation or result in liability.
THE COMPANY'S PLATFORM INFRASTRUCTURE AND ITS SCALABILITY ARE NOT PROVEN. If
the Company's Internet-based products are used by an increasing number of
users, the network infrastructure would need to be expanded from time to time.
In addition, the Company will need to accommodate changing customer
requirements. The Company may not be able to accurately project the rate or
timing of increases, if any, in the use of its systems or to expand and upgrade
the systems and infrastructure to accommodate such changes on a timely basis,
at a commercially reasonable cost, or at all. The systems may not accommodate
increased use while maintaining acceptable overall performance.
POTENTIAL LIABILITY IF CONFIDENTIAL INFORMATION IS DISCLOSED INAPPROPRIATELY.
Claims for unlawful disclosure of confidential information have been brought,
sometimes successfully, against on-line service providers in the past. Any
such liability will have a material adverse effect on the Company's reputation,
business, results of operations and financial condition.
DEPENDENCY ON INTELLECTUAL PROPERTY RIGHTS. The Company's intellectual
property is important to its business. The Company relies on a combination of
copyright, trademark and trade secret laws, confidentiality procedures and
contractual provisions to protect its intellectual property. The Company's
efforts to protect its intellectual property may not be adequate. Competitors
may independently develop similar technology or duplicate the Company's
products or services. Unauthorized parties may infringe upon or misappropriate
the Company's products, services or proprietary information. In addition, the
laws of some foreign countries do not protect proprietary rights as well as the
laws of the United States, and the global nature of the Internet makes it
difficult to control the ultimate destination of its products and services. In
the future, litigation may be necessary to enforce the Company's intellectual
13
property rights or to determine the validity and scope of the proprietary
rights of others. Any such litigation could be time-consuming and costly. It
may even be cost prohibitive, and there is always a risk that the Company will
not prevail if a suit is filed. The Company could be subject to intellectual
property infringement claims as the number of competitors grows and the content
and functionality of its services overlaps with competitive offerings.
Defending against these claims, even if not meritorious, could be expensive and
divert the Company's attention from its operations. If the Company becomes
liable to third parties for infringing their intellectual property rights, it
could be required to pay a substantial damage award and forced to develop
noninfringing technology, obtain a license or cease selling the applications
that contain the infringing technology. The Company may be unable to develop
noninfringing technology or obtain a license on commercially reasonable terms,
or at all. The Company also intends to rely on a variety of technologies that
it will license from third parties, including any product development,
database, and Internet server software that will be used to operate its
products and services. These third-party licenses may not be available to the
Company on commercially reasonable terms. If the Company were deprived of the
right to use software incorporated in its products for any reason, or if the
tools utilized in the development of its products were discontinued or the
capabilities contained in future releases were not up to the standards set by
the Company, there could be a serious disruption to the business.
THE COMPANY MAY NOT ACHIEVE SUFFICIENT AND SUSTAINED LEVELS OF PROFITABILITY.
The sustained profit potential of the Company's business model is unproven.
The Company's revenue is dependent on the number of customers who subscribe to
its Internet-based products and services, and the volume of the data, documents
or other information those customers send or retrieve utilizing these services.
The success of the Company's products and services and other proposed products
and services depend to a large extent on the future of B2B e-commerce using the
Internet, which is uncertain. In addition, the Company anticipates increasing
its operating expenses, especially in the areas of sales, marketing, product
development, and customer service. As a result, the Company may not be able to
achieve and/or sustain levels of profitability that are satisfactory to
investors and shareholders. If the Company experiences a shortfall in its
estimated revenue, it may be unable to adjust spending in a timely manner to
achieve desired profits.
INTERNET USAGE STAGNATES OR THE INTERNET'S INFRASTRUCTURE FAILS. If the
Internet does not gain increased acceptance for B2B e-commerce, the Company
will not grow and profitability will be hampered. Concerns about the security
of on-line transactions and the privacy of users may inhibit the growth of the
Internet as a means of delivering business documents and data. The Company may
need to incur significant expenses and use significant resources to protect
against the threat of security breaches or to alleviate problems caused by
security breaches. The Company cannot be certain that the infrastructure or
complementary services necessary to maintain the Internet as a useful and easy
means of transferring documents and data will continue to develop.
DEPENDENCY ON DATA CENTERS, WHICH COULD BE DESTROYED OR DAMAGED. The Company's
Internet-based products are dependent upon the ability to protect computer
equipment and the information stored on this equipment against damage that may
be caused by fire, power loss, telecommunication or Internet failures,
unauthorized intrusion, computer viruses and disabling devices, internal errors
14
and other similar events. The Company currently leases space in a data center
located in Dayton, Ohio that provides physical security (24 hour security
guards), environment control (humidity and temperature), and electricity
(battery operated, backfilled from the Dayton power grid, with six hours of
battery backup in the event of a power failure). Additional motor generator
services are available within the six hour battery backup timeframe if
necessary) and bandwidth (multiple Internet backbone providers with load
balancing). The Company also maintains backup systems at its facility in
Beavercreek, Ohio located approximately twelve miles from the data center. In
the event of a regional catastrophe, the Company may suffer a significant loss
to its systems and may be unable to provide services to customers, which would
have a substantial effect on the Company.
Depending on future financial position, the Company has plans to lease backup
data center space, which is geographically separated from its current data
center with procedures to provide for switching to the backup data center in
the event of a catastrophic event or system failure.
RISKS RELATED TO OUR COMMON STOCK
THE COMPANY'S OPERATING RESULTS COULD FLUCTUATE, CAUSING ITS STOCK PRICE TO
FALL. Due to the volatile nature of "Internet Stocks" and particularly "over
the counter" or "bulletin board" stocks, the Company's stock price could be
adversely affected based on fluctuations in its operating results.
THE LACK OF AN ESTABLISHED TRADING MARKET MAY MAKE IT DIFFICULT TO TRANSFER OUR
STOCK. The Company's common stock is traded on the OTC Bulletin Board.
Although there is limited trading in the common stock, there is no established
trading market. Until there is an established trading market, holders of the
common stock may find it difficult to dispose of, or to obtain accurate
quotations for the price, of the common stock. See "Description of Securities"
and "Market for Common Equity and Related Shareholder Matters."
SINCE WE HAVE NOT PAID ANY DIVIDENDS ON OUR COMMON STOCK AND DO NOT INTEND TO
DO SO IN THE FORESEEABLE FUTURE, A PURCHASER IN THE OFFERING WILL ONLY REALIZE
AN ECONOMIC GAIN ON HIS OR HER INVESTMENT FROM APPRECIATION, IF ANY, IN THE
MARKET PRICE OF THE COMMON STOCK. We have not paid and have no intentions in
the foreseeable future to pay any dividends on our common stock. Therefore, an
investor in all likelihood will only realize a profit on his investment if the
market price of our common stock increases in value.
BECAUSE SHARES OF OUR COMMON STOCK TRADE UNDER $5.00 THE APPLICATION OF THE
"PENNY STOCK REGULATION" COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON
STOCK AND MAY AFFECT YOUR ABILITY TO RESELL YOUR SHARES. Our securities may be
deemed a penny stock. Penny stocks generally are equity securities with a
price of less than $5.00 per share other than securities registered on certain
national securities exchanges or quoted on the NASDAQ stock market, provided
that current price and volume information with respect to transactions in such
securities is provided by the exchange or system. Our securities may be
subject to "penny stock rules" that impose additional sales practice
requirements on broker-dealers who sell penny stock securities to persons other
than established customers and accredited investors (generally those with
assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000
together with their spouse). For transactions covered by these rules, the
15
broker-dealer must make a special suitability determination for the purchase of
penny stock securities and have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving
a penny stock, unless exempt, the "penny stock rules" require the delivery,
prior to the transaction, of a disclosure schedule prescribed by the Securities
and Exchange Commission relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements must be sent disclosing recent price information on the
limited market in penny stocks. Consequently, the "penny stock rules" may
restrict the ability of broker-dealers to sell our securities and may have the
effect of reducing the level of trading activity of our common stock in the
secondary market. The foregoing required penny stock restrictions will not
apply to our securities if our securities maintain a market price of $5.00 or
greater. The price of our securities may not reach or maintain a $5.00 price
level.
THE SELLING SHAREHOLDERS, IF THEY CHOOSE TO SELL PART OR ALL OF THEIR SHARES IN
SUFFICIENTLY LARGE VOLUMES IN A RELATIVELY SHORT TIME PERIOD, MAY CAUSE THE
MARKET PRICE OF OUR COMMON STOCK TO DECLINE. Often sales of large blocks of
stock can reduce the price of a common stock.
THE COMPANY'S OFFICERS HAVE EFFECTIVE CONTROL OF THE COMPANY AND OTHER
STOCKHOLDERS MAY HAVE LITTLE OR NO VOICE IN CORPORATE MANAGEMENT. The
President beneficially owns 64.6% of the outstanding shares of common stock.
As a result, the President effectively controls the election of directors and
matters requiring approval by the Company's shareholders. Thus, he may be able
to prevent corporate transactions such as future mergers, which might be
favorable from the Company's standpoint or the standpoint of the other
shareholders.
QUARTERLY, SEASONAL AND OTHER FLUCTUATIONS IN OUR BUSINESS AND OPERATING
RESULTS MAY DEPRESS THE TRADING PRICE OF OUR COMMON STOCK. Our operating
results have fluctuated widely in the past, and we expect that these results
will fluctuate in the future due to do a number of factors. We do not control
several of these factors. These factors include the following (as well as
other factors described in other Risk Factors):
* Changes in general economic conditions
* Changes in specific economic conditions prevailing in our industry and in
other technology industries
* Our ability to obtain new customers
* The impact of accounting for non-cash interest expense
As a result of the factors discussed herein as well as others, we believe that
period-to-period comparisons of our historical results of operations are not
necessarily good predictors of indications of our future performance. If our
future operating results are below the expectations of investors or any stock
market securities analysts who may follow our stock, our stock price may
decline.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements including statements
16
regarding the expectations of future operations within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. For this purpose, any statements contained in this prospectus
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, words such as "may," "will,"
"expect," "believe," "anticipate," "estimate," or "continue" or comparable
terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, and
actual results may differ materially depending on a variety of factors, many
of which are not within the Company's control. These factors include, but are
not limited to, economic conditions generally and in the industries in which
the Company may participate, competition within chosen industry, including
competition from much larger competitors, technological advances, and the
failure to successfully develop business relationships. In light of these
risks and uncertainties, you are cautioned not to place undue reliance on these
forward looking statements. For example, statements included in this
prospectus regarding our financial position, business strategy and other plans
and objectives for future operations, and assumptions and predictions about
future demand for our services and products, supply, costs, marketing and
pricing factors are all forward-looking statements.
We believe that the assumptions and expectations reflected in the above stated
forward-looking statements are reasonable, based on information available to us
on the date of this prospectus, but we cannot assure you that these assumptions
and expectations will prove to have been correct or that we will take any
action that we may presently be planning. We have disclosed certain important
factors that could cause our actual results to differ materially from our
current expectations under "Risk Factors" and elsewhere in this prospectus.
You should understand that forward-looking statements made in connection with
this offering are necessarily qualified by these factors. We are not
undertaking to publicly update or revise any forward-looking statement if we
obtain new information or upon the occurrence of future events or otherwise.
USE OF PROCEEDS
The net proceeds to the Company from the exercise of the warrants by the
selling security holders are net after deducting the estimated offering expense
of $16,000, which are as follows (all amounts are estimates):
Securities and Exchange Commission filing fee $ 1,000
National Association of Securities Dealers, Inc filing fee 1,000
Printing costs 2,000
Blue Sky fees and expenses 2,000
Legal fees and expenses 5,000
Accounting fees and expenses 2,000
Miscellaneous 3,000
-------
Total $16,000
======
Whether we sell any shares of our common stock, the present shareholders of the
Company shall pay for all expenses listed above.
The proceeds, net of expenses, are intended to be utilized substantially as
17
follows:
Application of proceeds Approximate Amount
----------------------- ------------------
Expansion of sales and marketing efforts $ 400,000
Escalation of development of existing and new products 350,000
Computer equipment 110,000
Working capital 224,850
Software 100,000
Payment of the 8% demand notes to the Company's President 45,000
---------
Total $1,229,850
=========
These proceeds are intended to be utilized substantially for working capital
and general corporate purposes as well as the costs and expenses associated
with development of new products and enhancement of existing products. As
management retains sole discretion as to the use of proceeds, such use of
proceeds will not vary substantially unless management (i) determines that the
proceeds would better serve the company's interests by acquiring a
complementary business in lieu of developing one itself; and (ii) management is
presented with the opportunity to acquire such a business. Management reserves
the right to use the proceeds for such a purpose. In the event that management
alters its use of proceeds as a result of the aforementioned, we would reduce
the proceeds for each category in the above table as appropriate in the
circumstances. A complementary business would be a business engaged in
Internet-based business-to-business commerce or a related technology based
company. We have not entered into any negotiations, preliminary or otherwise,
to acquire a complementary business and thus have no indication as to the form
or structure such transaction would entail. If the proceeds are less than
indicated above, we will apply any proceeds approximately in the same
percentage breakdown as indicated above giving no necessary priority to any one
particular category.
DETERMINATION OF OFFERING PRICE
The offering price is determined as follows: Proceeds to
Company
----------------
Exercise of outstanding Warrants related to the 15%
convertible subordinated notes for 675,000
shares of common stock @ $1.205 per share $ 813,375 (A)
Exercise of Warrants reserved for future issuance
to a note holder for 75,000 shares of common stock
@$1.205 per share $ 90,375 (A)
Exercise of Warrants attached to the 10% convertible
subordinated notes for up to 250,000
shares of common stock @ $1.25 per share $ 312,500 (B)
Exercise of Warrants issued in exchange for services performed
for up to 20,000 shares of common stock at $1.48
18
per share $ 29,600 (C)
Conversion of 15% Convertible Subordinated Notes into
common stock in an amount equal to principal and accrued
interest at $1.06 per common share - (D)
Conversion of 10% Convertible Subordinated Notes into
common stock in an amount equal to principal and accrued
interest at $1.10 per common share - (E)
(A) In 2001 the Company issued seven 15% Convertible Subordinated Notes of
which four currently are outstanding in the principal amount of $250,000. The
notes may be converted at the note holders'option at maturity in the principal
amount plus any accrued interest into the Company's common stock at a price of
$1.06 per common share. The Notes have outstanding warrants whereby the note
holders can acquire 675,000 shares of the Company's common stock at a price of
$1.205 per common shares. In addition, warrants for the acquisition of 75,000
common shares are reserved for future issuance to a note holder. The warrants
expire on several dates in 2005. The Company will realize up to $903,750,
depending upon whether and the extent that the note holders exercise their
warrants. On November 14, 2003 the holder of the Company's 15% Convertible
Subordinated Notes in the principal amount of $250,000 converted the note into
235,849 shares of the Company's common stock.
(B) In 2002 the Company issued six 10% Convertible Subordinated Notes that
currently are outstanding in the principal amount of $250,000. The notes may
be converted at the note holders' option at maturity in the principal amount
plus any accrued interest into the Company's common stock at a price of $1.10
per common share, and have attached warrants whereby the note holders can
acquire up to 250,000 common shares of the Company at a price of $1.25 per
common share. The warrants expire on September 27, 2005. The Company will
realize up to $312,500, depending upon whether and the extent that the note
holders exercise their warrants.
(C) In 2001 the Company granted warrants to an unrelated third party for the
purchase of 20,000 shares of the Company's stock at $1.48 per share,
exercisable through June 25, 2006. The Company will realize up to $29,600 if
these warrants are exercised.
(D) The 15% Convertible Subordinated Notes issued in 2001 are convertible at
maturity in the principal amount plus unpaid accrued interest into the
Company's common stock at a price of $1.06 per common share. The maximum
number of shares upon conversion of the principal and interest is expected to
be 498,581, based upon accrued interest expected to be outstanding at the
earliest expected conversion date (principally January 5, 2004) and the
conversion on November 14, 2001 of a note in the principal amount of $250,000.
(E) The 10% Convertible Subordinated Notes issued in 2002 are convertible at
maturity in the principal amount plus unpaid accrued interest into the
Company's common stock at a price of $1.10 per common share. The maximum
number of shares upon conversion of the principle and interest is expected to
be 233,459, based upon accrued interest expected to be outstanding at the
earliest expected conversion date (principally January 5, 2004).
19
The maximum number of shares expected to be issued is 1,752,040, consisting of
732,040 shares issued upon conversion of the Convertible Subordinated Notes
and 1,020,000 upon exercise of all the warrants. The total proceeds to the
Company assuming the full exercise of all warrants is $1,245,850 ($1,229,850
net of $16,000 estimated offering expenses); $903,750 from the full exercise of
the warrants attached to the 15% Convertible Subordinated Notes; $312,500 from
the full exercise of the warrants attached to the 10% Convertible Subordinated
Notes; and $29,600 resulting from the exercise by the unrelated third party of
20,000 warrants.
DILUTION
The following summarizes the dilution of ownership of the current shareholders
assuming the sale of all shares to be registered:
Percentage ownership
# shares Before offering After offering
-------- --------------- --------------
Shares currently owned by shareholders
other than selling security holders 5,585,367 98.67%
Shares currently owned by selling
Security holders 75,635 1.33
--------- ------
Total shares currently owned 5,661,002 100.00 76.37%
======
Shares to be registered 1,752,040 23.63
--------- -----
Total shares to be outstanding 7,413,042 100.00%
========= ======
DIVIDEND POLICY
The Company does not intend to pay dividends on our common stock. Management
plans to retain any earnings in the foreseeable future in the development and
expansion of the Company's business. Management can give no assurance that any
dividends on the common stock will ever be paid.
CAPITALIZATION
The following sets forth the capitalization of the Company as of September 30,
2003, and the adjusted capitalization assuming the sale of the common stock
offered in this offering as if it occurred on September 30, 2003. This
information should be read in conjunction with the financial statements and
related notes thereto included elsewhere in this prospectus.
