<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1996
REGISTRATION NO. 333-1054
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LEGACY SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7372 95-4221982
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
8521 RESEDA BOULEVARD
NORTHRIDGE, CALIFORNIA 91324
(818) 885-5773
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
ARIELLA J. LEHRER, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
LEGACY SOFTWARE, INC.
8521 RESEDA BOULEVARD
NORTHRIDGE, CALIFORNIA 91324
(818) 885-5773
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
------------------------------
COPIES TO:
V. Joseph Stubbs, Esq. John F. Hartigan, Esq.
Brobeck, Phleger & Harrison LLP Morgan, Lewis & Bockius LLP
550 South Hope Street 801 South Grand Avenue
Los Angeles, California 90071 Los Angeles, California 90017
(213) 489-4060 (213) 612-2500
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
LEGACY SOFTWARE, INC.
EXPLANATORY NOTE
This Registration Statement contains two prospectuses: (1) the prospectus
covering the underwritten Public Offering by the Company of shares of Common
Stock (the "Primary Prospectus"), and (2) the prospectus covering the resale by
a certain stockholder of shares of Common Stock (the "Resale Prospectus"). The
Resale Prospectus is identical to the Primary Prospectus except for the
following sections: the Outside Front Cover Page, the Principal and Selling
Stockholders, Plan of Distribution and the Outside Back Cover Page, copies of
which are attached to this Registration Statement as pages A-1 through A-6.
<PAGE>
CROSS REFERENCE SHEET
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(b)OF REGULATION S-K
BETWEEN REGISTRATION STATEMENT AND FORM OF PROSPECTUS
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM OF FORM S-1 CAPTION OR LOCATION IN PROSPECTUS
----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Outside Front Cover Page; Cross Reference Sheet;
Facing Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Prospectus Summary; Risk Factors; Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Risk Factors; Underwriting
6. Dilution............................................. Risk Factors; Dilution
7. Selling Security Holders............................. Principal and Selling Stockholders
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting; Plan of
Distribution
9. Description of Securities to be Registered........... Outside Front Cover Page; Description of Capital
Stock; Underwriting
10. Interests of Named Experts and Counsel............... Not Applicable
11. Information with Respect to the Registrant........... Outside Front Cover Page; Prospectus Summary; Risk
Factors; Dividend Policy; Dilution; Capitalization;
Selected Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal and Selling Stockholders;
Description of Capital Stock; Shares Eligible for
Future Sale; Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 6, 1996
PROSPECTUS
1,000,000 SHARES
LEGACY SOFTWARE, INC. [LOGO]
COMMON STOCK
------------------
All of the 1,000,000 shares (the "Shares") of common stock, par value $0.001
per share (the "Common Stock"), offered hereby (the "Public Offering") are being
offered for sale by Legacy Software, Inc. ("Legacy" or the "Company"). Prior to
the Public Offering, there has been no public market for the Company's Common
Stock, and there can be no assurance that such a public market will develop or
be sustained after the Public Offering. It is currently estimated that the
initial Public Offering price per share of Common Stock will be between $5.50
and $6.50.
The Public Offering price for the Common Stock was determined by negotiation
between the Company and the Underwriter (as defined below) and is not
necessarily related to the Company's asset value, net worth or other established
criteria of value. The Underwriter may make a market in the Common Stock of the
Company upon closing of the Public Offering, but there is no assurance that the
Underwriter will be successful in its efforts. The failure of market makers to
make a market or the loss of market makers for the Common Stock will have a
material adverse effect on the market for the Common Stock. See "Risk Factors"
and "Underwriting."
The Company has applied for inclusion of the Common Stock on The Nasdaq
SmallCap Market under the symbol "LGCY," subject to official notice of issuance.
--------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. AN INVESTMENT IN THE COMMON STOCK SHOULD BE
CONSIDERED ONLY BY PERSONS WHO CAN SUFFER THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" ON PAGE 8
AND "DILUTION."
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share........... $ $ $
Total (3)........... $ $ $
</TABLE>
(1) The Company has agreed to pay to JB Oxford & Company, as the Underwriter
(the "Underwriter"), a non-accountable expense allowance of two percent (2%)
of the gross proceeds of the Public Offering. The Company has also agreed to
sell to the Underwriter, for a nominal purchase price, a five-year warrant
(the "JBO Warrant") to purchase up to 92,800 shares of Common Stock,
exercisable at one hundred fifty percent (150%) of the Price to Public. The
JBO Warrant may not be exercised for a period of 12 months following the
date hereof. In addition, the Company has agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at approximately
$ or approximately $ if the Underwriter's over-allotment option is
exercised in full.
(3) The Company has granted the Underwriter a 30-day option to purchase up to
150,000 additional shares of Common Stock, at the Price to Public less
Underwriting Discounts and Commissions solely to cover over-allotments, if
any. See "Underwriting." If all such additional shares are purchased by the
Underwriter, the total Price to Public will be $ , Underwriting
Discounts and Commissions will be $ and the total Proceeds to Company
will be $ .
--------------------------
The Registration Statement of which this Prospectus forms a part, also
covers (i) 534,351 shares of Common Stock issuable upon conversion of $700,000
in principal amount of a certain convertible promissory note (the "Convertible
Note"), the conversion of which is a condition to the closing of the Public
Offering, (ii) 200,000 shares of Common Stock underlying certain warrants (the
"Warrants") (such 734,351 shares of Common Stock, collectively, the "Resale
Shares"). The Resale Shares are being registered for resale, but are not,
however, part of the Public Offering. The Company will not receive any of the
proceeds from the sale of the Resale Shares. The holder of the Convertible Note
and Warrants has agreed not to sell or transfer any Resale Shares obtained upon
conversion or exercise, as applicable, for a period of 365 days from the date of
this Prospectus without the prior written consent of the Underwriter.
--------------------------
The shares of Common Stock are offered subject to prior sale, when, as and
if delivered and accepted by the Underwriter and subject to the Underwriter's
right to withdraw, cancel or modify said offer and to reject orders in whole or
in part. It is expected that delivery of the Common Stock will be made on or
about , 1996, at the offices of JB Oxford & Company, 9665 Wilshire
Boulevard, Third Floor, Beverly Hills, California 90212.
JB OXFORD
& COMPANY
MAY , 1996
<PAGE>
[Photos of the box front for the EMERGENCY ROOM title, doctors and nurses,
an examination room and a skeleton. The following text appears with the Legacy
logo:
"Legacy Software-Registered Trademark- develops entertainment and
educational products for homes and schools. EMERGENCY ROOM, the Company's first
title published under its CAREERSIM-TM- series, is a multimedia simulation
designed to capture the experience of what it is like to be an emergency room
doctor.
EMERGENCY ROOM, for ages 12 and up, was co-developed with IBM".]
IN CONNECTION WITH THIS PUBLIC OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
THE COMPANY INTENDS TO FURNISH TO ITS STOCKHOLDERS ANNUAL REPORTS THAT
CONTAIN FINANCIAL STATEMENTS THAT HAVE BEEN EXAMINED AND REPORTED UPON, WITH AN
OPINION EXPRESSED BY AN INDEPENDENT PUBLIC ACCOUNTING FIRM AFTER THE END OF EACH
FISCAL YEAR. IN ADDITION, THE COMPANY INTENDS TO FURNISH TO ITS STOCKHOLDERS
QUARTERLY REPORTS FOR THE FIRST THREE QUARTERS OF EACH FISCAL YEAR THAT CONTAIN
UNAUDITED INTERIM FINANCIAL INFORMATION AFTER THE END OF EACH FISCAL QUARTER,
UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY. THE COMPANY IS NOT
CURRENTLY SUBJECT TO THE REPORTING REQUIREMENTS OF SECTION 13(a) OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
THE UNDERWRITER HAS NO OBLIGATION TO BECOME A MARKET MAKER OR TO EFFECT
OTHER TRANSACTIONS IN THE COMPANY'S COMMON STOCK. A SIGNIFICANT AMOUNT OF THE
COMMON STOCK TO BE SOLD IN THIS PUBLIC OFFERING MAY, IN THE ORDINARY COURSE OF
BUSINESS, BE SOLD TO CUSTOMERS OF THE UNDERWRITER, AND THE CONCENTRATION OF
COMMON STOCK IN CUSTOMERS OF THE UNDERWRITER MAY MATERIALLY ADVERSELY AFFECT THE
MARKET FOR AND LIQUIDITY OF SUCH COMMON STOCK. IN THE EVENT THAT ADDITIONAL
BROKER-DEALERS DO NOT MAKE A MARKET IN THE COMPANY'S COMMON STOCK, OF WHICH
THERE CAN BE NO ASSURANCE, THE UNDERWRITER MAY BECOME A DOMINATING INFLUENCE ON
THE MARKET WHICH MAY ADVERSELY AFFECT THE LIQUIDITY OF THE COMPANY'S COMMON
STOCK.
ALTHOUGH IT HAS NO LEGAL OBLIGATION TO DO SO, THE UNDERWRITER MAY BECOME A
MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE COMPANY'S COMMON STOCK.
THE UNDERWRITER MAY DISCONTINUE SUCH ACTIVITIES AT ANY TIME OR FROM
TIME-TO-TIME. SEE "RISK FACTORS -- ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY
OF STOCK PRICE" AND "-- UNDERWRITER'S INFLUENCE ON THE MARKET MAY HAVE ADVERSE
CONSEQUENCES."
FOR CALIFORNIA RESIDENTS
WITH RESPECT TO SALES OF THE COMMON STOCK BEING OFFERED HEREBY TO CALIFORNIA
RESIDENTS, SUCH COMMON STOCK MAY BE SOLD ONLY TO: (1) "ACCREDITED INVESTORS"
WITHIN THE MEANING OF REGULATION D UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(2) BANKS, SAVINGS AND LOAN ASSOCIATIONS, TRUST COMPANIES, INSURANCE COMPANIES,
INVESTMENT COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY OF 1940, PENSION
AND PROFIT-SHARING TRUSTS, CORPORATIONS OR OTHER ENTITIES WHICH, TOGETHER WITH
THE CORPORATION'S OR OTHER ENTITY'S AFFILIATES, HAVE A NET WORTH ON A
CONSOLIDATED BASIS ACCORDING TO THEIR MOST RECENT REGULARLY PREPARED FINANCIAL
STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED, BUT NOT NECESSARILY AUDITED, BY
OUTSIDE ACCOUNTANTS) OF NOT LESS THAN $14,000,000 AND SUBSIDIARIES OF THE
FOREGOING OR (3) ANY PERSON (OTHER THAN A PERSON FORMED FOR THE SOLE PURPOSE OF
PURCHASING THE COMMON STOCK OFFERED HEREBY) WHO PURCHASES AT LEAST $1,000,000
AGGREGATE AMOUNT OF THE COMMON STOCK OFFERED HEREBY, OR (4) ANY PERSON WHO (A)
HAS AN INCOME OF $65,000 AND A NET WORTH OF $250,000, OR (B) HAS A NET WORTH OF
$500,000 (IN EACH CASE EXCLUDING HOME, HOME FURNISHINGS AND PERSONAL
AUTOMOBILES). EACH CALIFORNIA RESIDENT PURCHASING THE COMON STOCK OFFERED HEREBY
WILL BE DEEMED TO REPRESENT BY SUCH PURCHASE THAT IT COMES WITHIN ONE OF THE
AFOREMENTIONED CATEGORIES, THAT IT WILL NOT SELL OR OTHERWISE TRANSFER SUCH
COMMON STOCK TO A CALIFORNIA RESIDENT UNLESS THE TRANSFEREE COMES WITHIN ONE OF
THE AFOREMENTIONED CATEGORIES AND THAT IT WILL ADIVSE THE TRANSFEREE OF THIS
CONDITION, WHICH TRANSFEREE, BY BECOMING SUCH WILL BE DEEMED TO BE BOUND BY THE
SAME RESTRICTIONS ON RESALE.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION, INCLUDING FINANCIAL STATEMENTS
AND RELATED NOTES THERETO, THE OTHER FINANCIAL INFORMATION AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL
INFORMATION IN THIS PROSPECTUS: (I) ASSUMES NO EXERCISE OF THE UNDERWRITER'S
OVER-ALLOTMENT OPTION; (II) GIVES EFFECT TO A 144 FOR 1 STOCK SPLIT EFFECTED IN
NOVEMBER, 1995; AND (III) GIVES EFFECT TO THE REINCORPORATION OF THE COMPANY IN
DELAWARE EFFECTED IN MARCH, 1996. INVESTORS SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
Legacy Software, Inc. ("Legacy" or the "Company") develops consumer software
products for the rapidly growing "edutainment" CD-ROM market. An edutainment
product combines entertainment and education content for home and educational
use, in which learning is an integral part of playing a game.
Legacy's innovative CAREER SIM-TM- series will simulate various career
disciplines by combining the expertise of game designers, educators, subject
matter experts, programmers and artists to produce mind stimulating software.
The CAREER SIM-TM- series is currently comprised of one title, the EMERGENCY
ROOM title, which is being marketed by the Company's co-development partner,
International Business Machines Corporation ("IBM"). In addition to the
EMERGENCY ROOM title, the Company has entered into a (i) development and license
agreement with IBM to develop the contemplated DISTRICT ATTORNEY title, which is
tentatively scheduled for release in March 1997, and (ii) non-binding letter of
intent with IBM to begin negotiations on a development and license agreement for
the contemplated ER CODE BLUE title. Pursuant to a letter agreement with IBM, in
March 1996, the Company delivered a design specification for the contemplated
CAREER SIM-TM- NEWS FLASH title to IBM. In April 1996, IBM notified the Company
of its decision not to proceed with the development of the contemplated NEWS
FLASH project, and the Company has initially decided to develop such project
without the co-funding assistance of IBM. There can be no assurances that the
Company will develop or complete the NEWS FLASH title with or without a
co-development partner or affiliate or pursuant to other arrangements. The
CAREER SIM-TM- products will be designed to explore realistic career situations
in an entertaining and engaging format. Underlying each title will be an expert
database of situations or "cases" which progresses from very easy to
challenging. In the process of mastering a case, the player will be exposed to
information that is typical of a particular discipline, as well as the
appropriate procedures and strategies utilized by practitioners of that
discipline. The player will learn the logic inherent in a particular career, and
the application of facts to the solution of realistic problems. Each case will
be presented in a dynamic entertaining format that seamlessly merges information
and realistic scenarios. The Company is designing the contemplated DISTRICT
ATTORNEY, NEWS FLASH and ER CODE BLUE CD-ROM titles to incorporate online
distribution and multiplayer gaming. See "Risk Factors -- Dependence on IBM,"
"-- Development of New Products; Unproven Acceptance of the Company's Products,
Including the EMERGENCY ROOM Title" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The EMERGENCY ROOM title, the Company's only currently marketed CAREER
SIM-TM- title, is a multimedia computer simulation designed to provide a
realistic and involving experience of what it is like to be an emergency room
doctor. The player begins as a medical student and works up the ranks to
attending physician by successfully completing 400 different medical cases at
five levels of difficulty. The EMERGENCY ROOM player examines, diagnoses and
treats patients whose problems range from simple broken bones to gunshot wounds.
The simulation integrates live-action video, 3-D graphics and a comprehensive
medical database covering all 400 cases in a game format. The EMERGENCY ROOM
title began shipping in October, 1995, and is exclusively marketed and
distributed by the Consumer Software Division of International Business Machines
Corporation ("IBM"), which funded approximately half of the development costs.
4
<PAGE>
The Company believes that simulation software combined with multimedia
CD-ROM technology, with its capacity for interactivity and reality through
graphics, video and sound, offers a new and exciting entertainment medium.
Legacy's objective is to exploit this new entertainment medium and establish
itself as a leading developer and publisher of mind stimulating edutainment,
infotainment and simulation products. The Company's strategy for achieving this
objective is to develop the CAREER SIM-TM- series and other families of
products, exploit leading-edge technologies and utilize co-development and
affiliate label distribution relationships. Legacy's Chairman of the Board of
Directors, President and CEO, Ariella J. Lehrer, Ph.D., is a cognitive
psychologist with more than twelve years of experience in software consulting
and executive management.
Total industry multimedia software title revenue has been estimated to reach
approximately $1.45 billion in 1995, representing an increase of approximately
85% from $786 million in 1994. Dataquest, a computer market research firm,
reported that in 1995 personal computer sales grew nearly 25% worldwide, to 59.7
million, and 21% in the U.S., to 22.5 million. From January through November,
1995, revenue from entertainment computer software titles grew 28% from the same
period during 1994. Computer software game titles grew by 27% in terms of units
over the same time period during 1994 to total 25.7 million units through
November, 1995, representing over 35% of all software units sold through
November, 1995. The 28% year-over-year revenue growth represents the highest
revenue growth rate of any category of software through November, 1995. Over the
first eleven months of 1995, educational software revenues totalled nearly $315
million on approximately 9.8 million units sold, growing by roughly 25% through
November, 1995 in terms of both units and revenues.
Prior to its CAREER SIM-TM- series, the Company created five children's
software edutainment titles, including CHILDREN'S WRITING AND PUBLISHING CENTER
(published by The Learning Company), MICKEY'S CROSSWORD PUZZLE MAKER (published
by Walt Disney Software), MUTANOID MATH CHALLENGE, MUTANOID WORD CHALLENGE, and
MAGIC BEAR'S MASTERPIECES (published by Legacy). These children's software
products have won numerous awards, including "The Best Educational Software
Program of the Decade" awarded in 1990 for CHILDREN'S WRITING AND PUBLISHING
CENTER by TECHNOLOGY AND LEARNING magazine, the nomination in 1992 of MUTANOID
WORD CHALLENGE for "Best Educational Software Program" by the Software
Publishers Association and the designation in 1993 and 1994 of MAGIC BEAR'S
MASTERPIECES as recommended for purchase by the California State Department of
Education and the New York City Public Schools Division of Instruction and
Professional Development. The Company received a total of $36,399 in software
sales revenue from three non-CAREER SIM-TM- titles, MUTANOID MATH CHALLENGE,
MUTANOID WORD CHALLENGE and MAGIC BEAR'S MASTERPIECES, during fiscal 1995. The
Company received a one-time payment of $475,000 for the development of
CHILDREN'S WRITING AND PUBLISHING CENTER from The Learning Company in 1989 and a
one-time payment of $75,000 for the development of MICKEY'S CROSSWORD PUZZLE
MAKER from Walt Disney Software in 1990.
The Company was organized in California in 1989 as a successor to a
partnership formed in 1986, and was reincorporated in Delaware in 1996. The
principal offices of the Company are located at 8521 Reseda Boulevard,
Northridge, California 91324, and its telephone number is 818/885-5773.
LEGACY SOFTWARE-REGISTERED TRADEMARK- and MUTANOIDS-REGISTERED TRADEMARK-
are registered trademarks of the Company, and EMERGENCY ROOM-TM- is a trademark
of the Company. In January 1996, the Company filed a trademark application with
the United States Patent and Trademark Office to register CAREER SIM-TM-, which
is also a trademark of the Company. This Prospectus also includes trademarks of
companies other than the Company.
5
<PAGE>
THE OFFERING (1)
<TABLE>
<S> <C>
Common Stock Offered by the
Company............................ 1,000,000 shares
Common Stock Outstanding Prior to
the Public Offering (2)(3)(4)...... 1,282,551 shares
Common Stock Outstanding After the
Public Offering (3)(4)............. 2,282,551 shares
Use of Proceeds.................... To repay indebtedness of $300,000 and to
pay a consultant $25,000, with the
remainder to be used for working capital
and general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq SmallCap Market
Symbol (5)......................... LGCY
Risk Factors....................... An investment in the securities offered
hereby involves a high degree of risk and
immediate substantial dilution. See "Risk
Factors" and "Dilution."
</TABLE>
- ------------------------
(1) Assumes that the Underwriter's over-allotment is not exercised. See
"Underwriting."
(2) Based on shares of Common Stock outstanding as of May 6, 1996.
(3) Excludes (i) an aggregate of 440,000 shares of Common Stock issuable upon
exercise of outstanding stock options, (ii) an aggregate of 131,800 shares
of Common Stock reserved for future issuance under the Company's 1995 Stock
Option/Stock Issuance Plan (the "1995 Stock Option/ Stock Issuance Plan"),
(iii) an aggregate of 150,000 shares of Common Stock reserved for future
issuance under the Company's Employee Stock Purchase Plan (the "Purchase
Plan"), (iv) 200,000 shares of Common Stock reserved for issuance upon
exercise of the Warrants and (v) 92,800 shares underlying that certain
warrant exercisable for 92,800 shares of Common Stock to be issued to the
Underwriter upon consummation of the Public Offering (the "JBO Warrant").
See "Management -- 1995 Stock Option/Stock Issuance Plan" and "Shares
Eligible for Future Sale."
(4) Gives effect to the issuance of 534,351 shares upon conversion of $700,000
in principal amount of the Convertible Note at a conversion price per share
of $1.31 upon the closing of the Public Offering.
(5) The inclusion of the Common Stock on The Nasdaq SmallCap Market does not
provide assurance that a public trading market will develop for the Common
Stock or, if one does develop, that it will be maintained. See "Risk Factors
-- Absence of Public Market; Possible Volatility of Stock Price," "-- Impact
of Potential Nasdaq Delisting" and "-- Underwriter's Influence in the Market
May Have Adverse Consequences."
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The statement of operations data set forth below with respect to the years
ended December 31, 1993, 1994 and 1995, and the balance sheet data at December
31, 1994 and 1995, are derived from, and are qualified by reference to, the
audited financial statements included elsewhere in this Prospectus. The
statement of operations data set forth below with respect to the years ended
December 31, 1991 and 1992, and the balance sheet data at December 31, 1991,
1992 and 1993, are derived from unaudited financial information prepared on the
same basis as the audited financial statements. In the opinion of management,
all unaudited financial information includes all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the information
presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1991 1992 1993 1994 1995
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Royalties................................ $ 12,272 $ 17,657 $ 34,819 $ 16,809 $ 9,179
Software sales........................... 216,397 158,146 421,715 69,856 36,399
Consulting............................... 0 0 0 100,000 6,000
----------- ------------ ----------- ------------ ------------
Total.................................. $ 228,669 $ 175,803 $ 456,534 $ 186,665 $ 51,578
----------- ------------ ----------- ------------ ------------
----------- ------------ ----------- ------------ ------------
Costs and expenses:
Cost of royalties........................ 0 0 0 0 13,939
Cost of software sales................... 98,640 45,754 177,661 46,783 31,528
Product development (1).................. 109,215 193,879 81,959 196,595 72,951
General and administrative............... 61,544 111,643 124,634 133,644 336,457
Selling.................................. 2,265 2,784 31,467 9,829 21,216
----------- ------------ ----------- ------------ ------------
Total.................................. 271,664 354,060 415,721 386,851 476,091
----------- ------------ ----------- ------------ ------------
Income (Loss) from operations.............. (42,995) (178,257) 40,813 (200,186) (424,513)
Interest expense........................... 11,493 25,251 41,775 51,707 267,005
----------- ------------ ----------- ------------ ------------
Net loss............................... $ (54,488) $ (203,508) $ (962) $ (251,893) $ (691,518)
----------- ------------ ----------- ------------ ------------
----------- ------------ ----------- ------------ ------------
Pro forma net loss (2)................. $ (779,768)
------------
------------
Net loss per common share.................. $ (0.04) $ (0.15) $ 0 $ (0.18) $ (0.49)
Pro forma net loss per common share........ $ (0.55)
Dividends per share........................ 0 0 0 0 0
Weighted average common stock shares
outstanding............................... 1,396,218 1,396,218 1,396,218 1,396,218 1,396,218
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------------
1991 1992 1993 1994 1995
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 60,728 $ 756 $ 3,389 $ 20,750 $ 365,190
Working capital (deficiency)............... (160,878) (390,578) 16,631 (186,013) (162,097)
Total assets............................... 74,193 24,537 191,601 96,492 710,890
Long-term debt (including current
portions)................................. 174,471 378,046 485,673 626,431 1,338,084
Stockholders' deficit...................... (218,532) (422,040) (423,002) (674,895) (824,590)
</TABLE>
- ------------------------
(1) Product development expenses for the years ended December 31, 1993, 1994,
and 1995 are net of co-funding of development expenses of $141,162, $338,058
and $261,410, respectively.
(2) Reflects a pro forma adjustment of $88,250 for increased compensation
expense as a result of assuming employment agreements entered into during
1995 and 1996 had been in effect as of January 1, 1995.
7
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY
AND ITS BUSINESS PROSPECTS BEFORE PURCHASING SHARES OFFERED BY THIS PROSPECTUS.
UNCERTAINTY AS TO GOING CONCERN. Due to the Company's stockholders'
deficiency of $824,590 and working capital deficiency of $162,097 as of December
31, 1995, there is substantial doubt as to the Company's ability to continue as
a going concern. The Company's independent certified public accountants have
included an explanatory paragraph in their report stating that these factors
raise substantial doubt as to the Company's ability to continue as a going
concern. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Financial Statements, the related notes thereto
and other financial information included herein.
CONTINUING OPERATING LOSSES; ACCUMULATED DEFICIT. Since January 1989, the
Company has incurred continuous losses which total $1,371,413 through the period
ended December 31, 1995. In addition, since 1991, net losses and costs and
expenses incurred by the Company increased each fiscal year during the period
ended December 31, 1995, except net losses in fiscal 1993 were smaller than net
losses in fiscal 1992. These losses and costs and expenses are attributable
primarily to the significant start-up costs associated with the development of
new products and the failure of the Company's prior products to gain market
acceptance. The Company will not be profitable in fiscal 1996, and there can be
no assurance that the Company will be able to achieve profitability and, if
achieved, that profitability will be sustained. Further, the Company's operating
results can be expected to vary significantly. See "-- Fluctuations in Operating
Results; Seasonality." Consequently, the Company is subject to the substantial
risks inherent in the establishment of a new business and the development,
manufacture and marketing of new products. There can be no assurance that the
Company will ever achieve significant revenues or become profitable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements, the related notes thereto and other
financial information included herein.
CAPITAL REQUIREMENTS; ADDITIONAL FINANCING REQUIRED. The Company is
dependent upon the proceeds of the Public Offering, co-funding of development
expenses by its co-development partner, International Business Machines
Corporation ("IBM"), and the anticipated cash flow from the Company's three
products currently being marketed, including its most recent title, the
EMERGENCY ROOM title. The Company will require substantial funds to develop its
current and future products and to market certain of its products. The Company
anticipates that approximately one-half of the projected development costs of
the currently contemplated DISTRICT ATTORNEY and ER CODE BLUE titles may be co-
funded by its co-development partner, IBM. This co-funding, as recognized in the
Company's Statements of Operations, has been offset against product development
expenses. The Company recognized $141,162, $338,058 and $261,410 of product
development expense co-funding, or approximately 63%, 63% and 78% of the
Company's total product development expenses, for the years ended December 31,
1993, 1994 and 1995, respectively. IBM co-funds development expenses based on
milestones developed for each contemplated title that approximate the time when
costs are incurred by the Company. IBM typically may terminate its agreements
with the Company at any time, and there can be no assurance that the Company
will be able to obtain additional sources to co-fund development expenses
following termination by IBM. In addition, upon notice from IBM of its decision
not to proceed with the development of the contemplated CAREER SIM-TM- NEWS
FLASH title, the Company has initially decided to develop such title without the
co-funding assistance of IBM, which will cost the Company substantially more
than the Company's cost of co-developing the EMERGENCY ROOM and contemplated
DISTRICT ATTORNEY titles with IBM. There can be no assurances that the Company
will develop or complete the NEWS FLASH title with or without a co-development
partner or affiliate or pursuant to other arrangements. See "-- Dependence on
IBM" and "-- Development of New Products; Unproven Acceptance of the Company's
Products, Including the EMERGENCY ROOM Title." Should IBM not provide the
necessary co-funding of development expenses or should the Company's actual
results of operations fall short of, or its rate of expansion significantly
exceed, its projections, or should its costs and capital
8
<PAGE>
expenditures exceed the amounts projected, the Company could be required to seek
additional financing. There can be no assurance that, if additional financing is
required, it will be available on acceptable terms, or at all. Additional
financing may involve substantial dilution to the interests of the Company's
then-current stockholders. See "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements, the related notes thereto and other financial information included
herein. If adequate additional funds are not available, the Company may be
required to delay, scale back or eliminate one or more of its product
development programs which could have a material adverse effect on the business,
operating results or financial condition of the Company. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition."
DEPENDENCE ON PROCEEDS OF THE PUBLIC OFFERING. The Company is dependent on,
among other things, the proceeds of the Public Offering to repay certain
indebtedness, to fund new product and business development and to expand sales
and marketing activities. The Company expects to use $300,000 of the proceeds of
the Public Offering to repay $300,000 of principal amount of the Convertible
Note. See "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements, the related
notes thereto and other financial information included herein.
BROAD DISCRETION IN APPLICATION OF PROCEEDS; ALLOCATION OF PROCEEDS. The
net proceeds to be received from the sale of 1,000,000 shares of Common Stock by
the Company in the Public Offering at an estimated Public Offering price of
$6.00 per share and, after deducting underwriting discounts and estimated
expenses payable by the Company, are estimated to be approximately $4,772,000.
The Company expects to use $300,000 of such proceeds to repay $300,000 in
principal indebtedness to EBC under the Convertible Note and $25,000 of such
proceeds to pay a consultant pursuant to the terms of a fee agreement dated
September 29, 1995 between the Company and such consultant. The remainder of
such net proceeds will be used to continue the development of the contemplated
CAREER SIM-TM- DISTRICT ATTORNEY title and to begin development of the
contemplated CAREER SIM-TM- NEWS FLASH and ER CODE BLUE titles. Therefore,
approximately $4,472,000 (94%) of the estimated $4,772,000 of net proceeds from
the Public Offering will be applied to product development, working capital and
general corporate purposes. Accordingly, the Company's management will have
broad discretion as to the application of these proceeds. See "Use of Proceeds."
DEPENDENCE ON IBM. DEPENDENCE ON THE ER LICENSE AGREEMENT. The Company
currently has limited marketing and sales capabilities. The Company has entered
into a Multimedia Rights License Agreement (the "ER License Agreement"), dated
January 4, 1995, as amended, with IBM for development by the Company and
licensing of its EMERGENCY ROOM title to IBM. Pursuant to the ER License
Agreement, (i) the Company has granted IBM an exclusive license to, among other
things, use, manufacture, sell and distribute the EMERGENCY ROOM title which IBM
began marketing in October, 1995, (ii) IBM has a right of first refusal on
derivative works within 12 months of acceptance of the title by IBM and (iii)
IBM is contractually obligated to pay the Company a royalty of a stated
percentage of revenue (net of returns and allowances) within 60 days after the
conclusion of each calendar quarter. If IBM exercises its right of first refusal
under the ER License Agreement, the terms and conditions, including royalty
obligations, will be negotiated by IBM and the Company. The ER License Agreement
may be terminated by either party at any time for cause. The EMERGENCY ROOM
title is currently being marketed and packaged as a product of IBM. Although
pursuant to the ER License Agreement the Company is the sole and exclusive owner
of the EMERGENCY ROOM title and has all copyrights thereto, the packaging of the
first 45,000 EMERGENCY ROOM CD-ROM disks shipped mistakenly indicates that IBM
has the copyright thereto. IBM has, however, agreed to designate the Company's
copyright of the EMERGENCY ROOM title on the packaging of subsequent units and
the CD-ROM disk.
DEPENDENCE ON THE DA LICENSE AGREEMENT. The Company also has entered into a
Development and License Agreement (the "DA License Agreement," collectively with
the ER License Agreement, the "IBM Agreements"), dated November 16, 1995, with
IBM for the development and licensing of the
9
<PAGE>
DISTRICT ATTORNEY title, a second contemplated CAREER SIM-TM- title involving
the legal profession. Because this title is currently in the initial development
stage, there can be no assurance that the Company will be able to develop or
complete the project or that the final product, if developed, will be marketed
under such title. Pursuant to the DA License Agreement, the Company has granted
IBM an exclusive license to, among other things, use, manufacture, sell and
distribute the contemplated DISTRICT ATTORNEY title, and IBM (i) has sole
responsibility for the marketing, distribution, sale and licensing of the title
which will be marketed and identified as an IBM product, (ii) may terminate the
DA License Agreement at any time with or without cause, (iii) has a right of
first refusal on derivative works, including sequels, within 12 months of
acceptance of the title by IBM and (iv) pays the Company a royalty of a stated
minimum percentage of revenue (net of returns and allowances) within 60 days
after the conclusion of each calendar quarter for U.S. transactions and within
90 days after the conclusion for each calendar quarter for non-U.S.
transactions. If IBM exercises its right of first refusal under the DA License
Agreement, the terms and conditions, including royalty obligations, will be
negotiated by IBM and the Company.
The Company is currently dependent upon IBM to co-fund product development
expenses under the DA License Agreement. Co-funding of development expenses by
IBM is based on milestones developed for each contemplated title that
approximate the time when development costs are incurred by the Company. The
Company anticipates that the contemplated DISTRICT ATTORNEY title will be
released by IBM in March 1997, and that the Company will begin to receive
royalty checks on shipments of such title in the following quarter. Royalty
revenue, if any, from the contemplated DISTRICT ATTORNEY title will only be
recognized in accordance with Statement of Financial Accounting Standards No. 48
("SFAS 48") and the Company's revenue recognition policy as adopted by the
Company's Board of Directors (the "Revenue Recognition Policy"), as further
described below. Although the Company is currently unable to comply with SFAS 48
and recognize royalty revenue on its only CAREER SIM-TM- title and IBM has
limited distribution experience for computer software titles, the Company
anticipates that if sales of the contemplated DISTRICT ATTORNEY title are
approximately equal to sales of the EMERGENCY ROOM title, royalty revenue from
the contemplated DISTRICT ATTORNEY title would be approximately equal to
estimated royalty revenue from the EMERGENCY ROOM title. There can be no
assurance, however, that sales of the contemplated DISTRICT ATTORNEY title, if
successfully completed and marketed, will be approximately equal to sales of the
EMERGENCY ROOM title. If IBM were to terminate the DA License Agreement, there
can be no assurance that the Company would be able to replace IBM as a
co-development partner or that the Company would be able to enter into an
agreement with another co-development partner for the co-funding of the
Company's products, including, among other things, co-funding of development
expenses, on terms similar to the IBM Agreements. See "-- Capital Requirements;
Additional Financing Required."
INABILITY TO RECOGNIZE ROYALTY REVENUE ON THE EMERGENCY ROOM TITLE. IBM
currently ships the EMERGENCY ROOM title to IBM's customers under sales and
consignment shipment arrangements. The Company is dependent upon IBM for
providing it with financial data and information about sales (net of estimated
returns) of the Company's products to distributors or through to customers by
retailers in the case of consignment shipments. To date, IBM has not provided
the Company with sufficient, timely financial data and information about sales
and consignment shipments of the EMERGENCY ROOM title during 1995 in order for
the Company to recognize royalty revenue on the accrual basis in accordance with
SFAS 48. In addition, the Company currently cannot reasonably estimate future
product returns as required by SFAS 48 due to the EMERGENCY ROOM title's limited
return history. The Company will not recognize royalty revenue from IBM unless
it can comply with SFAS 48. There can be no assurance, however, that IBM will
provide the Company with sufficient financial data and information in order for
the Company to recognize royalty revenue on the accrual basis in accordance with
SFAS 48. Royalty revenues on consignment shipments made by IBM are only
recognized when both (i) the Company receives evidence of product sell-through
from IBM and (ii) the Company can comply with SFAS 48. Based on an analysis
pursuant to the Company's Revenue Recognition Policy of, among other things, (i)
the Company's and IBM's experience on EMERGENCY ROOM title sales and returns to
date, (ii) additional information and data on the EMERGENCY ROOM title which the
Company
10
<PAGE>
anticipates receiving from IBM, (iii) sales and returns of the Company's past
products and other information relating thereto, (iv) information regarding
significant purchasers of the Company's products, (v) sales and returns of
comparable computer software products of other developers and other information
relating thereto and (vi) computer software industry data and practices, the
Company anticipates that it will be able to comply with SFAS 48 and recognize
royalty revenue, net of estimated returns, on the EMERGENCY ROOM title no sooner
than for the third quarter of 1996. There can be no assurance, however, that the
Company will be able to recognize royalty revenue on the EMERGENCY ROOM title in
the Company's financial statements for the third quarter of 1996. When the
Company determines it can comply with SFAS 48 and does recognize royalty
revenue, future filings, including without limitation the footnotes to the
financial statements of the Company, will set forth the quarters in which
products were shipped to which such revenue relates. No royalty revenue from the
EMERGENCY ROOM title co-developed with IBM has been recognized in the Company's
Statements of Operations for the years ended December 31, 1993, 1994 and 1995.
The Company's inability to recognize royalty revenue on an accrual basis for its
products, including those products which are co-developed with IBM, could have a
material adverse effect on the Company's stock price because the Company will
not be able to recognize royalty revenue on products until the Company can
comply with SFAS 48. Furthermore, following the Public Offering, the Company
will be subject to certain periodic reporting requirements under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). To the extent that IBM
does not timely provide the Company with sufficient financial data and
information about sales or consignment shipments of the Company's products
during any fiscal quarter or year, the Company's operating results during such
fiscal quarter or year may be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
When the Company has the ability, if ever, to record royalties on the
accrual method, the Company will not recognize royalty revenue (net of estimated
returns) from IBM unless the Company's products are sold to distributors or
through to consumers by retailers in the case of consignment shipments.
Consequently, the number of the Company's products returned to IBM from its
distributors and the timing of any such returns may have a material adverse
effect on the Company's future royalty revenue.
Further, in the event that the Company creates a derivative work with a
third party, IBM is entitled to receive certain royalties thereon in accordance
with the IBM Agreements. If IBM were to terminate the ER License Agreement,
there can be no assurance that the Company will be able to replace IBM's
marketing, distributing, selling or licensing efforts or be able to develop
derivative products of the EMERGENCY ROOM title or that such termination
otherwise will not have a material adverse effect on the Company's business,
operating results or financial condition. If IBM were to terminate the DA
License Agreement, there can be no assurance that the Company will be able to
replace IBM as a co-development partner or be able to develop the contemplated
DISTRICT ATTORNEY title or that such termination otherwise will not have a
material adverse effect on the Company's business, operating results or
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
REJECTION OF THE CONTEMPLATED NEWS FLASH TITLE. On January 17, 1996, the
Company entered into a letter agreement with IBM for the preparation of the
design specification of the contemplated third CAREER SIM-TM- CD-ROM title, the
NEWS FLASH title. Under such letter agreement, the Company delivered the final
working design specification for such title on March 12, 1996. On April 16,
1996, IBM notified the Company of its decision not to continue the contemplated
NEWS FLASH project. Pursuant to the terms of such letter agreement with respect
to the contemplated NEWS FLASH project, the Company is free to continue
development of such project independent of IBM. If the Company develops such
project with a third party, the Company is obligated to return to IBM all
amounts paid by IBM to the Company pursuant to the letter agreement. As a result
of IBM's notification, the Company has decided to develop the contemplated
CAREER SIM-TM- NEWS FLASH title on its own, although the Company may enter into
a co-development agreement, affiliate label distribution relationship or
11
<PAGE>
other arrangement with respect to the contemplated NEWS FLASH title. There can
be no assurances that the Company will develop or complete the NEWS FLASH title
with or without a co-development partner or affiliate or pursuant to other
arrangements. See "-- Development of New Products; Unproven Acceptance of the
Company's Products, Including the EMERGENCY ROOM Title."
DEPENDENCE ON THE CONTEMPLATED ER CODE BLUE TITLE. On March 15, 1996, the
Company entered into a non-binding letter of intent with IBM to begin
negotiations on a development and license agreement for a contemplated fourth
CAREER SIM-TM- title, the ER CODE BLUE title. Under such letter of intent, the
Company will provide IBM with a detailed budget, anticipated development
schedule and certain other information about the target audience, estimated
sales volume and price and third party involvement. Pursuant to such letter of
intent, (i) neither the Company nor IBM is under any obligation to conclude any
transaction they contemplate or discuss, (ii) either the Company or IBM can end
discussions freely at any time for any reason, (iii) neither the Company nor IBM
will have any liability to the other for failure to consummate any transaction,
and (iv) all discussion, proposals, term sheets, draft agreements and other
similar materials will be null and void if discussions are terminated. On April
17, 1996, IBM notified the Company that it is having internal discussions on how
to best utilize its resources in the consumer software market, and that such
discussions could affect IBM's decision to enter into a development and
licensing agreement regarding the contemplated ER CODE BLUE title. The Company
anticipates that if it enters into a development and license agreement with
respect to the contemplated ER CODE BLUE title in the second quarter of 1996,
such title would be released into the market in the third quarter of 1997, and
that the Company will begin to receive royalty checks on shipments of such title
in the following quarter. Royalty revenue, if any, from the contemplated ER CODE
BLUE title will only be recognized in accordance with SFAS 48 and the Company's
revenue recognition policy. Although the Company is currently unable to comply
with SFAS 48 and recognize royalty revenue on its only CAREER SIM-TM- title and
IBM has limited distribution experience for computer software game titles, the
Company anticipates that sales of the contemplated ER CODE BLUE title will be
approximately equal to sales of the EMERGENCY ROOM title. There can be no
assurance, however, that sales of the contemplated ER CODE BLUE title, if
successfully completed and marketed, will be approximately equal to sales of the
EMERGENCY ROOM title. There can be no assurances that the Company will enter
into an agreement with IBM for the development of the contemplated ER CODE BLUE
project, that the Company will be able to develop or complete such project or
that the final product, if developed, will be marketed under such title.
NO COMMITMENT FOR FUTURE TITLES. On April 17, 1996, IBM also notified the
Company that it, at the present time, is not prepared to commit to additional
projects, including a new project for which the Company submitted a proposal to
IBM in April 1996, regardless of the Company's willingness to fund such projects
in 1996. There can be no assurances that IBM will commit to any additional
projects with the Company in the future.
To the extent that the Company's titles are marketed as products of IBM,
they may not be readily or clearly identified as products of the Company. As a
result, there can be no assurance that the Company will gain significant name
recognition or the goodwill associated therewith.
DEPENDENCE ON IBM FOR MARKETING AND DISTRIBUTION. Broad product
distribution is one of the most difficult yet critical components of success for
a multimedia developer. The Consumer Software Division of IBM is a new division
of IBM which is still building the organization necessary to provide in-store
sales promotion and support, and which the Company believes has limited
experience in marketing, distributing, selling and licensing edutainment
software. IBM does not have minimum marketing, distribution, sales or licensing
requirements under the ER License Agreement, and no assurance can be given that
IBM will actively or successfully market, distribute, sell or license the
Company's products. Sales and consignment shipments by IBM are also subject to
returns. See "-- Product Returns" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." A failure by IBM to successfully
market, distribute, sell or license the Company's Products would have a material
adverse effect on the Company's business, operating results and financial
condition.
12
<PAGE>
RELIANCE ON THE EMERGENCY ROOM TITLE; LIMITED PRODUCTS. It is expected that
the EMERGENCY ROOM title will be responsible for substantially all of the
Company's royalty revenue in fiscal 1996. The Company currently cannot recognize
royalties received from IBM as revenue due to its inability to comply with SFAS
48. Based on an analysis pursuant to the Company's Revenue Recognition Policy
of, among other things, (i) the Company's and IBM's experience on EMERGENCY ROOM
title sales and returns to date, (ii) additional information and data on the
EMERGENCY ROOM title which the Company anticipates receiving from IBM, (iii)
sales and returns of the Company's past products and other information relating
thereto, (iv) information regarding significant purchasers of the Company's
products, (v) sales and returns of comparable computer software products of
other developers and other information relating thereto and (vi) computer
software industry data and practices, the Company anticipates that it will be
able to comply with SFAS 48 and recognize royalty revenue, net of estimated
returns, on the EMERGENCY ROOM title no sooner than for the third quarter of
1996. There can be no assurance, however, that the Company will be able to
recognize royalty revenue on the EMERGENCY ROOM title in the Company's financial
statements for the third quarter of 1996. When the Company determines it can
comply with SFAS 48 and does recognize royalty revenue, future filings,
including without limitation the footnotes to the financial statements of the
Company, will set forth the quarters in which products were shipped to which
such revenue relates. Consequently, no royalty revenue for the EMERGENCY ROOM
title has been recognized in 1995. IBM has notified the Company that IBM expects
sales of the EMERGENCY ROOM title to be significantly lower in the first quarter
of 1996 as compared to the fourth quarter of 1995. The Company receives no
software sales revenue from the EMERGENCY ROOM title due to its royalty
arrangement with IBM. While the Company believes that revenue from the EMERGENCY
ROOM title will represent a decreasing percentage of revenue after 1996, a more
rapid decrease than currently anticipated or a failure to replace the EMERGENCY
ROOM title with additional products generating significant revenue could have a
material adverse effect on the Company's business, operating results and
financial condition. Moreover, if the Company's additional products currently in
development do not generate significant revenue, the anticipated decline in
future royalty revenue from the EMERGENCY ROOM title will have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business." The Company has completed the initial development
stage of the contemplated DISTRICT ATTORNEY title and is in the initial
development stage of the contemplated NEWS FLASH and ER CODE BLUE CAREER SIM-TM-
titles. No assurances can be given that the Company will be able to successfully
develop or complete any of the contemplated projects, or that any final product,
if developed, will be successfully marketed or will achieve customer acceptance.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements, the related notes thereto and other
financial information included herein.
DEVELOPMENT OF NEW PRODUCTS; UNPROVEN ACCEPTANCE OF THE COMPANY'S PRODUCTS,
INCLUDING THE EMERGENCY ROOM TITLE. The Company is at an early stage of
development and its earnings growth depends primarily upon increased market
acceptance of its software products, including the Company's newest title,
EMERGENCY ROOM, which was released in October, 1995, and is currently the only
product generating significant revenue for the Company. The Company currently
cannot recognize royalties received from IBM as revenue due to its inability to
comply with SFAS 48. Consequently, no royalty revenue for the EMERGENCY ROOM
title has been recognized in 1995. The Company receives no software sales
revenue from the EMERGENCY ROOM title due to its royalty arrangement with IBM.
There can be no assurance that the EMERGENCY ROOM title, or any of the Company's
future titles, will be completed, successfully marketed or achieve customer
acceptance. The Company's growth also depends on the Company's continued
introduction of new projects which will require significant additional
development, beta testing (testing of the Company's products with customers) and
additional investment prior to their introduction into the market. In addition,
upon notice from IBM of its decision not to proceed with the development of the
contemplated CAREER SIM-TM- NEWS FLASH title, the Company has initially decided
to develop such title without the co-funding assistance of IBM, which will cost
the Company substantially more than the Company's cost of co-developing the
EMERGENCY ROOM and DISTRICT ATTORNEY titles with IBM. There can be no assurances
that the Company will
13
<PAGE>
develop or complete the NEWS FLASH title with or without a co-development
partner or affiliate or pursuant to other arrangements. A failure to develop the
project may have a material adverse effect on the Company's business, operating
results and financial condition. See "-- Dependence on IBM." There can be no
assurance that the Company's product development efforts will progress further
with respect to any potential new products or that they will be successfully
completed. In addition, there can be no assurance that the Company's potential
new products will be capable of being produced in commercial quantities at
reasonable costs or that these potential products, if introduced, will be
successfully marketed or will achieve customer acceptance. See "-- Fluctuations
in Operating Results; Seasonality," "Management Discussion and Analysis of
Financial Condition and Results of Operations," and the Financial Statements,
the related notes thereto and other financial information included herein and
"Business."
DEPENDENCE ON NEW PRODUCTS AND PRODUCT ENHANCEMENT INTRODUCTIONS; PRODUCT
DELAYS. The Company's success in the software development business depends on,
among other things, the timely introduction of successful new products or
enhancements of existing products to replace declining revenues from products at
the latter stage of a product cycle. Consumer preferences for software products
are difficult to predict, and few consumer software products achieve sustained
market acceptance. If revenues from new products or enhancements do not replace
declining revenues from existing products, the Company's business, operating
results and financial condition could be materially adversely affected. The
process of developing software products such as those offered by the Company is
extremely complex and is expected to become more complex and expensive in the
future as new computer formats and technologies are developed. A significant
delay in the introduction of one or more new products or enhancements could have
a material adverse effect on the ultimate success of such products and on the
Company's business, operating results and financial condition, particularly in
view of the seasonality of the Company's business. See "-- Fluctuations in
Operating Results; Seasonality," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
CHANGING PRODUCT FORMATS. The Company must continually anticipate the
emergence of, and adapt its products to, popular computer formats for consumer
software. When the Company chooses to publish or develop a product for a
computer format, it must make a substantial development investment one to two
years in advance of shipments of products on that computer format. If the
Company invests in a computer format that does not achieve significant market
penetration, the Company's planned revenues from those products will be
adversely affected and the Company may not recover its development investment.
If the Company does not choose to publish or develop a computer format that
achieves significant market success, the Company's revenue growth may also be
adversely affected. The EMERGENCY ROOM title requires a standard 486
micro-processor computer with Microsoft-Registered Trademark- DOS 6.0, a double
speed CD-ROM drive, 50MHz CPU, 4 MB of free hard disk space, a 100% compatible
Sound Blaster sound card and an SVGA monitor to be played. The Company is not,
at the current time, however, pursuing hardware formats other than
IBM-compatible personal computers ("PCs") operating on the
Microsoft-Registered Trademark- Windows-Registered Trademark- 95 operating
system for its future titles, including the contemplated DISTRICT ATTORNEY, NEWS
FLASH and ER CODE BLUE titles, and there can be no assurance that the Company
has chosen to support the computer formats that ultimately will be successful.
See "Business -- Industry Background" and "-- Product Development Methodology."
DEVELOPING MARKET; NEW ENTRANTS. The market for CD-ROM computer software is
rapidly evolving and is characterized by an increasing number of market entrants
who have introduced or developed multimedia products and services. There are
thousands of CD-ROM products competing for retail shelf space that, even in
larger stores, is limited to 300 to 500 titles. Furthermore, as is typical in
the case of a rapidly evolving industry, demand and market acceptance for newly
introduced products and services are subject to a high level of uncertainty.
Because the market for CD-ROM computer software is rapidly changing, there can
be no assurance that market acceptance of the Company's products will be
achieved. See "Business -- Industry Background."
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DEPENDENCE ON PERSONAL COMPUTER SALES. The success of the Company is
dependent in part upon the continued consumer use of PCs. To date, the Company's
products have been produced for, and its product development efforts are
directed toward, multimedia PCs. While the Company may develop products for
other computer formats that it believes will achieve significant market
penetration, a leveling off or decline in the sales rate of multimedia PCs or
the demand for consumer software formatted for multimedia PCs could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Product Development Methodology."
COMPETITION. The computer software development industry is intensely
competitive and subject to rapid technological change. Because the edutainment
software market segment is still emerging and the cost barriers to entry into
this segment are relatively low, the Company expects competition to continue and
increase in the future. The Company's competitors range from small companies
with limited resources to large, more established producers of entertainment and
educational software, many of which have significantly greater assets and
greater financial, technical and personnel resources than those of the Company.
Increased competition, resulting from, among other things, the timing of
competitive product releases and the similarity of such products to those of the
Company, may result in significant price competition, reduced profit margins,
loss of shelf space or a reduction in sell-through of the Company's products at
retail stores, any of which could have a material adverse effect on the
Company's business, operating results or financial condition. In addition, the
Company believes that large software companies, media companies and film studios
are increasing their focus on the interactive entertainment and edutainment
sectors of the software market and, as a result of their financial and other
resources, name recognition, customer base and licensed rights, are significant
competitors in the software industry. Current and future competitors with
greater financial resources than the Company may be able to carry larger
inventories, undertake more extensive marketing campaigns, adopt more aggressive
pricing policies and make higher offers or guarantees to software developers and
co-development partners than the Company. New hardware formats and electronic
delivery systems may be introduced into the software market and potential new
competitors may enter the software development and distribution market,
resulting in greater competition for the Company. There can be no assurance that
the Company will have the resources required to respond effectively to market or
technological changes or to compete successfully with current or future
competitors or that competitive pressures faced by the Company will not
materially and adversely affect the Company's business, operating results or
financial condition. See "Business -- Competition."
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY. The Company may experience
significant quarterly fluctuations in net sales and operating results due to a
variety of factors, including fluctuations in the mix of products with varying
profit margins sold by the Company or its co-development partner, the size and
rate of growth of the consumer software market, market acceptance of the
Company's products and those of its competitors, development and promotional
expenses relating to the introduction of new products or enhancements of
existing products, projected and actual changes in computer formats, the timing
and success of product introductions, product returns, changes in pricing
policies by the Company or its co-development partner and its competitors, the
accuracy of retailers' forecasts of consumer demand, the timing of orders from
major customers, order cancellations, delays in shipment, and delays in the
recognition of royalty revenue from sales and consignment shipments of the
Company's products. The significant shifts in quarterly expenses experienced by
the Company throughout 1994 and 1995 are primarily due to changes in product
development expenses, which are net of co-funded development expenses. In
addition, general and administrative expenses increased during the third and
fourth quarters of 1995 due to an increase in the Company's overhead structure
and completion of the development phase of the EMERGENCY ROOM title. The Company
also expects to experience significant fluctuations in its quarterly profit
margins as a result of changes in the mix of products with varying profit
margins sold by the Company or its co-development partner from quarter to
quarter, the timing of product introductions and the recognition of royalty
revenue received from its co-development partner, IBM. In response to
competitive pressures, the Company or its co-development partner may take
certain pricing or marketing actions that could materially adversely affect the
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Company's business, operating results and financial condition. Products are
generally shipped by the Company's co-development partner as orders are received
and, accordingly, the Company currently operates with no backlog, and will not
until such time, if ever, as the Company manufactures the products it develops.
The Company's expense levels are based, in part, on its expectations regarding
future revenues and, as a result, operating results would be disproportionately
adversely affected by a decrease in revenues or a failure to meet the Company's
revenues expectations. Defective products may result in higher customer support
costs and product returns. Typically, revenues are highest during the fourth
fiscal quarter, decline in the first fiscal quarter and are lowest in the second
and third fiscal quarters. This seasonal pattern is due primarily to the
increased demand for the Company's products during the calendar year-end holiday
selling season. IBM has notified the Company that IBM expects sales of the
EMERGENCY ROOM title to be significantly lower in the first quarter of 1996 as
compared to the fourth quarter of 1995. Furthermore, due to the Company's
inability to comply with SFAS 48, no royalty revenue on the EMERGENCY ROOM title
will be recognized in the Company's Statements of Operations unless the Company
can comply with SFAS 48. Based on an analysis pursuant to the Company's Revenue
Recognition Policy of, among other things, (i) the Company's and IBM's
experience on EMERGENCY ROOM title sales and returns to date, (ii) additional
information and data on the EMERGENCY ROOM title which the Company anticipates
receiving from IBM, (iii) sales and returns of the Company's past products and
other information relating thereto, (iv) information regarding significant
purchasers of the Company's products, (v) sales and returns of comparable
computer software products of other developers and other information relating
thereto and (vi) computer software industry data and practices, the Company
anticipates that it will be able to comply with SFAS 48 and recognize royalty
revenue, net of estimated returns, on the EMERGENCY ROOM title no sooner than
for the third quarter of 1996. There can be no assurance, however, that the
Company will be able to recognize royalty revenue on the EMERGENCY ROOM title in
the Company's financial statements for the third quarter of 1996. When the
Company determines it can comply with SFAS 48 and does recognize royalty
revenue, future filings, including without limitation the footnotes to the
financial statements of the Company, will set forth the quarters in which
products were shipped to which such revenue relates. See "-- Dependence on IBM."
Other fluctuations in retail sales are related to the school market, which
generally purchases most products at the beginning of the school year in
September or in late spring, when software budgets must be expended. There can
be no assurance that the Company will achieve profitability and, even if
achieved, that such profitability will be consistent on a quarterly or annual
basis. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
PRODUCT RETURNS. The Company, through its co-development partner, IBM,
accepts product returns or provides markdowns or other credits on varying terms
in the event that the customer holds excess inventory of the Company's products.