September 30, 2003
-----------------------------
Actual
(Unaudited) As Adjusted
-------------- --------------
Current liabilities $ 1,145,181 321,710
--------- -------
Total liabilities 1,145,181 321,710
--------- -------
20
Shareholders' equity
Common stock, $0.01 par value; 20,000,000
shares authorized; 5,661,002 issued and
outstanding at September 30, 2003;
7,413,042 issued and outstanding at
September 30, 2003 as adjusted for
sale of shares in this offering 5,661 7,413
Paid-in Capital 850,459 2,902,028
Accumulated deficit (801,148) (801,148)
--------- ----------
Total shareholders' equity 54,972 2,108,293
--------- ---------
Total liabilities and shareholders' equity $ 1,200,153 2,430,003
========= =========
SELLING SECURITY HOLDERS
We are registering for offer and sale 1,752,040 shares of common stock that
will be held by certain security holders upon their conversion of the
convertible subordinate notes up to 732,040 shares; by certain security holders
upon their exercise of warrants for up to 1,000,000 shares; and by a certain
security holder upon exercise of warrants for up to 20,000 shares. The selling
security holders may offer their shares for sale on continuous basis pursuant
to Rule 415 of the General Rules and Regulations of the Securities and Exchange
Commission which Rules pertain to delayed and continuous offerings and sales of
securities. In regard to the selling security holders' shares offered under
Rule 415, we have committed to keep this prospectus current during any period
in which offers or sales are made See "Risk Factors." All of the selling
security holders' shares registered hereby will become tradable immediately at
the dates of issuance of the shares at conversion of the Convertible
Subordinate Notes and at the dates of exercise of the warrants; all such dates
are after the effective date of the registration statement of which this
prospectus is a part.
The following table sets forth certain ownership and registration information
regarding the shares held by each person who is a selling security holder as of
October 31, 2003. This information is based upon information provided to
Advant-e Corporation by the named selling security holder or by the Company's
transfer agent. Because the selling security holders may sell all, some, or
none of their respective shares of common stock, no definitive estimate as to
the number of shares that will be held by the selling security holders after
this offering can be provided. Selling security holders may include the
security holders listed below and their transferees, pledges, donees or their
successors. Except as set forth below, none of the selling security holders is
currently an affiliate of Advant-e Corporation and except as set forth below
none of them have had a material relationship with Advant-e Corporation during
the past three years.
Shares Shares
Offered Owned Shares Owned After Offering
Name of Selling in this Before ---------------------------
Security holder Prospectus Offering Number(3) Percent(1)
--------------- ---------- -------- ------ -------
James D. Rike (4) 69,458 - 69,458
21
The Pinnacle Fund, L.P. (7) 610,849 - 610,849 8.24
Gary C. Evans (4) 185,849 - 185,849 2.51
Halter Financial Group (2)(4) 74,481 75,635 150,116 2.03
John S. Lemak (4) 232,944 - 232,944 3.14
Covenant Investments, L.P.(5) 96,692 - 96,692 1.30
Blair Baker (5) 96,692 - 96,692 1.30
Scott Brock (5) 48,346 - 48,346
Rene Larrave (5) 96,692 - 96,692 1.30
Charter Private Equity,L.P.(5) 48,345 - 48,345
Barwell Partners, Ltd. (5) 96,692 - 96,692 1.30
CTC, Inc. (6) 20,000 - 20,000
Reserved for potential future
issuance to note holder (8) 75,000 - 75,000 1.01
--------- ------ ---------
1,752,040 75,635 1,827,675
========= ====== =========
(1) Includes only percentage holdings if 1% or greater. Percentages are
based on 7,413,042 shares--5,661,002 currently outstanding common
shares plus 1,752,040 common shares offered in this prospectus.
(2) The Halter Financial Group (HFG), a financial services provider,
provided merger-related services to Advant-e Corporation in connection
with the merger of Advant-e Corporation and Edict Systems, Inc. on April
10, 2000. HFG was compensated for those service by issuance of 400,000
shares of Advant-e's common stock to HFG, its designees or assignees.
Also in connection with that merger, HFG and its designees or assignees
subsequently acquired an additional 141,500 shares of the Company common
stock pursuant to a stock purchase agreement.
(3) Assumes the sale of none of the shares offered by the selling security
holders.
(4) Holder of the Company's 15% Convertible Subordinated Notes issued in
2001.
(5) Holder of the Company's 10% Convertible Subordinated Notes issued on
July 9, 2002.
(6) Holder of warrants received in exchanged for investor relations services.
(7) Converted $250,000 15% Convertible Subordinated Note into common stock
effective November 14, 2004.
(8) Warrants have not been issued to one of the note holders and are therefore
not outstanding. The Company anticipates issuing these warrants at some
future date.
PLAN OF DISTRIBUTION
Sale of the selling security holder shares
In this section of the prospectus, the term "selling security holder" means and
includes: (1) the persons identified in the tables above as the selling
security holders and (2) any of their donees, pledges, distributes, transferees
or other successors in interest who may (a) receive any of the common stock
offered hereby after the date of this prospectus and (b) offer or sell those
shares hereunder.
The common stock offered by this prospectus may be sold from time to time to
22
directly by the selling security holders. Alternatively, the selling security
holders may from time to time offer those shares through underwriters, brokers,
dealers, agents or other intermediaries. The Company is unaware if any of the
selling security holders, as of the date of this prospectus, had entered into
any underwriting or distribution arrangements with respect to the common stock
offered hereby. The distribution of the common stock by the selling security
holders may be effected in one or more transactions that may take place on the
OTC Bulletin Board (including one or more block transactions) through customary
brokerage channels, either through brokers acting as agents for the selling
security holders, or through market makers, dealers or underwriters acting as
principals who may resell these shares on the OTC Bulletin Board; in privately-
negotiated sales; by a combination of these methods; or by other means. These
transactions may be effected at market prices prevailing at the time of sale,
at prices related to the prevailing market prices or at other negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the selling security holders in connection with
sales of the common stock.
The selling security holders may enter into hedging transactions with broker-
dealers in connection with distributions of the shares or otherwise. In such
transactions, broker-dealers may engage in short sales of the shares in the
course of hedging the positions they assume with the selling security holder.
The selling security holder also may sell shares short and redeliver the shares
to close out their short positions. The selling security holders may enter
into option or other transactions with broker-dealers which require the
delivery to the broker-dealer of the shares. The broker-dealer may then resell
or otherwise transfer the shares pursuant to this prospectus.
The selling security holders also may loan or pledge the shares to a broker-
dealer. The broker-dealer may sell the shares so loaned, or upon a default the
broker-dealer may sell the pledged shares pursuant to this prospectus. Any
securities covered by this prospectus which qualify for sale pursuant to Rule
144 promulgated under the Securities Act may be sold under Rule 144 rather than
pursuant to this prospectus. The Company is unaware if any of the selling
security holders, as of the date of this prospectus, had entered into any
underwriting or distribution arrangements with respect to the common stock
offered hereby. There is no underwriter or coordinating broker acting in
connection with the proposed sale of shares by the selling security holders.
Although the shares of common stock covered by this prospectus are not
currently being underwritten, the selling security holders or their
underwriters, brokers, dealers or other agents or other intermediaries that may
participate with the selling security holders in any offering or distribution
of common stock may be deemed "underwriters" within the meaning of the
Securities Act and any profits realized or commissions received by them may be
deemed underwriting compensation thereunder.
At the time a particular offer of common stock is made by or on behalf of a
selling security holder, to the extent required under applicable rules of the
Securities and Exchange Commission, we will prepare a prospectus supplement
setting forth the number of shares being offered and the terms of the offering,
including the name or names of any underwriters, dealers, brokers, agents or
other intermediaries, if any, the purchase price paid by any underwriter for
securities purchased from the selling security holders and any discounts,
23
commissions or concessions allowed or re-allowed or paid to others, and the
proposed selling price to the public.
Under applicable rules and regulations under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), any person engaged in a distribution of
the common stock offered hereby may not simultaneously engage in market making
activities with respect to the common stock for a period of up to five days
preceding such distribution. The selling security holders will be subject
to the applicable provisions of the Exchange Act and the rules and regulations
promulgated thereunder, including without limitation Regulation M, which
provisions may limit the time of purchases and sales by the selling security
holders.
In order to comply with certain state securities laws, if applicable, the
common stock offered hereby will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In certain states, the common stock
shares may not be sold unless they are registered or qualified for sale in such
state, or unless an exemption from registration or qualification is available
and is obtained.
All costs, expenses and fees in connection with the registration of the common
stock offered hereby will be borne by us. However, any brokerage or
underwriting commissions and similar selling expenses, if any, attributable to
the sale of the common stock will be borne by the selling security holders.
LEGAL PROCEEDINGS
The Company is currently not subject to any legal proceedings. The Company may
from time to time become a party to various legal proceedings arising in the
ordinary course of business.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Jason K. Wadzinski 39 President/CEO/Director
John F. Sheffs 78 Director
Jason K. Wadzinski founded Edict Systems, Inc. in 1990 and has held the
position of President/CEO/Director since inception. He has been President, CEO
and Director of Advant-e Corporation since the merger of Edict and Advant-e on
April 10, 2000. Mr. Wadzinski is an Air Force veteran and has held positions
in information technology since 1982.
John F. Sheffs has been a Director of Edict since 1995. He is currently also
Treasure of Edict Systems. Also during the past 5 years Mr. Sheffs was a
consultant and investor. Mr. Sheffs has been a Director of Advant-e
Corporation since the merger of Edict and Advant-e on April 10, 2000. Before
that, Mr. Sheffs was President/CEO/Director and sole Shareholder of Electro
Sales Associates, Inc., a manufacturers' representative company that sold
various electronics products to manufacturing companies located in the eastern
half of the United States. Mr. Sheffs has a lifetime of experience in
management and entrepreneurship, with special emphasis on sales and marketing.
24
No family relationship exists among directors and executive officers.
No legal proceedings occurred during the last five years that are material to
an evaluation of the ability or integrity of any director or executive officer.
The Company's stock is currently not listed on any exchange. The stock is
traded on the over-the-counter Bulletin Board. As a result, the Company is not
required to have, and does not have, an audit committee.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth as of October 31, 2003, the number and
percentage of the outstanding shares of common stock which, according to the
information supplied to the Company, were beneficially owned by (i) each person
who is currently a director of the Company, (ii) each executive officer, (iii)
all current directors and executive officers of the Company as a group, and
(iv) each person who, to the knowledge of the Company, is the beneficial owner
of more than 5% of the outstanding common stock.
Except as otherwise indicated, the persons named in the table have sole voting
and dispositive power with respect to all shares beneficially owned, subject
to community property laws where applicable.
(i) The following table has been completed for each Director of the
Company:
Before Offering After Offering
-------------------------- --------------------------
Common Options Percent Common Options Percent
Name and Address Shares of Class Shares of Class
---------------- --------- ------- -------- --------- ------- --------
Jason Wadzinski 3,658,508 0 64.6 3,658,508 0 49.4
C/O Edict Systems, Inc.
2680 Indian Ripple Rd.
Dayton, OH 45440
John F. Sheffs 311,338 0 5.5 311,338 0 4.2
C/O Edict Systems, Inc.
2680 Indian Ripple Rd.
Dayton, OH 45440
(ii) The following table has been completed for each Executive Officer of
the Company:
Before Offering After Offering
-------------------------- --------------------------
Common Options Percent Common Options Percent
Name and Address Shares of Class Shares of Class
---------------- --------- ------- -------- --------- ------- --------
Jason Wadzinski 3,658,508 0 64.6 3,658,508 0 49.4
C/O Edict Systems, Inc.
2680 Indian Ripple Rd.
Dayton, OH 45440
25
(iii) The following table has been completed for all Directors and Executive
Officers of the Company as a group:
Before Offering After Offering
-------------------------- --------------------------
Common Options Percent Common Options Percent
Shares of Class Shares of Class
--------- ------- -------- ----------------- --------
All Officers and 3,969,846 0 70.1 3,969,846 0 53.6
Directors as a
Group (2 persons)
(iv) The following table has been completed for those persons known to the
Company as beneficial owners of five percent or more of the Company's
voting common stock:
Before Offering After Offering
-------------------------- --------------------------
Common Options Percent Common Options Percent
Name and Address Shares of Class Shares of Class
---------------- --------- ------- -------- --------- ------- --------
Jason Wadzinski 3,658,508 0 64.6 3,658,508 0 49.4
C/O Edict Systems, Inc.
2680 Indian Ripple Rd.
Dayton, OH 45440
John F. Sheffs 311,338 0 5.5 311,338 0 4.2
C/O Edict Systems, Inc.
2680 Indian Ripple Rd.
Dayton, OH 45440
Sharon Hardin 311,320 0 5.5 311,320 0 4.2
32 W. National Rd.
Englewood OH 45322
The Pinnacle Fund, L.P. 610,849 0 8.2
4965 Pleasant Park Blvd.
Suite 240
Plano, TX 75093
Total shares outstanding:
at October 31,2003 5,661,002
after offering 7,413,042
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 20,000,000 shares of
common stock, par value $.001 per share; with 5,661,002 issued and outstanding
October 31, 2003. The holders of the common stock are entitled to one vote
per share held and have the sole right and power to vote on all matters on
which a vote of shareholders is taken. Voting rights are non-cumulative. The
holders of shares of the common stock are entitled to receive dividends when,
as and if declared by the board of directors, out of funds legally available
therefore and to share pro-rata in any distribution to shareholders. The
Company anticipates that any earnings will be retained for use in the business
for the foreseeable future and therefore not distributed as dividends. Upon
26
liquidation, dissolution, or winding up, the holders of the common stock are
entitled to receive the net assets held by the Company after distributions to
creditors. The holders of our common stock do not have any preemptive right to
subscribe for or purchase any shares of any class of stock. The outstanding
shares of the common stock and the shares offered hereby will not be subject to
further call or redemption and will be fully paid and non-assessable.
The Company has outstanding in the aggregate principal amount of $250,000
($500,000 at September 30, 2003) its fifteen percent (15%) Convertible
Subordinated Notes. The holders of these notes have the right at maturity to
convert the entire amount of the notes, including any accrued interest, into
shares of the Company's common stock at a price of $1.06 per common share.
Warrants attached to these same Convertible Subordinated Notes entitle the note
holders to acquire 750,000 common shares at $1.205 per common share for a total
of $903,750. There are issued and outstanding warrants for the acquisition of
675,000 common shares. In addition, warrants for the acquisition 75,000 common
shares are reserved for future issuance to a note holder. The warrants are
exercisable through various dates through December 13, 2005.
The Company has outstanding in the aggregate principal amount of $250,000 its
ten percent (10%) Convertible Subordinated Notes. The holders of these notes
have the right at maturity to convert the entire amount of the notes, including
any accrued interest, into shares of the Company's common stock at a price of
$1.10 per common share. Warrants attached to these same Convertible
Subordinated Notes entitle the note holders to acquire 250,000 common shares at
$1.25 per common share for a total of $312,500. These warrants are exercisable
through various dates through September 27, 2005.
The Company in 2001 issued warrants to an unrelated third party for the
issuance of 20,000 shares of the Company's common stock at $1.48 per share,
exercisable through June 25, 2006. None of these warrants have been exercised.
No preferred stock, debt securities or other securities are being offered or
registered.
INTERESTS OF NAMED EXPERTS AND COUNSEL
The financial statements at December 31, 2002 and for the fiscal year ended
December 31, 2002 included in this prospectus have been audited by J.D. Cloud &
Co. L.L.P., independent certified public accountants, 120 East Fourth Street,
Cincinnati, Ohio 45202, for the periods and to the extent as set forth in their
report appearing elsewhere herein, and are included in reliance upon such
report and upon the authority of said firm as experts in accounting and
auditing.
The financial statements for the year ended December 31, 2001 included in this
prospectus have been audited by Battelle & Battelle LLP, independent certified
public accountants, 2000 West Dorothy Lane, Dayton, Ohio 45439, for the periods
and to the extent as set forth in their report appearing elsewhere herein, and
are included in reliance upon such report and upon the authority of said firm
as experts in accounting and auditing.
The legality of the common stock included in this prospectus will be passed
upon for us by Barbara L. Sager Co., L.P.A., Centerville, Ohio but purchasers
27
of our common stock should not rely on Barbara L. Sager Co., L.P.A. with
respect to any other matters.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
The Company's certificate of incorporation and bylaws contain provisions
indemnifying the directors and executive officers against liabilities. In the
certificate of incorporation, the Company has eliminated the personal liability
of the directors and executive officers to the Company and its shareholders for
monetary damages for breach of their fiduciary duty, including acts
constituting gross negligence. However, in accordance with Delaware law, a
director will not be indemnified for a breach of its duty of loyalty, acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation or any transaction from which the director derived improper personal
benefit.
In addition, the bylaws further provide that the Company may advance to the
directors and officers expenses incurred in connection with proceedings against
them for which they are entitled to indemnification. The Company has also
agreed to indemnify, defend, and hold harmless each of the officers and
directors to the fullest extent permissible by law with regard to any and all
loss, expense or liability, including payment and advancement of reasonable
attorney's fees, arising out of or relating to claims of any kind, whether
actual or threatened, relating in any way to their service to us. The Company
plans to memorialize these provisions in written agreements.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No transaction, proposed transaction or series of transactions occurred in the
last two years and through the date of this filing directly or indirectly,
between the Company and any director or executive officer that exceeded $60,000
during the last two years.
DESCRIPTION OF BUSINESS
General
Advant-e provides, through its wholly-owned and sole operation subsidiary,
Edict Systems, Inc., business-to-business electronic commerce products and
services focusing primarily on supply chain connectivity. The Company
provides high-quality, cost-effective solutions which give the Company's
customers the ability to leverage technology to improve their businesses.
The Company provides software and Internet-based solutions to small and medium
sized suppliers (often called "spokes") of large companies allowing them to
satisfy the Electronic Commerce requirements (most often electronic data
interchange (EDI) requirements) of their customers. Advant-e provides services
to large companies (often called "hubs") to enable them to maximize their
current supply chain Electronic Commerce investments by increasing the number
of suppliers who can conduct business with them electronically. The Company
provides consultative services for its customers, generally small and medium
sized suppliers to large buying organizations wherein it acts as a liaison
between the buyers and their suppliers to interface with the buyer on behalf
of the Company's customers.
28
Advant-e provides these products and services via its wholly owned subsidiary,
Edict Systems, Inc. Edict has been a leading provider of Electronic Data
Interchange (EDI) and Electronic Commerce products and services since 1990.