When the Company has the ability, if ever, to record royalties on the accrual
basis, the Company will recognize no royalty revenue (net of estimated returns)
from IBM unless the Company's products are sold to distributors or through to
consumers by retailers in the case of consignment shipments. Further,
approximately one-half of the initial shipment of EMERGENCY ROOM units are being
sold on consignment and may be returned to IBM in any number and at any time if
they are not sold. In addition, it is typical in the software industry that
products shipped may be returned for a period of up to 180 days from the date of
shipping. Software products as complex as those published by the Company may
contain undetected errors when first introduced or when new versions are
released. It is the Company's practice to accept returns of defective, damaged
or shelf-worn products at any time. If the Company can comply with SFAS 48 and
recognize royalty revenue on the accrual basis of accounting, at the time of
product shipment, the Company will establish reserves, including reserves under
the Company's policies for stock balancing, price protection and returns of
defective, damaged and shelf-worn products, which will estimate the potential
for future returns of products based on historical return rates, seasonality of
sales, retailer inventories of the Company's products and other factors. Product
returns that exceed the Company's future reserves, or loss of or delay in market
acceptance of a new product as a result of software failures or otherwise, could
materially and adversely affect the Company's business, operating results
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and financial condition. Although the Company will maintain reserves which it
believes to be adequate with respect to product returns and price reductions,
there can be no assurance that actual returns to the Company will not exceed the
reserves to be established. Consequently, the Company's financial results of
subsequent periods may be adversely affected by returns of products shipped in
prior periods. See "Risk Factors -- Dependence on IBM," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business --
Marketing and Distribution."
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the
Public Offering, there has been no public market for the Common Stock. Although
an application has been made to have the Common Stock quoted and traded on The
Nasdaq SmallCap Market, there can be no assurance that an active trading market
in the Common Stock will develop or, if it does develop, that it will be
sustained after the completion of the Public Offering. The Public Offering price
for the Common Stock was determined by negotiation between the Company and the
Underwriter and is not necessarily related to the Company's asset value, net
worth or other established criteria of value. The Underwriter may make a market
in the Common Stock of the Company upon closing of the Public Offering, but
there is no assurance that the Underwriter will be successful in its efforts.
The loss of market makers or failure of market makers to make a market for the
Common Stock will have a material adverse effect on the market for the Common
Stock. See "Risk Factors" and "Underwriting." Market prices for the Common Stock
following the Public Offering will be influenced by a number of factors,
including quarterly variations in the financial results of the Company and its
competitors, changes in earnings, estimates by analysts, conditions in the
computer software industry, the overall economy and the financial markets.
CURRENT INDEBTEDNESS. After giving effect to the use of proceeds from the
Public Offering, the Company will have four outstanding unsecured promissory
notes, two of which are each in the principal amount of $73,200, payable to each
of Ariella J. Lehrer, Ph.D., the Chairman of the Company's Board of Directors,
President and Chief Executive Officer, and Stanley Wojtysiak, the Company's
Secretary and a Director. These promissory notes mature on March 31, 1997. The
Company also has outstanding an unsecured promissory note in the principal
amount of $260,051 payable to Dr. Lehrer's father-in-law, which matures on March
31, 1997, and an unsecured promissory note in the amount of $120,885 payable to
an unrelated third party over a one-year period beginning July 1, 1996. See
"Management's Discussion and Analysis of Operating Results and Financial
Condition" and "Certain Transactions." The Company has historically not made
principal payments on any of such indebtedness, although the Company has made
interest payments on such indebtedness from time to time in the past. After the
Public Offering, the Company anticipates making payments of all accrued interest
on such indebtedness and thereafter making principal and interest payments on
such indebtedness as they come due from revenue. Based on present operations,
there is no assurance that the Company will have available sufficient funds to
satisfy its current indebtedness as and when it comes due.
UNCERTAIN AVAILABILITY OF DEFERRED TAX ASSETS. The Company provides a
valuation allowance for deferred tax assets when it is more likely than not,
based on available evidence, that some portion or all of the deferred tax assets
will not be realized. In management's opinion, it cannot determine if it is more
likely than not that the Company will generate sufficient future taxable income
before 2010, the year after all currently available net operating loss
carryforwards expire, to utilize all of the Company's deferred tax assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements, the related notes thereto and other
financial information included herein.
DEPENDENCE UPON KEY INDIVIDUALS. The future success of the Company is
dependent to a significant degree upon the continuing performance and
contributions of its senior management and on its ability to attract, motivate
and retain highly qualified employees. In particular, the Company is highly
dependent on the management services and unique expertise of Dr. Lehrer
(Chairman of the Company's Board of Directors, President and Chief Executive
Officer). The Company currently maintains a $1,000,000 life insurance policy on
Dr. Lehrer, the beneficiary of which is the Company. The
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Company also has entered into employment agreements with Dr. Lehrer and certain
other members of the Company's senior management. See "Management -- Employment
Contracts, Termination of Employment and Change-in-Control Arrangements." The
loss of the services of any of the Company's senior management would have a
material adverse effect on the business operating results or financial condition
of the Company. Competition for highly qualified employees is intense, and there
can be no assurance that the Company will be able to retain its highly qualified
employees or that it will be able to attract, assimilate or retain other highly
qualified personnel in the future. The inability to attract and retain the
necessary technical, managerial and marketing personnel could have a material
adverse effect upon the Company's business, operating results or financial
condition. See "Business -- Employees" and "Management."
DILUTION AND DIVIDEND POLICY. Purchasers of the Common Stock in the Public
Offering will experience immediate and substantial dilution of approximately
$4.15 per share in the net tangible book value per share of Common Stock from
the $6.00 per share Public Offering price or approximately 69.2% of the purchase
price paid per share in the Public Offering. "Proforma net tangible book value"
represents the total amount of the Company's tangible assets less the Company's
total amount of liabilities; "net tangible book value per share" means such
excess divided by the number of shares of Common Stock outstanding. The Company
expects that it will retain all available earnings, if any, generated by its
operations for the development and growth of its business and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. In addition, the payment of cash dividends may be limited by financing
agreements or arrangements entered into by the Company in the future. See
"Dividend Policy" and "Dilution."
NO DIVIDENDS ON COMMON STOCK. The Company anticipates that for the
foreseeable future all earnings, if any, will be retained for the development,
marketing and distribution of software titles and for other corporate purposes.
Accordingly, the Company does not currently anticipate paying cash dividends in
the foreseeable future. See "Dividend Policy."
CONCENTRATION OF SHARE OWNERSHIP. Holders of Common Stock are entitled to
one vote per share on all matters on which the holders of Common Stock are
entitled to vote and the holders of Common Stock may cumulate their votes in the
election of directors. Immediately following the Public Offering, the Company's
directors and officers as a group collectively will have approximately 26.71% of
the combined voting power of the outstanding shares of Common Stock on a fully
diluted basis. Upon consummation of the Public Offering and conversion of
$700,000 in principal amount of the Convertible Note into 534,351 shares of
Common Stock and giving effect to exercise of the warrants granted by the
Company to EBC Trust Corporation ("EBC") to purchase 200,000 shares of Common
Stock, subject to adjustment under certain circumstances, at an initial purchase
price of $1.31 per share (the "Warrants"), EBC, the holder of the Convertible
Note, will have approximately 29.58% of the outstanding shares of Common Stock.
See "Principal Stockholders" and "Description of Capital Stock -- Common Stock."
There is no relationship or voting arrangement between any officer or director
of the Company and EBC or any officer or director of EBC.
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Public Offering,
the Company will have outstanding 2,282,551 shares of Common Stock, assuming
conversion of the Convertible Note, assuming no exercise of the Underwriter's
over-allotment option and assuming no exercise of outstanding options under the
Company's 1995 Stock Option/Stock Issuance Plan after December 31, 1995. Other
than the 1,000,000 shares sold in the Public Offering, 1,282,551 shares will be
subject to lock-up agreements restricting their transfer until 365 days after
the date of the Public Offering and will not be eligible for sale in the public
market for 365 days after the date of the Public Offering, except with the prior
written consent of the Underwriter. The holders of all such shares have agreed
with the Underwriter not to offer, sell, contract to sell or otherwise dispose,
directly or indirectly, any shares of Common Stock or securities exercisable for
Common Stock or exercise any registration rights with respect thereto for a
period of 365 days after the Public Offering. The Company has reserved 292,800
shares for issuance upon exercise of the Warrants, all of which are subject to
certain registration rights. The Registration Statement, of which this
Prospectus forms a part, covers the resale of
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(i) 534,351 shares of Common Stock to be issued prior to closing of the Public
Offering in connection with the conversion of $700,000 in principal amount of
the Convertible Note and (ii) 200,000 shares of Common Stock issuable upon
exercise of the Warrants (collectively, the "Resale Shares"). The Resale Shares
are being registered for resale, but are not, however, part of the underwritten
Public Offering. Upon consummation of the Public Offering, the Company will
issue the JBO Warrant to the Underwriter, which is exercisable into 92,800
shares of Common Stock 12 months following the date of the Public Offering. The
JBO Warrant contains certain demand and piggyback registration rights. After the
termination of the 365-day lock-up, an additional 720,000 shares of Common Stock
will be eligible for sale in the public market pursuant Rule 144 under the
Securities Act of 1993, as amended (the "Securities Act"), over the 12 months
following expiration of the lock-up. In addition, as of May 6, 1996, options to
purchase an aggregate of 390,000 shares of Common Stock granted under the
Company's 1995 Stock Option/Stock Issuance Plan (the "1995 Stock Option/Stock
Issuance Plan"), and 50,000 shares of Common Stock granted outside the 1995
Stock Option/Stock Issuance Plan, were outstanding, all of which are subject to
the 365-day lock-up described above. As of May 6, 1996, the Company had reserved
150,000 shares for issuance upon purchase by employees under the Company's
Employee Stock Purchase Plan, none of which had been purchased. See "Management
- -- Employee Stock Purchase Plan." The Company intends to register 50,000 shares
of Common Stock on a registration statement on Form S-8 shortly after the
effective date of the Public Offering that are reserved for issuance pursuant to
an option granted to a consultant as compensation for services rendered to the
Company in connection with the development of the EMERGENCY ROOM title. Sales of
substantial amounts of Common Stock in the public market (or the perception that
such sales could occur) after the Public Offering could adversely affect the
market price of the Common Stock. See "Description of Capital Stock --
Registration Rights" and "Shares Eligible for Future Sale."
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION AND DELAWARE LAW. The Board of Directors of the Company has the
authority to issue up to 5,000,000 shares of Preferred Stock (the "Preferred
Stock") and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no present plans to issue shares of
Preferred Stock. In addition, the Company will, upon consummation of the Public
Offering, be subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. In general, this statute prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless such
business combination is approved in the prescribed manner. These provisions of
the Company's Certificate of Incorporation and of the Delaware General
Corporation Law could have the effect of making it more difficult for a party to
acquire, or of discouraging a party from attempting to acquire, control of the
Company. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of Common Stock. See "Management --
Executive Officers and Directors," "Description of Capital Stock -- Preferred
Stock" and "-- Certain Provisions of the Delaware General Corporation Law."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND RISK OF LITIGATION. The
Company's success and ability to compete is dependent in part upon its
proprietary technology. The Company regards its technology as proprietary and
relies primarily on a combination of trademark, copyright, trade secret laws,
third-party non-disclosure agreements and other methods to protect its
proprietary rights. The source code for the Company's proprietary software is
protected both as a trade secret and as an unpublished and unregistered
copyrighted work. The EMERGENCY ROOM product contains proprietary software which
is comprised of the manager routines and system code for such product. The
Company is designing the contemplated DISTRICT ATTORNEY, NEWS FLASH and ER CODE
BLUE products using the
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same basic software manager routines and system code as the EMERGENCY ROOM
product. In addition, since release of the EMERGENCY ROOM product, the Company
has made improvements in the software manager routines and system code for use
in its contemplated products. The technology in which the Company has
proprietary rights is embodied in its software. This includes the EMERGENCY ROOM
software, the improved software which it intends to utilize in its contemplated
products and its off-line tools for translating data. The Company presently does
not have other technology in which it has proprietary rights. The Company's
software may give it a competitive advantage with respect to a competitor
entering the market in that the competitor would have to undergo the software
development needed to make its products. However, a competitor could
independently develop software which provides the same results as does the
Company's software without copying the Company's software such that the
Company's proprietary rights are not violated. The Company's software does not
represent the only way in which the results and effects of the Company's
products could be achieved. Furthermore, despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use the Company's
products or technology without authorization, or to develop similar or superior
technology independently. In addition, copyright and trade secret protection may
be unavailable or limited in certain foreign countries. The Company generally
enters into confidentiality and invention assignment agreements with its
employees and consultants, and generally limits access to and distribution of
its software, documentation and other proprietary information. Nevertheless,
there can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology. In addition, litigation may be necessary in
the future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the proprietary
rights of others, or to defend against claims of infringement or invalidity.
Such litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, operating
results or financial condition. See "Business -- Proprietary Rights."
There can be no assurance that infringement or invalidity claims (or claims
for indemnification resulting from infringement or invalidity claims) by third
parties will not be asserted or prosecuted against the Company or that any such
assertions or prosecutions will not materially adversely affect the Company's
business, operating results or financial condition. Irrespective of the validity
or the successful assertion of such claims, the Company would incur significant
costs and diversion of resources with respect to the defense thereof which could
have a material adverse effect on the Company's business, operating results or
financial condition. If any claims or actions are asserted against the Company,
the Company may seek to obtain a license under a third party's intellectual
property rights. There can be no assurance, however, that under such
circumstances a license would be available under reasonable terms or at all. See
"Business -- Proprietary Rights."
UNCERTAIN MANAGEMENT OF GROWTH. The Company is undergoing and expects to
continue to undergo in the future a period of rapid expansion and growth. In
response, the Company will be required to implement a variety of new and/or
upgraded management systems and expand its administrative staff. In addition,
the Company expects to develop three CAREER SIM-TM- titles, the contemplated
DISTRICT ATTORNEY, NEWS FLASH and ER CODE BLUE titles at the same time. The
Company has never developed three titles at the same time, and there can be no
assurance that the Company will be able to develop successfully any or all of
such titles. There can be no assurance that the Company's systems, financial
resources, procedures and controls will be adequate to support the Company's
operations or the development and marketing of such titles, or that Company
management will be able to implement the strategies necessary to exploit fully
the market window for the Company's products. The Company has recently hired a
new chief financial officer and an executive producer and will continue to hire
key personnel in high level management positions in the future. The Company's
ability to manage its future growth effectively will require it to continue to
attract, motivate and retain highly qualified employees and to improve its
management information systems. If the Company is unable to manage expansion and
growth effectively, the Company's business, operating results and financial
condition will be materially adversely affected. See "Business -- Company
Strategy," "-- Products," "-- Employees" and "-- Facilities."
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IMPACT OF POTENTIAL NASDAQ DELISTING. The Company has applied for trading
of the Common Stock on The Nasdaq SmallCap Market, subject to official notice of
issuance. The National Association of Securities Dealers, Inc. ("NASD") has
rules which establish criteria for the initial and continued listing of
securities on The Nasdaq SmallCap Market. Under the rules for initial listing, a
company must have, among other things, at least $4,000,000 in total assets, at
least $2,000,000 in total stockholders' equity and a minimum bid price of $3.00
per share. For continued listing on The Nasdaq SmallCap Market, a company must
maintain, among other things, at least $2,000,000 in total assets, at least
$1,000,000 in stockholders' equity, and a minimum bid price of $1.00 per share.
Giving effect to the receipt and application of the net proceeds of the Public
Offering on December 31, 1995, the Company would expect to have approximately
$5,300,000 in total assets and approximately $4,400,000 in total stockholders'
equity.
If the Company were to continue to incur operating losses, it might not be
able to maintain the standards for continued listing and the listed securities
could be subject to delisting from The Nasdaq SmallCap Market. If the Company's
securities are delisted, trading in the delisted securities could thereafter be
conducted on the NASD Bulletin Board which is commonly referred as the "pink
sheets." If this were to occur, an investor would find it more difficult to
dispose of the Company's securities or to obtain accurate quotations as to the
price of the Company's securities and it could have an adverse effect on the
coverage of news concerning the Company. In addition, if the Company's
securities were delisted, they would be subject to a rule that imposes
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(accredited investors are generally persons having net worth in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with a
spouse). For transactions covered by this rule, the broker-dealer must make a
special suitability determination for the purchaser and must have received the
purchaser's written consent to the transaction prior to sales and further must
disclose certain information concerning the risks of purchasing low-priced
securities on the market for such securities. Consequently, delisting, if it
occurred, would adversely affect the ability of broker-dealers to sell the
Common Stock and the ability of purchasers in the Public Offering to sell the
Common Stock in the secondary market and would make subsequent financing more
difficult.
In order for the Common Stock to be included for trading on The Nasdaq
SmallCap Market, there must exist market makers and specialists, respectively,
to support trading in the Common Stock. As of the date of this Prospectus, two
brokerage firms, including the Underwriter, sufficient to satisfy the
requirements of The Nasdaq SmallCap Market have indicated their intention to
engage in market making activities with respect to the Common Stock. There is no
obligation on the part of the Underwriter, or any other brokerage firm, to
continue to act as a market maker. In the event that the market makers and
specialists cease to function as such, public trading in the Common Stock will
be adversely affected or may cease entirely. See "Underwriting."
UNDERWRITER'S INFLUENCE ON THE MARKET MAY HAVE ADVERSE CONSEQUENCES. A
significant number of shares of Common Stock may be sold to customers of the
Underwriter. Such customers subsequently may engage in transactions for the sale
or purchase of such securities through or with the Underwriter. Although it has
no legal obligation to do so, the Underwriter may from time to time in the
future make a market in and otherwise effect transactions in the Common Stock.
To the extent the Underwriter acts as a market maker in the Common Stock, it may
be a dominating influence in that market. The price and liquidity of Common
Stock may be affected by the degree, if any, of the Underwriter's participation
in the market. Such market making activities, if commenced, may be discontinued
at any time or from time to time by the Underwriter without obligation or prior
notice. Any discontinuance by the Underwriter of its market making activities
will adversely affect the price and liquidity of the securities. See
"Underwriting."
UNDERWRITER'S LIMITED EXPERIENCE. The Underwriter was organized as a
broker-dealer in 1993, and the Public Offering is the first public offering
underwritten by the Underwriter. See "Underwriting."
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USE OF PROCEEDS
The net proceeds to be received from the sale of the 1,000,000 shares of
Common Stock offered by the Company in the Public Offering at an estimated
Public Offering price of $6.00 per share and, after deducting underwriting
discounts and estimated expenses payable by the Company, are estimated to be
approximately $4,772,000. The Company expects to use $300,000 of such proceeds
to repay $300,000 in principal indebtedness to EBC under the Convertible Note.
The Convertible Note matures on November 21, 1996 and has an interest rate of
10% per annum. The Company expects to use $25,000 of such proceeds to pay a
consultant pursuant to the terms of a fee agreement dated September 29, 1995
between the Company and such consultant. The remainder of such net proceeds will
be used to fund the Company's portion of the completion costs for the
contemplated DISTRICT ATTORNEY title and co-development of one new contemplated
CAREER SIM-TM- title, the ER CODE BLUE title, and the development of another new
contemplated CAREER SIM-TM- title, the NEWS FLASH title, without the co-funding
assistance of IBM, the primary costs of which are salary expense and external
video production costs, and for working capital additions to the Company's
management infrastructure, relocation of the Company to a larger facility and
general corporate purposes.
DIVIDEND POLICY
The Company has not paid dividends since its inception. The Company
currently intends to retain all earnings, if any, for use in the expansion of
its business and therefore does not anticipate paying any dividends in the
foreseeable future. In addition, the payment of cash dividends may be limited by
financing agreements entered into by the Company in the future.
22
<PAGE>
DILUTION
At December 31, 1995, the Company had a proforma net tangible book value
(giving effect to the issuance of 7,200 shares of Common Stock to certain
individuals for services performed and the conversion of $700,000 in principal
amount of the Convertible Note into 534,351 shares of Common Stock at a
conversion price of $1.31 per share) of $(671,945), or $(0.52) per share.
"Proforma net tangible book value" represents the total amount of the Company's
tangible assets less the Company's total amount of liabilities; "proforma net
tangible book value per share" means such excess divided by the number of shares
of Common Stock outstanding. After giving effect to the sale by the Company of
the 1,000,000 shares of Common Stock in the Public Offering (assuming the Public
Offering price of $6.00 per share and after deduction of the estimated
underwriting discounts and commissions and estimated Public Offering expenses
payable by the Company), and the application of the estimated net proceeds to be
received by the Company therefrom, the pro forma net tangible book value of the
Common Stock at December 31, 1995 would have been approximately $4,229,996, or
$1.85 per share. See "Use of Proceeds." This represents an immediate increase in
net tangible book value of $2.37 per share to existing stockholders and an
immediate dilution of $4.15 or approximately 69.2% per share to investors
purchasing shares of Common Stock in the Public Offering (the "New Investors").
"Dilution" per share represents the difference between the price per share to be
paid by the New Investors and the pro forma net tangible book value per share
after giving effect to the Public Offering. The following table illustrates such
dilution:
<TABLE>
<S> <C> <C>
Assumed Public Offering price per share............................. $ 6.00
Net tangible book value per share before giving effect to the
Public Offering.................................................. $ (0.52)
Increase in net tangible book value per share attributable New
Investors........................................................ 2.37
---------
Pro forma net tangible book value per share after giving effect to
the Public Offering................................................ 1.85
---------
Dilution per share to New Investors................................. $ 4.15
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis at December 31, 1995,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and to be paid by New Investors at an assumed Public Offering price of $6.00 per
share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Founders........................................... 720,000 31% $ 5,000 0% $ 0.01
Other Existing Stockholders........................ 562,551 25% 756,400 11% 1.34
New Investors...................................... 1,000,000 44% 6,000,000 89% 6.00
----------- --- ------------- ---
Total.............................................. 2,282,551 100% $ 6,761,400 100%
----------- --- ------------- ---
----------- --- ------------- ---
</TABLE>
The foregoing calculations assume no exercise of any outstanding stock
options or warrants to purchase Common Stock. During the year ended and
subsequent to December 31, 1995, the Company (i) issued the Warrants, (ii)
issued stock options to purchase an aggregate of 440,000 shares of Common Stock
pursuant to the Company's 1995 Stock Option/Stock Issuance Plan and certain
stock option grants outside the 1995 Stock Option/Stock Issuance Plan at a
weighted average exercise price of $5.09 per share, (iii) had an aggregate of
131,800 shares of Common Stock reserved for future issuance under the Company's
1995 Stock Option/Stock Issuance Plan, (iv) reserved an aggregate of 150,000
shares of Common Stock for issuance under the Company's Purchase Plan and (v)
issued the JBO Warrant. To the extent the Warrants are exercised there will be
further dilution to New Investors. See "Management -- 1995 Stock Option/Stock
Issuance Plan," "-- Employee Stock Purchase Plan" and "Shares Eligible for
Future Sale."
23
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
December 31, 1995, (ii) pro forma as of December 31, 1995 giving effect to the
reincorporation of the Company as a Delaware corporation, the issuance of
534,351 shares of Common Stock upon conversion of $700,000 in principal amount
of the Convertible Note and the issuance of 7,200 shares of Common Stock to
certain individuals for services performed and (iii) as adjusted as of December
31, 1995 to reflect the sale of 1,000,000 shares of Common Stock offered by the
Company hereby (at an assumed Public Offering price of $6.00 per share after
deducting the estimated underwriting discounts and commissions and Public
Offering expenses) and the application of the estimated net proceeds therefrom.
This table should be read in conjunction with the "Use of Proceeds," "Management
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Financial Statements, the related notes thereto and other
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------------------------
PUBLIC
PRO FORMA OFFERING AS
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED (3)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Notes payable and current portion of long-
term debt (1)............................... 332,842 0 332,842 (272,400)(6) 60,442
------------ ------------ ------------ ------------ ------------
Long-term debt and accrued interest, less
current portion (1)......................... 1,005,242 (389,798)(4) 615,444 0 615,444
------------ ------------ ------------ ------------ ------------
Stockholders' equity:
Preferred Stock, par value $.001 per share,
5,000,000 shares authorized; none issued
and outstanding........................... 0 0 0 0 0
Common Stock, par value $.001 per share,
10,000,000 shares authorized; 741,000
shares issued and outstanding
(historical), 1,282,551 shares issued and
outstanding (pro forma), 2,282,551 issued
and outstanding (as adjusted) (2)......... 546,823 714,400(5) 1,261,223 4,772,000(7) 6,033,223
Accumulated deficit........................ (1,371,413) (310,202)(4) (1,681,615) (45,105)(8) (1,726,720)
------------ ------------ ------------ ------------ ------------
Total Equity............................. (824,590) 404,198 (420,392) 4,726,895 4,306,503
------------ ------------ ------------ ------------ ------------
Total Capitalization......................... 513,494 14,400 527,894 4,454,495 4,982,389
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
- --------------------------
(1) See Notes 4, 6, 8 and 9 of Notes to Financial Statements for information
concerning the Company's commitments.
(2) Excludes (i) 200,000 shares of Common Stock reserved for issuance upon
exercise of the Warrants, (ii) 92,800 shares of Common Stock reserved for
issuance upon exercise of the JBO Warrant, (iii) an aggregate of 440,000
shares of Common Stock issuable upon exercise of outstanding stock options,
(iv) an aggregate of 131,800 shares of Common Stock reserved for future
issuance under the Company's 1995 Stock Option/Stock Issuance Plan and (v)
an aggregate of 150,000 shares of Common Stock reserved for future issuance
under the Company's Purchase Plan. See "Management -- 1995 Stock
Option/Stock Issuance Plan," "Certain Transactions," "Shares Eligible for
Future Sale" and Note 8 of Notes to Financial Statements.
(3) Adjusted to give effect to the use of the estimated proceeds of the Public
Offering based on an estimated Public Offering price of $6.00 per share. See
"Use of Proceeds."
(4) Gives effect to the conversion into common stock of $700,000 of convertible
debt, less the associated unamortized original issue discount of $310,202
which has been recognized as interest expense on the date of conversion.
(5) Gives effect to the conversion into common stock of $700,000 of convertible
debt and the issuance of 7,200 shares of common stock valued at $14,400.
(6) Gives effect to the repayment of $300,000 of debt, less the associated
unamortized original issue discount of $27,600.
(7) Gives effect to the net proceeds received from the Public Offering of
$4,772,000.
(8) Gives effect to the recognition in interest expense of the unamortized
original issue discount of $27,600 on debt repaid with the proceeds of the
Public Offering, and the recognition in interest expense of deferred loan
fees, associated with the aforementioned repaid debt, of $17,505.
24
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data set forth below with respect to the years
ended December 31, 1993, 1994 and 1995, and the balance sheet data at December
31, 1994 and 1995 are derived from, and are qualified by reference to, the
audited financial statements included elsewhere in this Prospectus. The
statement of operations data set forth below with respect to the years ended
December 31, 1991 and 1992 and the balance sheet data at December 31, 1991, 1992
and 1993 are derived from the unaudited financial information prepared on the
same basis as the audited financial statements. In the opinion of management,
all unaudited financial information includes all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the information
presented. The information presented below should be read in conjunction with
and is qualified by "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Financial Statements, the related
notes thereto and other financial information included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Royalties................................... $ 12,272 $ 17,657 $ 34,819 $ 16,809 $ 9,179
Software sales.............................. 216,397 158,146 421,715 69,856 36,399
Consulting.................................. 0 0 0 100,000 6,000
------------ ------------ ------------ ------------ -------------
Total..................................... $ 228,669 $ 175,803 $ 456,534 $ 186,665 $ 51,578
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Costs and expenses:
Cost of royalties........................... 0 0 0 0 13,939
Cost of software sales...................... 98,640 45,754 177,661 46,783 31,528
Product development (1)..................... 109,215 193,879 81,959 196,595 72,951
General and administrative.................. 61,544 111,643 124,634 133,644 336,457
Selling..................................... 2,265 2,784 31,467 9,829 21,216
------------ ------------ ------------ ------------ -------------
Total..................................... 271,664 354,060 415,721 386,851 476,091
------------ ------------ ------------ ------------ -------------
Income (Loss) from operations................. (42,995) (178,257) 40,813 (200,186) (424,513)
Interest expense.............................. 11,493 25,251 41,775 51,707 267,005
------------ ------------ ------------ ------------ -------------
Net loss...................................... $ (54,488) $ (203,508) $ (962) $ (251,893) $ (691,518)
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Pro forma net loss (2)........................ $ (779,768)
-------------
-------------
Net loss per common share..................... $ (0.04) $ (0.15) $ 0 $ (0.18) $ (0.49)
Pro forma net loss per common share........... $ (0.55)
Dividends per share........................... 0 0 0 0 0
Weighted average common stock shares
outstanding.................................. 1,396,218 1,396,218 1,396,218 1,396,218 1,396,218
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------------
1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 60,728 $ 756 $ 3,389 $ 20,750 $ 365,190
Working capital (deficiency).................. (160,878) (390,578) 16,631 (186,013) (162,097)
Total assets.................................. 74,193 24,537 191,601 96,492 710,890
Long-term debt (including current portions)... 174,471 378,046 485,673 626,431 1,338,084
Stockholders' deficit......................... (218,532) (422,040) (423,002) (674,895) (824,590)
</TABLE>
- ------------------------
(1) Product development expenses for the years ended December 31, 1993, 1994,
and 1995 are net of co-funding of development expenses of $141,162, $338,058
and $261,410, respectively.
(2) Reflects a proforma adjustment of $88,250 for increased compensation expense
as a result of assuming employment agreements entered into during 1995 and
1996 had been in effect as of January 1, 1995.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements, Notes to Financial Statements and other financial information
included herein. Certain statements set forth herein are forward-looking and
involve risks and uncertainties. For information regarding potential factors
that could have a material adverse effect on the Company's business, operating
results and financial condition refer to the "Risk Factors" section.
OVERVIEW
The Company was organized in California in 1989, as a successor to a
partnership formed in 1986, and was reincorporated in Delaware in March, 1996
through a merger with and into its wholly-owned subsidiary, which was
incorporated in Delaware in 1995. The Company develops software products for the
rapidly growing "edutainment" market. An edutainment product combines
entertainment and education content for home and educational institutions, in
which learning is an integral part of playing a game. The EMERGENCY ROOM title,
the Company's first and currently only marketed CAREER SIM-TM- title, is a
multimedia computer simulation designed to provide a realistic and involving
experience of what it is like to be an emergency room doctor.
The Company has entered into co-development agreements with IBM for its
first two CAREER SIM-TM- titles, including the EMERGENCY ROOM title, which IBM
began marketing in October, 1995, and the contemplated DISTRICT ATTORNEY title.
Under such co-development agreements, IBM co-funds development expenses that are
approximately equal to one-half of the projected cost for each title. The amount
of the co-funding to be provided by IBM, which is developed from projections of
the development costs made by the Company and reviewed by IBM, is an agreed upon
dollar amount specified in the development agreement. Funds are committed by IBM
based on milestones developed for each title that approximate the time when
costs are incurred by the Company. This co-funding, as recognized in the
Company's Statements of Operations, has been offset against product development
expenses. The Company recognized $141,162, $338,058 and $261,410 in product
development expense co-funding, or approximately 63%, 63% and 78% of the
Company's total product development expenses, for the years ended December 31,
1993, 1994 and 1995, respectively. This co-funding provided by IBM exceeded the
anticipated 50% product development expense co-funding due to variances between
projected and actual costs of developing the EMERGENCY ROOM title. The variance
was due to this projection being the first projection developed by the Company
for this type of software product. In addition, the Company capitalized $90,446
of product development costs during 1995, which caused the co-funding percentage
to increase to 78% from 63% in the prior year. The Company expects this co-
funding percentage to more closely approximate 50% on future co-developed
products due to the Company having more experience in projecting product
development costs. The loss of IBM as a co-development partner would have a
material adverse effect on the Company's business, operating results and
financial condition.
DEPENDENCE ON THE ER LICENSE AGREEMENT. Pursuant to the ER License
Agreement, (i) the Company has granted IBM an exclusive license to, among other
things, use, manufacture, sell and distribute the EMERGENCY ROOM title which IBM
began marketing in October, 1995, (ii) IBM has a right of first refusal on
derivative works within 12 months of acceptance of the title by IBM and (iii)
IBM is contractually obligated to pay the Company a royalty of a stated
percentage of revenue (net of returns and allowances) within 60 days after the
conclusion of each calendar quarter. If IBM exercises its right of first refusal
under the ER License Agreement, the terms and conditions, including royalty
obligations, will be negotiated by IBM and the Company. The ER License Agreement
may be terminated by either party at any time for cause. The EMERGENCY ROOM
title is currently being marketed and packaged as a product of IBM. Although
pursuant to the ER License Agreement the Company is the sole and exclusive owner
of the EMERGENCY ROOM title and has all copyrights thereto,
26
<PAGE>
the packaging of the first 45,000 EMERGENCY ROOM CD-ROM disks shipped mistakenly
indicates that IBM has the copyright thereto. IBM has, however, agreed to
designate the Company's copyright of the EMERGENCY ROOM title on the packaging
of subsequent units and the CD-ROM disk.
DEPENDENCE ON THE DA LICENSE AGREEMENT. The Company also has entered into
the DA License Agreement with IBM for the development and licensing of, the
DISTRICT ATTORNEY title, a second contemplated CAREER SIM-TM- title involving
the legal profession. Because the DISTRICT ATTORNEY title is currently in the
initial development stage, there can be no assurance that the Company will be
able to develop or complete the project or that the final product, if developed,
will be marketed under such title. Pursuant to the DA License Agreement, the
Company has granted IBM an exclusive license to, among other things, use,
manufacture, sell and distribute the DISTRICT ATTORNEY title, and IBM (i) has
sole responsibility for the marketing, distribution, sale and licensing of the
title which will be marketed and identified as an IBM product, (ii) may
terminate the DA License Agreement at any time with or without cause, (iii) has
a right of first refusal on derivative works, including sequels, within 12
months of acceptance of the title by IBM and (iv) pays the Company a royalty of
a stated minimum percentage of revenue (net of returns and allowances) within 60
days after the conclusion of each calendar quarter for U.S. transactions and
within 90 days after the conclusion for each calendar quarter for non-U.S.
transactions. If IBM exercises its right of first refusal under the DA License
Agreement, the terms and conditions, including royalty obligations, will be
negotiated by IBM and the Company.
The Company is currently dependent upon IBM to co-fund product development
expenses under the DA License Agreement. Co-funding of development expenses by
IBM is based on milestones developed for each contemplated title that
approximate the time when development costs are incurred by the Company. As of
December 31, 1995, $650,000 of the total contractual future development expense
co-funding had not been paid to the Company under the DA License Agreement. This
co-funding will be earned and received in the future by the Company as it
completes development milestones set forth in the DA License Agreement. The
Company anticipates that the contemplated DISTRICT ATTORNEY title will be
released by IBM in March 1997, and that the Company will begin to receive
royalty checks on shipments of such title in the following quarter. Royalty
revenue, if any, from the contemplated DISTRICT ATTORNEY title will only be
recognized in accordance with SFAS 48 and the Company's Revenue Recognition
Policy. Although the Company is currently unable to comply with SFAS 48 and
recognize royalty revenue on its only CAREER SIM-TM- title and IBM has limited
distribution experience for computer software titles, the Company anticipates
that if sales of the contemplated DISTRICT ATTORNEY title are approximately
equal to sales of the EMERGENCY ROOM title, royalty revenue from the
contemplated DISTRICT ATTORNEY title would be approximately equal to estimated
royalty revenue from the EMERGENCY ROOM title. There can be no assurance,
however, that sales of the contemplated DISTRICT ATTORNEY title, if successfully
completed and marketed, will be approximately equal to sales of the EMERGENCY
ROOM title. If IBM were to terminate the DA License Agreement, there can be no
assurance that the Company would be able to replace IBM as a co-development
partner or that the Company would be able to enter into an agreement with
another co-development partner for the co-funding of the Company's products,
including, among other things, co-funding of development expenses, on terms
similar to the IBM Agreements. See "Risk Factors -- Capital Requirements;
Additional Financing Required;" "-- Dependence on IBM."
REJECTION OF THE CONTEMPLATED NEWS FLASH TITLE. On January 17, 1996, the
Company entered into a letter agreement with IBM for the preparation of the
design specification of the contemplated third CAREER SIM-TM- title, the NEWS
FLASH title. Under such letter agreement, the Company delivered the final
working design specification for such title on March 12, 1996. On April 16,
1996, IBM notified the Company of its decision not to continue the contemplated
NEWS FLASH project. Pursuant to the terms of such letter agreement with respect
to the contemplated NEWS FLASH project, the Company is free to continue
development of such project independent of IBM. If the Company develops such
project with a third party, the Company is obligated to return to IBM all
amounts paid by IBM to the Company pursuant to such letter agreement. As a
result of IBM's notification, the Company has
27
<PAGE>
decided to develop such title on its own, which will cost the Company
substantially more than the Company's cost of co-developing the EMERGENCY ROOM
and DISTRICT ATTORNEY titles with IBM, although the Company may enter into a
co-development agreement, affiliate label distribution relationship or other
arrangement with respect to the contemplated NEWS FLASH title. There can be no
assurances that the Company will develop or complete the NEWS FLASH title with
or without a co-development partner or affiliate or pursuant to other
arrangements. See "Risk Factors -- Development of New Products; Unproven
Acceptance of the Company's Products, Including the EMERGENCY ROOM Title."
On March 15, 1996, the Company entered into a non-binding letter of intent
with IBM to begin negotiations on a development and license agreement for a
contemplated fourth CAREER SIM-TM- title, the contemplated ER CODE BLUE title.
Under such letter of intent, the Company will provide IBM with a detailed
budget, anticipated development schedule and certain other information about the
target audience, estimated sales volume and price and third party involvement.
Pursuant to such letter of intent, (i) neither the Company nor IBM is under any
obligation to conclude any transaction they contemplate or discuss, (ii) either
the Company or IBM can end discussions freely at any time for any reason, (iii)
neither the Company nor IBM will have any liability to the other for failure to
consummate any transaction, and (iv) all discussion, proposals, term sheets,
draft agreements and other similar materials will be null and void if
discussions are terminated. On April 17, 1996, IBM notified the Company that it
is having internal discussions on how to best utilize its resources in the
consumer software market, and that such discussions could affect IBM's decision
to enter into a development and licensing agreement regarding the contemplated
ER CODE BLUE title. The Company anticipates that if it enters into a development
and license agreement with respect to the contemplated ER CODE BLUE title in the
second quarter of 1996, such title would be released into the market in the
third quarter of 1997, and that the Company will begin to receive royalty checks
on shipments of such title in the following quarter. Royalty revenue, if any,
from the contemplated ER CODE BLUE title will only be recognized in accordance
with SFAS 48 and the Company's revenue recognition policy. Although the Company
is currently unable to comply with SFAS 48 and recognize royalty revenue on its
only CAREER SIM-TM- title and IBM has limited distribution experience for
computer software game titles, the Company anticipates that sales of the
contemplated ER CODE BLUE title will be approximately equal to sales of the
EMERGENCY ROOM title. There can be no assurance, however, that sales of the
contemplated ER CODE BLUE title, if successfully completed and marketed, will be
approximately equal to sales of the EMERGENCY ROOM title. There can be no
assurances that the Company will enter into an agreement with IBM for the
development of the contemplated ER CODE BLUE project, that the Company will be
able to develop or complete such project or that the final product, if
developed, will be marketed under such title. See "Risk Factors -- Dependence on
IBM."
On April 17, 1996, IBM also notified the Company that, at the present time,
it is not prepared to commit to additional projects, including a new project for
which the Company submitted a proposal to IBM in April 1996, regardless of the
Company's willingness to fund such projects in 1996. There can be no assurances
that IBM will commit to any additional projects with the Company in the future.
The Company anticipates that each of these titles will be completed on time
and at the costs originally determined. However, unforeseen technical problems
could result in higher development costs per title, longer periods for title
completion and delays in introduction of titles to the market. See "Risk
Factors." Each license agreement may be terminated by the Company's
co-development partner at any milestone and there can be no assurance that the
Company will be able to recover any of the funds it has expended for
co-development of such products. The Company reserves the right, at the
discretion of its Board of Directors, to reallocate its use of the net proceeds
of the Public Offering in response to these and other factors. Pending the use
of the net proceeds for such purposes, the Company will invest such proceeds in
short-term, interest-bearing investments.
Currently the Company's revenue is derived from royalties, software sales
and consulting fees. IBM currently ships the EMERGENCY ROOM title to IBM's
customers under sales and consignment shipment arrangements. Royalty revenues
consist of royalties earned on sales of software developed with IBM, from which
the Company earns a specified percentage of the sales price or a specified
dollar
28
<PAGE>
amount per unit. To date, IBM has not provided the Company with sufficient,
timely financial data and information about sales and consignment shipments of
the EMERGENCY ROOM title during 1995 in order for the Company to recognize
royalty revenue on the accrual basis in accordance with SFAS 48. In addition,
the Company currently cannot reasonably estimate future product returns as
required by SFAS 48 due to the EMERGENCY ROOM title's limited return history.
The Company will not recognize royalty revenue from IBM on a cash basis unless
it can comply with SFAS 48. There can be no assurance, however, that IBM will
provide the Company with sufficient financial data and information in order for
the Company to recognize royalty revenue on the accrual basis in accordance with
SFAS 48. Cash received for royalty revenues on consignment shipments made by IBM
are only recognized when both (i) the Company receives evidence of product
sell-through from IBM and (ii) the Company can comply with SFAS 48. Based on an
analysis pursuant to the Company's Revenue Recognition Policy of, among other
things, (i) the Company's and IBM's experience on EMERGENCY ROOM title sales and
returns to date, (ii) additional information and data on the EMERGENCY ROOM
title which the Company anticipates receiving from IBM, (iii) sales and returns
of the Company's past products and other information relating thereto, (iv)
information regarding significant purchasers of the Company's products, (v)
sales and returns of comparable computer software products of other developers
and other information relating thereto and (vi) computer software industry data
and practices, the Company anticipates that it will be able to comply with SFAS
48 and recognize royalty revenue, net of estimated returns, on the EMERGENCY
ROOM title no sooner than for the third quarter of 1996. There can be no
assurance, however, that the Company will be able to recognize royalty revenue
on the EMERGENCY ROOM title in the Company's financial statements for the third
quarter of 1996. When the Company determines it can comply with SFAS 48 and does
recognize royalty revenue, future filings, including without limitation the
footnotes to the financial statements of the Company, will set forth the
quarters in which products were shipped to which such revenue relates. No
royalty revenue from the EMERGENCY ROOM title developed with IBM has been
recognized in the Company's Statements of Operations for the years ended
December 31, 1993, 1994 and 1995. Software sales, which consist of sales of
Company-owned software by the Company, are recorded at the time of shipment
provided that no significant vendor and post-contract support obligations remain
outstanding and collection of the resulting receivable is deemed probable by
management. Consulting revenue includes a variety of consulting services,
including comprehensive studies of the edutainment software market performed for
the Company's software co-development partner. Consulting revenue is recognized
when services are performed.
Product development costs, which are net of co-funding of development
expenses, primarily include personnel expenses and costs associated with
external video production for use in the Company's software titles. Co-funding
of development expenses by IBM is based on milestones developed for each
contemplated title that approximate the time when development costs are incurred
by the Company. In exchange, the Company's co-development partner is granted
certain rights in the finished product relating to, among other things,
marketing, distribution, trademarks and derivative products. Co-funding of
development expenses is recognized as a ratio of related product development
costs as these costs are incurred. This ratio is calculated by dividing the
total estimated co-funded development expenses to be received by the total
estimated product development costs. Cost of royalties consists of the
amortization of capitalized software costs. In accordance with Statement of
Financial Accounting Standards No. 86 (SFAS 86), the Company capitalizes
internal development costs, net of related co-funded development expenses, on a
project when technological feasibility for such project has been established.
The Company ceases capitalizing such costs when the products derived from the
project are available for general release to customers. The capitalized costs
are then amortized over the useful life of the products. Cost of software sales
consists of product packaging and documentation. Selling expenses primarily
include freight and miscellaneous advertising. General and administrative
expenses are primarily personnel expenses, professional expenses and other
overhead costs.
The Company's prospects must be considered in light of the risks, expenses
and difficulties encountered by companies in early stages of development,
particularly companies in new and rapidly
29
<PAGE>
evolving markets. The Company has incurred net losses since inception and
expects to continue to operate at a loss during 1996. As of December 31, 1995,
the Company had an accumulated deficit of $1,248,513.
SEASONALITY
Typically, shipments are highest during the fourth fiscal quarter, decline
in the first fiscal quarter and are lowest in the second and third fiscal
quarters. This seasonal pattern is due primarily to the increased demand for the
Company's products during the calendar year-end holiday selling season.
Furthermore, due to the Company's inability to comply with SFAS 48, no royalty
revenue on the EMERGENCY ROOM title will be recognized in the Company's
Statement of Operations unless the Company can comply with SFAS 48. Based on an
analysis pursuant to the Company's Revenue Recognition Policy of, among other
things, (i) the Company's and IBM's experience on EMERGENCY ROOM title sales and
returns to date, (ii) additional information and data on the EMERGENCY ROOM
title which the Company anticipates receiving from IBM, (iii) sales and returns
of the Company's past products and other information relating thereto, (iv)
information regarding significant purchasers of the Company's products, (v)
sales and returns of comparable computer software products of other developers
and other information relating thereto and (vi) computer software industry data
and practices, the Company anticipates that it will be able to comply with SFAS
48 and recognize royalty revenue, net of estimated returns, on the EMERGENCY
ROOM title no sooner than for the third quarter of 1996. There can be no
assurance, however, that the Company will be able to recognize royalty revenue
on the EMERGENCY ROOM title in the Company's financial statements for the third
quarter of 1996. When the Company determines it can comply with SFAS 48 and does
recognize royalty revenue, future filings, including without limitation the
footnotes to the financial statements of the Company, will set forth the
quarters in which products were shipped to which such revenue relates. IBM has
notified the Company that IBM expects sales of the EMERGENCY ROOM title to be
significantly lower in the first quarter of 1996 as compared to the fourth
quarter of 1995. Other fluctuations in retail sales are related to the school
market, which generally purchases most products at the beginning of the school
year in September or in late spring, when software budgets must be expended. In
terms of OEM or hardware and software bundling opportunities, the potential for
these sales exists year round. The Company achieved approximately 23%, 34% and
12% of its total sales during the final quarter of 1993, 1994 and 1995,
respectively. See "Risk Factors -- Fluctuations in Operating Results;
Seasonality."
QUARTERLY RESULTS
The following table sets forth unaudited operating data for each of the
specified quarters for the years ended December 31, 1994 and 1995. This
quarterly information has been prepared on the same basis as the annual
consolidated financial statements and, in the opinion of management, contains
all normal recurring adjustments necessary to state fairly the information set
forth herein. The unaudited quarterly financial data presented below has not
been subject to a review by BDO Seidman,
30
<PAGE>
LLP, the Company's independent public accountants. The operating results for any
quarter are not necessarily indicative of results for any future period. See the
Financial Statements, the related notes thereto and other financial information
included herein.
<TABLE>
<CAPTION>
1994 1995
------------------------------------------ ------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Royalties.................... $ 2,661 $ 3,947 $ 7,570 $ 2,631 $ 4,100 $ 2,700 $ 2,379 $ 0
Software sales............... 27,493 19,638 11,429 11,296 16,379 12,740 7,280 0
Consulting................... 0 0 50,000 50,000 0 0 0 6,000
--------- --------- --------- --------- --------- --------- --------- ---------
Total...................... 30,154 23,585 68,999 63,927 20,479 15,440 9,659 6,000
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Costs and expenses:
Cost of royalties............ 0 0 0 0 0 0 0 13,939
Cost of software sales....... 18,393 13,138 7,646 7,606 14,185 11,032 6,311 0
Product development.......... 41,204 55,361 39,484 60,546 0 0 0 72,951
General and administrative... 24,435 33,667 40,779 34,763 46,819 47,842 66,727 175,069
Selling...................... 2,148 2,947 3,445 1,289 4,235 6,358 8,229 2,394
--------- --------- --------- --------- --------- --------- --------- ---------
Total...................... 86,180 105,113 91,354 104,204 65,239 65,232 81,267 264,353
--------- --------- --------- --------- --------- --------- --------- ---------
Income (Loss) from
operations.................... (56,026) (81,528) (22,355) (40,277) (44,760) (49,792) (71,608) (258,353)
Interest expense............... 11,395 12,322 12,521 15,469 13,076 14,465 26,113 213,351
--------- --------- --------- --------- --------- --------- --------- ---------
Net loss....................... $ (67,421) $ (93,850) $ (34,876) $ (55,746) $ (57,836) $ (64,257) $ (97,721) $(471,704)
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
The following table sets forth certain unaudited statement of operations
data as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
1994 1995
------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Royalties....................... 9% 17% 11% 4% 20% 17% 25% 0%
Software sales.................. 91% 83% 17% 18% 80% 83% 75% 0%
Consulting...................... 0% 0% 72% 78% 0% 0% 0% 100%
------- ------- ------- ------- ------- ------- ------- -------
Total......................... 100% 100% 100% 100% 100% 100% 100% 100%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of royalties............... 0% 0% 0% 0% 0% 0% 0% 232%
Cost of software sales.......... 61% 56% 11% 12% 69% 71% 65% 0%
Product Development............. 137% 235% 57% 95% 0% 0% 0% 1,216%
General and administrative...... 81% 143% 59% 54% 229% 310% 691% 2,918%
Selling......................... 7% 12% 5% 2% 21% 41% 85% 40%
------- ------- ------- ------- ------- ------- ------- -------
Total......................... 286% 446% 132% 163% 319% 422% 841% 4,406%
------- ------- ------- ------- ------- ------- ------- -------
Income (Loss) from operations..... (186)% (346)% (32)% (63)% (219)% (322)% (741)% (4,306)%
Interest expense.................. 38% 52% 18% 24% 64% 94% 270% 3,556%
------- ------- ------- ------- ------- ------- ------- -------
Net loss.......................... (224)% (398)% (50)% (87)% (283)% (416)% (1,012)% (7,862)%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
The shifts in quarterly revenue are primarily due to the timing of the
Company's consulting contracts. In addition, software sales and royalties
related to the Company's self-developed software titles generally decreased each
quarter as the Company's titles lose market share to competing software titles
designed to better take advantage of the new computer hardware available in the
marketplace.
The significant shifts in quarterly expenses throughout 1994 and 1995 are
primarily due to changes in product development costs, which are net of
co-funded development expenses. In addition, general and administrative expenses
increased during the third and fourth quarters of 1995 due to an increase in the
Company's overhead structure and completion of the development phase of the
EMERGENCY ROOM title. These product development costs represent the costs to
develop the EMERGENCY
31
<PAGE>
ROOM and DISTRICT ATTORNEY titles, with co-funded development expenses from the
sharing of the co-development costs being recorded as a ratio of these costs as
they are incurred. The changes in the quarterly amounts of this item are due to
the Company being in various stages of product development which necessitates
different levels of expenditures between those quarters. The Company expects
this quarterly volatility to continue in the future, which will be driven by the
development of its products under existing and new co-development agreements.
The Company expects significant royalty revenue from these products as they are
developed and sold to partially offset the quarterly volatility related to
product development. In addition, the Company does not expect software sales and
consulting revenues to be significant components of revenue in the future. The
Company is focusing its resources on its software products under co-development,
affiliate or other arrangements.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenue for 1995 decreased by $135,087 or 72%, as compared to 1994.
Revenue by type for 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Revenue
Royalties............................. $ 16,809 $ 9,179
Software sales........................ 69,856 36,399
Consulting............................ 100,000 6,000
----------- -----------
Total................................... $ 186,665 $ 51,578
----------- -----------
----------- -----------
</TABLE>
Royalty revenue decreased by $7,630 or 45% due to, among other things, the
introduction of competing software titles designed to better take advantage of
the new personal computer hardware available in the marketplace. In addition,
IBM shipped approximately 45,000 units, 25,000 units of which were consignment
shipments, of the EMERGENCY ROOM title to vendors during the fourth quarter of
1995. No royalty revenue from the EMERGENCY ROOM title developed with IBM has
been recognized in the Company's Statements of Operations for the year ended
December 31, 1995. The Company will not recognize royalty revenue from IBM
unless it can comply with SFAS 48. There can be no assurance, however, that IBM
will provide the Company with sufficient financial data and information in order
for the Company to recognize royalty revenue on the accrual basis in accordance
with SFAS 48. Royalty revenues on consignment shipments made by IBM will only be
recognized when both (i) the Company receives evidence of product sell-through
from IBM and (ii) the Company can comply with SFAS 48. Based on an analysis
pursuant to the Company's Revenue Recognition Policy of, among other things, (i)
the Company's and IBM's experience on EMERGENCY ROOM title sales and returns to
date, (ii) additional information and data on the EMERGENCY ROOM title which the
Company anticipates receiving from IBM, (iii) sales and returns of the Company's
past products and other information relating thereto, (iv) information regarding
significant purchasers of the Company's products, (v) sales and returns of
comparable computer software products of other developers and other information
relating thereto and (vi) computer software industry data and practices, the
Company anticipates that it will be able to comply with SFAS 48 and recognize
royalty revenue, net of estimated returns, on the EMERGENCY ROOM title no sooner
than for the third quarter of 1996. There can be no assurance, however, that the
Company will be able to recognize royalty revenue on the EMERGENCY ROOM title in
the Company's financial statements for the third quarter of 1996. When the
Company determines it can comply with SFAS 48 and does recognize royalty
revenue, future filings, including without limitation the footnotes to the
financial statements of the Company, will set forth the quarters in which
products were shipped to which such revenue relates. In February 1996, the
Company received two royalty checks from IBM in the aggregate amount of
$312,787, which amount is subject to offset for product returns to IBM. No
royalty revenue related to these checks will be recognized until the revenue
recognition parameters discussed above are satisfied. If the Company's
32
<PAGE>
contemplated products currently in development do not generate significant
revenue, the anticipated decline in future royalty revenue from the EMERGENCY
ROOM title will have a material adverse effect on the Company's business,
operating results and financial condition.
In addition, the Company is dependent upon IBM for providing it with
financial data and information about sales (net of estimated returns) of the
Company's products to distributors or through to customers by retailers in the
case of consignment shipments. In order for the Company to comply with SFAS 48
and recognize royalty revenue on an accrual basis, it will require sufficient,
timely financial and sales data from IBM. To date, IBM has not provided the
Company with sufficient financial data and information about sales and
consignment shipments of the EMERGENCY ROOM title during 1995 in order for the
Company to recognize royalty revenue on the accrual basis. Following the Public
Offering, the Company will be subject to certain periodic reporting requirements
under the Exchange Act. To the extent that IBM does not timely provide the
Company with sufficient financial data and information about sales or
consignment shipments of the Company's products during any fiscal quarter or
year, the Company's operating results during such fiscal quarter or year may be
materially adversely affected.
Software sales continued to decrease as the unit sales volume of the
Company's self-developed software titles, MUTANOID MATH CHALLENGE and MUTANOID
WORD CHALLENGE, decreased due to the introduction of competing software titles
designed to better take advantage of the new personal computer hardware
available in the marketplace. Consulting revenues decreased from 1994 to 1995
due to the Company taking on fewer and smaller consulting contracts during 1995
than 1994. The Company, principally represented by Dr. Lehrer, was engaged in
1994 by two companies to perform consulting services. The first engagement
involved developing a specific computer software product design. The second
engagement involved strategic planning in the technology area. The 1995
consulting revenue was earned through advising a company on the overall
strategic plan for one of its divisions.
Total cost of revenue for 1995 decreased by $1,316 or 3%, as compared to
1994. Cost of revenue by type for 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Cost of Revenue
Royalties............................. $ 0 $ 13,939
Software Sales........................ 46,783 31,528
----------- -----------
Total................................... $ 46,783 $ 45,467
----------- -----------
----------- -----------
</TABLE>
The increase in cost of royalties is due to the amortization of capitalized
software development costs in 1995 associated with the development of the
EMERGENCY ROOM title. Cost of software sales decreased by $15,255 or 33% during
1995 due to the decline in sales of the Company's self-developed software titles
during 1995 compared to 1994. The gross margin on software sales also declined
from 33% in 1994 to 13% in 1995, which was primarily due to fewer multi-unit
sales to single customers during 1995. The cost of consulting revenue was
negligible for 1994 and 1995 and therefore has not been separately disclosed.