Our company is comprised of 4 principal business products/services. These are:
* Web EDI - web-based supply chain solution for the grocery and other
industries (GroceryEC.com, RetailEC.com, MfgEC.com, CPGSupplierEC.com,
web-edi.com, etc.)
* EnterpriseEC - Internet-based Electronic Business Transaction Network
Services
* Formula_One - EDI software and Bar Code Label Modules (legacy software
products)
* Value-Added Applications--Internet-based solutions that enhance the value
of electronic commerce capabilities
Many small and medium size companies have resisted doing Electronic Commerce
and Electronic Data Interchange (EDI) with their business partners due to many
factors, but primarily due to high cost and low transaction volume. By
leveraging the power of the Internet, our web-based solutions have minimal
requirements (access to Internet and a browser), and are cost effective. EDI
and other business technologies have proven to be valuable tools to reduce
cost, increase accuracy, shorten lead times, insure product availability, and
increase customer satisfaction. Edict helps large enterprises by extending the
value of existing eBusiness initiatives and by assisting companies with
leveraging the Internet to increase trading community participation,
management, and visibility. Edict has developed solutions for small companies
that allow them to begin doing eBusiness for the first time via web-based
solutions, or to integrate data from existing stand-alone solutions into their
internal applications to gain the maximum benefits of doing business
electronically.
Business History and Organization
Advant-e Corporation (formerly Twilight Products, Ltd.) ("Advant-e" or
"Twilight") was incorporated in the State of Delaware on March 9, 1994. On
April 10, 2000, Twilight acquired all of the issued and outstanding shares of
Edict Systems, Inc., a company incorporated in September of 1994 and organized
under the laws of the State of Ohio, pursuant to terms of an Agreement of Plan
of Merger dated April 10, 2000 (the "Merger Agreement").
Immediately following the Merger, the shareholders of Edict owned approximately
81% of the issued and outstanding common stock of Twilight and the Directors
and Officers of Edict became the Directors and Officers of Twilight. Edict
Systems, Inc. is a wholly owned subsidiary of Advant-e and is the sole
operating entity of Advant-e (Advant-e and Edict collectively referred to as
the "Company").
On April 10, 2000, the Company entered into a stock purchase agreement with
Halter Financial Group ("HFG") and Art Beroff ("Beroff"). This Stock Purchase
Agreement was a requirement by Edict to complete the merger with Twilight.
Under the terms of the Stock Purchase Agreement, HFG and Beroff, or their
designees, purchased 282,829 shares of common stock at approximately $1.06 per
share for a total purchase price of $299,821; the last final purchase was made
on June 26, 2001.
29
On September 6, 2000, Advant-e filed an amendment to its Certificate of
Incorporation with the Secretary of State of Delaware in order to change its
name from "Twilight Productions Ltd." to "Advant-e Corporation". This
amendment was adopted by the written consent of a majority of the shareholders
of the Company on August 6, 2000. In connection with its name change, the
Company changed its CUSIP number from 901373100 to 00761J107.
On March 24, 2001, the Company authorized the issuance of $200,000 and on
September 27, 2001 authorized the issuance of an additional $325,000 of 15%
Convertible Subordinated Notes that are convertible at maturity in the
principal amount plus accrued interest into shares of the Company's common
stock at a price of $1.06 per common share. The holders of all except one of
these Notes were also granted a warrant to acquire common shares of the
Company, at a price of $1.205 per common share, determined by multiplying the
principal amount of each note by 1.5. Such warrants have expiration dates
throughout 2005. As a result, there are issued and outstanding warrants for
the acquisition of 675,000 shares of the Company's common stock. In addition,
warrants for the acquisition of 75,000 shares of the Company's common stock are
reserved for future issuance to one of the note holders. The notes were issued
in exchange for cash totaling $525,000 on various dates in 2001. The total
outstanding principal balance of the notes at October 31, 2003 is $500,000.
Effective November 14, 2002 a holder of the Company's 15% Convertible
Subordinated Notes in the principal amount of $250,000 converted the principal
amount of the note to 235,849 shares of the common stock. As a result, the
balance at December 1, 2003 is $250,000.
On July 9, 2002 the Company authorized the issuance of, and on the same date
issued in exchange for cash, $250,000 of 10% Convertible Subordinated Notes
that are convertible in the principal amount plus accrued interest into shares
of the Company's common stock at a price of $1.10 per common share. The
holders of the notes are each granted a warrant to acquire common shares of the
Company, at a price of $1.25 per common share, determined by multiplying the
principal amount of each Convertible Subordinated Note by 1.0. Such warrants
have an expiration date of September 27, 2005. The total outstanding principal
balance of the notes is currently $250,000.
Overview/Background
The Company, via its wholly-owned subsidiary Edict Systems, Inc. is a provider
of business-to-business ("B2B") electronic commerce ("e-commerce") products and
services, offering comprehensive, standards-based and proprietary solutions for
businesses of all sizes. The Company develops, markets, and supports B2B e-
commerce software products and provides Internet-based communication and e-
commerce data processing services that help businesses process reoccurring
transactions required in the electronic procurement of goods and services and
other B2B relationships.
The Company's software products enable businesses to engage in e-commerce with
one another by allowing companies to fully integrate e-commerce data into their
business infrastructure and operations as well as allowing smaller companies
the ability to manually process electronic transactions.
The Company also provides consultative services for its customers, generally
small and medium sized suppliers to large buying organizations wherein it acts
30
as a liaison between the buyers and their suppliers to interface with the buyer
on behalf of the Company's customers. Customers consist of businesses across a
number of industries throughout the United States and Canada.
Advant-e specializes in horizontal transaction services via EnterpriseEC(R),
an Internet-based Electronic Business Transaction Network and Trading Community
Management Platform, and web-based EDI and Electronic Commerce solutions for
small and medium size companies. The Company markets its web-EDI solutions
within specific vertical industries with branded Vertical Industry Portals
including www.GroceryEC.com, www.RetailEC.com, www.CPGSupplier.com,
www.LogisticsEC.com, and www.MfgEC.com. In addition to Internet and web-based
e-commerce solutions, Edict also provides e-commerce integration and bar coding
applications via its FORMULA_ONE(R) translation software and Bar Code Label
Modules as well as software solutions provided by the Company's business
partners.
The following is a description of the Company's four principal business
products/services:
1. Web-based Electronic Commerce/Electronic Data Interchange (web-EDI)
document processing systems and branded vertical industry portals such as
GroceryEC.com, RetailEC.com, CPGSupplier.com, MfgEC.com, and LogisticsEC.com,
etc. GroceryEC.com is the Company's first vertical industry business-to-
business web-based e-commerce portal and accounts for most of the Company's
revenues. GroceryEC.com is a web-based system for allowing manufacturers and
brokers in the grocery industry to conduct electronic commerce with grocery
retailers. GroceryEC.com allows its subscribers to send and receive electronic
purchase orders, invoices, price changes, item information, promotional
contracts, advance ship notices, and other documents via a web-based service.
The grocery retailing industry has changed dramatically due to technological
advances with EDI making many of these changes feasible. The strength of the
Company's business model is that the party that has a large influence on the
buying decision, the major grocery retailers ("hubs"), is not the party that
pays for the service; the suppliers ("spokes") who use GroceryEC.com pay for
it. The large retailers increase the return on their existing EDI e-commerce
investment, and smaller and medium-sized suppliers gain efficiencies at a very
reasonable cost. At October 31, 2003, GroceryEC.com supported more than 120
retailers and had approximately 2,600 production customers generating
transaction revenues. Several other vertical industry portals are in limited
use (RetailEC.com, MfgEC.com, and CPGSupplier.com) and others are planned for
future release. In addition to the Internet domain names mentioned, the
Company owns FoodServiceEC.com, AutomotiveEC.com, HealthcareEC.com,
PetroleumEC.com, HighTechEC.com, EZEC.com, EasyEC.com, DrugStoreEC.com,
WebEDI.com and others.
2. Internet-based Business-to-Business Electronic-Commerce Network Services--
EnterpriseEC.com. The Company's Electronic Trading Network (ETN) and
trading community management platform, began generating revenue in the third
quarter of 2002. An ETN is an Internet-based service that is an alternative to
higher-cost traditional Value Added Networks. The Company currently markets
this service primarily to its GroceryEC.com and other web-EDI customers and its
current Formula_One software customers; however, the Company also markets this
service to customers of other existing Value Added Networks.
31
3. Electronic Commerce and Bar Coding Software-FORMULA_ONE EDI software and
Bar Code Label Modules. In addition to Internet and web-based e-commerce
solutions, the Company also provides electronic commerce integration and bar
coding applications via its Formula_One translation software and Bar Code
Label Modules. Revenues from these products are steadily declining as the
Company continues to emphasize its Internet-based electronic commerce products
that have more growth and profit potential. Over the course of 2004, the
Company plans on sunsetting a portion of its software business, primarily
older DOS-based software. The Company intends on leveraging business partners
to provide integration software and services to existing and future software
customers.
4. Value-Added Applications. Using data stored for other services, the
Company intends on providing value-added web-based applications to current and
future customers that includes data mining, processing and reporting. These
products are currently in the pre-development stage.
For items 1 and 2 above, the Company's EDI administration, technical support
and systems maintenance personnel provide consultative services that enable
the Company's customers (suppliers) and their trading partners (usually buying
organizations of large companies or "hubs") to conduct EDI transactions as
requested by the hub by interfacing with the hub on behalf of the Company's
customers to facilitate the establishment of their electronic (EDI) trading
partner relationship. Because each hub has established processes in place to
migrate a non-EDI supplier to an EDI-enabled supplier, and because these
procedures vary among the hubs, the Company acts as a liaison between its
customers and the hub to establish this EDI connection. Since most of the
Company's customers are small to medium-sized companies, they recognize that
the Company has the resources and expertise to establish this connection for
them. This trading partner connection and relationship, once established, is
portable to other EDI service providers if the customer chooses to do so.
Time periods of these web-EDI agreements can be cancelled at any time by
customers with 30-days prior written notice. EnterpriseEC agreements can be
cancelled at any time during the first year with 90-days prior written notice
and in subsequent years with 30-days prior written notice.
The Company is currently focusing on increasing subscription fees relating to
its web-EDI services and EnterpriseEC.
The Company is continuing its strategy to shift its primary focus from EDI and
bar coding software and license fees to Internet-based electronic commerce
subscription services.
The Market
Business-to-business e-commerce involves the automation of business processes
and transactions through the use of computers and telecommunications to
exchange and electronically process commercial information and transactions
between businesses. In the 1980's, the predominant technology for B2B e-
commerce was Electronic Data Interchange ("EDI") which involves the use of
industry standards to conduct the exchange of business documents
electronically. The transactions were communicated between businesses over
private communication networks, known as VANs, which provided security,
32
administration of trading partnerships, auditing, and delivery of electronic
transactions. In the 1990's, the Internet, because of its wider acceptance
among businesses, became a viable option for conducting e-commerce instead of
using private networks. This development greatly increased the opportunity
for more businesses to participate in e-commerce due primarily to a
perception of lower cost associated with using the Internet.
The advantages of B2B e-commerce typically include elimination of redundant
data entry, a reduction in administration associated with processing paper
documents, a reduction in lead-time necessary to process documents, the
ability to reduce inventory based on "just in time" philosophies, and
increased data accuracy. The use of data standards for e-commerce is
important for companies with disparate computer systems to communicate
business documents electronically in an effective manner.
As larger companies seek to garner the maximum return on their ability to do
e-commerce, many of their smaller trading partners will require applications
to manually process and generate electronic documents externally from their
business systems until such a time that the volume of e-commerce transactions
warrant the necessary investment to integrate the e-commerce data into their
legacy systems. These smaller companies utilize PC-based software or web-
based "portals" for processing and creating e-commerce documents to support
their business partners.
Strategy
The Company plans to become a leading provider of B2B e-commerce software and
solutions by providing software products and services to the B2B marketplace
for the broadest possible distribution. By focusing on vertical markets
within the B2B marketplace along with providing horizontal market solutions,
the Company intends to provide solutions to a broad potential customer base.
There are two major components to conducting B2B e-commerce - communications
and data processing.
In support of the first major component - communications, the Company has
developed its EnterpriseEC service which is an Internet-based e-commerce
network providing similar functionality as traditional VANs, but at reduced
prices due to using the Internet as a communications infrastructure instead
of creating and maintaining a private network. EnterpriseEC can be used by
companies that currently have e-commerce software in place, but are using
traditional VANs by using secure file transfer protocol ("FTP"), EDI-INT, or
any other direct method of transferring data that is acceptable to the
customer.
In addition, EnterpriseEC communicates with traditional VANs via Internet
connections with several VANs who interconnect with the other established VANs
in the marketplace. EnterpriseEC also allows customers to transmit and receive
data directly to the Company's data center using other communications protocols
such as asynchronous or bisynchronous, bypassing the Internet altogether. This
is provided for those customers that have concerns about the Internet being
used for B2B e-commerce due to security or availability concerns.
In support of the second major component of B2B e-commerce - data processing,
33
the Company has developed both PC-based software and web-based solutions.
The processing of e-commerce data falls into two general categories - those
that are integrating the e-commerce data into their in-house legacy business
systems and those that process and generate electronic documents manually
(not integrated).
For companies that want to integrate e-commerce data into their in-house
legacy business systems, the Company offers its FORMULA_ONE EDI translation
software. This software provides connectivity to most private VANs as well
as EnterpriseEC. Once data is received into FORMULA_ONE, it can be
translated into any customer requested format using reformat programs that
are custom developed by the Company with the reformatted data being exported
to in-house legacy systems for integration.
In addition to using FORMULA_ONE for integration, EnterpriseEC has the ability
to reformat data prior to transmission to the customer for integration purposes
using custom developed applications, which are hosted on the EnterpriseEC
computer systems.
For companies that want a stand-alone solution which produces readable
documents of incoming e-commerce data and generates outgoing e-commerce
documents by using data entry screens, the Company has several solutions. In
addition to assisting companies with integration, FORMULA_ONE also has stand-
alone capabilities whereby incoming data is printed in a readable format and
data entry screens are available for generating outgoing documents. In many
cases, the outgoing documents are created from incoming data using a
"document turnaround" feature within FORMULA_ONE. This feature allows a
customer to load an incoming document (such as a purchase order) into a data
entry screen for faster generation of an outgoing document (such as an
invoice). This "turnaround" feature can be used whenever an outgoing
document contains much of the information contained in an associated incoming
document.
The Company has also produced a web-based solution for processing e-commerce
data in a stand-alone environment. By generating hypertext markup language
("HTML") based readable reports of incoming electronic documents, and
utilizing Java applets and/or HTML based entry screens for creating outgoing
electronic documents, the Company has created an alternative to traditional
e-commerce software and network services. The Company provides these web-
based solutions via web-based portals that target specific industry segments.
The Company intends to utilize its many years of experience in the e-commerce
industry to market EnterpriseEC horizontally to companies currently doing e-
commerce as well as companies who will be conducting e-commerce in the future.
Because EnterpriseEC is not industry specific and utilizes both standards-based
e-commerce data formats as well as proprietary formats, any company doing e-
commerce is a potential customer of EnterpriseEC.
The Company intends to leverage its current FORMULA_ONE customer base to
increase connectivity opportunities with EnterpriseEC as most of the
FORMULA_ONE customers are currently using commercial VANs. The Company has
developed a secure FTP software program that integrates with FORMULA_ONE
providing connectivity to its EnterpriseEC service.
34
The Company's GroceryEC Vortal is currently a leading provider of web-based B2B
e-commerce in the grocery industry. The Company plans to duplicate the success
of GroceryEC in other vertical industries where there is a high concentration
of EDI usage among large buyers, but relatively low support from small and
medium size suppliers.
The Company has also initiated a Hub and Spoke marketing program whereby large
companies that have a need to conduct e-commerce with a broad business partner
base can leverage the capabilities of EnterpriseEC and Web EDI at little or no
cost to the large company, provided they meet certain criteria. These criteria
consist of:
A. A minimum of 100 potential business partners not currently doing
e-commerce with them;
B. A mandate to these business partners to conduct e-commerce combined with
a penalty for non-compliance (such as an assessment or handling fee for
processing paper-based documents) or an incentive for compliance (such
as better payment terms);
C. The Hub must provide a list of targeted business partners to the Company;
D. The Hub must make their business partners aware that EnterpriseEC or its
web EDI soltuions are available to satisfy the mandate;
E. Establish a direct connection with EnterpriseEC via the Internet or other
communications protocols.
No sole endorsement of the Company's products are necessary by the Hub company
to gain the benefits of the Hub and Spoke marketing program.
Management believes that the products and services offered by the Company,
combined with the Hub & Spoke marketing program, offer a unique service in
the B2B electronic commerce industry by combining the provision of network
services to large companies at significantly reduced cost with web-based
document processing capabilities for their trading partners which allows the
large company to get 100% participation from their potential trading partners.
This approach offers an excellent opportunity for Company growth.
Competition
The B2B e-commerce market is highly competitive. Numerous companies supply
B2B e-commerce software products, private network services, Internet VAN
services, and Web EDI capabilities. Many of the Company's competitors have
significantly greater financial and personnel resources than the Company, due
in part either to their revenue and profitability, or their market
capitalization. The Company's competitors range from small companies with
limited resources to large companies with substantially greater financial and
marketing resources than the Company. The Company believes that existing
competitors who compete with the Company in one segment of the market are
likely to expand the range of their e-commerce services to include other
market segments the Company has targeted or will target. In addition, the
barrier to entry into the Company's markets is not large so it is likely that
new competitors will enter the Company's markets on an ongoing basis. Also,
large telecommunication, media, and software companies may offer services in
direct competition to the Company. The Company believes the principal
competitive factors in the commercial B2B e-commerce industry include
responsiveness to customer needs, efficiency in the delivery of solutions,
35
ease of product use, quality of service, price and value. The Company
believes it competes favorably with regard to these factors.
Intellectual and Proprietary Rights
The Company regards portions of its software products and other designs
including its web site designs, as proprietary and will attempt to protect
them by all available means including trade secret laws, employee and third-
party nondisclosure agreements, and built-in software protections.