Product development expenses, which are net of co-funding of development
expenses, decreased by $123,644 or 63% during 1995 as compared to 1994. The
decrease was primarily due to the completion of the development phase of the
EMERGENCY ROOM title at the end of the third quarter of 1995, which was
partially offset by the commencement of the development phase of the
contemplated DISTRICT ATTORNEY title during the fourth quarter. In addition, the
Company capitalized $90,446 of product development costs during the first three
quarters of 1995, while no costs were capitalized during 1994.
General and administrative expenses increased by $202,813 or 152% during
1995 as compared to 1994. The increase is principally due to the increase in the
Company's overhead structure, resulting
33
<PAGE>
from an increase in the number of employees, including the hiring of the
Company's new chief financial officer. In addition, the Company's development
staff had a greater percentage of its time allocable to development of its
CAREER SIM-TM- software titles during 1994 than in 1995, causing a larger
percentage of their departmental expenses to be allocated to general and
administrative expenses in 1995 than in 1994 (see related decrease in product
development expenses during 1995 discussed above). During 1995 and 1996, the
Company entered into employment agreements with key members of management. Had
these agreements been in place throughout 1994 and 1995, total general and
administrative expenses would have been $121,000 and $88,250 higher for the
years ended December 31, 1994 and 1995.
Selling expenses increased by $11,387 or 116% from 1994 to 1995. The
increase in selling expenses is primarily due to miscellaneous expenditures
associated with the EMERGENCY ROOM title.
Interest expense increased by $215,298 or 416% from 1994 to 1995. This
increase is primarily due to interest expense incurred during the fourth quarter
related to the principal amount of the Convertible Note obtained by the Company
on November 21, 1995. Interest expense on the Convertible Note results from (i)
the 10% interest rate on the Convertible Note, (ii) amortization of the
difference in the fair value of the Warrants at the date of grant and the
conversion feature of the Convertible Note and their exercise price and (iii)
amortization of deferred loan costs associated with the Convertible Note.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Total revenue for 1994 decreased by $269,869 or 59%, as compared to 1993.
Revenue by type for 1993 and 1994 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1993 1994
----------- -----------
<S> <C> <C>
Revenue
Royalties............................. $ 34,819 $ 16,809
Software sales........................ 421,715 69,856
Consulting............................ 0 100,000
----------- -----------
Total................................... $ 456,534 $ 186,665
----------- -----------
----------- -----------
</TABLE>
The significant shift in the makeup of the Company's revenue mix from 1993
to 1994 is due to greater software sales of MUTANOID MATH CHALLENGE and MUTANOID
WORD CHALLENGE occurring during 1993, the unit sales volume of which
significantly slowed during 1994 due to the introduction of competing software
titles designed to better take advantage of the new personal computer hardware
available in the marketplace. In addition, the Company also earned significant
consulting revenues from two consulting contracts during 1994. The Company,
principally represented by Dr. Lehrer, was engaged in 1994 by two companies to
perform consulting services. The first engagement involved developing a specific
computer software product design. The second engagement involved strategic
planning in the technology area.
Due to the significant decrease in software sales revenue discussed above,
cost of software sales decreased by $130,878 or 74% during 1994 as compared to
1993. The decrease in the gross margin from 58% in 1993 to 33% in 1994 was
primarily due to the repackaging of the Company's software titles in 1994 and
fewer multi-unit sales to single customers in 1994 as compared to 1993. The cost
of consulting revenue was negligible for 1994 and therefore has not been
separately disclosed.
Product development expenses, which are net of co-funding of development
expenses, increased by $114,636 or 140% during 1994 as compared to 1993. The
increase was primarily due to the commencement of the development phase of the
EMERGENCY ROOM title during 1993, while the Company spent all of 1994 continuing
development of this software title.
Selling expenses decreased by $21,638 or 69% from 1993 to 1994. The decrease
in selling expenses was primarily due to the decrease in software sales during
1994 discussed above.
General and administrative expenses increased by $9,010 or 7% from 1993 to
1994. This increase is due to the increase in the Company's cost structure
during 1994 necessitated by the development of
34
<PAGE>
the EMERGENCY ROOM title. During 1995 and 1996, the Company entered into
employment agreements with key members of management. Had these agreements been
in place throughout 1993 and 1994, total general and administrative expenses
would have been $193,850 and $121,000 higher for the years ended December 31,
1993 and 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
loans from its principal stockholders, related parties and finance companies, as
evidenced by cash provided by financing sources of $77,500, $100,000 and
$815,208 for the years ended December 31, 1993, 1994 and 1995. The Company had
cash outflows from operations of $64,170, $24,960 and $335,615 for the years
ended December 31, 1993, 1994 and 1995. These cash outflows are primarily due to
net losses caused by research and development expenses associated with the
EMERGENCY ROOM and contemplated DISTRICT ATTORNEY titles. Development of the
EMERGENCY ROOM and contemplated DISTRICT ATTORNEY titles also required the
Company to acquire certain equipment, primarily computers, and incur certain
capitalizable development costs totalling $10,697, $57,679 and $135,153 for the
years ended December 31, 1993, 1994 and 1995. Due to the Company's stockholders'
deficiency of $1,070,392 and working capital deficiency of $162,097 as of
December 31, 1995, the Company's independent certified public accountants have
included an explanatory paragraph in their report stating that these factors
raise substantial doubt as to the Company's ability to continue as a going
concern. See "Risk Factors -- Uncertainty as a Going Concern; -- Dependence on
Proceeds of the Public Offering."
The Company is dependent on the proceeds of the Public Offering to repay
certain indebtedness, to fund new product and business development and to expand
sales and marketing activities. See Financial Statements, the related notes
thereto and other financial information included herein. See "Risk Factors --
Development of New Products; Unproven Acceptance of the Company's Products,
Including the EMERGENCY ROOM Title; -- Uncertain Management of Growth" and "Use
of Proceeds."
The Company has two outstanding unsecured promissory notes each in the
principal amount of $73,200, payable to each of Ariella J. Lehrer, Ph.D., the
Company's Chairman of the Board, President and Chief Executive Officer, and
Stanley Wojtysiak, the Company's Secretary and a Director. These promissory
notes mature on March 31, 1997. The Company also has outstanding an unsecured
promissory note in the principal amount of $260,051 payable to Dr. Lehrer's
father-in-law, which matures on March 31, 1997, and an unsecured promissory note
in the amount of $120,885 payable to an unrelated third party over a one-year
period beginning July 1, 1996. See "Risk Factors -- Current Indebtedness" and
"Certain Transactions." The Company has historically not made principal payments
on any of such indebtedness, although the Company has made interest payments on
such indebtedness from time to time in the past. After the Public Offering, the
Company anticipates making payments of all accrued interest on such indebtedness
and thereafter making principal and interest payments on such indebtedness as
they come due from revenue.
The losses that the Company has experienced since inception have generated a
tax net operating loss of $942,000. The Tax Reform Act of 1986 contains
provisions which limit the federal net operating loss carryforwards available
that can be used in any given year in the event of certain occurrences,
including significant ownership changes. In addition, the Company provides a
valuation allowance for deferred tax assets when it is more likely than not,
based on available evidence, that some portion or all of the deferred tax assets
will not be realized. In management's opinion, it cannot determine if it is more
likely than not that the Company will generate sufficient future taxable income
before 2010, the year after all currently available net operating loss
carryforwards expire, to utilize all of the Company's deferred tax assets. A
valuation allowance has been recognized for the full amount of the deferred tax
asset of $377,000 at December 31, 1995. See "Risk Factors -- Uncertain
Availability of Tax Assets."
In November, 1995, the Company's liquidity improved when it obtained the
$1,000,000 Convertible Note from a third party lender. The proceeds from
issuance of the Convertible Note, net of legal fees of $50,000, finder's fees of
$50,000, a placement agent fee of $50,000 and the payoff of outstanding debt of
$154,498, has been applied to working capital. Interest on the Convertible Note
accrues at the rate of 10% per annum and is payable monthly, beginning on
December 1, 1995; provided, however,
35
<PAGE>
that the Company is required to prepay $300,000 of the principal of the
Convertible Note with the proceeds of the Public Offering. See "Use of
Proceeds." In addition, $700,000 in principal amount of the Convertible Note is
convertible at the option of the holder into shares of Common Stock of the
Company at the per share conversion price of $1.31. EBC has agreed with the
Company to convert such $700,000 in principal amount of the Convertible Note
into 534,351 shares of Common Stock at the per share conversion price of $1.31
upon the closing of the Public Offering. In connection with the Convertible
Note, the Company also granted EBC a warrant to purchase 200,000 shares of
Common Stock, subject to adjustment under certain circumstances at an initial
purchase price of $1.31 per share.
The Company expects to continue making expenditures to acquire additional
hardware, software, furniture and fixtures and to lease additional office space
as it expands, although no material commitments have been made by the Company as
of May 6, 1996. In addition, the Company does not expect future expenditures for
these items to be material in nature. The Company anticipates that its principal
future expenditures will be for continued research and development in connection
with the development and implementation of its technology, sales and marketing
activities, costs related to the production of its software titles and general
and administrative expenses, with additional general and administrative expenses
being incurred due to the Company becoming a public reporting company.
The Company anticipates that its capital resources, including the proceeds
from the Public Offering and co-funding of development expenses by IBM will be
sufficient to satisfy its capital requirements for the next 18 to 24 months. The
Company is also currently co-developing the contemplated DISTRICT ATTORNEY
CAREER SIM-TM- title with IBM. The completion of this software title is
tentatively scheduled for March 1997 with royalty income expected to be received
in subsequent periods. Upon consummation of the Public Offering it is expected
that the Company will have begun development of three additional contemplated
CAREER SIM-TM- related titles, including the DISTRICT ATTORNEY title. With
respect to these three titles, the Company (i) has entered into a development
and license agreement with IBM to develop the contemplated DISTRICT ATTORNEY
title, (ii) has entered into a non-binding letter of intent with IBM to begin
negotiations on a development and license agreement for the contemplated ER CODE
BLUE title, and (iii) has initially decided to develop the contemplated NEWS
FLASH title without the co-funding assistance of IBM. There can be no assurances
that the Company will develop or complete the NEWS FLASH title with or without a
co-development partner or affiliate or pursuant to other arrangements. The
development and production of each software title is expected to require 12 to
15 months from initiation to delivery into the market. While it is anticipated
that some or all of these software titles may involve obtaining co-funding of
development expenses from other sources, there can be no assurance that such
contracts can be consummated and such co-funding of product development expenses
will be received. See "Risk Factors -- Dependence on IBM."
The Company's ability to achieve positive cash flow after the next 18 months
depends on a variety of factors including continued co-funding of development
expenses by IBM, the timeliness and success of the release of its software
titles, the costs of developing and producing such titles and various other
factors, some of which may be beyond the Company's control. Should the Company's
loss be greater than currently anticipated or its software title production and
introduction be delayed significantly or not generate significant future
revenues, the Company may require additional capital, which it may seek through
additional public or private financings or other sources. The Company's future
capital requirements will be affected by, among other things, the market
acceptance of the Company's software titles, the timing and cost of producing
new titles, promotional and advertising expenses required to launch new titles
and investments in technological and production process research.
If appropriate opportunities arise, a portion of the proceeds from the
Public Offering may be used for selective acquisitions of businesses, products
or technologies that complement the Company's business. The Company has no
present commitments or understandings with respect to any acquisitions at this
time.
36
<PAGE>
INFLATION
The Company believes that inflation has not had a material impact on its
operations. Substantial increases in labor costs or video production costs on
video produced for use within the Company's software programs could adversely
affect the operations of the Company for future periods.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of "
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard establishes new guidelines regarding when impairment
losses on long-lived assets, which include plant and equipment, certain
identifiable intangible assets and goodwill, should be recognized and how
impairment losses should be measured. The Company does not expect such new
standard to have a material effect on its financial position or results of
operations.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting
Standards Board (FASB) is effective for specific transactions entered into after
December 15, 1995, while the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard establishes a fair value method of accounting for
stock-based compensation plans and for transactions in which an entity acquires
goods or services from nonemployees in exchange for equity instruments. At the
present time, the Company has not determined if it will change its accounting
policy for stock based compensation or only provide the required disclosure. As
such, the impact on the Company's financial position and results of operations
is currently unknown.
37
<PAGE>
BUSINESS
GENERAL
Legacy develops consumer software products for the rapidly growing
"edutainment" CD-ROM market. An edutainment product combines entertainment and
education content for home and educational use, in which learning is an integral
part of playing a game.
Legacy's innovative CAREER SIM-TM- series will simulate various career
disciplines by combining the expertise of game designers, educators,
professionals, programmers and artists to produce mind stimulating software. The
CAREER SIM-TM- series is currently comprised of one title, the EMERGENCY ROOM
title, which is being marketed by the Company's co-development partner, IBM. In
addition to the EMERGENCY ROOM title, the Company has entered into a development
and license agreement with IBM to develop the contemplated DISTRICT ATTORNEY
title, which is tentatively scheduled for release in March 1997, and a
non-binding letter of intent with IBM to begin negotiations on a development and
license agreement for the contemplated ER CODE BLUE title. Pursuant to a letter
agreement with IBM, in March 1996, the Company delivered a design specification
for the contemplated CAREER SIM-TM- NEWS FLASH title to IBM. In April 1996, IBM
notified the Company of its decision not to proceed with the development of the
contemplated NEWS FLASH project, and the Company has initially decided to
develop such project without the co-funding assistance of IBM. There can be no
assurances that the Company will develop or complete the NEWS FLASH title with
or without a co-development partner or affiliate or pursuant to other
arrangements. The CAREER SIM-TM- products will be designed to explore realistic
career situations in various disciplines through an entertaining and engaging
format. Underlying each title will be an expert database of situations or
"cases" which progresses from very easy to challenging. In the process of
mastering a case, the player will be exposed to information that is typical of a
particular career discipline, as well as the appropriate procedures and
strategies utilized by practitioners of that discipline. The player will learn
the logic inherent in a particular career, and the application of facts to the
solution of realistic problems. Each case will be presented in a dynamic
entertaining format that seamlessly merges information and realistic scenarios.
The Company is designing the contemplated DISTRICT ATTORNEY, NEWS FLASH and ER
CODE BLUE titles to incorporate online distribution and multiplayer gaming. See
"Risk Factors -- Dependence on IBM" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Prior to its CAREER SIM-TM-
series, the Company created or marketed five children's software edutainment
titles, including CHILDREN'S WRITING AND PUBLISHING CENTER (published by The
Learning Company), MICKEY'S CROSSWORD PUZZLE MAKER (published by Walt Disney
Software), MUTANOID MATH CHALLENGE, MUTANOID WORD CHALLENGE, and MAGIC BEAR'S
MASTERPIECES (published by Legacy). The Company received a total of $36,399 in
software sales revenue from three of these non-Career SIM-TM- titles, MUTANOID
MATH CHALLENGE, MUTANOID WORD CHALLENGE and MAGIC BEAR'S MASTERPIECES, during
fiscal 1995. The Company received a one-time payment of $475,000 for the
development of CHILDREN'S WRITING AND PUBLISHING CENTER from The Learning
Company in 1989 and a one-time payment of $75,000 for the development of
MICKEY'S CROSSWORD PUZZLE MAKER from Walt Disney Software in 1990.
The EMERGENCY ROOM title, the Company's first CAREER SIM-TM- title, is a
multimedia computer simulation designed to provide a realistic and involving
experience of what it is like to be an emergency room doctor. The player begins
as a medical student and works up the ranks to attending physician by
successfully completing 400 different medical cases at five levels of
difficulty. The EMERGENCY ROOM player examines, diagnoses and treats patients
whose problems range from simple broken bones to gunshot wounds. The simulation
integrates live-action video, 3-D graphics and a comprehensive medical database
in a game format. The EMERGENCY ROOM title began shipping in October, 1995, and
is exclusively marketed and distributed by the IBM Consumer Software Division,
which funded approximately half of the development costs.
DEPENDENCE ON THE ER LICENSE AGREEMENT. The Company entered into the ER
License Agreement with IBM for development by the Company and licensing of its
EMERGENCY ROOM title to IBM. Pursuant to the ER License Agreement, (i) the
Company has granted IBM an exclusive license to, among other things, use,
manufacture, sell and distribute the EMERGENCY ROOM title which IBM began
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marketing in October, 1995, (ii) IBM has a right of first refusal on derivative
works within 12 months of acceptance of the title by IBM and (iii) IBM is
contractually obligated to pay the Company a royalty of a stated percentage of
revenue (net of returns and allowances) within 60 days after the conclusion of
each calendar quarter. If IBM exercises its right of first refusal under the ER
License Agreement, the terms and conditions, including royalty obligations, will
be negotiated by IBM and the Company. The ER License Agreement may be terminated
by either party at any time for cause. The EMERGENCY ROOM title is currently
being marketed and packaged as a product of IBM. Although pursuant to the ER
License Agreement the Company is the sole and exclusive owner of the EMERGENCY
ROOM title and has all copyrights thereto, the packaging of the first 45,000
EMERGENCY ROOM CD-ROM disks shipped mistakenly indicates that IBM has the
copyright thereto. IBM has, however, agreed to designate the Company's copyright
of the EMERGENCY ROOM title on the packaging of subsequent units and the CD-ROM
disk.
DEPENDENCE ON THE DA LICENSE AGREEMENT. The Company also has entered into
the DA License Agreement with IBM for the development and licensing of, the
DISTRICT ATTORNEY title, a second contemplated CAREER SIM-TM- title involving
the legal profession. Because this title is currently in the initial development
stage, there can be no assurance that the Company will be able to develop or
complete the project or that the final product, if developed, will be marketed
under such title. Pursuant to the DA License Agreement, the Company has granted
IBM an exclusive license to, among other things, use, manufacture, sell and
distribute the contemplated DISTRICT ATTORNEY title, and IBM (i) has sole
responsibility for the marketing, distribution, sale and licensing of the title
which will be marketed and identified as an IBM product, (ii) may terminate the
DA License Agreement at any time with or without cause, (iii) has a right of
first refusal on derivative works, including sequels, within 12 months of
acceptance of the title by IBM and (iv) pays the Company a royalty of a stated
minimum percentage of revenue (net of returns and allowances) within 60 days
after the conclusion of each calendar quarter for U.S. transactions and within
90 days after the conclusion for each calendar quarter for non-U.S.
transactions. If IBM exercises its right of first refusal the DA License
Agreement, the terms and conditions, including royalty obligations, will be
negotiated by IBM and the Company.
The Company is currently dependent upon IBM to co-fund product development
expenses under the DA License Agreement. Co-funding of development expenses by
IBM is based on milestones developed for each contemplated title that
approximate the time when development costs are incurred by the Company. The
Company anticipates that the contemplated DISTRICT ATTORNEY title will be
released by IBM in March 1997, and that the Company will begin to receive
royalty checks on shipments of such title in the following quarter. Royalty
revenue, if any, from the contemplated DISTRICT ATTORNEY title will only be
recognized in accordance with SFAS 48 and the Company's Revenue Recognition
Policy. Although the Company is currently unable to comply with SFAS 48 and
recognize royalty revenue on its only CAREER SIM-TM- title and IBM has limited
distribution experience for computer software game titles, the Company
anticipates that if sales of the contemplated DISTRICT ATTORNEY title are
approximately equal to sales of the EMERGENCY ROOM title, royalty revenue from
the contemplated DISTRICT ATTORNEY title would be approximately equal to
estimated royalty revenue from the EMERGENCY ROOM title. There can be no
assurance, however, that sales of the contemplated DISTRICT ATTORNEY title, if
successfully completed and marketed, will be approximately equal to sales of the
EMERGENCY ROOM title. If IBM were to terminate the DA License Agreement, there
can be no assurance that the Company would be able to replace IBM as a
co-development partner or that the Company would be able to enter into an
agreement with another co-development partner for the co-funding of the
Company's products, including, among other things, co-funding of development
expenses, on terms similar to the IBM Agreements.
INABILITY TO RECOGNIZE ROYALTY REVENUE ON THE EMERGENCY ROOM TITLE. IBM
currently ships the EMERGENCY ROOM title to IBM's customers under sales and
consignment shipment arrangements. The Company is dependent upon IBM for
providing it with financial data and information about sales (net of estimated
returns) of the Company's products to distributors or through to customers by
retailers in the case of consignment shipments. To date, IBM has not provided
the Company with sufficient financial data and information about sales and
consignment shipments of the EMERGENCY ROOM title
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during 1995 in order for the Company to recognize royalty revenue on the accrual
basis in accordance with SFAS 48. In addition, the Company currently cannot
reasonably estimate future product returns as required by SFAS 48 due to the
EMERGENCY ROOM title's limited return history. The Company will not recognize
royalty revenue from IBM unless it can comply with SFAS 48. There can be no
assurance, however, that IBM will provide the Company with sufficient, timely
financial data and information in order for the Company to recognize royalty
revenue on the accrual basis in accordance with SFAS 48. Royalty revenues on
consignment shipments made by IBM are only recognized when both (i) the Company
receives evidence of product sell-through from IBM and (ii) the Company can
comply with SFAS 48. Based on an analysis pursuant to the Company's Revenue
Recognition Policy of, among other things, (i) the Company's and IBM's
experience on EMERGENCY ROOM title sales and returns to date, (ii) additional
information and data on the EMERGENCY ROOM title which the Company anticipates
receiving from IBM, (iii) sales and returns of the Company's past products and
other information relating thereto, (iv) information regarding significant
purchasers of the Company's products, (v) sales and returns of comparable
computer software products of other developers and other information relating
thereto and (vi) computer software industry data and practices, the Company
anticipates that it will be able to comply with SFAS 48 and recognize royalty
revenue, net of estimated returns, on the EMERGENCY ROOM title no sooner than
for the third quarter of 1996. There can be no assurance, however, that the
Company will be able to recognize royalty revenue on the EMERGENCY ROOM title in
the Company's financial statements for the third quarter of 1996. When the
Company determines it can comply with SFAS 48 and does recognize royalty
revenue, future filings, including without limitation the footnotes to the
financial statements of the Company, will set forth the quarters in which
products were shipped to which such revenue relates. No royalty revenue from the
EMERGENCY ROOM title co-developed with IBM has been recognized in the Company's
Statements of Operations for the years ended December 31, 1993, 1994 and 1995.
The Company's inability to recognize royalty revenue on an accrual basis for its
products, including those products which are co-developed with IBM, could have a
material adverse effect on the Company's stock price because the Company will
not be able to recognize royalty revenue on products until the Company can
comply with SFAS 48. Furthermore, following the Public Offering, the Company
will be subject to certain periodic reporting requirements under the Exchange
Act. Pursuant to the ER License Agreement, IBM is, among other things,
contractually obligated to pay the Company a royalty within 60 days after the
conclusion of each calendar quarter, and pursuant to the DA License Agreement,
IBM is, among other things, contractually obligated to pay the Company a royalty
within 60 days after the conclusion of each calendar quarter for U.S.
transactions and within 90 days after the conclusion for each calendar quarter
for non-U.S. transactions. To the extent that IBM does not timely provide the
Company with sufficient financial data and information about sales or
consignment shipments of the Company's products during any fiscal quarter or
year, the Company's operating results during such fiscal quarter or year may be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
When the Company has the ability, if ever, to record royalties on the
accrual method, the Company will not recognize royalty revenue (net of estimated
returns) from IBM unless the Company's products are sold to distributors or
through to consumers by retailers in the case of consignment shipments.
Consequently, the number of the Company's products returned to IBM from its
distributors and the timing of any such returns may have a material adverse
effect on the Company's future royalty revenue.
Further, in the event that the Company creates a derivative work with a
third party, IBM is entitled to receive certain royalties thereon in accordance
with the IBM Agreements. If IBM were to terminate the ER License Agreement,
there can be no assurance that the Company will be able to replace IBM's
marketing, distributing, selling or licensing efforts or be able to develop
derivative products of the EMERGENCY ROOM title or that such termination
otherwise will not have a material adverse effect on the Company's business,
operating results or financial condition. If IBM were to terminate the DA
License Agreement, there can be no assurance that the Company will be able to
replace IBM as a co-development partner or be able to develop the contemplated
DISTRICT ATTORNEY title
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or that such termination otherwise will not have a material adverse effect on
the Company's business, operating results or financial condition. See "Risk
Factors -- Capital Requirements; Additional Financing Required," "-- Dependence
on IBM" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
REJECTION OF THE CONTEMPLATED NEWS FLASH TITLE. On January 17, 1996, the
Company entered into a letter agreement with IBM for the preparation of the
design specification for the NEWS FLASH CD-ROM game, its contemplated third
CAREER SIM-TM- title. Under such letter agreement, the Company delivered the
final working design specification for such title on March 12, 1996. On April
16, 1996, IBM notified the Company of its decision not to continue the
contemplated NEWS FLASH project. Pursuant to the terms of such letter agreement
with respect to the contemplated NEWS FLASH project, the Company is free to
continue development of the respective project independent of IBM. If the
Company develops such project with a third party, the Company is obligated to
return to IBM all moneys paid by IBM to the Company pursuant to such letter
agreement. As a result of IBM's notification, the Company has decided to develop
the contemplated CAREER SIM-TM- NEWS FLASH title on its own, which will cost the
Company substantially more than the Company's cost of co-developing EMERGENCY
ROOM and the DISTRICT ATTORNEY titles with IBM, although the Company may enter
into a co-development agreement, affiliate label distribution relationship or
other arrangement with respect to the contemplated NEWS FLASH title. There can
be no assurances that the Company will develop or complete the NEWS FLASH title
with or without a co-development partner or affiliate or pursuant to other
arrangements. A failure to develop the project may have a material adverse
effect on the Company's business, operating results and financial condition. See
"Risk Factors -- Development of New Products; Unproven Acceptance of the
Company's Products, Including the EMERGENCY ROOM Title."
DEPENDENCE ON THE CONTEMPLATED ER CODE BLUE TITLE. On March 15, 1996, the
Company entered into a non-binding letter of intent with IBM to begin
negotiations on a development and license agreement for a contemplated fourth
CAREER SIM-TM- title, the ER CODE BLUE title. Under such letter of intent, the
Company will provide IBM with a detailed budget, anticipated development
schedule and certain other information about the target audience, estimated
sales volume and price and third party involvement. Pursuant to such letter of
intent, (i) neither the Company nor IBM is under any obligation to conclude any
transaction they contemplate or discuss, (ii) either the Company or IBM can end
discussions freely at any time for any reason, (iii) neither the Company nor IBM
will have any liability to the other for failure to consummate any transaction,
and (iv) all discussion, proposals, term sheets, draft agreements and other
similar materials will be null and void if discussions are terminated. On April
17, 1996, IBM notified the Company that it is having internal discussions on how
to best utilize its resources in the consumer software market, and that such
discussions could affect IBM's decision to enter into a development and license
agreement regarding the contemplated ER CODE BLUE title. The Company anticipates
that if it enters into a development and license agreement with respect to the
contemplated ER CODE BLUE title in the second quarter of 1996, such title would
be released into the market in the third quarter of 1997, and that the Company
will begin to receive royalty checks on shipments of such title in the following
quarter. Royalty revenue, if any, from the contemplated ER CODE BLUE title will
only be recognized in accordance with SFAS 48 and the Company's revenue
recognition policy. Although the Company is currently unable to comply with SFAS
48 and recognize royalty revenue on its only CAREER SIM-TM- title and IBM has
limited distribution experience for computer software game titles, the Company
anticipates that sales of the contemplated ER CODE BLUE title will be
approximately equal to sales of the EMERGENCY ROOM title. There can be no
assurance, however, that sales of the contemplated ER CODE BLUE title, if
successfully completed and marketed, will be approximately equal to sales of the
EMERGENCY ROOM title. There can be no assurances that the Company will enter
into an agreement with IBM for the development of the contemplated ER CODE BLUE
project, that the Company will be able to develop or complete such project or
that the final product, if developed, will be marketed under such title.
NO COMMITMENT FOR FUTURE TITLES. On April 17, 1996, IBM also notified the
Company that it, at the present time, is not prepared to commit to additional
projects, including a new project for which
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the Company submitted a proposal to IBM in April 1996, regardless of the
Company's willingness to fund such projects in 1996. There can be no assurances
that IBM will commit to any additional projects with the Company in the future.
To the extent that the Company's titles are marketed as products of IBM,
they may not be readily or clearly identified as products of the Company As a
result, there can be no assurance that the Company will gain significant name
recognition or the goodwill associated therewith.