Although the Company believes that its current technology and designs have
been independently developed, there can be no assurance that the technology
does not or will not infringe on the rights of others. The Company has no
patents or registered copyrights pertaining to its products, and it may be
possible for unauthorized third parties to copy certain portions of the
Company's products or to "reverse engineer" or otherwise obtain and use, to
the Company's detriment, information that the Company regards as proprietary.
Moreover, the laws of some countries do not offer the same protection to the
Company's proprietary rights as do those of the United States and Canada.
There can be no assurance that legal protections relied upon by the Company
to protect its proprietary position will be adequate or that the Company's
competitors will not independently develop technologies that are
substantially equivalent or superior to those utilized by the Company. It is
the intention of the Company to apply for patent protection of any processes
or business methods determined to be patentable and in the best interest of
the Company to do so.
The Company owns United States trademark rights to "EnterpriseEC" and
"FORMULA_ONE". Other trademarks may be acquired by the Company if and when
management determines that it is in the best interest of the Company to do
so.
Third Party Technology
The Company incorporates in its products certain software licensed to it by
other software developers. These include software components and objects
licensed from various vendors. The Company also relies on licensed software
development tools, database software, and server software from third party
providers for the development and operation of its products.
If the Company was deprived of the right to use software incorporated in its
products for any reason, or if the tools utilized in the development of its
products were discontinued or the capabilities contained in future releases
were not up to the standards set by the Company, there could be serious
disruption to its business.
Employees
The Company believes its success depends to a significant extent on its ability
to attract, motivate and retain highly skilled vision-oriented management and
employees. To this end, the Company intends to focus on incentive programs for
its employees and, will endeavor to create a corporate culture which is
challenging, rewarding and enhances the employees' career development. As of
October 31, 2003 the Company had a total of 30 employees, 29 full-time
36
employees and 1 part-time employee. Seventeen employees are technical
personnel engaged in developing, maintaining or providing technical support for
the Company's products and services, seven employees are marketing and sales
personnel, and five are involved in administration and finance.
The Company announced on October 29, 2003 the hiring of an Executive Vice
President. This individual has a long track record of outstanding performance
in sales, marketing, and senior level management. This individual will lead
the Company's efforts in sales and marketing, strategic planning, and customer
relationship management.
Research and Development
The Company conducts research and development on two levels on a continuing
basis. First, the Company continually studies the business processes in the
B2B industry, as well as the vertical industries it targets. A pivotal part
of the success of the Company's products is in understanding the exact needs
of its customers, and applying that knowledge to its products and services.
Second, core technology research, development, and engineering is conducted on
a continual basis. New technologies associated with the Internet and standards
for conducting e-commerce (such as extensible markup language or "XML") and the
commercial product development software that support it are continually being
researched and incorporated into the Company's products when deemed necessary.
The Company spent an estimated $25,000 in 2002 and an estimated $50,000 in 2001
for research and development. The Company intends to pass such costs on to its
customers in the future.
Government Regulation
Based upon its experience and knowledge of the industry, the Company believes
that its products comply substantially with applicable regulations in the
markets which the Company has targeted, however, there can be no assurances
that the future regulations or laws will not be adopted which would have an
adverse effect on the Company. The Company cannot predict the extent or
impact of future legislation or regulation by federal, state or local
authorities.
Reports to Security Holders
We are currently subject to the reporting requirements of the Securities
Exchange Act, and we file periodic reports including annual Form 10-KSB and
quarterly form 10-QSB, and other information with the Securities and Exchange
Commission ("Commission"). In addition, we will upon request, furnish
shareholders with annual reports containing audited financial statements
certified by our independent accountants and interim reports containing
unaudited financial information as it may be necessary or desirable. We will
provide without charge to each person who receives a copy of this prospectus,
upon written or oral request, a copy of any information that is incorporated by
reference in this prospectus (not including exhibits to the information that is
incorporated by reference unless the exhibits are themselves specifically
incorporated by reference). Such request should be directed to Advant-e
Corporation, Attention: Investor Relations, 2680 Indian Ripple Rd., Dayton,
37
OH 45440, telephone 937-429-4288. Our web site is www.advant-e.com and
www.edictsystems.com.
For further information with respect to us and the securities hereby offered,
reference is made to the registration statement and to the exhibits filed as
part of it and to all other reports and information that we have filed with the
Commission, which may be inspected and copied at the public reference
facilities of the Commission in Washington D.C. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
NW, Washington, D.C. 20549, telephone 1-800-SEC-0330, at prescribed rates and
are available on the World Wide Web at: http//www.sec.gov. The Commission
maintains on this web site on the Internet that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. Visitors to the site may access such
information by searching the EDGAR database on the SEC's web site.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form SB-2 Registration Statement contains forward-looking statements,
including statements regarding the expectations of future operations. For this
purpose, any statements contained in this Form SB-2 Registration Statement that
are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, words such as "may," "will,"
"expect," "believe," "anticipate," "estimate," or "continue" or comparable
terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, and
actual results may differ materially depending on a variety of factors, many of
which are not within the Company's control. These factors include, but are not
limited to, economic conditions generally and in the industries in which the
Company may participate, competition within chosen industry, including
competition from much larger competitors, technological advances, and the
failure to successfully develop business relationships. In light of these
risks and uncertainties, you are cautioned not to place undue reliance on these
forward looking statements. The Company acknowledges that the safe harbor
contained in the Litigation Reform Act of 1995 is not applicable to the
disclosure in this Form SB-2 Registration Statement.
This item should be read in conjunction with the Financial Statements and other
items contained elsewhere in this SB-2 Registration Statement.
IMPACT OF CRITICAL ACCOUNTING POLICIES
The SEC has recently issued Financial Reporting Release No. 60, "Cautionary
Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"),
suggesting companies provide additional disclosure and commentary on those
accounting policies considered most critical. FRR 60 considers an accounting
policy to be critical if it is important to our financial condition and
results, and requires significant judgment and estimates on the part of
management in its application. Management believes the following represent our
critical accounting policies as contemplated by FRR 60. For a summary of all of
our significant accounting policies, including the critical accounting policies
38
discussed below, see the Notes to the Financial Statements for the year ended
December 31, 2002 and for the nine months ended September 30, 2003, included in
this Registration Statement.
Revenue Recognition
The Company recognizes revenues in accordance with the Securities Exchange
Commission Staff Accounting Bulletin 101 (SAB 101), which requires the Company
to recognize revenue when, in addition to other criteria, delivery has
occurred or services have been rendered.
Revenues from software product sales are recognized when the product is
shipped. Ongoing software license fees are recognized ratably over the
license period, generally twelve months.
Revenues from Internet-based products and services (GroceryEC, MfgEC,
EnterpriseEC, etc) are comprised of three components - account activation and
trading partner set up fees, monthly subscription fees, and usage based
transactional fees.
Revenues earned from account activation and trading partner set up fees are
recognized after the Company performs consultative work required in order to
establish an electronic trading partnership between the customer and their
desired trading partners. Trading partnerships, once established, require no
ongoing effort on the part of the Company and customers are able to utilize
the electronic trading partnerships either directly with their customers or
via a service provider other than the Company.
Revenues earned from monthly subscriptions are recognized after the monthly
subscription has elapsed.
Usage based transactional fees are recognized upon completion of processing
those transactions.
Software Development Costs
The Company accounts for the costs of computer software that it develops for
internal use, costs associated with operation of its web sites, in accordance
with the American Institute of Certified Public Accountants Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" and Emerging Issues Task Force ("EITF") No. 00-2
"Accounting for Web Site Development Costs". Such capitalized costs represent
solely the salaries and benefits of employees working on the graphics and
content development stages, or adding functionality or features. Under SOP
98-1 and EITF No. 00-2, overhead, general and administrative and training costs
are not capitalized. The Company accounts for the costs of computer software
that it sells, leases and markets as a separate product in accordance with
Financial Accounting Standards Board Statement No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed".
Capitalized costs are amortized by the straight-line method over the remaining
estimated economic lives of the software application, generally three years,
and are reported at the lower of unamortized cost or net realizable value.
39
Debt Discount and Amortization
Debt discount recognized in connection with equity instruments issued with
debt (beneficial conversion features and detachable warrants) is amortized to
interest expense over the life of the underlying debt as an estimate of the
cost of the financing event.
Deferred Income Taxes
Deferred income taxes are provided to recognize future tax benefits of net
operating loss carry forwards, to the extent realization of such benefits is
more likely than not. Deferred income taxes are also provided for temporary
differences in recognition of assets and liabilities for financial statements
and for income tax purposes.
OVERVIEW
The Company, via its wholly-owned subsidiary Edict Systems, Inc. is a provider
of business-to-business ("B2B") electronic commerce ("e-commerce") products and
services, offering comprehensive, standards-based and proprietary solutions for
businesses of all sizes. The Company develops, markets, and supports B2B e-
commerce software products and provides Internet-based communication and e-
commerce data processing services that help businesses process reoccurring
transactions required in the electronic procurement of goods and services and
other B2B relationships.
The Company's software products enable businesses to engage in e-commerce with
one another by allowing companies to fully integrate e-commerce data into their
business infrastructure and operations as well as providing smaller companies
with the ability to manually process electronic transactions.
The Company also provides consultative services for its customers, generally
small and medium sized suppliers to large buying organizations wherein it acts
as a liaison between the buyers and their suppliers to interface with the buyer
on behalf of the Company's customers. Customers consist of businesses across a
number of industries throughout the United States and Canada.
Advant-e specializes in horizontal transaction services via EnterpriseEC(R),
an Internet-based Electronic Business Transaction Network and Trading Community
Management Platform, and web-based EDI and Electronic Commerce solutions for
small and medium size companies. The Company markets its web-EDI solutions
within specific vertical industries with branded Vertical Industry Portals
including www.GroceryEC.com, www.RetailEC.com, www.CPGSupplier.com,
www.LogisticsEC.com, and www.MfgEC.com. In addition to Internet and web-based
e-commerce solutions, Edict Systems also provides e-commerce integration and
bar coding applications via its FORMULA_ONE(R) translation software and Bar
Code Label Modules as well as software solutions provided by the Company's
business partners.
The following is a description of the Company's four principal business
products/services:
1. Web-based Electronic Commerce/Electronic Data Interchange (web-EDI)
document processing systems and branded vertical industry portals such as
40
GroceryEC.com, RetailEC.com, CPGSupplier.com, MfgEC.com, and LogisticsEC.com,
etc. GroceryEC.com is the Company's first vertical industry business-to-
business web-based e-commerce portal and accounts for most of the Company's
revenues. GroceryEC.com is a web-based system for allowing manufacturers and
brokers in the grocery industry to conduct electronic commerce with grocery
retailers. GroceryEC.com allows its subscribers to send and receive electronic
purchase orders, invoices, price changes, item information, promotional
contracts, advance ship notices, and other documents via a web-based service.
The grocery retailing industry has changed dramatically due to technological
advances with EDI making many of these changes feasible. The strength of the
Company's business model is that the party that has a large influence on the
buying decision, the major grocery retailers ("hubs"), is not the party that
pays for the service; the suppliers ("spokes") who use GroceryEC.com pay for
it. The large retailers increase the return on their existing EDI e-commerce
investment, and smaller and medium-sized suppliers gain efficiencies at a very
reasonable cost. At October 31, 2003, GroceryEC.com supported more than 120
retailers and had approximately 2,600 production customers generating
transaction revenues. Several other vertical industry portals are in limited
use (RetailEC.com, MfgEC.com, and CPGSupplier.com) and others are planned for
future release. In addition to the Internet domain names mentioned, the
Company owns FoodServiceEC.com, AutomotiveEC.com, HealthcareEC.com,
PetroleumEC.com, HighTechEC.com, EZEC.com, EasyEC.com, DrugStoreEC.com,
WebEDI.com and others.
2. Internet-based Business-to-Business Electronic-Commerce Network Services--
EnterpriseEC.com. The Company's Electronic Trading Network (ETN) and trading
community management platform, began generating revenue in the third quarter of
2002. An ETN is an Internet-based service that is an alternative to higher-
cost traditional Value Added Networks. The Company currently markets this
service primarily to its GroceryEC.com and other web-EDI customers and its
current Formula_One software customers; however, the Company also markets this
service to customers of other existing Value Added Networks.
3. Electronic Commerce and Bar Coding Software-FORMULA_ONE EDI software and
Bar Code Label Modules. In addition to Internet and web-based e-commerce
solutions, the Company also provides electronic commerce integration and bar
coding applications via its Formula_One translation software and Bar Code
Label Modules. Revenues from these products are steadily declining as the
Company continues to emphasize its Internet-based electronic commerce products
that have more growth and profit potential. Over the course of 2004, the
Company plans on sunsetting a portion of its software business, primarily older
DOS-based software. The Company intends on leveraging business partners to
provide integration software and services to existing and future software
customers.
4. Value-Added Applications. Using data stored for other services, the
Company intends on providing value-added web-based applications to current and
future customers that includes data mining, processing and reporting. These
products are currently in the pre-development stage.
For items 1 and 2 above, the Company's EDI administration, technical support
and systems maintenance personnel provide consultative services that enable
the Company's customers (suppliers) and their trading partners (usually buying
organizations of large companies or "hubs") to conduct EDI transactions as
41
requested by the hub by interfacing with the hub on behalf of the Company's
customers to facilitate the establishment of their electronic trading partner
relationship. Because each hub has established processes in place to migrate a
non-EDI supplier to an EDI-enabled supplier, and because these procedures vary
among the hubs, the Company acts as a liaison between its customers and the hub
to establish this EDI connection. Since most of the Company's customers are
small to medium-sized companies, they recognize that the Company has the
resources and expertise to establish this connection for them. This trading
partner connection and relationship, once established, is portable to other EDI
service providers if the customer chooses to do so.
Revenue recognition polices with respect to Internet based subscription fees--
The Company recognizes as revenues one-time Account Activation Fees ($100 per
new customer), Trading Partner Setup Fees ($50 per partner for web-EDI) and
interconnect Setup Fees ($50 per interconnect) after the Company performs
consultative work required in order to establish the electronic trading
partnership between the customer and their desired trading partner.
The Company recognizes monthly subscription fees of $25 per month per customer
($45 if the Customer does not pay by credit card) and $5 per month per trading
partner the customer connects to (up to 5 partners) upon the completion of one
month of services provided. These fees are non-refundable. The Company
recognizes transaction fees (document processing fees) upon completion of the
processed transactions; these transactions are billed or charged to a
customer's credit card once per month at the end of a monthly period. These
fees are non-refundable and are only billed after services are provided.
Time periods of these web-EDI agreements can be cancelled at any time by
customers with 30-days prior written notice. EnterpriseEC agreements can be
cancelled at any time during the first year with 90-days prior written notice
and in subsequent years with 30-days prior written notice.
Periodically customers do cancel the service, usually because they no longer
need to process EDI documents electronically. Other customers may have their
accounts deactivated for non-payment per the terms of the services agreement.
Such sales returns and allowances are minimal - less than one-half of one
percent of sales.
Revenues from sales of Formula_One and BCLM software products are recognized
when the software is shipped to the customer. Recurring license and
maintenance fees relating to software products are billed annually and
recognized as revenue ratably as earned over the 1-year license period.
The Company is currently focusing on increasing subscription fees relating to
its web-EDI services and EnterpriseEC.
The Company is continuing its strategy to shift its primary focus from EDI and
bar coding software and license fees to Internet-based electronic commerce
subscription services.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
42
Revenues in the first nine months of 2003 increased by $683,254 (47%) over
revenues in the first nine months of 2002. Revenues from Internet-based
subscription services increased by $781,975 (65%). Revenues from software and
license fees decreased by $98,721 (42%). The increase in revenues from
Internet-based subscription services (primarily from grocery industry web-EDI
and EnterpriseEC) and the decline in revenues from software and license fees
reflects the Company's continuing shift of its focus from software sales to
Internet-based subscription services.
Operating expenses increased by $493,862 (31%). Salaries and benefits
increased by $351,616 (46%) due to additional personnel to maintain and support
our Internet-based subscription services; to improve the effectiveness and
efficiency of our product development and technical support functions; for
salary increases for key personnel; and ratably less development cost
capitalized. These increases were partially offset by personnel reductions.
General and administrative expenses increased by $160,499 (49%) due to
increased costs associated with marketing web-EDI and EnterpriseEC services,
increased costs of the Company's new general offices, and expenses related to
non-compete agreements. Depreciation expense increased by $15,969 (77%)
resulting primarily from the Company's capital expenditures in the fourth
quarter of 2002 to increase its computer processing capacity and to purchase
furniture and equipment for the Company's newly leased offices. Amortization
of software development costs increased by $103,348 due primarily to
amortization of EnterpriseEC software development costs. Interest expense
decreased by $116,937 because the discount related to the 15% Convertible
Subordinated Notes was substantially amortized to expense in 2002 and the
discount related to the 10% Convertible Subordinated Notes was fully-amortized
to expense at the end of the second quarter of 2003.
Interest expense in the first nine months of 2003 included $45,379 in non-cash
charges associated primarily with the issuance of warrants and the beneficial
conversion feature of the Convertible Subordinated Notes issued in 2002.
The income tax expense of $19,430 in 2003 is computed at an approximate
effective tax rate of 20%--the rate at which deferred tax assets are expected
to be utilized. Income tax expense of $8,610 in 2002 reflects the effects of
the non-deductibility for income tax purposes of the non-cash interest expense
associated with the Convertible Subordinated Notes issued in 2001 and 2002.
The Company reports net income in the nine months ended September 30, 2003 of
$32,339 compared to the net loss in the nine months ended September 30, 2002 of
$146,233.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The following table sets forth the cost and accumulated amortization of the
products comprising the Software Development Costs asset at September 30, 2003:
Accumulated
Product Cost Amortization Net
------- ---- ------------ ---
43
GroceryEC (Web EDI) 428,260 310,228 118,032
Web EDI enhancements 141,558 22,983 118,575
EnterpriseEC 470,661 176,497 294,164
------- ------- -------
Total $1,040,479 509,708 530,771
========= ======= =======
GroceryEC (WebEDI) is currently generating cash flow and is the Company's
largest and primary source of revenue. Sales of EnterpriseEC continue to grow
in 2003. Based on our current marketplace analysis and marketing efforts we
expect EnterpriseEC product revenues and cash flows to continue to increase.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the quarter ended September 30, 2003, the Company incurred substantial
operating losses. The Company reported net income for the quarter ended
September 30, 2003 and for the nine months ended September 30, 2003, and
generated positive cash flow from operations in the nine months ended September
30, 2003 and in the year ended December 31, 2002. This improvement in 2003
results were, in part, due to certain cost saving initiatives implemented in
the third quarter of 2003 that included modest workforce and salary reductions
and reductions in general and administrative expenses including travel,
professional fees and other expenses.