DEPENDENCE ON IBM FOR MARKETING AND DISTRIBUTION. Broad product
distribution is one of the most difficult yet critical components of success for
a multimedia developer. The Consumer Software Division of IBM is a new division
of IBM which is still building the organization necessary to provide in-store
sales promotion and support, and which the Company believes has limited
experience in marketing, distributing, selling and licensing edutainment
software. IBM does not have minimum marketing, distribution, sales or licensing
requirements under the ER License Agreement, and no assurance can be given that
IBM will actively or successfully market, distribute, sell or license the
Company's products. Sales and consignment shipments by IBM are also subject to
returns. See "Risk Factors -- Dependence on IBM," "-- Product Returns" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." A failure by IBM to successfully market, distribute, sell or
license the Company's products would have a material adverse effect on the
Company's business, operating results and financial condition.
The Company was organized in California in 1989, as a successor to a
partnership formed in 1986, and reincorporated in Delaware in March, 1996,
through a merger with and into its wholly-owned subsidiary, which was
incorporated in Delaware in 1995.
INDUSTRY BACKGROUND
Sales of consumer software are highly dependent upon the availability of
relatively inexpensive personal computers or PCs. Emerging technologies have
resulted in the development of easier to use and more powerful personal
computers that are capable of utilizing an expanding array of technologically
advanced software products. In particular, the recent development of new
multimedia technologies such as CD-ROM drives, color graphics, video, animation,
sound, music and speech capabilities has enabled software developers to produce
more engaging, interactive software that can make the learning process more
effective and enjoyable. Inteco, a market research firm, projects worldwide
sales of CD-ROM drives to reach approximately 60 million by 1997. The Company
believes that the growth of multimedia computers containing CD-ROM drives will
result in increased demand for consumer and school software utilizing the
graphic, sound and data capabilities of such hardware technology.
Total industry multimedia software title revenue has been estimated to reach
approximately $1.45 billion in 1995, representing an increase of approximately
85% from $786 million in 1994. Dataquest, a computer market research firm,
reported that in 1995 personal computer sales grew nearly 25% worldwide, to 59.7
million, and 21% in the U.S., to 22.5 million. From January through November,
1995, revenue from entertainment computer software titles grew 28% from the same
period during 1994. Computer software game titles grew by 27% in terms of units
over the same time period during 1994 to total 25.7 million units through
November, 1995, representing over 35% of all software units sold through
November, 1995. The 28% year-over-year revenue growth represents the highest
revenue growth rate of any category of software through November, 1995. Over the
first eleven months of 1995, educational software revenues totalled nearly $315
million on approximately 9.8 million units sold, growing by roughly 25% through
November, 1995 in terms of both units and revenues.
Industry experts predict that consumer interest in on-line services will
continue to grow. According to International Data Corp., subscriptions for
on-line computer services will exceed 14.5 million by January 1, 1996. The
number of home users actively accessing the World Wide Web (the "Web") on the
Internet is expected to grow by 2 million in fourth quarter, 1995, bringing the
total number of U.S. home users of the Web to 3 million.
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COMPANY STRATEGY
Legacy's objective is to establish itself as a leading developer and
publisher of mind stimulating edutainment, infotainment and simulation products.
The Company's strategy for achieving this objective is to develop the CAREER
SIM-TM- series and other families of products, exploit leading-edge
technologies, including the Company's proprietary high level computer
programming language, and utilize co-development and affiliate label
distribution relationships. The Company's strategy consists of the following
principal elements:
DEVELOP THE CAREER SIM-TM- SERIES AND OTHER FAMILIES OF PRODUCTS. Legacy
seeks to develop its
unique CAREER SIM-TM- series into a family of complementary products which
permits the user to explore professional career simulations. The first title of
this series is the EMERGENCY ROOM title in which the user plays the role of an
emergency room doctor who examines, diagnoses and treats as many as 400
different patients. Through the selection and examination of patients,
administration of tests and application of treatments, the game player learns
about anatomy, disease, accident prevention and the experiences of an emergency
room doctor.
The Company plans to publish other titles in the CAREER SIM-TM- series
simulating a variety of professions and their respective on-the-job experiences.
In November, 1995, the Company entered into the DA License Agreement with IBM to
produce a new edutainment title to simulate the experiences of being a lawyer.
The contemplated DISTRICT ATTORNEY CAREER SIM-TM- title will incorporate the
excitement and drama of real-life courtroom cases, from evidence gathering to
crime lab tests and witness cross-examination. Because there is always a chance
that something will go wrong on the way to a conviction, the player will need to
analyze critical background information, work closely with the police and
systematically prove the case to the jury. The contemplated DISTRICT ATTORNEY
title is currently in production and is tentatively scheduled for completion in
March 1997. In January, 1996, the Company entered into a letter agreement with
IBM to create the design specification of a contemplated third CAREER SIM-TM-
title, the NEWS FLASH title. Under such letter agreement, the Company delivered
the final working design specification for the contemplated NEWS FLASH title on
March 12, 1996. On April 16, 1996, however, IBM notified the Company of its
decision not to continue the contemplated NEWS FLASH project, and the Company
has initially decided to develop such project without the co-funding assistance
of IBM. There can be no assurances that the Company will develop or complete the
NEWS FLASH title with or without a co-development partner or affiliate or
pursuant to other arrangements. This title will pit the player's television
station in a citywide search for fast-breaking news stories. The contemplated
NEWS FLASH title players will achieve high television ratings by constructing
news stories about current events, sports, business, arts and entertainment. On
March 15, 1996, the Company entered into a non-binding letter of intent with IBM
to begin negotiations on a development and license agreement for a contemplated
fourth CAREER SIM-TM- title, the ER CODE BLUE title, the follow-on title to the
EMERGENCY ROOM title. The contemplated ER CODE BLUE title will challenge the
player with twenty-five new medical cases in which the player will have to make
fast-paced decisions about which patient is the most critically ill or injured.
The Company believes that the expertise, technology and know-how developed
in connection with the production of the EMERGENCY ROOM title can be leveraged
to reduce the cost and product development cycle of new titles for the CAREER
SIM-TM- series.
In addition, the Company intends to develop new types of computer
simulations and distribute them through strategic marketing partnerships.
EXPLOIT LEADING-EDGE TECHNOLOGIES. Legacy seeks to produce leading-edge
multimedia products more quickly and at a lower cost than its competitors
through the use of its proprietary techniques, processes and tools developed
over the past six years. These tools, techniques and processes support the full
range of interactivity and high resolution still frame, full motion video and
3-D animations that today's CD-ROM customer expects in a high quality multimedia
production. Foremost among the Company's proprietary tools is its high level
computer programming language that allows complex programming operations to be
initiated and controlled with less effort than other instruction sets.
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Legacy has developed tools, techniques and processes which allow its
production team to create CD-ROM titles that can model complex, realistic
experiences based on expert systems. An expert system consists of text and
pictorial content developed by practicing professionals that defines the
"correct" solution to a scenario "problem," as well as appropriate responses to
an "incorrect" solution. Content experts are able to generate the underlying
informational database using standard word processing and graphic tools.
Legacy's proprietary off-line tools translate the data into a format which can
be easily accessed by Legacy's manager routines and system code. This approach
to incorporating massive amounts of data into a product provides the maximum
flexibility for the game designers and content experts, ensuring that every
CAREER SIM-TM- product accurately reflects the structure and content of the
information required to master that profession. The Company is currently
pursuing patent protection of certain components of its software technology.
The EMERGENCY ROOM title requires a standard 486 micro-processor computer
with Microsoft-Registered Trademark- DOS 6.0, a double speed CD-ROM drive, 50MHz
CPU, 4 MB of free hard disk space, a 100% compatible Sound Blaster sound card
and an SVGA monitor. Legacy is not, at the current time, pursuing hardware
formats other than IBM-compatible PCs operating on the
Microsoft-Registered Trademark- Windows-Registered Trademark- 95 operating
system for its future titles, including the contemplated DISTRICT ATTORNEY, NEWS
FLASH and ER CODE BLUE titles, which has the technical capabilities necessary to
run titles with the quality and features the Company believes to be crucial to
success in the multimedia software industry. In the event that IBM-compatible
PCs operating on the Microsoft-Registered Trademark-
Windows-Registered Trademark- 95 operating system are superseded in the PC
marketplace by other hardware formats and operating systems, the Company expects
to develop its products to run on such formats and operating systems. See "Risk
Factors -- Changing Product Formats."
The Company is developing its current products to include the ability to
access online resources and multiplayer gaming. In addition, in the future,
derivative versions of the CAREER SIM-TM- titles and/ or new cases may be down
loadable from either online services or the Internet. The Company intends to
modify its products to take advantage of the opportunities that arise from new
forms of distribution, such as the Internet.
UTILIZE CO-DEVELOPMENT AND AFFILIATE LABEL DISTRIBUTION RELATIONSHIPS. The
Company believes that strategic co-development alliances maximize the Company's
access to limited retail shelf space, reduce risks associated with the
development of new titles and result in high quality products. In the Company's
co-development relationship with IBM, the Company and IBM share development
costs of software titles and Legacy receives a royalty from the first unit sold.
Under its agreement with IBM, IBM exclusively distributes and sells the products
in the consumer market and has a right of first refusal to participate in the
development of any derivative product based in part on the EMERGENCY ROOM title,
including without limitation, academic, professional, on-line, non-IBM
compatible hardware and foreign language versions, if any. If, however, IBM
elects not to participate in any such product version, the Company may establish
other strategic relationships to develop, market and distribute such derivative
products and IBM is entitled to receive certain royalties. The Company plans to
continue to co-develop consumer versions of its CAREER SIM-TM- titles for teens
and adults with IBM, which is rapidly building its presence in the consumer
software market and is investing significant resources into the marketing and
sales of the EMERGENCY ROOM title.
The Company intends to seek affiliate label distribution agreements with
strategic partners for its contemplated NEWS FLASH project. In an affiliate
label distribution agreement, the Company is responsible for all of the
manufacturing costs associated with a title, and shares marketing and
distribution costs with another software company that already has an established
distribution channel and can effectively obtain and maintain retail shelf space.
Although the Company assumes additional costs under an affiliate label
arrangement, the Company's potential gross margins and revenue are greater than
those in co-development relationships. Affiliate label distribution agreements
also allow the Company to further build its brand name recognition. See "Risk
Factors -- Dependence on IBM."
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PRODUCTS
Legacy develops and publishes high quality multimedia computer software for
use on IBM-compatible computer formats. A description of the Company's products
currently being marketed and products in the later stages of development and the
components contained therein is set forth below.
PREVIOUS RELEASES. The first two of the Company's six products were
developed for other publishers: CHILDREN'S WRITING AND PUBLISHING CENTER for The
Learning Company, which was awarded "The Best Educational Software Program of
the Decade" in 1990 by TECHNOLOGY AND LEARNING magazine, and MICKEY'S CROSSWORD
PUZZLE MAKER for The Walt Disney Company. Both products met with critical and
sales success, experiencing sales of more than 100,000 units each. Seven years
after its initial publication, CHILDREN'S WRITING AND PUBLISHING CENTER, along
with its later versions (developed by The Learning Company), remains one of the
best selling titles in elementary schools. The Company followed the success of
these titles with the development of two more products which the Company
published, MUTANOID MATH CHALLENGE and MUTANOID WORD CHALLENGE, which was
nominated in 1992 for "Best Educational Software Program" by the Software
Publishers Association. In 1994, Legacy began marketing another edutainment
title, MAGIC BEAR'S MASTERPIECES, designed to teach geometry and problem solving
concepts to children, ages 6 to 10. Each of the California State Department of
Education and the New York City Public Schools Division of Instruction and
Professional Development has placed MAGIC BEAR'S MASTERPIECES on its respective
list of "recommended" software products for children. Despite the positive
response that these products garnered from customers, the Company believes that
the marketing, sale and distribution of the products published by Legacy were
hampered by inadequate marketing resources and sales support. The Company
received a total of $36,399 in software sales revenue from MUTANOID MATH
CHALLENGE, MUTANOID WORD CHALLENGE and MAGIC BEAR'S MASTERPIECES during fiscal
1995. The Company received a one-time payment of $475,000 for the development of
CHILDREN'S WRITING AND PUBLISHING CENTER from The Learning Company in 1989 and a
one-time payment of $75,000 for the development of MICKEY'S CROSSWORD PUZZLE
MAKER from Walt Disney Software in 1990.
CURRENT RELEASE. The EMERGENCY ROOM title, the first title in the CAREER
SIM-TM- series for teens and adults, was co-developed with IBM and released in
October, 1995. The EMERGENCY ROOM title is a unique multimedia simulation which
is designed to engage and entertain the user through a realistic experience of
working as an emergency room doctor. There are 400 different diagnoses at five
levels of difficulty, resulting in a potentially different experience each time
the game is played. The Company believes that through the selection and
examination of patients, administration of tests and application of treatments,
the EMERGENCY ROOM player learns about anatomy, disease, medical terminology and
the experiences of being a doctor. The game provides access to all of the
information a player needs to make sound medical decisions through consultations
with medical dictionaries, expert staff advice and study aids located throughout
the rooms in "Legacy Memorial Hospital." The educational aspects of the
EMERGENCY ROOM title are complemented by numerous funny and unexpected
interactions with the Legacy Memorial Hospital staff, who include well-known
television actors, and patients whose wit and humor add enjoyment to the game
playing experience. The EMERGENCY ROOM title includes more than 15,000 frames of
3-D rendered animation and twenty minutes of video, altogether taking up more
than 620 MB of storage on a CD-ROM disk.
FUTURE PRODUCT RELEASES IN THE CAREER SIM-TM- SERIES. The Company plans to
capitalize upon the development and release of the EMERGENCY ROOM title by
expanding the CAREER SIM-TM- series to include additional titles which enable
the user to simulate the most engaging aspects of various professionals' work
experiences. In November, 1995, the Company and IBM entered into the DA License
Agreement to co-develop the contemplated DISTRICT ATTORNEY title, the second
CAREER SIM-TM- title, which will incorporate the excitement and drama of
real-life courtroom cases, from evidence gathering to crime lab tests and
witness cross-examination. Because there is always a chance that something will
go wrong on the way to a conviction, the player will need to analyze critical
background information, work closely with the police and systematically prove
the case to the jury. The contemplated DISTRICT ATTORNEY title is currently in
production and is tentatively scheduled for completion in March 1997.
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Pursuant to a letter agreement with IBM, in March 1996, the Company delivered a
design specification for the contemplated CAREER SIM-TM- NEWS FLASH title to
IBM. In April 1996, IBM notified the Company of its decision not to proceed with
the development of the contemplated NEWS FLASH project, and the Company has
initially decided to develop such project without the co-funding assistance of
IBM. There can be no assurances that the Company will develop or complete the
NEWS FLASH title with or without a co-development partner or affiliate or
pursuant to other arrangements. This title pits the player's television station
in a citywide search for fast-breaking news stories. The contemplated NEWS FLASH
players achieve high television ratings by constructing news stories about
current events, sports, business, arts and entertainment. On March 15, 1996, the
Company entered into a non-binding letter of intent with IBM to begin
negotiations on a development and license agreement for a contemplated fourth
CAREER SIM-TM- title, the ER CODE BLUE title, the follow-on title to the
EMERGENCY ROOM title. The contemplated ER CODE BLUE title will challenge the
player with twenty-five new medical cases in which the player will have to make
fast-paced decisions about which patient is the most critically ill or injured.
The Company believes that this family of products will appeal to a wide range of
users because of the educational aspects of learning about a career while
engaged in a challenging yet fun game. Because the contemplated DISTRICT
ATTORNEY, NEWS FLASH and ER CODE BLUE titles are currently in the early or
initial stages of development, respectively, there can be no assurance that such
products, if developed, will be marketed under these respective titles. See
"Risk Factors -- Dependence on IBM" and "-- Development of New Products;
Unproven Acceptance of the Company's Products, Including the EMERGENCY ROOM
Title."
PRODUCT DEVELOPMENT METHODOLOGY
Legacy has developed a unique, flexible and effective product development
approach which integrates the expertise of various disciplines as well as market
research in all stages of the process.
CONCEPT PHASE. Pre-production for a software product begins with an idea or
concept which originates with the Company's designers and producers, including
Dr. Lehrer, based on their knowledge of educational and entertainment software.
A competitive product analysis is completed in which the features and benefits
of existing products and the opportunities for new products are analyzed. A
collaborative team comprised of a lead interactive designer, programmer, art
director and producer begins planning the outline that describes the
characteristics of the program. The team prepares a treatment which describes
the subject to be explored, multiple story lines, development issues and the
general look and feel of the screens. The treatment is then presented to a focus
group of target customers for input on, among other things, design concepts,
competitive products, market positioning and critical features.
PROTOTYPE PHASE. In the second phase of product development, an interactive
prototype frequently is developed using an authoring tool. As appropriate, the
team consults with outside experts on subject matter content and scripting, then
incorporates the necessary multimedia disciplines to build a program prototype.
The prototype undergoes field testing among the product's target customers and
subject matter experts, who suggest further refinements. The team then prepares
story boards, a dialog script, a technical design, sample graphic screens, a
schedule and a production budget.
PRODUCTION PHASE. The Company believes that a mix of internal and
third-party resources can be a cost-effective method of facilitating the
development of new products. The core creative team is supplemented in the
production phase with character designers, animators, writers, audio engineers,
video producers and musicians whom the Company employs on an independent
contractor basis. A team of computer artists begins developing graphics and
animations and the video elements are scripted and shot. At the same time, a
complete product specification is developed, in which the product definition is
detailed completely, including, among other things, interface and palette
issues, text size and fonts, action buttons, interactivity and levels of
gameplay.
The subject matter experts, writers and consultants in a CAREER SIM-TM-
product are critical to this production process. They create the initial version
of the scenarios or cases on which the gameplay is based and determine the
critical path through each case that defines success and devise cases that
systematically increase in level of difficulty. The subject expert also defines
what information from the
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discipline must be mastered and made available to the game player and helps to
identify the resources to obtain or create that information. The subject matter
expert works closely with the interactive designer and consults on interface,
graphic and branching issues. Upon completion of the consultant's factual
database of cases, a professional writer develops supporting storylines,
characters and dialog.
The use of video involves all the normal issues associated with traditional
film, including concept, scripting, creating a shot list and hiring talent,
camera crews and a sound stage. The filmed results are digitized, then adjusted
to balance image quality with screen size and frame rate. Sound professionals
work on the definition and creation of sound effects, voice over and original
music which bring the game environment to life.
The technical team's early involvement with the project helps define the
program's technical requirements, including disk space, screen size, sound
considerations and peripheral connectivity. As the team refines the product,
programmers decide what game engines, tools and libraries are to be used.
Keeping in mind the title's overall logic, application programmers begin
implementing code to integrate animation, sound and video.
QUALITY ASSURANCE PHASE. The quality assurance phase commences when the
design specification has been completely implemented. The quality assurance
phase devises a test plan and begins a comprehensive review which ranges from
verifying that all functions operate according to the design specification,
there are no program crashes and the game works on all intended hardware
systems. Outside hardware configuration testing labs are hired by the Company to
review installation procedures and performance issues on hundreds of
combinations of video boards, sound boards, memory configurations and
Microsoft-Registered Trademark- Windows-Registered Trademark- versions. The
final "golden master" is then shipped to the publisher for marketing and sales.
In fiscal 1993, 1994 and 1995, the Company's product development expenses,
net of development expense co-funding, were $81,959, $196,595 and $72,951,
respectively. The Company expects to continue to increase the resources it
devotes to developing new products, including new titles as well as derivative
versions and upgrades of existing titles. There can be no assurances, however,
that the Company will be able to introduce new products on schedule or that such
new products will achieve market acceptance.
MARKETING AND DISTRIBUTION
While the number of CD-ROM titles in print continues to increase at a rate
in excess of 50% per year, available retail shelf space for CD-ROM titles
increased by approximately 24% in 1995 compared to 1994, according to InfoTech,
a market research firm. Because of the nearly 4,000 CD-ROM titles vying for
limited retail shelf space, competition for retail shelf space is intense.
As a result, broad product distribution is one of the most difficult, yet
critical components of success for a multimedia developer. Unless a product is
on the shelf available for purchase, it cannot be sold in significant sales
volumes. The Company believes that distribution in the software industry is
increasingly controlled by a limited number of large publishers who have the
financial size and resources to obtain adequate retail shelf space. Without
significant capitalization it is not feasible for a software company to market
and promote its products independently. The Company believes that co-development
agreements are the preferred means to sell its products at this time because the
Company is able to invest in its products without having to assume full
responsibility for development and publishing costs. Because the Company assumes
some financial risk during the development phase, it is able to receive
royalties from sales beginning with the first unit under its co-development
arrangements. In addition, Legacy is able to take advantage of the brand name
recognition of its distribution partner, while it continues to build recognition
for its own name. See "Risk Factors -- Dependence on IBM." The Company plans to
continue to co-develop consumer versions of its CAREER SIM-TM- titles for teens
and adults with IBM, which is rapidly building its presence in the consumer
software market and is investing significant resources into the marketing and
sales of the EMERGENCY ROOM title. Notwithstanding the foregoing, the Company
has initially decided to develop the NEWS FLASH title
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without the co-funding assistance of IBM. There can be no assurances that the
Company will develop or complete the NEWS FLASH title with or without a
co-development partner or affiliate or pursuant to other arrangements.
Since shipment of the EMERGENCY ROOM title began in October, 1995, IBM has
aggressively pursued broad distribution for the title through a regional sales
representative organization. As of December, 1995, approximately 45,000 units of
the product, including approximately 25,000 units on consignment, were shipped
by IBM to vendors for distribution through retailers such as Best Buy, Toys R Us
and Walmart, as well as exclusive software retailers such as Electronics
Boutique and Software Etc. and traditional computer stores such as Comp USA. The
Company believes that IBM has hired marketing executives with experience in
consumer software sales and is building the organization necessary to provide
in-store sales promotion and support. The Company also believes that IBM is
committed to becoming a significant force in the consumer software business, as
reflected in the rapidly growing number of titles which are under development.
However, there can be no assurances that IBM will continue to build its sales
promotion and support organization or remain committed to the consumer software
business.
As Legacy's brand name recognition continues to improve, as its revenues
from the sales of its products increase, and as its product line grows, the
Company plans to publish its own products and distribute them through affiliate
label distribution agreements. In an affiliate label distribution agreement, a
master distributor assumes responsibility for retail marketing and distributing
a product while the developer/publisher assumes responsibility for development,
manufacturing and, to some extent, marketing. Although the Company assumes
additional costs under an affiliate label arrangement, the Company's potential
gross margins and revenue are greater than those in co-development relationships
because the Company is not limited to a stated royalty percentage. Affiliate
label distribution agreements also allow the Company to further build its brand
name recognition because the products are marketed under the Company's brand
name.
COMPETITION
The market for the Company's products is highly competitive and is
characterized by rapidly changing technology, evolving industry standards and
frequent new product introductions and enhancements. The number of CD-ROM titles
in print in the United States during the 1995 holiday season alone increased by
93% since the 1994 holiday season, growing from 2,032 to 3,919, according to
InfoTech, a market research firm. There are in excess of 11,000 CD-ROM and
multimedia titles commercially available worldwide, according to TFPL
Publishing, which also projects an annual growth rate of such titles in 1996 in
excess of 50%. Principal competitive factors in marketing consumer software
include content, brand name recognition, price, access to retail shelf space,
product enhancements, new product introductions, marketing support and
distribution systems. Many of the Company's competitors have comparable or
greater financial, technical, marketing, sales and customer support resources,
as well as greater name recognition and a larger customer base, than the
Company. In addition, the Company believes that large software companies, media
companies and film studios are increasing their focus on the interactive
entertainment and edutainment software markets and, as a result of their
financial and other resources, name recognition and customer base, may become
significant competitors of the Company. See "Risk Factors -- Competition."
In addition, the market for the Company's products is characterized by
significant price competition, and the Company expects that it will face
increasing price pressures from competitors. While there is not yet another
series of CD-ROM multimedia titles focused on professional career education for
teens and adults, there may be competitive product releases in the future which
could result in significant competition, price erosion and loss of shelf space
for the Company and its products.
PROPRIETARY RIGHTS
The Company regards its technology as proprietary and relies primarily on a
combination of trademark, copyright, trade secret laws, employee and third-party
non-disclosure agreements and other methods to protect its proprietary rights.
The source code for the Company's proprietary software is protected both as a
trade secret and as an unpublished and unregistered copyrighted work.
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The EMERGENCY ROOM product contains proprietary software which is comprised of
the manager routines and system code for such product. In addition, since
release of the EMERGENCY ROOM product, the Company has made improvements in the
software manager routines and system code for use in its contemplated products.
The Company is designing the contemplated DISTRICT ATTORNEY, NEWS FLASH and ER
CODE BLUE products using the same basic software manager routines and system
code as the EMERGENCY ROOM product. The Company has registered trademarks in the
United States for certain of its product names and has pending trademark
applications for certain additional product names. The Company believes that
trademarks and copyrights are important and significant to the Company's
success, as are other factors such as the knowledge, ability and experience of
the Company's personnel and the Company's research and development program.
Legacy's tools, techniques and processes support the full range of
interactivity and high resolution graphics that today's CD-ROM software customer
expects. For example, the EMERGENCY ROOM title contains full motion video, over
500 voice over files, more than 15,000 frames of 3-D rendered animation, with a
graphic standard the Company believes to be as good or better than current best
selling CD-ROM titles.
Legacy has developed tools, techniques and processes which allow its
production team to cost effectively create games that can model complex,
realistic experiences based on expert systems. An expert system consists of text
and pictorial content developed by practicing professionals that defines the
"correct" solution to a scenario "problem," as well as appropriate responses to
an "incorrect" solution. For example, in the EMERGENCY ROOM title, there are 400
different medical cases or scenarios for which the correct actions in each of
five rooms, a waiting, examination, laboratory, imaging and treatment room, are
predefined. Content experts are able to generate the underlying informational
database using standard word processing and graphic tools. Legacy's proprietary
off-line tools translate the data into a format which can be easily accessed by
Legacy's manager routines and system code. This approach to incorporate massive
amounts of data into a product provides the maximum flexibility for the game
designers and content experts, ensuring that every CAREER SIM-TM- product
accurately reflects the structure and content of the information required to
master that profession. The tools, techniques and processes for which the
Company has proprietary rights are its off-line software tools for translating
data and its software manager routines and system code. The Company's methods of
protection for these proprietary rights are trade secret protection and
copyright protection.
The Company is currently pursuing patent protection of certain components of
its software technology. The Company has not yet filed for patent protection
with the United States Patent and Trademark Office or any foreign governmental
agency.
The technology in which the Company has proprietary rights is embodied in
its software. This includes the EMERGENCY ROOM software, the improved software
which it intends to utilize in its contemplated products and its off-line tools
for translating data. The Company presently does not have other technology in
which it has proprietary rights. The Company's software would give it a
competitive advantage with respect to a competitor entering the market in that
the competitor would have to undergo the software development needed to make its
products. However, a competitor could independently develop software which
provides the same results as does the Company's software without copying the
Company's software such that the Company's proprietary rights are not violated.
The Company's software does not represent the only way in which the results and
effects of the Company's products could be achieved. See "Risk Factors --
Limited Protection of Intellectual Property and Risk of Litigation."
EMPLOYEES
As of May 6, 1996, the Company had 14 full-time employees and 1 part-time
employee, of whom 11 were engaged in research and development and 4 in general
and administrative. Competition for highly specialized employees with technical,
management, marketing, sales, product development and other specialized training
is intense, and there can be no assurance that the Company will be
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successful in attracting or retaining such personnel. The Company's employees
are not covered by a collective bargaining agreement and the Company has
experienced no work stoppages. The Company believes that its relationship with
employees is good.
FACILITIES
The Company's principal administrative, sales, marketing and development
facility occupies approximately 2,895 square feet of space in Northridge,
California which the Company leases on a month-to-month basis. Because the
Company believes that its existing facility will not be adequate to meet the
Company's needs in the future the Company plans to lease a larger facility in
the Los Angeles, California metropolitan area on commercially reasonable terms.
See "Use of Proceeds."
LITIGATION
The Company is not involved in any litigation that is expected to have a
material adverse effect on the Company's business or financial position.
SEASONALITY AND SHELF LIFE
Fourth quarter holiday sales represent a significant amount of the sales
that can be expected in the retail channel from an edutainment software product.