Management believes that current cash and cash equivalents and cash that may
be generated from operations in the ensuing year will be sufficient to meet
the anticipated capital expenditure requirements and cash interest
requirements, provided that the maturity date of certain subordinated notes
is extended, the terms modified, or replacement capital is obtained as
discussed below. Such projections are based on historical trends related to
growth of revenue from existing customers and new customer acquisition, and
anticipated revenue growth from EnterpriseEC. The projections also include
anticipated cash requirements to provide continuing customer support,
installation, sales and marketing, product development and enhancement, and
general overhead.
To achieve these projections, the Company anticipates the need to maintain
existing capital levels. The Company has completed negotiations with most
holders of its Convertible Subordinated Notes, and is currently negotiating,
with certain other holders of its subordinated notes to obtain extensions of
the due dates of the notes, which were primarily due in the third quarter of
2003 or which are due in the fourth quarter of 2003. Substantially all of the
note holders agreed to extend the maturity dates of their notes to January 5,
2004 provided the Company pays all accrued interest before due dates ranging
from September 22, 2003 to December 17, 2003. The Company, to date, has made
all such interest payments. Those interest payments were contemplated in the
Company's cash flow projections. Management also expects that, if the
Company's financial and operating results in the last two quarters of 2003 are
satisfactory to the note holders, some, if not all, of the note holders may
further extend the maturity dates, convert the notes into the Company's common
stock pursuant to the note agreements, or modify the terms of the notes.
44
In addition, the Company is pursuing additional sources of capital to replace
the Convertible Subordinated Notes in the event that the note holders request
payment.
Effective November 14, 2003 a holder of the Company's 15% Convertible
Subordinated Notes in the principal amount of $250,000 agreed to convert the
principal amount of the note to 235,849 shares of the common stock.
Any projections of future cash needs and cash flows are subject to substantial
uncertainty.
CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 2002 TO SEPTEMBER 30, 2003
Accounts receivable at September 30, 2003 increased by $37, 200 (24%),
reflecting the Company' s growth in revenues in 2003. Software development
costs decreased by $104,185 as additions of $110,757 were more than offset by
amortization of those costs of $214,942. The Company amortizes its software
development costs using the straight-line method over three years.
The Company produced $259,827 cash from operations in the nine months ended
September 30, 2003. As a result, during that period the Company reduced its
accounts payable by $98,357, reduced accrued interest by $43,819 primarily
resulting from payments of $129,084 to the holders of the Company's convertible
subordinated debt net of additional interest expense on those notes of $86,063,
and increased its Cash balance at September 30, 2003 by $85,516.
Other accrued expenses, which consists primarily of salaries, payroll taxes,
and property taxes, increased by $43,655 due primarily to the timing of the
final payrolls in the quarter. Deferred revenue increased $20,343 as the
Company received prepayments from two customers for future services of $46,041,
which were offset by reduced deferred license fees of $25,698. The balance of
deferred license fees is expected to continue to decline due to the Company's
continuing shift of its focus from software sales, including resulting license
fees for the use of the software, to Internet-based subscription services.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board in April 2003 issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
This statement amends and clarifies financial accounting and reporting for
derivative instruments and for hedging activities under FASB Statement No.
133. This statement clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, clarifies
when a derivative contains a financing component, amends the definition of an
underlying instrument relative to Guarantees, and amends certain other existing
pronouncements so as to result in more consistent reporting of contracts as
either derivatives or hybrid instruments. The statement is effective,
generally, for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The Company has had no
transactions that are covered by the provisions of SFAS No. 149. As a result,
SFAS No. 149 has no effect on the Company's financial position or results of
operations.
The Financial Accounting Standards Board in May 2003 issued SFAS No. 150,
45
"Accounting for Certain Financial Instruments with Characteristics of
Liabilities and Equity." This statement requires that an issuer classify
certain defined financial instruments as liabilities, many of which were
previously classified as equity or between the liabilities section and the
equity section of the statement of financial position. This statement requires
classification as liabilities any financial instruments that are issued in the
form of shares that are mandatorily redeemable; that embody an obligation to
repurchase the issuer's equity shares; that embody an obligation that issuer
must or may settle by issuing a variable number of its equity shares if at
inception the monetary value of the obligation is based on either a fixed
monetary amount, variations in something other than the fair value of the
issuer's equity shares, or variations inversely related to changes in the fair
value of the issuer's equity shares. The statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. It is to be implemented by reporting the cumulative effect of a change
in an accounting principle for financial instruments created before the
issuance date of this Statement and still existing at the beginning of the
interim period of adoption. The Company has had no transactions that are
covered by the provisions of SFAS No. 150. As a result, SFAS No. 150 has no
effect on the Company's financial position or results of operations.
YEAR ENDED DECEMBER 31, 2002 AND 2001
Revenues in 2002 of $2,008,389 increased by $823,071 (69%) over the $1,185,318
for 2001. Revenues from Internet products and services increased from $839,074
in 2001 to $1,728,996 in 2002 (106% increase). Revenues from software and
license fees decreased from $346,244 in 2001 to $279,393 in 2002 (19%
decrease). The increase in revenues from Internet products and services and
the decline in revenues from software and license fees reflects the Company's
continuing shift of its primary focus from EDI and bar coding software to
Internet-based services.
Operating expenses in 2002 of $2,342,189 increased by $977,660 over the
$1,364,529 in 2001. Production expenses increased by $70,965 due primarily to
additional licensed computer software and computer lease expense. Salaries
and benefits increased by $416,491 due to additional personnel to maintain,
support and market our Internet-based subscription services, particularly our
Internet-based business-to-business electronic commerce network (EBTN) and web-
EDI services, ratably less development cost capitalized, increased health
insurance cost due to rate increases and added personnel, and additional
administrative personnel and salary increases.
General and administrative expenses increased by $224,546 due to increased
costs to market our web-EDI, EnterpriseEC and alternate channel business,
increased legal and accounting related to the SEC comment letter, additional
investor relations costs, and costs related to relocating the Company's general
offices. Depreciation expense increased by $6,917 due to property and
equipment additions resulting from the Company's move to a new office location.
Amortization of software development costs increased by $80,036 due primarily
to amortization of EnterpriseEC software development costs beginning in 2002.
Interest expense increased by $183,505 due to interest on the $525,000
Convertible Subordinated Notes that were outstanding throughout 2002 and the
10% Convertible Subordinated Notes that were issued in July 2002. Interest
46
expense in 2002 included $202,473 non-cash amortization of the fair value
attributable to the warrants and beneficial conversion features of the
Convertible Subordinated Notes, compared to $86,500 in 2001.
The income tax benefit in 2002 was $26,266 compared to $17,582 in 2001. The
tax benefit in both years relates to the loss before amortization of the fair
value attributable to the warrants and beneficial conversion privilege of the
Convertible Subordinated Notes, since the amortization is non-deductible for
income tax purposes.
Accordingly, the Company reports a net loss of $307,534 ($0.05 per common
share) in 2002, compared to the net loss of $161,629 ($0.03 per common share)
in 2001.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The following table sets forth the cost and accumulated amortization of the
products comprising the Software Development Costs asset at December 31, 2002:
Accumulated
Product Cost Amortization Net
------- ---- ------------ ---
GroceryEC (Web EDI) 428,260 234,651 193,609
Web EDI enhancements 30,802 1,284 29,518
EnterpriseEC 470,661 58,832 411,829
------- ------- -------
$ 929,723 294,767 634,956
======== ======== =======
GroceryEC is currently generating positive cash flow and is the Company's
largest and primary source of revenue. Sales of EnterpriseEC totaled $39,971
in 2002. Based on our marketplace analysis and marketing efforts we expect
EnterpriseEC to ramp up quickly in 2003 and produce positive cash flow in 2004.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board issued SFAS No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement requires that gains and losses from
extinguishments of debt should be classified as extraordinary items only if
they meet the criteria in APB Opinion 30; i.e., the provisions of Opinion 30
will distinguish transactions, including extinguishments of debt, that are part
of an entity's recurring operation from those that are unusual or infrequent or
that meet the criteria for classification as an extraordinary item. This
statement also requires that lease modifications that have economic effects
similar to sale-leaseback transactions must be accounted for in the same manner
as sale-leaseback transactions pursuant to SFAS No. 13. The Company has
47
implemented the provisions of SFAS No. 145 in the second quarter of 2002 but
has had no transactions that are covered by the provisions of SFAS No. 145. As
a result, SFAS No. 145 has no effect on the Company's financial position or
results of operations.
The Financial Accounting Standards Board issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." This statement requires
that a liability for a cost, such as certain employee termination benefits,
associated with an exit or disposal activity be recognized when the liability
is incurred, and that the fair value is the objective for measurement of the
liability. SFAS No. 146 address and nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." The Company must adopt the provisions of SFAS No. 146
for any exit or disposal activities that are initiated after December 31, 2002.
The Company has had no such transactions in 2002 or through the date of the
filing of this Form SB-2; as a result, SFAS No. 146 has no effect on the
Company's financial position or results of operations.
The Financial Accounting Standards Board issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123 (Issued 12/02)." This statement prescribes two additional
transition methods for entities that adopt the preferable method of accounting
for stock-based employee compensation (the fair value method) to replace the
prospective method of transition for changes to the fair value based method as
prescribed in Statement 123. In addition, this statement requires disclosure
of comparable information for all companies by prescribing a specific tabular
format and by requiring disclosure in the "Summary of Significant Accounting
Policies." And this Statement improves the timeliness of those disclosures by
requiring their inclusion in financial reports for interim periods. The
provisions of SFAS No. 148 are in effect for fiscal years ending after December
15, 2002 for transition guidance and annual disclosure provisions; for
financial reports containing financial statements for interim periods beginning
after December 15, 2002 for interim disclosure provisions. The Company has no
stock-based compensation plans in 2002 or through the filing of this Form SB-2;
as a result SFAS No. 148 has no effect on the Company's financial position
or results of operations.
DESCRIPTION OF PROPERTY
The Company presently leases 12,000 square feet of office space as its
principal place of business at 2680 Indian Ripple Rd. Dayton, OH 45440. The
lease agreement has a three-year term that started on October 1, 2002 with two
consecutive three-year renewal options. Monthly rent under the agreement is
averages $7,299 ($87,588 per year)in the three successive years of the lease.
The lease rate in the renewal periods, if exercised, will increase by a maximum
amount of 5% per year. Lease payments include substantially all maintenance
and repairs, and real estate taxes and utilities. The Company has a right of
first refusal on 7,000 square feet of adjacent office space.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to May 4, 2000 the Company's common stock was traded on the OTC Bulletin
Board under the symbol "TWIP". From May 4, 2000 the Company's stock was traded
48
on the pink sheets until December 13, 2000 when it began trading on the Over
the Counter Bulletin Board with the symbol "AVEE".
The following table sets forth, during the periods indicated, the range of high
and low bid prices for the Company's common stock on the OTC Bulletin Board or
the Pink Sheets, as applicable. Such high and low bid information reflects
inter-dealer quotes, without retail mark-up, mark down or commissions and may
not represent actual transactions.
FISCAL 2001
Quarter ended:
March 31, 2001 3.250 1.500
June 30, 2001 1.700 1.260
September 30, 2001 1.450 1.190
December 31, 2001 1.300 1.010
FISCAL 2002
Quarter ended:
March 31, 2002 1.400 1.060
June 30, 2002 1.420 1.150
September 30, 2002 1.210 0.950
December 31, 2002 2.510 0.750
FISCAL 2003
Quarter ended:
March 31, 2003 1.450 1.130
June 30, 2003 1.500 1.020
September 30, 2003 2.250 1.300
October 1, 2003 to November 28, 2003 1.350 1.750
As of October 31, 2003 the Company had 310 registered holders of record of
common stock. Some of those registered holders are brokers who are holding
shares for multiple clients in street names. Accordingly, the Company believes
the number of actual Shareholders of common stock exceeds the number of
registered holders of record.
The Company has not paid any cash or stock dividends. The Company presently
intends to reinvest earnings, if any, to fund the development and expansion of
the Company and therefore, does not anticipate paying dividends on common stock
in the foreseeable future. The declaration of dividends will be at the
discretion of the Board of Directors and will depend upon the Company's
earnings, financial position, general economic conditions and other pertinent
factors.
No securities are authorized for issuance under equity compensation plans,
however, the Company intends to develop and implement an employee stock option
plan in 2004.
EXECUTIVE COMPENSATION
All compensation for all services rendered for the Company's executive
officers and members of its Board of Directors, for the nine months ended
September 30, 2003 and for 2002, 2001 and 2000 are as follows:
49
Board of Total
Name and title Period Salary Directors Fees Compensation
-------------- ---- --------- -------------- ------------
Jason K. Wadzinski
President/CEO/Director Nine Months
Ended
September
30, 2003 $57,630 5,000 62,630
John F. Sheffs
Secretary/Treasurer/
Director Nine Months
Ended
September
30, 2003 - 5,000 5,000
Jason K. Wadzinski
President/CEO/Director 2002 62,400 10,000 72,400
John F. Sheffs
Secretary, Treasurer/
Director 2002 - 10,000 -
Jason K. Wadzinski
President/CEO/Director 2001 62,400 - 62,400
Jason K. Wadzinski
President/CEO/Director 2000 58,500 - 58,500
Jason K. Wadzinski is the sole executive officer of the Company. No payments
classified as long-term compensation, other annual compensation and all other
compensation were made. The Company has no long-term incentive plans.
Fees to Directors are paid at the discretion of the Board of Directors.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are currently subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and we file periodic
reports and other information with the Securities and Exchange Commission
("Commission"). In addition, we will furnish shareholders with annual reports
containing audited financial statements certified by our independent
accountants and interim reports containing unaudited financial information as
it may be necessary of desirable. We will provide without charge to each
person who receives a copy of this prospectus, upon written or oral request, a
copy of any information that is incorporated by reference in this prospectus
(not including exhibits to the information that is incorporated by reference
unless the exhibits are themselves specifically incorporated by reference).
Such request should be directed to Advant-e Corporation, Attention: Investor
Relations, 2680 Indian Ripple Rd., Dayton, OH 45440, telephone 937-429-4288.
Our web site is www.advant-e.com and www.edictsystems.com.
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act with respect to the securities
being offered. This prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Reference is made
to exhibits to the registration statement for the complete text. For further
50
information with respect to us and the securities hereby offered, reference is
made to the registration statement and to the exhibits filed as part of it,
which may be inspected and copied at the public reference facilities of the
Commission in Washington D.C. Copies of such material can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, NW, Washington,
D.C. 20549, telephone 1-800-SEC-0330, at prescribed rates and are available on
the World Wide Web at: http//www.sec.gov. The Commission maintains on this
web site on the Internet that contains reports, proxy and information
statements and other information regarding issuers that file electronically
with the Commission. Visitors to the site may access such information by
searching the EDGAR database on the SEC's web site.
LEGAL MATTERS
The legality of the common stock included in this prospectus has been passed
upon for us by Barbara L. Sager, Co., L.P.A., Centerville, Ohio but purchasers
of our common stock should not rely on Barbara L. Sager, Co. with respect to
any other matters.
51
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheet at September 30, 2003 (Unaudited) F-2
Consolidated Statements of Operations for the Nine Months Ended
September 30, 2003 and 2002 (Unaudited) F-3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and 2002 (Unaudited) F-4
Notes to Consolidated Financial Statements at September 30, 2003
(Unaudited) F-5
Consolidated Balance Sheet at December 31, 2002 F-9
Consolidated Statements of Operations for the Years Ended December 31,
2002 and 2001 F-11
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2002 and 2001 F-12
Consolidated Statements of Cash Flows for the Years Ended December, 31
2002 and 2001 F-13
Notes to Consolidated Financial Statements at December 31, 2002 F-14
Report of J.D. Cloud & Co. L.L.P., Independent Auditors, on
Consolidated Financial Statements, December 31, 2002 F-23
Report of Battelle & Battelle LLP, Independent Auditors on
Consolidated Financial Statements, December 31, 2001 F-24
The interim financial statements of the Company included herein have been
prepared without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Although certain information normally included in
financial statements prepared in accordance with generally accepted accounting
principles may have been condensed or omitted, the Company believes that the
disclosures are adequate. The unaudited interim financial statements included
herein for the nine months ended September 30, 2003 and 2002,
respectively, reflect all adjustments which, in the opinion of management, are
necessary to present a fair statement of the results for the interim periods.
The results for interim periods are not necessarily indicative of trends or of
results to be expected for a full year. It is suggested that these quarterly
financial statements are read in conjunction with the annual audited financial
statements and notes thereto for the year ended December 31, 2002, included
herein.
F-1
ADVANT-E CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 2003
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 184,256
Accounts receivable, net 194,855
Prepaid expenses 20,362
Deferred income taxes 21,170
---------
Total current assets 420,643
---------
SOFTWARE DEVELOPMENT COSTS, net of accumulated
amortization of $509,708 at September 30, 2003
and $294,767 at December 31, 2002 530,771
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $140,120 at September 30, 2003
and $103,460 at December 31, 2002 163,110
OTHER ASSETS
Deferred income taxes 79,046
Deposits 6,583
---------
85,629
---------
Total assets $ 1,200,153
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 59,963
Accrued interest 74,206
Other accrued expenses 93,255
Deferred revenue 114,236
Bank note payable 8,521
Convertible subordinated notes payable 750,000
8% demand notes payable to shareholder 45,000
---------
Total current liabilities 1,145,181
---------
LONG-TERM LIABILITIES
Bank note payable, less current maturities -
---------
Total liabilities 1,145,181
---------
F-2
SHAREHOLDERS' EQUITY
Common stock, $.001 par value; 20,000,000
shares authorized; 5,661,002 issued and
outstanding 5,661
Paid-in capital 850,459
Accumulated deficit (801,148)
---------
Total shareholders' equity 54,972
---------
Total liabilities and shareholders' equity $ 1,200,153
=========
The accompanying notes are an integral part of the financial statements.