Typically, sales are highest during the fourth fiscal quarter, decline in the
first fiscal quarter and are lowest in the second and third fiscal quarters.
This seasonal pattern is due primarily to the increased demand for the Company's
products during the calendar year-end holiday selling season. Furthermore, due
to the Company's inability to comply with SFAS 48, no royalty revenue on the
EMERGENCY ROOM title will be recognized in the Company's Statements of
Operations unless the Company can comply with SFAS 48. Based on an analysis
pursuant to the Company's Revenue Recognition Policy of, among other things, (i)
the Company's and IBM's experience on EMERGENCY ROOM title sales and returns to
date, (ii) additional information and data on the EMERGENCY ROOM title which the
Company anticipates receiving from IBM, (iii) sales and returns of the Company's
past products and other information relating thereto, (iv) information regarding
significant purchasers of the Company's products, (v) sales and returns of
comparable computer software products of other developers and other information
relating thereto and (vi) computer software industry data and practices, the
Company anticipates that it will be able to comply with SFAS 48 and recognize
royalty revenue, net of estimated returns, on the EMERGENCY ROOM title no sooner
than for the third quarter of 1996. There can be no assurance, however, that the
Company will be able to recognize royalty revenue on the EMERGENCY ROOM title in
the Company's financial statements for the third quarter of 1996. When the
Company determines it can comply with SFAS 48 and does recognize royalty
revenue, future filings, including without limitation the footnotes to the
financial statements of the Company, will set forth the quarters in which
products were shipped to which such revenue relates. IBM has notified the
Company that IBM expects shipments of the EMERGENCY ROOM title to be
significantly lower in the first quarter of 1996 as compared to the fourth
quarter of 1995. Other fluctuations in retail sales are related to the school
market, which generally purchases most products at the beginning of the school
year in September or in late spring, when software budgets must be expended. In
terms of OEM or hardware and software bundling opportunities, the potential for
these sales exists year round. The Company achieved approximately 23%, 34% and
12% of its total sales during the final quarter of 1993, 1994 and 1995,
respectively. See "Risk Factors -- Fluctuations in Operating Results;
Seasonality" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The average entertainment title has a product life span of approximately 18
months. The average education title has a product life span of approximately 3
years. The Company believes that the shelf life of the CAREER SIM-TM- titles
will be longer than the typical entertainment title because of the sophisticated
and educational content of such products.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the names, ages as of May 6, 1996, positions and a brief
description of the business experience of the Company's executive officers and
directors. All directors hold office until the next annual meeting of
stockholders and until their successors are duly elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
-------------------------------------- --- -----------------------------------
<S> <C> <C>
Ariella J. Lehrer, Ph.D............... 43 Chairman of Board of Directors,
President and Chief Executive
Officer
William E. Sliney..................... 57 Vice President of Finance, Chief
Financial Officer, Treasurer and a
Director
Stanley Wojtysiak..................... 53 Secretary and a Director
Curtis A. Hessler (1)(2).............. 52 Director
Arthur G. Hiller (3).................. 72 Director
Daniel D. Phillips (1)(2)(3).......... 42 Director
Ivan M. Rosenberg, Ph.D (1)(2)(3)..... 53 Director
</TABLE>
- ------------------------
(1) Member of the Stock Option Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
(3) Member of the Compensation Committee of the Board of Directors.
ARIELLA J. LEHRER, PH.D., has served as the Company's Chairman of the Board
of Directors, President and Chief Executive Officer since August, 1989. Dr.
Lehrer received a Master of Arts in Child Development from Pacific Oaks College
in 1976, a Ph.D. in Cognitive Psychology from Claremont Graduate School in 1983
and completed a post-doctorate at the University of California, Los Angeles in
1984. Prior to joining the Company, Dr. Lehrer headed Lehrer Associates, a
consulting company whose clients included The Learning Company, Walt Disney
Software, Commodore International, Ltd., IBM and SoftKat, Inc. From 1986 to
1989, Dr. Lehrer served on the California Educational Technology Commission. Dr.
Lehrer is a member of the Board of Fellows of the Claremont Graduate School's
Center for Organizational and Social Psychology and of the Board of Governors of
the Otis College of Art and Design.
WILLIAM E. SLINEY has served as the Company's Chief Financial Officer since
October 16, 1995. On November 9, 1995, Mr. Sliney also became the Company's Vice
President of Finance, Treasurer and a director. From September, 1994 until
October, 1995, Mr. Sliney was an independent consultant. Prior to that, Mr.
Sliney was Chief Executive Officer of Gump's from May, 1993 to August, 1994, and
Vice President and Chief Financial Officer of Highland Superstores, Inc. from
January to May, 1993. From 1987 to 1992, Mr. Sliney was President, Chief
Financial and Administrative Officer and a director of Phoenix Service
Corporation. Mr. Sliney graduated from Northeastern University in 1961 with a
Bachelor of Science in Business Administration and from the University of
California, Los Angeles, in 1963 with a Master of Business Administration.
STANLEY WOJTYSIAK has been Secretary of the Company since January, 1996 and
a director of the Company since August, 1989. Mr. Wojtysiak was Chairman of the
Board of Directors and President of the Company from January, 1989 to August,
1989, Vice President of Engineering from August, 1989 to October, 1989, Vice
President of Development from September, 1995 to October, 1995 and Chief
Financial Officer from January, 1989 to October, 1995. Prior to co-founding the
predecessor to the Company in 1986, Mr. Wojtysiak was a software manager for
Oakleaf Corporation. Mr. Wojtysiak graduated from Purdue University in 1964 with
a Bachelor of Science in Mathematics.
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CURTIS A. HESSLER has been a director of the Company since January, 1996.
From February, 1991 until December, 1995, Mr. Hessler was Executive Vice
President of the Times Mirror Company in charge of corporate affairs and
non-newspaper businesses. From December, 1984 until February, 1991, Mr. Hessler
was Vice Chairman of Unisys Corporation in charge of corporate affairs and
defense systems businesses. Mr. Hessler received a Bachelor of Arts in Social
Studies from Harvard College in 1966, a Juris Doctor from Yale Law School in
1973 and an Master of Arts in Economics from the University of California,
Berkeley in 1976. From 1966 to 1969, Mr. Hessler studied in the B.Phil.
Economics program at Oxford University. Mr. Hessler is a director of Wallace
Computer Services, Inc. and of Interactive Search, Inc., two privately held
companies.
ARTHUR G. HILLER has been a director of the Company since January, 1996. Mr.
Hiller has been an independent motion picture director since 1962. Mr. Hiller
received a Bachelor of Arts from the University of Toronto in 1947 and a Master
of Arts in Psychology from the University of Toronto in 1950.
DANIEL D. PHILLIPS has been a director of the company since January, 1996.
Mr. Phillips has extensive experience opening up and expanding markets and
channels for start up software companies. Currently Mr. Phillips is Vice
President Worldwide Sales for Concord Communications, a privately held, venture
capital backed, software company in the network management market. Prior to that
from October, 1989 to May, 1994, Mr. Phillips was Vice President Worldwide Sales
and Vice President of International and OEM Operations of Epoch Systems, a
privately held, venture capital backed, start up software company that was
acquired by EMC Corporation. Prior to that, Mr. Phillips was Director of Sales
and Director of International and OEM Operations during a five year period for
Applix Inc. Mr. Phillips is a director of Allycom, Inc., a privately held
company.
IVAN M. ROSENBERG, PH.D., has been a consultant to the Company since
February, 1995, and a director of the Company since June, 1995. Dr. Rosenberg is
an entrepreneur and consultant to senior business executives. Dr. Rosenberg
founded Distinctive Software Corporation in 1981. From 1988 to 1990, Dr.
Rosenberg was Vice President for Products and Information Systems at E.K.
Williams & Co., a business accounting and consulting company. In 1992, he
founded Business Information Solutions, a consulting company assisting small to
medium size companies with tactical and strategic automation decisions, which he
continues to own. Dr. Rosenberg also is a senior consultant with The Crossroads
Group, Inc., which assists companies in executive training, team-building,
re-engineering, communications effectiveness and culture changes. Dr. Rosenberg
currently serves on the boards of directors of the Los Angeles Venture
Association, Distinctive Solutions Corporation and the nonprofit Technology for
Results in Elementary Education and has served on the boards of directors of the
Institute of Management Consultants (Los Angeles Chapter) and Interex (the
Hewlett Packard International User's Group). Dr. Rosenberg is also a director of
Cybernet, Inc., a privately held long-distance telecommunications company. Dr.
Rosenberg received a Bachelor of Science in Electrical Engineering in 1965 and a
Master of Science in Computer Science in 1966 from Cornell University, and a
Master of Science in Management in 1974 and a Ph.D. in Business Information
Systems in 1976 from the University of Rochester.
BOARD OF DIRECTORS COMMITTEES AND COMPENSATION
The Board of Directors has appointed three committees: the Audit Committee,
the Compensation Committee and the Stock Option Committee. The members of the
Audit Committee are Messrs. Hessler, Phillips and Rosenberg. Responsibilities of
the Audit Committee include reviewing financial statements and consulting with
the independent auditors concerning the Company's financial statements,
accounting and financial policies and internal controls and reviewing the scope
of the independent auditors' activities and fees. The members of the
Compensation Committee are Messrs. Hiller, Phillips and Rosenberg. The
Compensation Committee is responsible for reviewing and approving within its
authority, compensation, benefits, training and other human resource policies.
The members of the Stock Option Committee are Messrs. Hessler, Phillips and
Rosenberg. The Stock Option Committee is responsible for administering the
Company's 1995 Stock Option/
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Stock Issuance Plan and granting options thereunder. The Company has no standard
arrangements pursuant to which directors of the Company are compensated for any
services provided as a director. Directors are eligible to participate in the
Company's 1995 Stock Option/Stock Issuance Plan. See "1995 Stock Option/Stock
Issuance Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee was formed in January, 1996 to
establish salary, bonus and other forms of compensation for officers of the
Company, provide recommendations for the salaries and incentive compensation of
the employees and consultants of the Company and make recommendations to the
Board of Directors regarding such matters. The principal objectives of the
Company's executive compensation are to: (i) support the achievement of the
desired Company performance; (ii) align the executive officer's interests with
the success of the Company and with the interests of the Company's stockholders;
and (iii) provide compensation that will attract and retain qualified management
and reward performance. These objectives are principally achieved through
compensation in the form of annual base salaries, discretionary bonuses and
equity investment opportunities, such as stock option grants. Prior to January,
1996, the Board of Directors performed the functions of the Compensation
Committee. The Company has not historically linked executive compensation
directly to corporate performance.
The Compensation Committee is currently composed of Messrs. Hessler,
Phillips and Rosenberg. No interlocking relationship exists between the
Company's Board of Directors or Compensation Committee and the board of
directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that a
corporation's certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director for monetary damages for breach
of their fiduciary duties as directors, except for liability (i) for any breach
of their duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law (the "DGCL") or (iv) for any transaction from which the
director derived an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers and may indemnify its employees and agents to the fullest extent
permitted by law. The Company believes that indemnification under its Bylaws
covers at least negligence and gross negligence on the part of indemnified
parties.
The Company has entered into agreements to provide indemnification for the
Company's directors and certain officers in addition to the indemnification
provided for in the Bylaws. These agreements, among other things, will indemnify
the Company's directors and certain officers to the fullest extent permitted by
Delaware law for certain expenses (including attorneys' fees), and all losses,
claims, liabilities, judgments, fines and settlement amounts incurred by such
person arising out of or in connection with such persons' service as directors
or officers of the Company or an affiliate of the Company.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
KEY PERSON LIFE INSURANCE
The Company maintains a life insurance policy in the amount of $1,000,000 on
Dr. Lehrer. The beneficiary under such life insurance policy is the Company.
Upon consummation of the Public
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Offering, the Company intends to obtain an additional $4,000,000 key person life
insurance policy on Dr. Lehrer, although there can be no assurance that such a
policy can be obtained, or can be obtained at a premium cost that is reasonable
to the Company.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid, during the year ended
December 31, 1995, to (i) the Chief Executive Officer of the Company and (ii)
the Company's only other executive officers whose total compensation for the
1995 fiscal year exceeded $100,000 (the "Named Executive Officers") for services
rendered in all capacities to the Company. No other person during the 1995
fiscal would have been otherwise includible in such table on the basis of
compensation earned for that fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- -------------------------------------------------- --------- --------- ----------- --------------
<S> <C> <C> <C> <C>
Ariella J. Lehrer, Ph.D. ......................... 1995 $ 62,250 $ 0 $ 0
President and Chief Executive Officer 1994 $ 48,000 $ 0 $ 0
1993 $ 22,750 $ 0 $ 0
William E. Sliney ................................ 1995 $ 20,833 $ 0 $ 4,500(2)
Vice President of Finance, Chief Financial
Officer and Treasurer (1)
</TABLE>
- ------------------------
(1) Mr. Sliney joined the Company in October, 1995; his annualized base salary
for 1995 was $100,000. See "--Employment Contracts, Termination of
Employment and Change-in-Control Arrangements."
(2) The Company paid for approximately $4,500 of relocation expenses of Mr.
Sliney during 1995.
STOCK OPTION GRANTS DURING 1995
No stock options or appreciation rights were granted to any Named Executive
Officers during the 1995 fiscal year. There were no outstanding unexercised
stock options or appreciation rights as of December 31, 1995.
Effective January 15, 1996, the Board granted options to the following
employees (including officers) and consultants of the Company in the amount
listed next to each individual's name: Ariella Lehrer (100,000); Stanley
Wojtysiak (100,000); William Sliney (50,000); John W. Miller (40,000); Gregory
Ackerman (50,000); Craig Brannon (10,000); Curtis Hessler (10,000); Arthur G.
Hiller (10,000); Daniel Phillips (10,000) and Ivan Rosenberg (10,000). The
options granted to Dr. Lehrer and Messrs. Wojtysiak and Miller are immediately
vested with respect to 50% of the option shares, and vest with respect to the
remaining 50% equally on the first and second anniversaries of the grant date.
The exercise price for such options is $6.00 per share. The options granted to
Messrs. Sliney, Ackerman and Brannon vest with respect to 25% of the option
shares one year after grant, and vest with respect to the remaining 75% equally
over the next 36 months thereafter. The exercise price for such options is $5.10
per share. The options granted to Messrs. Hessler, Hiller, Phillips and
Rosenberg, the Company's outside directors, vest in four successive equal annual
installments upon such optionee's completion of service as a member of the Board
of Directors measured from the date of grant. The exercise price for such
options is $6.00 per share. Each option was granted at or above fair market
value, and to the extent the optionee was a 10% stockholder, in which case the
option was granted at 110% of fair market value. In determining the fair market
value of the Company's Common Stock, the Board of Directors considered various
factors, including the Company's financial condition and business prospects, its
operating results, the absence of a market for its Common Stock and the risks
54
<PAGE>
normally associated with high technology companies. The options have a 10-year
term (except to the extent the optionee was a 10% stockholder, in which case the
option term is 5 years), subject to earlier termination in the event optionee's
service with the Company terminates.
On November 9, 1995, the Board granted an option exercisable for 50,000
shares of Common Stock to Elizabeth Nolan, M.D., a consultant to the Company.
Dr. Nolan's option becomes exercisable at the per share price of $3.00 to be
paid by the Company upon the filing of a registration statement on Form S-8 by
the Company with respect to the shares of Common Stock underlying Dr. Nolan's
option. Under certain circumstances, including the failure of Dr. Nolan to
exercise her option, the Company shall issue to Dr. Nolan a promissory note in
the amount of $150,000 as compensation for services performed.
1995 STOCK OPTION/STOCK ISSUANCE PLAN
The 1995 Stock Option/Stock Issuance Plan was adopted by the Board of
Directors on November 9, 1995 and approved by the stockholders on November 9,
1995. 521,800 shares of Common Stock have been authorized for issuance under the
Option Plan. In no event may any one participant in the Option Plan receive
option grants or direct stock issuances for more than 250,000 shares in the
aggregate.
The Option Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals may, at the
discretion of the Plan Administrator, which is the Stock Option Committee of the
Company's Board of Directors, be granted options to purchase shares of Common
Stock at an exercise price not less than 85% of their fair market value on the
grant date; (ii) the Stock Issuance Program under which such individuals may, in
the Plan Administrator's discretion, be issued shares of Common Stock directly,
through the purchase of such shares at a price not less than 85% of their fair
market value at the time of issuance or as a bonus tied to the performance of
services; and (iii) the Automatic Option Grant Program under which option grants
will automatically be made at periodic intervals to eligible non-employee Board
members to purchase shares of Common Stock at an exercise price equal to 100% of
their fair market value on the grant date.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Stock Option Committee. The Stock Option Committee, as
Plan Administrator, will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances, the time or times
when such option grants or stock issuances are to be made, the number of shares
subject to each such grant or issuance, the status of any granted option as
either an incentive stock option or a non-statutory stock option under the
Federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding.
In the event the Company is acquired by merger, consolidation or asset sale,
the shares of Common Stock subject to each option outstanding at the time under
the Option Plan will immediately vest in full, except to the extent the
Company's repurchase rights with respect to those shares are to be assigned to
the acquiring entity, and options will accelerate to the extent not assumed by
the acquiring entity. The Stock Option Committee also has discretion to provide
for the acceleration of one or more outstanding options under the Option Plan
and the vesting of shares subject to outstanding options upon the occurrence of
certain hostile tender offers. Such accelerated vesting may be conditioned upon
the subsequent termination of the affected optionee's service.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Common Stock.
55
<PAGE>
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program in return for
the grant of new options for the same or different number of option shares with
an exercise price per share based upon the fair market value of the Common Stock
on the new grant date.
Under the Automatic Option Grant Program, each individual who is first
elected or appointed as a non-employee Board member on or after the first date
on which the Company's Common Stock is registered under Section 12(g) of the
Exchange Act will receive an option grant on such date for 10,000 shares of
Common Stock, provided such individual has not otherwise been in the prior
employ of the Company. Each individual who first becomes a non-employee Board
member thereafter will receive a 10,000-share option grant on the date such
individual joins the Board provided such individual has not been in the prior
employ of the Company. In addition, at each Annual Stockholders Meeting,
beginning with the 1997 Annual Meeting, each individual who is to continue to
serve as a non-employee Board member after the meeting will receive an
additional option grant to purchase 2,500 shares of Common Stock whether or not
such individual has been in the prior employ of the Company.
Each automatic grant will have a term of ten (10) years, subject to earlier
termination following the optionee's cessation of Board service. Each automatic
option will be immediately exercisable; however, any shares purchased upon
exercise of the option will be subject to repurchase should the optionee's
service as a non-employee Board member cease prior to vesting in the shares. The
initial 10,000-share grant will vest in four equal and successive annual
installments over the optionee's period of Board service. Each additional
2,500-share grant will vest upon the optionee's completion of one year of Board
service measured from the grant date. However, each outstanding option will
immediately vest upon (i) certain changes in the ownership or control of the
Company or (ii) the death or disability of the optionee while serving as a Board
member.
The Board may amend or modify the Option Plan at any time, but may not amend
the Automatic Option Grant Program at intervals more frequently than once every
six months, and any amendment to the Option Plan must not adversely affect the
rights and obligations with respect to options, stock appreciation rights or
unvested stock issuances at the time outstanding under the Option Plan unless
the optionee or the participant consents to such amendment or modification. The
Option Plan will terminate upon the earliest of (i) October 31, 2005, (ii) the
date on which all shares available for issuance under the Plan shall have been
issued pursuant to the exercise of options or the issuance of shares (whether
vested or unvested) under the Option Plan and (iii) the termination of all
outstanding options in connection with certain stockholder-approved transactions
to which the Company is a party.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors on January 15, 1996 and approved by the stockholders
on January 15, 1996. The Purchase Plan is designed to allow eligible employees
of the Company and participating subsidiaries to purchase shares of Common
Stock, at semi-annual intervals, through their periodic payroll deductions under
the Purchase Plan, and a reserve of 150,000 shares of Common Stock has been
established for this purpose. Employees will be eligible to participate if they
are employed by the Company for at least 20 hours per week and five months per
calendar year.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering period
will begin on the day the Underwriting Agreement is executed and priced in
connection with the Public Offering and will end on the last business day in
March, 1998.
Payroll deductions may not exceed 15% of base salary for each semi-annual
period. The purchase price per share will be eighty-five percent (85%) of the
LOWER of (i) the fair market value of the Common
56
<PAGE>
Stock on the participant's entry date into the offering period or (ii) the fair
market value on the semi-annual purchase date. Each outstanding purchase right
will be exercised immediately prior to a merger or consolidation of the Company.
The Board may amend or terminate the Purchase Plan immediately after any
purchase date. However, the Board may not, without stockholder approval,
materially increase the number of shares of Common Stock available for issuance
or materially modify the eligibility requirements for participation or the
benefits available to participants.
The Purchase Plan will terminate on the earliest of (i) the last business
day in April 2006, (ii) the date on which all shares available for issuance
under the Purchase Plan are sold and (iii) the date on which all purchase rights
are exercised in connection with a merger or consolidation.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has entered into an employment agreement with each of Ariella J.
Lehrer, Ph.D., William Sliney and Stanley Wojtysiak (collectively, the
"Employment Agreements") providing for a minimum employment period of five years
beginning November 10, 1995 for Dr. Lehrer and Mr. Wojtysiak and October 16,
1995 for Mr. Sliney. Each of Dr. Lehrer and Messrs. Sliney and Wojtysiak is
referred to herein as the "Employee." Pursuant to her Employment Agreement, Dr.
Lehrer currently is entitled to an annual base salary of $105,000, which
automatically will adjust upward to $120,000 per annum effective March 1, 1996.
Mr. Sliney is currently entitled to an annual base salary of $100,000, which
automatically will adjust upward to $115,000 per annum effective March 1, 1996.
Mr. Wojtysiak is currently entitled to an annual base salary of $90,000, which
automatically will adjust upward to $100,000 per annum effective March 1, 1996.
The Employment Agreements also provide that following certain registrations of
the Company's Common Stock under the Securities Act, each Employee's respective
annual base salary will be reviewed and adjusted by the Board of Directors so as
to be in accordance with the compensation packages provided by similarly
situated public companies to officers who have comparable duties and
responsibilities to those of the Employee. The Company may terminate each
Employee's employment at any time with or without cause and each Employee may
terminate her or his employment following a change in control of the Company,
which is triggered by a person becoming a beneficial owner (as defined in Rule
13d-3 of the Exchange Act) of 30% or more of the combined voting power of the
then outstanding securities of the Company; provided, however, that neither the
Public Offering nor the beneficial ownership representing 30% or more of the
combined voting power of the then outstanding voting securities of the Company
by EBC constitutes a change in control. If any Employee's employment is
terminated by the Company other than pursuant to a voluntary termination by the
Employee, a termination for cause by the Company or the expiration of the term
of employment, during the period beginning on the date of such termination until
the earlier of (x) the Employee's death or (y) date the Employment Agreement
would have terminated had the Employee not been earlier terminated, provided
that such period shall not be less than one year, such Employee shall be
entitled to receive (A) the pro rata portion of the base salary theretofore
earned but unpaid, (B) her or his monthly base salary, (C) a pro-rata portion of
her or his bonus for such fiscal year, provided that as of the date of such
termination the Employee has completed six or more months of the Company's then
current fiscal year and (D) full vesting of her or his stock options, warrants,
rights and other Company stock-related awards granted to the Employee by the
Company that otherwise would have vested and become exercisable during such
fiscal year of the Company in which the Employee is terminated. In the event
that within two years following a change in control of the Company the Employee
is terminated as a result of an involuntary termination for any reason other
than for cause, disability, death or normal retirement, the Employee will be
entitled to the compensation and benefits set forth above until the later of (x)
date the Employment Agreement would have terminated had the Employee not been
earlier terminated and (y) two years from such date of termination of the
Employee following such change in control and involuntary termination,
regardless of the Employee's death.
57
<PAGE>
In addition, the Stock Option Committee as Plan Administrator of the 1995
Stock Option/Stock Issuance Plan will have the authority to provide for the
accelerated vesting of the shares of Common Stock subject to outstanding options
held by the Chief Executive Officer and any other executive officer of the
Company, or the shares of Common Stock subject to direct issuances held by any
such individual, in connection with certain changes in control of the Company or
the subsequent termination of the officer's employment following the change in
control event.
CERTAIN TRANSACTIONS
On November 21, 1995, the Company issued to EBC, a third party lender, the
Convertible Note in the original principal amount of $1,000,000 in connection
with a Loan and Security Agreement entered into on such date by the Company and
EBC. Interest on the Convertible Note accrues at the rate of 10% per annum and
is payable monthly, beginning on December 1, 1995; provided, however, that the
Company is required to prepay $300,000 of the principal of the Convertible Note
with the proceeds of the Public Offering. See "Use of Proceeds." In addition,
conversion of the remaining $700,000 in principal amount of the Convertible Note
into 534,531 shares of Common Stock of the Company at the per share conversion
price of $1.31 is a condition to the closing of the Public Offering. The Company
has also granted EBC the Warrants to purchase 200,000 shares (the "EBC Warrant
Shares") of Common Stock, subject to adjustment under certain circumstances, at
an initial purchase price of $1.31 per share. EBC was also granted certain
rights with respect to registration under the Securities Act of the shares of
Common Stock into which the Convertible Note is convertible and of the EBC
Warrant Shares. See "Description of Capital Stock -- Registration Rights."
Certain officers and directors and an immediate family member of one of such
officers have made certain loans to the Company. As of May 6, 1996, the Company
had four outstanding unsecured promissory notes, two of which are each in the
principal amount of $73,200, payable to each of Ariella J. Lehrer, Ph.D., the
Chairman of the Company's Board of Directors, President and Chief Executive
Officer, and Stanley Wojtysiak, the Company's Secretary and a Director. These
promissory notes mature on March 31, 1997. The Company also has outstanding an
unsecured promissory note in the amount of $260,051 payable to Dr. Lehrer's
father-in-law, which matures on March 31, 1997, and an unsecured promissory note
in the amount of $120,885 payable to an unrelated third party over a one-year
period beginning July 1, 1996. The loans accrue interest at the rates of 9.0% to
16.7% per annum. As of May 6, 1996, the outstanding principal and accrued
interest due on each of Dr. Lehrer's loan, Mr. Wojtysiak's loan and Mr. Lehrer's
loan were approximately $101,319, $131,017 and $328,033, respectively. After the
Public Offering, the Company anticipates making payments of all accrued interest
on such indebtedness and thereafter making principal and interest payments on
such indebtedness as they come due from revenue. See also "Management --
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements."
Dr. Rosenberg, a member of the Company's Board of Directors since June,
1995, has been a consultant to the Company since February, 1995, and in
November, 1995, the Company issued Dr. Rosenberg 21,000 shares of Common Stock
for such consulting services performed during 1995.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested directors of the Board of
Directors, and will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
58
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock as of May 6, 1996, as adjusted to reflect
the sale of the shares offered hereby (assuming no exercise of the Underwriter's
over-allotment option) (i) by each person known to the Company to beneficially
own more than 5% of the outstanding shares of the Common Stock, (ii) by each of
the Company's directors, (iii) by each of the Company's Named Executive Officers
and (iv) by all directors and executive officers of the Company as a group. The
number of shares beneficially owned by each director and executive officer is
determined under rules of the Securities and Exchange Commission (the
"Commission"), and such information is not necessarily indicative of beneficial
ownership for any other purpose. Unless otherwise indicated, each person has
sole voting and investment power (or shares such powers with his or her spouse)
with respect to the shares set forth in the following table.