ADVANT-E CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Nine Months Ended
September 30,
2003 2002
---- ----
REVENUES
Internet products and services $ 1,987,852 1,205,877
Software and license fees 136,499 235,220
--------- ---------
Total revenues 2,124,351 1,441,097
--------- ---------
OPERATING EXPENSES
Production 86,910 107,543
Salaries and benefits 1,108,673 757,057
General and administrative 486,032 325,533
Depreciation 36,660 20,691
Amortization of software
development costs 214,942 111,594
Interest 139,365 256,302
--------- ---------
Total operating expenses 2,072,582 1,578,720
--------- ---------
INCOME (LOSS) BEFORE TAXES 51,769 ( 137,623)
INCOME TAXES 19,430 8,610
--------- --------
NET INCOME (LOSS) $ 32,339 ( 146,233)
========= ========
F-3
EARNINGS (LOSS) PER SHARE
Basic $ 0.01 (0.03)
==== ====
Diluted $ 0.01 (0.03)
==== ====
AVERAGE SHARES OUTSTANDING
Basic 5,661,002 5,661,002
========= =========
Diluted 5,745,797 5,661,002
========= =========
The accompanying notes are an integral part of the financial statements.
ADVANT-E CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 32,339 (146,233)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 36,660 20,691
Amortization of software development costs 214,942 111,594
Deferred income taxes 19,430 8,610
Amortization of note discount resulting
from valuation of warrants and beneficial
conversion features 45,379 180,680
Increase (decrease) in cash arising from
changes in assets and liabilities:
Accounts receivable (37,200) (73,682)
Prepaid expenses 26,455 18,256
Accounts payable (98,357) 12,415
Accrued interest (43,819) 62,708
Other accrued expenses 43,655 43,982
Deferred revenue 20,343 (15,677)
Deposits - ( 6,584)
------- -------
Net cash provided by operating activities 259,827 216,760
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment ( 28,181) ( 69,742)
Software development costs (110,757) (276,901)
------- -------
F-4
Net cash used in investing activities (138,938) (346,643)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Convertible Subordinated Notes - 250,000
Payments on Convertible Subordinated Notes ( 25,000) -
Payments on bank loans ( 10,373) (58,115)
------ --------
Net cash provided by (used in)
financing activities ( 35,373) 191,885
------ -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 85,516 62,002
Cash and cash equivalents, beginning of period 98,740 180,679
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 184,256 242,681
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ITEMS
Interest paid $ 137,804 12,759
Non-cash transactions
Fair value of warrants issued with
Convertible Subordinated Notes - 27,500
Value of beneficial conversion feature of
Convertible Subordinated Notes - 52,000
The accompanying notes are an integral part of the financial statements.
ADVANT-E CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2003
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Advant-e Corporation and its wholly-owned subsidiary Edict
Systems, Inc. (collectively, the "Company").
The statements have been prepared in accordance with U.S. generally accepted
accounting principles for interim financial information and the instructions
to Form 10-QSB. Accordingly, they do not include all of the information and
notes to financial statements required by U.S. generally accepted accounting
principles for complete financial statements. In the opinion of management,
the unaudited consolidated financial statements include all adjustments
considered necessary for a fair presentation of financial position, results
of operations, and cash flows for the interim periods.
The preparation of financial statements in conformity with U.S. 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 those estimates.
F-5
Results of operations for the three months and for the nine months ended
September 30, 2003 are not necessarily indicative of the results to be
expected for the full year ending December 31, 2003. These unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements, accounting policies, and financial notes
thereto included in Advant-e Corporation's 2002 Form 10-KSB filed with the
Securities and Exchange Commission.
NOTE 2 - OPERATIONS AND MANAGEMENT'S INTENT
Prior to the quarter ended September 30, 2003, the Company incurred substantial
operating losses. The Company reported net income for the quarter ended
September 30, 2003 and for the nine months ended September 30, 2003, and
generated positive cash flow from operations in the nine months ended September
30, 2003 and in the year ended December 31, 2002. This improvement in 2003
results were, in part, due to certain cost saving initiatives implemented in
the third quarter of 2003 that included modest workforce and salary reductions
and reductions in general and administrative expenses including travel,
professional fees and other expenses.
Management believes that current cash and cash equivalents and cash that may
be generated from operations in the ensuing year will be sufficient to meet
the anticipated capital expenditure requirements and cash interest
requirements, provided that the maturity date of certain subordinated notes
is extended, the terms modified, or replacement capital is obtained as
discussed below. Such projections are based on historical trends related to
growth of revenue from existing customers and new customer acquisition, and
anticipated revenue growth from EnterpriseEC. The projections also include
anticipated cash requirements to provide continuing customer support,
installation, sales and marketing, product development and enhancement,
and general overhead.
To achieve these projections, the Company anticipates the need to maintain
existing capital levels. The Company has completed negotiations with most
holders of its Convertible Subordinated Notes, and is currently negotiating,
with certain other holders of its subordinated notes to obtain extensions of
the due dates of the notes, which were primarily due in the third quarter of
2003 or which are due in the fourth quarter of 2003. Substantially all of the
note holders agreed to extend the maturity dates of their notes to January 5,
2004 provided the Company pays all accrued interest before due dates ranging
from September 22, 2003 to December 17, 2003. The Company, to date, has made
all such interest payments. Those interest payments were contemplated in the
Company's cash flow projections. Effective on November 14, 2003 a holder of
the Company's 15% Convertible Subordinated Notes in the principal amount of
$250,000 agreed to convert the principal amount of the note into 235,859 shares
of the Company's common stock. Management also expects that, if the Company's
financial and operating results in the last two quarters of 2003 are
satisfactory to the note holders, some, if not all, of the note holders may
further extend the maturity dates, convert the notes into the Company's common
stock pursuant to the note agreements, or modify the terms of the notes. In
addition, the Company is pursuing additional sources of capital to replace the
Convertible Subordinated Notes in the event that the note holders request
payment.
F-6
Any projections of future cash needs and cash flows are subject to substantial
uncertainty.
NOTE 3 - INCOME TAX BENEFIT
Income tax benefits consist solely of deferred tax benefits.
The following is a reconciliation of income taxes to the amount computed at the
statutory rate of 34% for the nine months ended September 30, 2003:
Nine months ended
September 30, 2003
------------------
Income taxes at expected statutory rate $ 17,601
Amount attributable to lower rates used
to calculate deferred income tax assets and
expected to apply when tax benefits are
realized, and state income taxes (13,599)
Non-deductible interest on debt discount
amortization 15,428
------
Income taxes applicable to income
before taxes $ 19,430
======
The net deferred tax asset arises principally from net operating loss
carryforwards, capitalization of software development costs (net of
accumulated amortization) for financial reporting purposes that have been
charged to expenses when incurred for income tax purposes, and use of the
cash basis for income tax purposes.
Management has recognized no valuation allowance for the net deferred tax asset
because it believes that it is more likely than not that future taxable income
will result in realization of such assets. This amount, however, could be
reduced in the near term if estimates of future taxable income during the net
operating loss carryforward period are reduced. The Company's net operating
loss carryforwards, of approximately $1.0 million, begin to expire in 2020.
NOTE 4 - EARNINGS (LOSS) PER SHARE
The reconciliation of the numerators and denominators of the basic and diluted
earnings per share calculations for the nine months ended September 30, 2003
follows:
F-7
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Nine months ended
September 30, 2003
----------------------------------
Basic Earnings Per Share:
Net income available to common
shareholders 32,339 5,661,002 0.01
Effect of dilutive securities:
Warrants attached to convertible
subordinated notes - 84,795 0.00
Diluted earnings per share:
Net income available to common
shareholders plus assumed
exercise of warrants 32,339 5,745,797 0.01
The beneficial conversion features of the Company's convertible subordinated
notes are excluded from the calculation of diluted earnings per share because
the effects are antidilutive.
In the nine months ended September 30, 2002 the numerator and the denominator
used in the calculation of diluted earnings (loss) per share are the same as
those used in the calculation of basic earnings (loss) per share. This occurs
because the exercise prices of the warrants attached to the Company's
Convertible Subordinated Notes and the exercise price of warrants to purchase
20,000 shares issued in 2001 in exchange for services are greater than the
average market price of the Company's shares during the period, and the
beneficial conversion features of the Company's Convertible Subordinated Notes
are antidilutive.
NOTE 5 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board in January 2003 issued FASB
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities.
The objective of this interpretation is to provide guidance on how to identify
a variable interest entity (VIE) and determine when the assets, liabilities,
noncontrolling interests, and results of operations of a VIE need to be
included in a company's consolidated financial statements. A company that
holds variable interests in an entity will need to consolidate the entity if
the company's interest in the VIE is such that the company will absorb a
majority of the VIEs expected losses and/or receive a majority of the entity's
expected residual returns, if they occur. FIN 46 also requires additional
disclosures by primary beneficiaries and other significant variable interest
holders. FIN 46 is applicable immediately for variable interest entities
created after January 31, 2003. For variable interest entities created prior
F-8
to January 31, 2003, the provisions of FIN 46 are applicable to public
companies no later than the first interim period ending after December 15,
2003. The Company has no such variable interest entities covered by the
provisions of FIN 46. As a result, FIN 46 has no effect on the Company's
financial position or results of operations.
The Financial Accounting Standards Board in April 2003 issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
This statement amends and clarifies financial accounting and reporting for
derivative instruments and for hedging activities under FASB Statement No. 133.
This statement clarifies under what circumstances a contract with an initial
net investment meets the characteristic of a derivative, clarifies when a
derivative contains a financing component, amends the definition of an
underlying instrument relative to Guarantees, and amends certain other existing
pronouncements so as to result in more consistent reporting of contracts as
either derivatives or hybrid instruments. The statement is effective,
generally, for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The Company has had no
transactions that are covered by the provisions of SFAS No. 149. As a result,
SFAS No. 149 has no effect on the Company's financial position or results of
operations.
The Financial Accounting Standards Board in May 2003 issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of
Liabilities and Equity." This statement requires that an issuer classify
certain defined financial instruments as liabilities, many of which were
previously classified as equity or between the liabilities section and the
equity section of the statement of financial position. This statement requires
classification as liabilities any financial instruments that are issued in the
form of shares that are mandatorily redeemable; that embody an obligation to
repurchase the issuer's equity shares; that embody an obligation that issuer
must or may settle by issuing a variable number of its equity shares if at
inception the monetary value of the obligation is based on either a fixed
monetary amount, variations in something other than the fair value of the
issuer's equity shares, or variations inversely related to changes in the fair
value of the issuer's equity shares. The statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. It is to be implemented by reporting the cumulative effect of a change
in an accounting principle for financial instruments created before the
issuance date of this Statement and still existing at the beginning of the
interim period of adoption. The Company has had no transactions that are
covered by the provisions of SFAS No. 150. As a result, SFAS No. 150 has no
effect on the Company's financial position or results of operations.
ADVANT-E CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
ASSETS
F-9
CURRENT ASSETS
Cash and cash equivalents $ 98,740
Accounts receivable, net 157,655
Prepaid expenses 46,817
Deferred income taxes 40,600
-------
Total current assets 343,812
-------
SOFTWARE DEVELOPMENT COSTS, net of
accumulated amortization of $294,767 634,956
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $103,460
171,589
OTHER ASSETS
Deferred income taxes 79,046
Deposits 6,583
------
85,629
---------
Total assets $ 1,235,986
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 158,320
Accrued expenses 167,625
Deferred revenue 93,893
Bank notes payable 14,097
Convertible subordinated notes
payable, net 729,621
8% demand notes payable to shareholder 45,000
---------
Total current liabilities 1,208,556
---------
LONG-TERM LIABILITIES
Bank notes payable, less current
maturities 4,797
---------
Total liabilities 1,213,353
---------
SHAREHOLDERS' EQUITY
Common stock, $.001 par value; 20,000,000
shares authorized; 5,661,002 issued and
outstanding 5,661
Paid-in capital 850,459
Retained earnings deficit (833,487)
-------
Total shareholders' equity 22,633
-------
Total liabilities and shareholders'
equity $ 1,235,986
=========
F-10
The accompanying notes are an integral part of the financial statements.
ADVANT-E CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
----------------------
2002 2001
---- ----
REVENUES
Internet products and services $ 1,728,996 839,074
Software and license fees 279,393 346,244
--------- ---------
Total revenues 2,008,389 1,185,318
--------- ---------
OPERATING EXPENSES
Production 132,433 61,468
Salaries and benefits 1,151,413 734,922
General and administrative 526,510 301,964
Compensation for investor relations services
in exchange for warrants - 4,800
Depreciation 36,081 29,164
Amortization of software development costs 184,289 104,253
Interest 311,463 127,958
--------- ---------
Total operating expenses 2,342,189 1,364,529
--------- ---------
LOSS BEFORE INCOME TAX BENEFIT (333,800) (179,211)
INCOME TAX BENEFIT ( 26,266) ( 17,582)
---------- ---------
NET LOSS $ (307,534) (161,629)
========= =========
LOSS PER SHARE
Basic and diluted $ (0.05) (0.03)
========= =========
AVERAGE SHARES OUTSTANDING
Basic and diluted 5,661,002 5,638,969
========= =========
The accompanying notes are an integral part of the financial statements.
F-11
ADVANT-E CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
common stock Retained
----------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
--------- ------ ------- -------- --------
Balance January 1, 2001 5,613,834 $ 5,613 461,357 (364,324) 102,646
Net loss (161,629) (161,629)
Issuance of common stock
for cash 47,168 48 49,950 49,998
Warrants issued
with 15% convertible
subordinated notes 70,276 70,276
Beneficial conversion
feature of 15% convertible
subordinated notes 176,904 176,904
Warrants issued with investor
relations services contract 4,800 4,800
--------- ----- ------- ------- -------
Balance December 31, 2001 5,661,002 5,661 763,287 (525,953) 242,995
Net loss (307,534) (307,534)
Warrants issued with 10%
convertible subordinated
notes 27,500 27,500
Beneficial conversion
feature of 10% convertible
subordinated notes 52,500 52,500
Beneficial conversion
feature of extension
of 15% convertible
subordinated notes 7,172 7,172
--------- ----- ------- -------- -------
Balance December 31, 2002 5,661,002 $ 5,661 850,459 (833,487) 22,633
========= ===== ======= ======= ======
The accompanying notes are an integral part of the financial statements.
F-12
ADVANT-E CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
-----------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (307,534) (161,629)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 36,081 29,164
Amortization of software development costs 184,289 104,253
Amortization of note discount resulting from
valuation of warrants and beneficial
conversion features 202,473 86,500
Compensation for investor relations services
in exchange for warrants - 4,800
Deferred income tax benefit (26,266) (17,582)
Increase (decrease) in cash arising from
changes in assets and liabilities:
Accounts receivable (73,426) (20,383)
Prepaid expenses 36,275 (76,939)
Accounts payable 61,370 3,372
Accrued expenses 111,738 32,149
Deferred revenue (20,404) (71,662)
Deposits (6,583) -
------- -------
Net cash provided by (used in)
operating activities 198,013 ( 87,957)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment (149,345) (33,978)
Software development costs (307,703) (348,437)
------- -------
Net cash used in investing activities (457,048) (382,415)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on Convertible Subordinated Notes 250,000 525,000
Payments on bank loans (72,904) (67,175)
Borrowings on bank loans - 41,771
Borrowings on notes payable to shareholder - 45,000
Proceeds from sale of common stock - 49,998
------- -------
Net cash provided by financing activities 177,096 594,594
------- -------
NET INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS (81,939) 124,222
Cash and cash equivalents, beginning of year 180,679 56,457
------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 98,740 180,679
======= =======
F-13
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ITEMS
Interest paid $ 14,620 17,802
Non-cash transactions
Fair value of warrants issued with Convertible
Subordinated Notes $ 27,500 70,276
Fair value of beneficial conversion privilege
of Convertible Subordinated Notes $ 59,672 176,904
Fair value of warrants issued in partial payment
for investor relations services $ - 4,800
The accompanying notes are an integral part of the financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 1 - BASIS OF PRESENTATION, ORGANIZATION AND OTHER MATTERS
Nature of Operations
Advent-E Corporation through its wholly-owned subsidiary, Edict Systems, Inc.
(collectively the Company), develops and markets electronic data interchange
and electronic commerce software products and services that enable its
customers to send and receive business documents electronically in standard and
proprietary formats. Customers consist of businesses across a number of
industries throughout the United States.
Principles of Consolidation
The consolidated financial statements include the accounts of Advant-e
Corporation and its wholly-owned subsidiary, Edict Systems, Inc. Intercompany
accounts and transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Significant estimates used in
preparing these financial statements include those considered in assessment of
recoverability of capitalized software development costs, those used in the
valuations of certain non-cash transactions including the issuance of common
shares of stock in exchange for specified services, the issuance of detachable
stock warrants, and the valuation of the beneficial conversion features in
connection with the Company's Convertible Subordinated Notes, and those used in
recording net deferred tax assets. It is at least reasonably possible that the
significant estimates used will change within the next year.
F-14
Cash Equivalents
The Company classifies as cash equivalents all highly liquid investments with
original maturities of three months or less.
Accounts Receivable and Credit Policies
Accounts receivable are uncollateralized customer obligations due under normal
trade terms generally requiring payment upon receipt of invoice or within
thirty days.
Accounts receivable are stated at the amount billed to the customer. Customer
account balances with invoices dated over 30 days old are considered
delinquent.
Payments of accounts receivable are allocated to the specific invoices
identified on the customer's remittance advice.
The carrying amount of accounts receivable is reduced by a valuation allowance
that reflects management's best estimate of the amounts that will not be
collected. Management considers account balances that are over 90 days old as
having a high probability of uncollectibility and generally includes those
amounts in the valuation allowance. In addition, management individually
reviews accounts receivable balances and, based on an assessment of current
creditworthiness, estimates the account balances that will not be collected and
includes those amounts, if any, in the valuation allowance.
The allowance for uncollectible accounts was $25,000 at December 31, 2002.
Software Development Costs
The Company accounts for the costs of computer software that it develops for
internal use, costs associated with operation of its web sites, in accordance
with the American Institute of Certified Public Accountants Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" and Emerging Issues Task Force ("EITF") No. 00-2
"Accounting for Web Site Development Costs". Such capitalized costs represent
solely the salaries and benefits of employees working on the graphics and
content development stages, or adding functionality or features. Under SOP
98-1 and EITF No. 00-2, overhead, general and administrative and training costs
are not capitalized. The Company accounts for the costs of computer software
that it sells, leases and markets as a separate product in accordance with
Financial Accounting Standards Board Statement No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed".
Capitalized costs are amortized by the straight-line method over the remaining
estimated economic lives of the software application, generally three years,
and are reported at the lower of unamortized cost or net realizable value.
Property and Equipment
Property and equipment are carried at cost. Costs of normal maintenance and
repairs are charged to expense as incurred. Impairment of asset value is
considered whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Depreciation is provided
F-15
using accelerated methods for financial reporting purposes at rates based on
useful lives of five to seven years.
Debt Discount and Amortization
Debt discount recognized in connection with equity instruments issued with
debt (beneficial conversion features and detachable warrants) is amortized to
interest expense over the life of the underlying debt as an estimate of the
cost of the financing event. The unamortized discount is shown as a reduction
of the debt instrument on the balance sheet. Amortization of debt discount
amounted to $202,473 in 2002 and $86,500 in 2001.
Revenue Recognition
The Company recognizes revenues in accordance with the Securities Exchange
Commission Staff Accounting Bulletin 101 (SAB 101), which requires the Company
to recognize revenue when, in addition to other criteria, delivery has
occurred or services have been rendered.
Revenues from software product sales are recognized when the product is
shipped. Ongoing software license fees are recognized ratably over the
license period, generally twelve months.
Revenues from Internet-based products and services (GroceryEC, MfgEC,
EnterpriseEC, etc) is comprised of three components - account activation and
trading partner set up fees, monthly subscription fees, and usage based
transactional fees.
Revenues earned from account activation and trading partner set up fees are
recognized after the Company performs consultative work required in order to
establish an electronic trading partnership between the customer and their
desired trading partners. Trading partnerships, once established, require no
ongoing effort on the part of the Company and customers are able to utilize
the electronic trading partnerships either directly with their customers or
via a service provider other than the Company.
Revenues earned from monthly subscriptions are recognized after the monthly
subscription has elapsed.
Usage based transactional fees are recognized upon completion of processing
those transactions.
Deferred Income Taxes
Deferred income taxes are provided to recognize future tax benefits of net
operating loss carry forwards, to the extent realization of such benefits is
more likely than not. Deferred income taxes are also provided for temporary
differences in recognition of assets and liabilities for financial statements
and for income tax purposes.
Advertising
All advertising costs are expensed as incurred. Advertising was $8,100 in
2002 and $6,258 in 2001.
F-16
Segment Reporting
Financial Accounting Standards Board Statement No. 131, "Disclosure about
Segments of an Enterprise and Related Information" established standards for
the reporting and disclosure of information about operating segments for
public businesses. The Company's business is comprised of one segment--the
development and sale of electronic data interchange and electronic commerce
software products.
NOTE 2 - OPERATIONS AND MANAGEMENT'S INTENT
The Company has incurred substantial operating losses to date. During 2002, the
Company generated positive cash flow from operations. Management believes that
current cash and cash equivalents and cash that may be generated from
operations in 2003 will be sufficient to meet the anticipated capital
expenditures requirements, cash interest requirements, and repayment of certain
of its subordinated notes maturing in 2003. Such projections are based on
continued growth from current customers and customers which are already under
contract utilizing the revenue rates that the Company has historically
experienced with current customers, as well as revenue growth from its recently
introduced EnterpriseEC product. The projections also include anticipated cash
requirements to provide continuing customer support, installation, sales and
marketing, and general overhead.
To attain these projections, the Company anticipates the need to maintain
existing capital levels. The Company is currently negotiating with certain
holders of its subordinated notes to obtain extensions of the due dates of the
notes, which are primarily due in the third and fourth quarters of 2003.
Management believes these notes will be extended prior to the existing maturity
dates. If such extensions are not obtained, the Company may be forced to raise
additional capital from new source borrowings, issue new shares, or reduce
current overhead. Any projections of future cash needs and cash flows are
subject to substantial uncertainty.
NOTE 3 - SOFTWARE DEVELOPMENT COSTS
Software development costs at December 31, 2002 the changes during the year
then ended are summarized as follows:
Accumulated
Cost Amortization Net
--------- ------------ ---------
Balance, January 1, 2002 783,174 271,632 511,542
Additions 307,703 307,703
Amortization expense 184,289 (184,289)
Costs of fully-amortized
software products (161,154) (161,154) -
------- ------- -------
Balance, December 31, 2002 $ 929,723 294,767 634,956
======= ======= =======
F-17
The unamortized costs at December 31, 2002 relate exclusively to internal use
software and costs associated with the web site development and related
enhancements.
The ongoing assessment of recoverability of capitalized software development
costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future revenues,
estimated economic life and changes in software and hardware technologies.
Impairment of asset value is considered whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
NOTE 4 - BANK NOTE PAYABLE
The Company has a commercial bank note payable that accrues interest at 5.54%
per year. Outstanding borrowings under this agreement were $18,893 at December
31, 2002. The loan is payable in monthly installments of $1,220 (principal and
interest) to April 23, 3004. The loan is collateralized by substantially all
the Company's assets, and is guaranteed by the Company's majority shareholder.
Principal payments for the next two years are $14,097 in 2003 and $4,797 in
2004.
NOTE 5 - NOTES PAYABLE TO SHAREHOLDER
The Company received $45,000 in 2001 from its President and majority
shareholder in exchange for 8% unsecured notes, payable on demand.
NOTE 6 - CONVERTIBLE SUBORDINATED NOTES PAYABLE
Convertible subordinated notes payable consist of the following at December 31,
2002:
15% Convertible Subordinated Notes that
mature on various dates through December
17, 2003 $ 525,000
Less: unamortized discount attributable
to estimated fair value of
detachable warrants and beneficial
conversion feature 5,379
-------
519,621
-------
10% Convertible Subordinated Notes issued July
9, 2002 that mature on September 27, 2003 250,000
Less: unamortized discount attributable
to estimated fair value of
detachable warrants and beneficial
conversion feature 40,000
-------
F-18
210,000
-------
$ 729,621
=======
The 15% Convertible Subordinated Notes as originally issued matured one year
from date of issuance (various dates in 2001); however, the maturity dates of
the notes were extended by one additional year to two years from the date of
the notes. These notes are subordinated to all senior debt of the Company
outstanding at the dates of issuance and any additional senior debt incurred
through the maturity dates. The holders of these notes, at the maturity
dates, have the right to convert the entire amount of the notes, including any
accrued interest, to the Company's common stock at $1.06 per common share.
The holders of the notes have warrants valid for three years from the date the
note was issued (later extended to four years) to purchase a total of 675,000
shares of the Company's common stock at a price of $1.205 per common share.
The Company used the Black-Scholes pricing model to estimate the fair value of
the warrants at the date of issuance at $70,276. The Company estimated the
value of the beneficial conversion privilege of the notes at $176,904 using
the intrinsic value method in accordance with the provisions of EITF 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios" and EITF 00-27 "Application of EITF
No. 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, to Certain Convertible
Instruments." The Company estimated the incremental value of the one-year
extension of the notes at $7,172. The fair value of the warrants at the date
of issuance and the value of the beneficial conversion privilege were amortized
to interest expense over the 12-month initial term of the notes beginning in
the fourth quarter 2001 and ending in the third quarter of 2002. The amounts
amortized as interest expense in 2002 totaled $162,473 and in 2001 totaled
$86,500.
On July 9, 2002 the Company received $250,000, pursuant to a Note Purchase
Agreement of the same date with three individuals and three other entities, in
exchange for the issuance of a total of $250,000 of Convertible Subordinated
Notes that accrue interest at a stated rate of 10% per year and that mature on
September 27, 2003. The notes are convertible at the maturity date, in the
amount of the note plus accrued interest, to the Company's common stock at
$1.10 per common share. The notes are subordinated to all current Senior Debt
of the Company and any future Senior Debt up to an amount not to exceed
$200,000. The notes are personally guaranteed by the Company's president, who
is also not permitted to sell, transfer or encumber any of the Company's
common shares that he owns without the prior written consent of each of two
specified representatives of the note holders. The holders of the notes have
warrants until September 27, 2005 to purchase a total of 250,000 shares of the
Company's common stock at a price of $1.25 per common share. The Company
used the Black-Scholes pricing model to estimate the fair value of the
warrants at the date of issuance at $27,500. The Company estimated the value
of the beneficial conversion privilege of the notes at $52,500 using the
intrinsic value method in accordance with the provisions of EITF 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios" and EITF 00-27 "Application of EITF
No. 98-5, Accounting for Convertible Securities with Beneficial Conversion
F-19
Features or Contingently Adjustable Conversion Ratios, to Certain Convertible
Instruments." The fair value of the warrants at the date of issuance and the
value of the beneficial conversion privilege are being amortized to interest
expense over the term of the notes beginning in the third quarter of 2002 and
ending in the second quarter of 2003. The amounts amortized as interest
expense in 2002 totaled $40,000.
NOTE 7 - PROFIT SHARING PLAN
The Company has a 401(k) pension plan covering employees who choose to
participate in the Plan. Company contributions are discretionary. The Company
made no contributions to the plan in 2002 and 2001.
NOTE 8 - INCOME TAX BENEFIT
Income tax benefits for 2002 and 2001 consist solely of deferred tax benefits.
The following is a reconciliation of the income tax benefit for federal income
tax to the amount computed at the statutory rate of 34%:
2002 2001
---- ----
Tax benefit at expected statutory rate $ 113,492 60,931
Amount attributable to lower graduated rates expected
to apply when tax benefits are expected to be
realized, and state income taxes (18,386) (12,307)
Non-deductible interest on debt discount amortization (68,840) (31,042)
------ ------
Federal income tax benefit applicable to loss before
income tax $ 26,266 17,582
====== ======
Net deferred taxes consisted of the following at December 31, 2002:
Deferred tax assets:
Net operating loss carryforward $ 226,705
Accounts payable and accrued expenses 41,888
Allowance for uncollectible accounts 5,000
Deferred revenue from license fees 18,779
-------
Total deferred tax assets 292,372
-------
Deferred tax liabilities:
Capitalized software costs, net (126,991)
Accounts receivable ( 36,371)
Prepaid expenses ( 9,364)
-------
Total deferred tax liabilities (172,726)
-------
F-20
Net deferred tax asset $ 119,646
=======
The net deferred tax asset arises principally from net operating loss
carryforwards, capitalization of software development costs (net of
accumulated amortization) for financial reporting purposes that have been
charged to expenses when incurred for income tax purposes, and use of the
cash basis for income tax purposes.
Management has recognized no valuation allowance for the net deferred tax asset
because it believes that it is more likely than not that future taxable income
will result in realization of such assets. This amount, however, could be
reduced in the near term if estimates of future taxable income during the net
operating loss carryforward period are reduced. The Company's net operating
loss carryforwards, of approximately $1,103,960, begin to expire in 2020.
NOTE 9 - EARNINGS (LOSS) PER SHARE
The reconciliation of the numerators and denominators of the basic and diluted
earnings (loss) per share calculations for the years ended December 31, 2002
and 2001 follows:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Year ended December 31, 2002
--------------------------------
Net loss $(307,534)
Basic Earnings (Loss) Per Share:
Loss available to common
shareholders (307,534) 5,661,002 (0.05)
Effect of dilutive securities:
Detachable warrants and beneficial
conversion feature of Convertible
Subordinated Notes are
anti-dilutive - - -
Diluted loss per share:
Loss available to common
shareholders plus assumed
conversion (307,534) 5,661,002 (0.05)
Year Ended December 31, 2001
------------------------------
Net loss (161,629)
F-21
Basic Earnings (Loss) Per Share:
Loss available to common
shareholders (161,629) 5,638,969 (0.03)
Effect of dilutive securities:
Detachable warrants and beneficial
conversion feature of Convertible
Subordinated Notes are
anti-dilutive - - -
Diluted loss per share:
Loss available to common
shareholders plus assumed
conversion $(161,629) 5,638,969 (0.03)
Warrants to purchase 20,000 shares of the Company's common stock at $1.48 per
share were outstanding at December 31, 2002 and 2001 but were not included in
the computation of diluted earnings per share because the warrants' exercise
price was greater than the average market price of the common shares during
the periods the warrants were outstanding. The warrants are exercisable during
the period from June 25, 2002 to June 25, 2006. No warrants have been
exercised.
NOTE 10 - CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of deposits in banks, which occasionally
exceed federally insured limits, and trade accounts receivable. The Company
manages the risk regarding deposits in banks by using high quality financial
institutions. Credit risk with respect to trade accounts receivable is
limited due to the large number of primarily domestic customers who are
geographically dispersed.
NOTE 11 - RESTATEMENT OF 2001 FINANCIAL STATEMENTS
The consolidated balance sheet at December 31, 2001 and the consolidated
statements of operations, cash flows, and shareholders' equity for the year
then ended reflect the restatements of non-cash charges for the valuation of
shares of the Company's common stock issued in exchange for services in 2000,
the valuation of warrants and beneficial conversion features related to the
Company's Convertible Subordinated Notes issued in 2001, and the valuation of
warrants issued in exchange for services in 2001.
The amounts and additional description of these restatements are detailed in
Note 2 to the Financial Statements included in Form 10-KSB/A (amended Form 10-
KSB) for the fiscal year ended December 30, 2001 previously filed with the
Securities and Exchange Commission on January 13, 2003.
NOTE 12 - OPERATING LEASES
The Company is obligated under operating leases for computer software through
April 2004, for computers and office equipment through May 2005, and for
F-22
office space through September 2005. In addition, the Company leases storage
space monthly from its President under terms of lease that can be terminated
on a date that is mutually agreeable to the President and the Company. Lease
expense was $177,136 in 2002 and $93,965 in 2001, including $36,000 in both
2002 and 2001 to the Company's President.
Minimum annual lease payments under these lease agreements for the next five
years are as follows:
2003 $ 163,785
2004 115,190
2005 74,216
2006 -
2007 -
-------
Total $ 353,191
=======
The minimum monthly software lease payments could be increased if the Company
increases utilization of this software in its operations above levels
prescribed in the agreement. The Company has the option to renew the
agreement for an additional 12 months to April 2005 at the same rate.
The Company has options to purchase the leased computer and office equipment
for its fair market value at the expiration of the lease periods.
The office space lease is for 12,000 square feet and has two consecutive
three-year renewal options at rates that cannot increase by more than 5% per
year. Lease payments include substantially all maintenance and repairs, real
estate taxes and utilities.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Advant-e Corporation and Subsidiary
Dayton, Ohio
We have audited the accompanying consolidated balance sheet of Advant-e
Corporation and Subsidiary as of December 31, 2002, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with U.S. 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
F-23
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Advant-e
Corporation and Subsidiary as of December 31, 2002, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with U.S. generally accepted accounting principles.
J.D. Cloud & Co. L.L.P
Certified Public Accountants
Cincinnati, Ohio
March 10, 2003
INDEPENDENT AUDITORS' REPORT
Advant-e Corporation and Subsidiary
Dayton, Ohio
We have audited the accompanying consolidated balance sheet of Advant-e
Corporation and Subsidiary as of December 31, 2001 (not presented herein) and
the accompanying related consolidated statements of operations, shareholders'
equity and cash flows for year then ended. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Advant-e
Corporation and Subsidiary as of December 31, 2001 and the consolidated results
of operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 11 to the consolidated financial statements, the
accompanying consolidated financial statements have been restated.
BATTELLE & BATTELLE LLP
March 14, 2002, except for Note 11, as to which the date is December 23, 2002
F-24
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On February 10, 2003, the Board of Directors of Advant-e Corporation engaged
the firm of J.D. Cloud & Company, LLP ("Cloud") as the Company's independent
auditors, replacing the firm of Battelle & Battelle, LLP ("Battelle"), which
was dismissed by the Board of Directors.
Battelle's report on the Company's financial statements for each of the two
most recent audited fiscal years ended December 31, 2000 and December 31, 2001,
did not contain an adverse opinion or a disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company's two most recent audited fiscal years and the subsequent
interim periods preceding the decision to change independent accountants, the
Company had no disagreements with Battelle on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved to the satisfaction of Battelle, would have
caused Battelle to make reference to the subject matter of the disagreement in
connection with its report on the Company's financial statements. Moreover,
there were no reportable events, as described in Item 304(a)(1)(v) of
Regulation S-K.
The Company provided Battelle with a copy of the foregoing disclosures. A copy
of Battelle's letter to the Securities and Exchange Commission dated February
13, 2003 stating Battelle's agreement with such disclosures, was filed with
Form 8-K filed by the Company on February 13, 2003.
During the Company's two most recent fiscal years and the subsequent interim
periods preceding the decision to engage Cloud as its independent auditors,
neither the Company, nor anyone acting on behalf of the Company, consulted
Cloud regarding the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements, or any reportable
event (as described in Item 304(a)(1)(v)) of Regulation S-K).
PART II-INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's certificate of incorporation and bylaws contain provisions
indemnifying the directors and executive officers against liabilities. In the
certificate of incorporation, the Company has eliminated the personal
liability of the directors and executive officers to the Company and its
shareholders for monetary damages for breach of their fiduciary duty,
including acts constituting gross negligence. However, in accordance with
Delaware law, a director will not be indemnified for a breach of its duty of
loyalty, acts or omissions not in good faith or involving intentional
misconduct or a knowing violation or any transaction from which the director
derived improper personal benefit.
In addition, the bylaws further provide that the Company may advance to the
directors and officers expenses incurred in connection with proceedings
against them for which they are entitled to indemnification. The Company has
52
also agreed to indemnify, defend, and hold harmless each of the officers and
directors to the fullest extent permissible by law with regard to any and all
loss, expense or liability, including payment and advancement of reasonable
attorney's fees, arising out of or relating to claims of any kind, whether
actual or threatened, relating in any way to their service to us. The Company
plans to memorialize these provisions in written agreements.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are estimated expenses of issuance and distribution. The Company
will pay all these expenses.
Securities and Exchange Commission filing fee $ 1,000
National Association of Securities Dealers, Inc filing fee 1,000
Printing costs 2,000
Blue Sky fees and expenses 2,000
Legal fees and expenses 5,000
Accounting fees and expenses 2,000
Miscellaneous 3,000
-------
Total $16,000
=======
RECENT SALES OF UNREGISTERED SECURITIES
On April 10, 2000, the Company entered into a stock purchase agreement with
Halter Financial Group ("HFG") and Art Beroff ("Beroff"). This Stock Purchase
Agreement was a requirement by Edict to complete the merger with Twilight.
Under the terms of the Stock Purchase Agreement, HFG and Beroff, or their
designees, purchased 282,829 shares of common stock at approximately $1.06 per
share for a total purchase price of $299,821. At the time of execution of the
Stock Purchase Agreement, shares of common stock were trading at approximately
$1.06 per share. This offering was made pursuant to Section 4(2) of the
Securities Act.
The following table sets forth securities sold by the Company in the last three
years that have not been registered under the Securities Act and were offered
and sold to the persons listed below pursuant to Rule 506. Such securities
were sold pursuant to a Stock Purchase Agreement with HFG and Beroff as a
requirement of the Merger. No fees were paid to an underwriter. The
securities sold are subject to a Registration Rights Agreement among Twilight,
HFG and Beroff whereby the holders of at least twenty-five percent of the
shares may file a written request with the Company to register the sale of all
or part of the securities. The following listed shares, however, are NOT being
registered pursuant to this registration statement.
Date of Class of Amount of Cost of
Sale Stock Securities Shares Name
------- -------- ---------- -------- ----
12/28/00 Common 47,166 $50,000.00 Charles S. Biehn, Jr.
53
6/13/01 Common 11,792 $12,499.52 Carole Beroff,
custodian for
Ilana Beroff UGMA
6/13/01 Common 11,792 $12,499.52 Carole Beroff,
custodian for
David Beroff UGMA
6/29/01 Common 11,792 $12,499.52 Carole Beroff,
custodian for
Ilana Beroff UGMA
6/29/01 Common 11,792 $12,499.52 Carole Beroff,
custodian for
David Beroff UGMA
The following is a description of the unregistered securities that are
convertible or exchangeable into equity securities, or are warrants
representing equity securities, including the terms of conversion or exercise
of the securities.
On March 24, 2001, the Company authorized the issuance of $200,000 and on
September 27, 2001 authorized the issuance of an additional $325,000 of 15%
Convertible Subordinated Notes that are convertible at maturity in the
principal amount plus any accrued interest into the Company's common stock at a
price of $1.06 per common share. All the note holders except one were granted
a warrant to acquire common shares of the Company, at a price of $1.205 per
common share, determined by multiplying the principal amount of each
convertible subordinated note by 1.5. The Company anticipates that it will
issue a warrant to this one note holder at some future date. This offering was
made to a limited group of investors pursuant to Rule 506 and Section 4(2) of
the Securities Act. No fees were paid to an underwriter.
On March 24, 2001, the Company received $50,000 from an individual in exchange
for a Convertible Subordinated Note. At maturity, assuming the note holder
elects to convert the note, the Company will issue 69,457 shares of the
Company's common stock. This note matured originally on March 19, 2002; the
note holder verbally extended the maturity date twice, first to March 19, 2003
and then to March 19, 2004.
On September 27, 2001, the Company received $250,000 from an investment fund
in exchange for a Convertible Subordinated Note. Effective November 14, 2003
the note holder converted the note into 235,849 shares of the Company's common
stock. The note holder received a warrant granting the holder the right to
acquire 375,000 shares of the Company's common stock at a price of $1.205 per
share until September 27, 2005. The majority shareholder has personally
guaranteed this note.
On October 7, 2001, the Company received $75,000 from an individual in exchange
for a Convertible Subordinated Note. At maturity, assuming the note holder
elects to convert the note, the Company expects to issue 73,349 shares of the
54
Company's common stock. The note holder received a warrant granting the holder
the right to acquire 112,500 shares of the Company's common stock at a price of
$1.205 per share until October 7, 2005. The majority shareholder has
personally guaranteed this note. This note matured originally on October 7,
2002; the note holder verbally extended the maturity date twice, first to
October 7, 2003 and then to January 5, 2004.
On September 25, 2001, the Company received $30,000 from a financial services
company for a Convertible Subordinated Note that matures on January 5, 2004.
If the note holder fully converts the note at maturity, the Company will issue
29,481 shares of the Company's common stock. The note holder received a
warrant granting the holder the right to acquire 45,000 shares of the Company's
common stock at a price of $1.205 per share until September 25, 2005. The
majority shareholder has personally guaranteed this note.
On December 13, 2001, the Company received $95,000 from an individual for a
Convertible Subordinated Note. At maturity, assuming the note holder elects to
convert the note, the Company will issue 90,444 shares of the Company's common
stock. The note holder received a warrant granting the holder the right to
acquire 142,500 shares of the Company's common stock at a price of $1.205 per
share until December 13, 2005. The majority shareholder has personally
guaranteed this note. This note matures on December 31, 2003.
On July 9, 2002 the Company authorized the issuance of, and on the same date
issued in exchange for cash, $250,000 of 10% Convertible Subordinated Notes
that mature on January 5, 2004, and are convertible in the principal amount
plus any accrued interest to the Company's common stock at a price of $1.10 per
common share. The holders of the notes are each granted a warrant to acquire
common shares of the Company, at a price of $1.25 per common share, determined
by multiplying the principal amount of each Convertible Subordinated Note by
1.0. Such warrants have an expiration date of September 27, 2005. This
offering was made to a limited group of investors pursuant to Rule 506 and
Section 4(2) of the Securities Act. No fees were paid to an underwriter.
The Company received the total of $250,000 from three individuals (in amounts
of $50,000, $25,000, and $50,000 respectively) and three limited partnerships
(in the amounts of $50,000, $25,000, and $50,000 respectively). At maturity,
assuming the note holders elect to convert the notes, the Company will issue
233,459 shares of the Company's common stock. The note holders received
warrants granting the holders the right to acquire 250,000 shares of the
Company's common stock at a price of $1.25 per share until December 13, 2005.
EXHIBITS
(a) Index to Exhibits
Exhibit Method
Number Description of Filing
------- ----------- ---------
1 Underwriting agreement N/A
2 Agreement and Plan of Merger, dated as of April 10,
2000, among Edict Systems, Inc., Twilight Productions, Previously
and Twilight Acquisitions Sub, Inc. filed (I)
55
3(a)(i) Amended Certificate of Incorporation Previously
filed (A)
3(a)(ii) By-laws Previously
filed (B)
4(i) Instruments defining the rights of security Previously
holders including indentures filed (A)
4(ii) Convertible Subordinated Note Previously
filed (C)
4(iii) Convertible Subordinated Note with warrant to
purchase common shares issued on September Previously
27, 2001 filed (E)
4(iv) 10% Convertible Subordinated Notes with
warrant to purchase common shares Previously
filed (H)
5 Opinion re: legality Filed
herewith
8 Opinion: tax matters N/A
9 Voting trust agreement N/A
10.1 Lease Agreement, dated as of January 1, 2000, Previously
between Jason K. Wadzinski and Edict Systems, Inc. filed (B)
10.2 Stock Purchase Agreement, dated April 10, 2000, Previously
among Twilight Productions, Ltd., Halter Financial filed (B)
Group, Inc. and Art Howard Beroff
10.3 Software Term License Agreement, including Previously
Amendment No. 1, dated as of April 18, 2001 filed (D)
between Cyclone Commerce, Inc. and Edict Systems
Inc.
10.4 Lease, dated as of July 30, 2002, between Fritz J. Previously
Russ and Dolores H. Russ and Edict Systems, Inc. filed (F)
11 (i) Statement re: computation of per share earnings Filed
for the quarterly period ended September 30, 2003 herewith
11 (ii) Statement re: computation of per share earnings Filed
for the years ended December 31, 2002 and 2001 herewith
13 (i) Form 10-KSB for the fiscal year ended Previously
December 31, 2002 filed (F)
13 (ii) Form 10-QSB for the quarterly period ended Previously
September 30, 2003 filed (J)
56
15 Letter on unaudited interim financial information N/A
16 Letter on change in certifying accountant Previously
filed (G)
21 Subsidiaries of the registrant Previously
filed (B)
23 (i) Consent of J.D. Cloud & Co. L.L.P. Filed
herewith
23 (ii) Consent of Battelle & Battelle LLP Filed
herewith
24 Power of attorney N/A
25 Statement of eligibility of trustee N/A
99 Additional Exhibits N/A
(A) Filed with Amendment No. 2 to Form 10-SB filed as of October 13, 2000
(B) Filed with Amendment No. 1 to Form 10-SB filed as of July 17, 2000
(C) Filed with Amendment No. 1 to Form 10-QSB for the quarter ended
March 31, 2001 filed as of January 13, 2003
(D) Filed with Amendment No. 1 to Form 10-QSB for the quarter ended
June 30, 2001 filed as of January 13, 2003
(E) Filed with Amendment No. 1 to Form 10-QSB for the quarter ended
September 30, 2001 filed as of January 13, 2003
(F) Filed with Form 10-KSB for the fiscal year ended December 31, 2002
as of March 31, 2003
(G) Filed with form 8-K on February 13, 2003.
(H) Filed with Form 10-QSB for the quarterly period ended September 30, 2002
as of December 16, 2002
(I) Filed with Form 10-SB12G as of July 11, 2000
(J) Filed with Form 10-QSB for the quarterly period ended September 30, 2003
as of November 12, 2003
UNDERTAKINGS
The undersigned Registrant undertakes:
1. To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: a. Include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; b.
Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; c. Include any additional or changed material
information on the plan of distribution.
2. That, or determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities that time to be the initial bona
fide offering.
3. To file a post-effective amendment to remove from the registration any of
the securities that remain unsold at the end of the offering.
57
4. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
5. In the event that a claim for indemnification against such liabilities,
other than the payment by the Registrant of expenses incurred and paid by a
director, officer of controlling person of the Registrant in the successful
defense of any action, suit or proceeding, is asserted by such director,
officer or controlling person in connection with the securities being
registered by this registration statement, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will go governed by the final adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Dayton,
State of Ohio on December 1, 2003.
Advant-e Corporation
------------------------------
Registrant
By: /s/ Jason K. Wadzinski
-----------------------------------------
Jason K. Wadzinski
Chief Executive Officer
December 1, 2003
By: /s/ John F. Sheffs
------------------------------------------
John F. Sheffs
Treasurer
December 1, 2003
EXHIBITS
EXHIBIT 11 (i) - STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Per share earnings are computed and displayed on the Consolidated Statement of
Operations for the nine months ended September 30, 2003 and
2002 and included in this Registration Statement.
58
Average shares used in the computation of per share earnings for the Statement
of Operations presentations include the following shares issued for basic and
diluted per share earnings:
Date and Description # shares
--------------------- ------------------
Nine Months Ended
September 30,
2003 2002
---- ----
Basic:
Outstanding at beginning
of period 5,661,002 5,661,002
Diluted:
Warrants attached to convertible
subordinated notes 84,795 -
Warrants issued for services - -
--------- ---------
5,745,797 5,661,002
========= =========
In the nine month ended September 30, 2002 the numerator and the denominator
used in the calculation of diluted earnings (loss) per share are the same as
those used in the calculation of basic earnings (loss) per share. This occurs
because the exercise prices of the warrants attached to the Company's
Convertible Subordinated Notes and the exercise price of warrants to purchase
20,000 shares issued in 2001 in exchange for services are greater than the
average market price of the Company's shares during both periods, and the
beneficial conversion features of the Company's Convertible Subordinated Notes
are anti-dilutive.
If the 15% Convertible Subordinated Notes convertible into common shares at
$1.06 per share that are outstanding at September 30, 2003 are converted at
maturity, there would be 540,814 outstanding and weighted average common
shares included in the calculation of diluted earnings per share for the nine
months ended September 30, 2003.
If the 10% Convertible Subordinated Notes convertible into common shares at
$1.10 per share that are outstanding at September 30, 2003 are converted at
maturity, there would be 227,462 outstanding and weighted average common shares
included in the calculation of diluted earnings per share for the nine months
ended September 30, 2003.
59
If the 15% and the 10% notes are converted at maturity, there would be 909,937
additional outstanding common shares at September 30, 2002, and 732,517
additional weighted average common shares for the nine months ended September
30, 2002.
Warrants to purchase 20,000 shares of the Company's common stock at $1.48 per
share were outstanding during the nine months ended September 30, 2003 and
2002. They were not included in the computation of diluted EPS in the periods
because the warrants' exercise price was greater than the average market price
of the common shares during the period the warrants were outstanding. The
warrants are exercisable during the period from June 25, 2002 to June 25, 2006.
EXHIBIT 11 (ii) - STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Per share earnings are computed and displayed on the Consolidated Statement of
Operations for the years ended December 31, 2002 and 2001 included in this
Registration Statement
Average shares used in the computation of per share earnings for the Statement
of Operations presentations include the following shares issued for basic and
diluted per share earnings:
Date and Description # shares
--------------------- ----------------------
Year Ended
December 31,
2002 2001
---- ----
Basic:
Outstanding at January 1 5,661,002 5,613,834
June 12, 2001 Issuance of 23,584 common shares
pursuant to stock purchase agreement 13,117
June 29, 2001 Issuance of 23,584 common shares
pursuant to stock purchase agreement 12,018
March 24, 2001 Issuance of 15% $50,000 Convertible
Subordinated Note - -
June 26, 2001, Issuance of 15% $25,000 Convertible
Subordinated Notes - -
June 26, 2001 Issuance of warrant to purchase 20,000
common shares
Sept. 27, 2001 Issuance of 15% $250,000
Convertible Subordinated Note - -
Sep. 27, 2001 Issuance of warrant to purchase 375,000
common shares
Oct. 7, 2001 Issuance of 15% $75,000 Convertible
Subordinated Note - -
60
Oct. 7, 2001 Issuance of warrant to purchase 112,500
common shares
Nov. 27, 2001 Issuance of 15% $30,000 convertible
Subordinated note - -
Nov. 27, 2001 Issuance of warrant to purchase 45,000
common shares
Dec. 17, 2001 Issuance of 15% $95,000 convertible
Subordinated note - -
Dec. 17, 2001 Issuance of warrant to purchase 142,500
common shares
July 9, 2002 Issuance of 10% $250,000 convertible
Subordinated notes - -
July 9, 2002 Issuance of warrants to purchase 250,000
Common shares
--------- ---------
5,661,002 5,638,969
========= =========
The calculation of both basic and diluted loss per share for 2002 and 2001 are
the same because the Company's Convertible Subordinated Notes are anti-dilutive
and the Company's outstanding warrants for the purchase of additional shares of
the Company's common shares resulted in no change to the numerator or
denominator since the exercise price was above the average market price of the
Company's common stock in 2001 and assumed exercise in 2002 is anti-dilutive.
If the 15% Convertible Subordinated Notes convertible into common shares at
$1.06 per share that are outstanding at December 31, 2002 are converted at
maturity, there would be 694,313 additional outstanding common shares,
resulting in 655,012 additional weighted average shares included in the
calculation of diluted earnings per share for 2002.
If the 10% Convertible Subordinated Notes convertible into common shares at
$1.10 per share that are outstanding at December 31, 2002 are converted at
maturity, there would be 281,111 additional outstanding common shares,
resulting in 122,526 additional weighted average shares included in the
calculation of diluted earnings per share for 2002.
If the 15% Convertible Subordinated Notes convertible into common shares at
$1.06 per share that are outstanding at December 31, 2001 are converted at
maturity, there would be 569,575 additional outstanding common shares,
resulting in 163,300 additional weighted average shares included in the
calculation of diluted earnings per share for 2001.
EXHIBIT 5 LEGAL OPINION AND CONSENT TO USE
Barbara L. Sager, Co., L.P.A.
134 Westpark Road
Centerville, Ohio 45459
(937) 657-6768
December 1, 2003
61
Advant-e Corporation
2680 Indian Ripple Road
Dayton, Ohio 45440
Re: Opinion and Consent of Counsel with respect to Registration Statement on
Form SB-2 on behalf of Advant-e Corporation
I have acted as special counsel for Advant-e Corporation (the "Company") in
connection with the proposed public offering of 1,752,040 shares of the
Company's common stock, $.001 par value per share (the "Shares"), pursuant to
the filing of a Registration Statement on Form SB-2 with the Securities and
Exchange Commission in accordance with the Securities Act of 1933, as amended.
In such connection, I am familiar with the Registration Statement, and I have
examined the Company's Certificate of Incorporation, as amended to date, the
Bylaws of the Company, as amended to date, and minutes and resolutions of the
Company's Board of Directors and shareholders, including those relating to the
issuance of the Shares. I have also examined such other documents,
certificates, instruments and corporate records, and such statutes, decisions
and questions of law, as I have deemed necessary or appropriate for the purpose
of this opinion.
Based upon the foregoing, I am of the opinion that the Shares to be sold by the
selling security holders, when issued and sold in the manner described in the
Registration Statement, will be validly issued, fully paid and nonassessable.
I hereby consent to be named by the Company in the Registration Statement and
prospectus included therein. I also consent to the Company filing this legal
opinion as an exhibit to the Registration Statement.
Very truly yours,
BARBARA L. SAGER, CO., L.P.A.
By:________________________________
Barbara L. Sager, President
EXHIBIT 23 (i) CONSENT OF J.D. CLOUD & CO. L.L.P.
We consent to the use in this registration statement on Form SB-2 of our
report, dated March 10, 2003, relating to the consolidated financial statements
of Advant-e Corporation and Subsidiary as of December 31, 2002 and for the year
then ended. We also consent to the reference to our Firm under the caption
"Experts" in such registration statement.
/s/ J.D. Cloud & Co. L.L.P.
Cincinnati, Ohio
December 1, 2003
62
EXHIBIT 23 (ii) CONSENT OF BATTELLE & BATTELLE LLP
We consent to the use in this registration statement on Form SB-2 of our
report, dated March 14, 2002, except for Note 2, as to which the date is
December 23, 2002, relating to the financial statements of Advant-e Corporation
and Subsidiary for the year ended December 31, 2001. We also consent to the
reference to our Firm under the caption "Experts" in such registration
statement.
/s/ Battelle & Battelle LLP
Dayton, Ohio
December 1, 2003
63