<TABLE>
<CAPTION>
NUMBER SHARES
BENEFICIALLY PERCENTAGE OF SHARES SHARES BENEFICIALLY OWNED
OWNED PRIOR TO BENEFICIALLY OWNED AFTER SECONDARY
THE PUBLIC ------------------------------ DISTRIBUTION BY THE
OFFERING AND BEFORE THE AFTER THE SELLING STOCKHOLDER
SECONDARY PUBLIC PUBLIC --------------------------
NAME AND ADDRESS (1) DISTRIBUTION (2) OFFERING (2) OFFERING (3)(4) NUMBER (3) PERCENT (3)(4)
- ----------------------------------------- ----------------- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Ariella J. Lehrer, Ph.D.................. 138,000(5) 10.36% 5.92% 138,000 5.92%
Stanley Wojtysiak........................ 338,000(6) 25.36% 14.49% 338,000 14.49%
William E. Sliney........................ 0 0% 0% 0 0%
Curtis A. Hessler........................ 0 0% 0% 0 0%
Arthur G. Hiller......................... 0 0% 0% 0 0%
Daniel D. Phillips....................... 0 0% 0% 0 0%
Ivan Rosenberg, Ph.D..................... 21,000 1.64% 0.92% 21,000 0.92%
E.B.C. Trust Corporation (7)............. 734,351(8) 49.53% 29.58% 0 0%
10, rue Princesse Florestine
MC 98000 Monaco
D&A Lehrer Children Trust................ 200,000(9) 15.59% 8.76% 200,000 8.76%
1300 Woodland Road
York, PA 17403
John W. Miller........................... 164,000(10) 12.59% 7.12% 164,000 7.12%
All directors and executive officers as a
group (7 persons)....................... 497,000(11) 47.60% 27.89% 549,500 27.89%
</TABLE>
- ------------------------
(1) Unless otherwise indicated, the stockholder's address is at the Company's
principal executive offices.
(2) Before the Public Offering, percent ownership is based on 1,282,551 shares
of Common Stock outstanding as of May 6, 1996 plus any shares issuable
pursuant to options or warrants held by the person or class in question
which may be exercised within 60 days of May 6, 1996.
(3) Assumes no exercise of the Underwriter's over-allotment option. Beneficial
ownership is determined in accordance with the rules of the Commission. In
computing the number of shares beneficially owned by a person (or group) and
the percentage ownership of that person (or group), shares of Common Stock
subject to options held by that person (or group) that are currently
exercisable or exercisable within 60 days of May 6, 1996 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of each other person (or
group). Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each stockholder named in this table has
sole voting and investment power with respect to the shares set forth
opposite such stockholder's name.
(4) After the Public Offering, percent ownership is based on 2,282,551 shares of
Common Stock outstanding as of May 6, 1996 plus any shares issuable pursuant
to options or warrants held by the person or class in question which may be
exercised within 60 days of May 6, 1996. After the
59
<PAGE>
sale of 734,351 shares of Common Stock by the Selling Stockholder (the
"Secondary Distribution"), percent ownership is based on 2,282,551 shares of
Common Stock outstanding as of May 6, 1996 plus any shares issuable pursuant
to options or warrants held by the person or class in question which may be
exercised within 60 days of May 6, 1996.
(5)Includes 50,000 shares which Dr. Lehrer has the right to acquire within 60
days after May 6, 1996 by exercise of stock options vested pursuant to the
1995 Stock Option/Stock Issuance Plan.
(6)Includes 50,000 shares which Mr. Wojtysiak has the right to acquire within
60 days after May 6, 1996 by exercise of stock options vested pursuant to
the 1995 Stock Option/Stock Issuance Plan.
(7)The beneficial owners of EBC's capital stock are Richard MacLellan and
Michael Woolf.
(8)Assumes conversion of $700,000 in principal amount of the Convertible Note
upon the closing of the Public Offering into 534,531 shares of Common Stock
and gives effect to the exercise of the Warrants into 200,000 shares of
Common Stock.
(9) Ariella J. Lehrer, Ph.D., has no voting or investment power or beneficial
ownership with respect to the D&A Lehrer Children Trust.
(10) Includes 20,000 shares which Mr. Miller has the right to acquire by
exercise of stock options vested pursuant to the 1995 Stock Option/Stock
Issuance Plan.
(11) Includes 100,000 shares which certain members of the group have the right
to acquire within 60 days after May 6, 1996 by exercise of stock options
vested pursuant to the 1995 Stock Option/ Stock Issuance Plan.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 10,000,000 shares of
Common Stock, par value $.001 per share, and 5,000,000 shares of Preferred
Stock, par value $.001.
COMMON STOCK
As of May 6, 1996, there were 748,200 shares of Common Stock outstanding
held of record by approximately 9 stockholders. There will be 2,282,551 shares
of Common Stock outstanding (assuming no exercise of the Underwriter's
over-allotment option and no exercise of outstanding options) after giving
effect to the sale of the Common Stock offered hereby and the issuance of
534,351 shares upon conversion of $700,000 in principal amount of the
Convertible Note at a conversion price per share of $1.31 upon the closing of
the Public Offering.
Holders of Common Stock are entitled to one vote per share on all matters on
which the holders of Common Stock are entitled to vote and currently the holders
of Common Stock may cumulate their votes in the election of directors.
Cumulative voting means that in any election of directors, each stockholder may
give one candidate a number of votes equal to the number of directors to be
elected multiplied by the number of shares held by such stockholder, or such
stockholder may distribute such number of votes among as many candidates as the
stockholder sees fit.
Holders of Common Stock on the applicable record date are entitled to share
ratably in such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor, subject to the
rights of the holders of any series of Preferred Stock. See "Dividend Policy."
Upon the liquidation, dissolution or winding up of the Company, each holder of
Common Stock will be entitled to share ratably in any distribution of the
Company's assets after the payment of all debts and other liabilities, subject
to any superior rights of the holders of any outstanding shares of Preferred
Stock.
Holders of the shares of Common Stock have no preemptive or other
subscription rights and there are no conversion rights or redemption or sinking
fund provisions with respect to such shares. All of the outstanding shares of
Common Stock are, and the shares of Common Stock offered hereby will be when
issued, fully paid and non-assessable.
Special meetings of the stockholders may be called by the Company's Board of
Directors, the Chairman of the Board of Directors or the President. Except as
otherwise required by law, holders of shares of Common Stock entitled to cast
not less than 10 percent of the votes at a special meeting of the stockholders
are entitled to request or call a special meeting of the stockholders.
Stockholders of the Company are required to provide advance notice of
nominations of directors to be made at, and of business proposed to be brought
before, a meeting of stockholders. The failure to deliver proper notice within
the period specified by the Company's Bylaws will result in the denial to the
stockholder of the right to make such nominations or propose such action at the
meeting.
PREFERRED STOCK
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has the authority, without further action by the stockholders, to
issue up to 5,000,000 shares of Preferred Stock in one or more series and to fix
the designations, powers, preferences, privileges, and relative participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater than
the rights of the Common Stock. The Board of Directors, without stockholder
approval, can issue Preferred Stock with voting, conversion or other rights that
could adversely affect the voting power and other rights of the holders of
Common Stock. Preferred Stock could thus be issued quickly with terms calculated
to delay or prevent a change in control of the Company or make removal of
management more difficult. Additionally, the issuance of Preferred Stock may
have
61
<PAGE>
the effect of decreasing the market price of the Common Stock, and may adversely
affect the voting and other rights of the holders of Common Stock. At present,
there are no shares of Preferred Stock outstanding and the Company has no plans
to issue any of the Preferred Stock.
CERTAIN PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW
Generally, Section 203 of the DGCL prohibits a publicly held Delaware
corporation from engaging in a broad range of "business combinations" with an
"interested stockholder" (defined generally as a person owning 15% of more of a
corporation's outstanding voting stock) for three years following the date such
person became an interested stockholder unless (i) before the person becomes an
interested stockholder, the transaction resulting in such person becoming an
interested stockholder or the business combination is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock of the corporation
(excluding shares owned by directors who are also officers of the corporation or
shares held by employee stock plans that do not provide employees with the right
to determine confidentially whether shares held subject to the plan will be
tendered in a tender offer or exchange offer), or (iii) on or after such date on
which such person became an interested stockholder the business combination is
approved by the board of directors and authorized at an annual or special
meeting, and not by written consent, by the affirmative vote of at least 66 2/3%
of the outstanding voting stock excluding shares owned by the interested
stockholders. The restrictions of Section 203 do not apply, among other reasons,
if a corporation, by action of its stockholders, adopts an amendment to its
certificate of incorporation or bylaws expressly electing not to be governed by
Section 203, provided that, in addition to any other vote required by law, such
amendment to the certificate of incorporation or bylaws must be approved by the
affirmative vote of a majority of the shares entitled to vote. Moreover, an
amendment so adopted is not effective until twelve months after its adoption and
does not apply to any business combination between the corporation and any
person who became an interested stockholder of such corporation on or prior to
such adoption. The Company's Certificate of Incorporation and Bylaws do not
currently contain any provisions electing not to be governed by Section 203 of
the DGCL.
Section 203 of the DGCL may discourage persons from making a tender offer
for or acquisitions of substantial amounts of the Common Stock. This could have
the effect of inhibiting changes in management and may also prevent temporary
fluctuations in the Common Stock that often result from takeover attempts.
Section 228 of the DGCL allows any action which is required to be or may be
taken at a special or annual meeting of the stockholders of a corporation to be
taken without a meeting with the written consent of holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted, provided that the certificate of incorporation
of such corporation does not contain a provision to the contrary. The Company's
Certificate of Incorporation contains no such provision, and therefore
stockholders holding a majority of the voting power of the Common Stock will be
able to approve a broad range of corporate actions requiring stockholder
approval without the necessity of holding a meeting of stockholders.
REGISTRATION RIGHTS
Pursuant to an agreement between the Company and EBC, as the holder of (i)
the Convertible Note and (ii) the Warrants, EBC is entitled to certain rights
with respect to the registration of the underlying shares of Common Stock under
the Securities Act. If the Company proposes to register any of its securities
under the Securities Act, either for its own account or for the account of other
security holders exercising registration rights, EBC is entitled to notice of
such registration and is entitled to include shares of such Common Stock
therein. Additionally, EBC is also entitled to certain demand registration
rights pursuant to which it may require the Company to file a registration
statement under the Securities Act at the Company's expense with respect to its
shares of Common Stock, and the Company is required to use its best efforts to
effect such registration. Further, EBC may require
62
<PAGE>
the Company to file additional registration statements on Form S-3 at the
Company's expense. All of these registration rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such registration and the
right of the Company not to effect a requested registration within six months
following an offering of the Company's securities, including the Public Offering
made hereby.
The Registration Statement of which this Prospectus forms a part, also
covers the Resale Shares consisting of 534,351 shares of Common Stock to be
issued to EBC, as holder of the Convertible Note, upon conversion of $700,000 in
principal amount of the Convertible Note at the closing of the Public Offering,
and 200,000 shares of Common Stock underlying the Warrants. The Resale Shares
are being registered for resale, but are not, however, part of the underwritten
Public Offering. The Company will not receive any of the proceeds from the sale
of the Resale Shares. EBC has agreed not to sell or transfer any Resale Shares
obtained upon conversion or exercise for a period of 365 days from the date of
this Prospectus without the prior written consent of the Underwriter.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Chemical
Mellon Shareholder Services, L.L.C.
LISTING
The Company has applied to have the Common Stock approved for quotation on
The Nasdaq SmallCap Market under the symbol "LGCY."
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Public Offering, there has been no market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market (or the perception that such sales will occur) could adversely
affect market prices prevailing from time to time. Furthermore, since only a
limited number of shares will be available for sale shortly after the Public
Offering because of certain contractual and legal restrictions on resale (as
described below), sales of substantial amounts of Common Stock of the Company in
the public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise capital in the
future.
Upon completion of the Public Offering, the Company will have outstanding an
aggregate of 2,282,551 shares of the Common Stock, assuming no exercise of the
Underwriter's over-allotment option and no exercise of outstanding options. Of
these shares, the 1,000,000 shares sold in the Public Offering will be freely
tradeable without restriction or further registration under the Securities Act,
unless such shares are purchased by "affiliates" of the Company as that term is
described in Rule 144 under the Securities Act (the "Affiliates"). The
Registration Statement of which this Prospectus forms a part, also covers
534,351 shares of Common Stock to be issued to EBC, as the holder of the
Convertible Note, upon conversion of $700,000 in principal amount of the
Convertible Note at the closing of the Public Offering and 200,000 shares of
Common Stock underlying the Warrants (collectively, the "Resale Shares"). The
Resale Shares have not been issued prior to the Effective Date. The holder of
the Warrants may exercise such securities to obtain Resale Shares at any time
following the Effective Date by delivering written notice to the Company. The
resale of the Resale Shares by the Selling Stockholders is subject to prospectus
delivery and other requirements of the Securities Act. The Resale Shares are
being registered for resale, but are not, however, part of the underwritten
Public Offering. The Company will not receive any of the proceeds from the sale
of the Resale Shares. The holder of the Resale Shares and the Warrants has
agreed not to sell or transfer any Resale Shares obtained upon conversion or
exercise for a period of 365 days from the date of this Prospectus without the
prior written consent of the Underwriter. The remaining 748,200 shares of Common
Stock held by existing stockholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted
Shares may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144, 144(k) or 701 promulgated
under the Securities Act, which rules are summarized below.
63
<PAGE>
Upon the completion of the Public Offering, the holder of (i) the 534,351
shares of Common Stock obtained on conversion of $700,000 in principal amount of
the Convertible Note, (ii) the Warrants and (iii) the JBO Warrant, or their
transferees, will be entitled to certain rights with respect to the registration
of such shares under the Securities Act. See "Description of Capital Stock --
Registration Rights." Registration of such shares under the Securities Act would
result in such shares becoming freely tradeable without restriction under the
Securities Act (except for shares purchased by Affiliates) immediately upon the
effectiveness of such registration.
The Company and each of its officers, directors, stockholders and option
holders have agreed not to issue, sell, make any short sale of, grant any option
for the purchase of, or otherwise transfer or dispose of, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for or
file a registration statement with respect to shares of the Common Stock for a
period of 365 days after the date of this Prospectus, without the prior written
consent of the Underwriter. The Underwriter currently has no plans to release
any portion of the securities subject to lock-up agreements. When determining
whether or not to release shares from the lock-up agreements, the Underwriter
will consider, among other factors, the stockholder's reasons for requesting the
release, the number of shares for which the release is being requested and
market conditions at the time.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock outstanding
as shown on the most recent report or statement published by the Company; or
(ii) the average weekly trading volume of the Common Stock on all national
securities exchanges and/or reported through the automated quotation system of a
registered securities association during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to such sale. Sales under Rule 144
are also subject to certain manner of sale provisions and notice requirements
and to the availability of current public information about the Company. Under
Rule 144(k), a person who is not deemed to have been an Affiliate of the Company
at any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least three years (including the holding
period of any prior owner except an Affiliate), is entitled to sell such shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144; therefore, unless otherwise restricted,
"144(k) shares" may be sold immediately upon the completion of the Public
Offering. In general, under Rule 701 of the Securities Act as currently in
effect, any employee, consultant or advisor of the Company who purchased shares
from the Company in connection with a compensatory stock or option plan or other
written agreement relating to compensation is eligible to resell such shares 90
days after the effective date of the Public Offering in reliance on Rule 144,
but without compliance with certain restrictions, including the holding period,
contained in Rule 144.
EBC is the holder of (i) the Warrants which are exercisable for 200,000
shares of Common Stock, subject to adjustment under certain circumstances, at a
per share exercise price of $1.31 and (ii) 534,351 shares of Common Stock to be
issued upon conversion of $700,000 in principal amount of the Convertible Note
immediately upon closing the Public Offering. The Warrant may be exercised at
any time on or after the Company's first registered public offering of Common
Stock and prior to November 21, 2000. In addition, subsequent to the Public
Offering but prior to the fifth anniversary thereof, EBC will have certain
rights to notice of the proposed registration of shares of Common Stock for the
account of any stockholder and to request inclusion in such registration of the
EBC Warrant Shares. The inclusion of any EBC Warrant Shares in any registration
by the Company will be subject to the right of the managing underwriters to
reduce or exclude the EBC Warrant Shares. With certain exceptions, the Company
will pay any expenses incurred in connection with a registration, except for
underwriting discounts and commissions attributable to the EBC Warrant Shares
being sold. See "Description of Capital Stock -- Registration Rights" and
"Certain Transactions."
64
<PAGE>
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Company's
1995 Stock Option/Stock Issuance Plan, the Company's Employee Stock Purchase
Plan and certain other issuances of shares of Common Stock or options to
purchase shares of Common Stock issued in connection with services rendered to
the Company. Based on the number of options outstanding and options and shares
reserved for issuance at May 6, 1996 under all such plans and with respect to
certain option grants made outside such plans, such registration statement would
cover approximately 721,800 shares. See "Management -- 1995 Stock Option/Stock
Issuance Plan" and "Management -- Employee Stock Purchase Plan." Such
registration statement is expected to be filed and become effective as soon as
practicable after the effective date of the Public Offering. Accordingly, shares
registered under such registration statement will, subject to Rule 144 volume
limitations applicable to Affiliates, be available for sale in the open market,
subject to vesting restrictions with the Company and the lock-up agreements
described above. As of May 6, 1996, options to purchase 390,000 shares of Common
Stock were issued and outstanding under the 1995 Stock Option/Stock Issuance
Plan. See "Management -- Board of Directors Committees and Compensation" and "--
1995 Stock Option/Stock Issuance Plan."
The holder of the Common Stock underlying the Warrants and the Convertible
Note has agreed not to sell any securities of the Company for a period of 365
days without the prior written consent of the Underwriter. The resale of the
securities by the Selling Stockholders is subject to prospectus delivery and
other requirements of the Securities Act.
65
<PAGE>
UNDERWRITING
JB Oxford & Company as the Underwriter has agreed, subject to the terms and
conditions of the Underwriting Agreement with the Company, to purchase from the
Company the number of shares of Common Stock set forth below opposite its name
below. The Underwriter is committed to purchase all of such shares if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------- -----------
<S> <C>
JB Oxford & Company..................... 1,000,000
-----------
Total............................... 1,000,000
-----------
-----------
</TABLE>
The Underwriter has advised the Company that the Underwriter proposes to
offer the shares of Common Stock offered hereby to the public initially at the
Public Offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $. per share
of Common Stock. The Underwriter may allow, and such dealers may reallow, a
discount not in excess of $. per share of Common Stock on sales to certain
other dealers. After the Public Offering, the Public Offering price, concession
and discount may be changed.
The Company has granted to the Underwriter an option exercisable for 30 days
after the date of this Prospectus, to purchase up to an aggregate of 150,000
additional shares of Common Stock at the Public Offering price set forth on the
cover page of this Prospectus, less underwriting discounts and commissions. If
the Underwriter exercises this option, the Underwriter will have a firm
commitment, subject to certain conditions, to purchase such shares. The
Underwriter may exercise such option only to cover over-allotments, if any,
incurred in the sale of the shares of Common Stock offered hereby.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance equal to 2% of the total proceeds of the Public Offering or $
($ if the Underwriter's over-allotment option is exercised). The Company
has also agreed to sell to the Underwriter, for a nominal purchase price, a
five-year warrant (the "JBO Warrant") to purchase up to 92,800 shares of Common
Stock exercisable at 150% of the Public Offering price set forth on the cover
page of this Prospectus. The JBO Warrant will not be transferable prior to its
initial exercise date except to successors in interest to the Underwriter,
officers of the Underwriter and members of the selling group and officers and
partners thereof.
The JBO Warrant will contain anti-dilution provisions providing for
appropriate adjustment in the event of certain events, including any
combination, recapitalization, reclassification, stock dividend or stock split.
The JBO Warrant does not entitle the Underwriter to any rights as a stockholder
of the Company until such warrant is exercised and shares of Common Stock are
purchased thereunder.
The Company has agreed to indemnify the Underwriter and others against
certain liabilities, including liabilities under the Securities Act.
The Company and each of its officers, directors, stockholders and option
holders have agreed not to issue, sell, make any short sale of, grant any option
for the purchase of, or otherwise transfer or dispose of, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for or
file a registration statement with respect to shares of the Common Stock for a
period of 365 days after the date of this Prospectus, without the prior written
consent of the Underwriter. The Underwriter currently has no plans to release
any portion of the securities subject to lock-up agreements. When determining
whether or not to release shares from the lock-up agreements, the Underwriter
will consider, among other factors, the stockholder's reasons for requesting the
release, the number of shares for which the release is being requested and
market conditions at the time.
The Underwriter does not intend to confirm sales to any accounts over which
it exercises discretionary authority.
66
<PAGE>
Prior to the Public Offering, there has been no established market for the
Common Stock of the Company. The Public Offering price for the Common Stock was
determined by negotiation between the Company and the Underwriter and is not
necessarily related to the Company's asset value, net worth or other established
criteria of value. The factors considered in such negotiations were, among
others, the prevailing market conditions and traditional valuation
methodologies, including a comparison of price-earnings multiples, return on
equity and price to book value multiples with comparable companies. The
Underwriter may make a market in the Common Stock of the Company upon closing of
the Public Offering, but there is no assurance that the Underwriter will be
successful in its efforts. The loss of market makers or failure of market makers
to make a market for the Common stock will have a material adverse effect on the
market for the Common Stock. There can be no assurance that an active trading
market will develop for the Common Stock or that the Common Stock will trade in
the public market subsequent to the Public Offering at or above the Public
Offering price. See "Risk Factors -- Absence of Public Market; Possible
Volatility of Stock Price" and "-- Underwriter's Influence on Market May Have
Adverse Consequences."
The Common Stock will be listed on The Nasdaq SmallCap Market, subject to
official notice of issuance.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the Shares may not simultaneously engage in
market-making activities with respect to the Common Stock for a period of two
business days prior to the commencement of such distribution. In addition, and
without limiting the foregoing, the Underwriter will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder
including, without limitation, Rules 10b-6 and 10b-7. All of the foregoing may
affect the marketability of, and the Underwriter's ability to engage in
market-making activities with respect to, the Shares.
In order to comply with certain states' securities laws, if applicable, the
Shares will be sold in such jurisdictions only through registered or licensed
brokers or dealers. In certain states the Shares may not be sold unless the
Shares have been registered or qualify for sale in such state or an exemption
from registration or qualification is available and is complied with. The
Company has submitted applications for qualification of the Shares in, among
other states, Ohio and New Jersey but has withdrawn such applications submitted
to Ohio and New Jersey.
UNDERWRITER'S LIMITED EXPERIENCE; RELATIONSHIP WITH THE COMPANY
The Underwriter was organized as a broker-dealer in 1993 and the Public
Offering is the first public offering underwritten by the Underwriter. The
Underwriter acted as placement agent for the Company in connection with the
private placement of the Convertible Note on November 21, 1995, and received a
placement fee of $50,000. Pursuant to a fee agreement, dated September 29, 1995,
between the Company and Ilona Foyer (the "Fee Agreement"), Ms. Foyer received
$75,000 from the Company as consideration for her introducing the Company to the
Underwriter in connection with the private placement of the Convertible Note. In
addition, pursuant to the Fee Agreement, Ms. Foyer will receive 7,200 shares of
Common Stock of the Company as consideration for her introduction of the Company
to the Underwriter in connection with the private placement of the Convertible
Note.
On November 21, 1995, the Company entered into a consulting agreement with
the Underwriter ("Consulting Agreement"), pursuant to which the Underwriter
acted as a financial consultant to the Company. Under the terms of such
agreement, the Underwriter performed certain investment banking and financial
advisory services in consideration of a $5,000 cash fee payable each month which
commenced on December 1, 1995. The Consulting Agreement was terminated on March
20, 1996.
67
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby are being passed upon for the Company by Brobeck, Phleger &
Harrison LLP, Los Angeles, California. Certain legal matters are being passed
upon for the Underwriter by Morgan, Lewis & Bockius LLP, Los Angeles,
California.
EXPERTS
The Financial Statements and Schedule included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their report (which contains an explanatory paragraph regarding uncertainties as
to the Company's ability to continue as a going concern) appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
reports given upon the authority of said firm as experts in accounting and
auditing.
68
<PAGE>
LEGACY SOFTWARE, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS................ F-2
FINANCIAL STATEMENTS
Balance sheets.................................................. F-3
Statements of operations........................................ F-4
Statements of shareholders' deficit............................. F-5
Statements of cash flows........................................ F-6
NOTES TO FINANCIAL STATEMENTS..................................... F-7 - F-15
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of
Legacy Software, Inc.
We have audited the accompanying balance sheets of Legacy Software, Inc. (a
California corporation), as of December 31, 1994 and 1995, and the statements of
operations, shareholders' deficit and cash flows for each of the years ended
December 31, 1993, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Legacy Software, Inc., as of
December 31, 1994 and 1995 and the results of its operations and its cash flows
for each of the years ended December 31, 1993, 1994 and 1995, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
had a working capital deficiency of $162,097 and a shareholders' deficiency of
$824,590 as of December 31, 1995. These matters raise substantial doubt as to
the Company's ability to continue as a going concern. The Company's future
operations are dependent upon generating funds to finance the marketing and
expansion of its operations and the repayment of notes payable. Management plans
to generate these funds through an initial public offering of the Company's
common stock as more fully discussed in Note 2. There is no assurance that the
public offering will be successful. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Los Angeles, California
January 17, 1996
F-2
<PAGE>
LEGACY SOFTWARE, INC.
BALANCE SHEETS
ASSETS (NOTE 4)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------ --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents......................................................... $ 20,750 $ 365,190
Accounts receivable, net of allowance for doubtful accounts of $10,300 and
$7,600........................................................................... 13,193 2,951
------------ --------------
Total current assets............................................................ 33,943 368,141
------------ --------------
SOFTWARE DEVELOPMENT COSTS.......................................................... -- 76,507
PROPERTY AND EQUIPMENT, net (Note 3)................................................ 60,549 84,097
OTHER ASSETS
Deferred loan fees................................................................ -- 17,505
Deferred offering costs........................................................... -- 157,541
Other............................................................................. 2,000 7,099
------------ --------------
$ 96,492 $ 710,890
------------ --------------
------------ --------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable.................................................................. $ 17,330 $ 9,952
Accrued expenses.................................................................. 1,846 32,807
Development expense co-funding billings in excess of development expense
co-funding recognized............................................................ 25,780 54,637
Accrued compensation (Note 8)..................................................... 100,000 100,000
Notes payable and current portion of long-term debt, primarily from related
parties (Note 4)................................................................. 75,000 332,842
------------ --------------
Total current liabilities....................................................... 219,956 530,238
------------ --------------
LONG-TERM DEBT AND ACCRUED INTEREST, primarily from related parties, net of current
portion (Note 4)................................................................... 551,431 1,005,242
COMMITMENTS (Note 6)
SHAREHOLDERS' DEFICIT (Note 8)
Preferred Stock, par value $.001 per share, 5,000,000 shares authorized; none
issued and outstanding........................................................... -- --
Common Stock, par value $.001 per share, 10,000,000 shares authorized; 720,000 and
741,000 shares issued and outstanding............................................ 720 741
Additional paid-in capital........................................................ 4,280 546,082
Accumulated deficit............................................................... (679,895) (1,371,413)
------------ --------------
Total shareholders' deficit..................................................... (674,895) (824,590)
------------ --------------
$ 96,492 $ 710,890
------------ --------------
------------ --------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
LEGACY SOFTWARE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
------------ ------------ -------------
<S> <C> <C> <C>
REVENUE (Note 7)
Royalties............................................................ 34,819 16,809 9,179
Software sales....................................................... 421,715 69,856 36,399
Consulting........................................................... -- 100,000 6,000
------------ ------------ -------------
Total revenue...................................................... 456,534 186,665 51,578
------------ ------------ -------------
COSTS AND EXPENSES
Cost of royalties.................................................... -- -- 13,939
Cost of software sales............................................... 177,661 46,783 31,528
Product development.................................................. 81,959 196,595 72,951
General and administrative........................................... 124,634 133,644 336,457
Selling.............................................................. 31,467 9,829 21,216
------------ ------------ -------------
415,721 386,851 476,091
------------ ------------ -------------
INCOME (LOSS) FROM OPERATIONS.......................................... 40,813 (200,186) (424,513)
INTEREST EXPENSE....................................................... 41,775 51,707 267,005
------------ ------------ -------------
NET LOSS............................................................... (962) (251,893) (691,518)
------------ ------------ -------------
------------ ------------ -------------
NET LOSS PER COMMON SHARE (Note 8)..................................... $ (0.00) $ (0.18) $ (0.49)
------------ ------------ -------------
------------ ------------ -------------
WEIGHTED AVERAGE COMMON STOCK SHARES OUTSTANDING (Note 8).............. 1,396,218 1,396,218 1,396,218
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
LEGACY SOFTWARE, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL
---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTALS
--------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993....................... 720,000 $ 720 $ 4,280 $ (427,040) $ (422,040)
Net Loss....................................... -- -- -- (962) (962)
--------- ----- ----------- -------------- --------------
Balance, December 31, 1993..................... 720,000 720 4,280 (428,002) (423,002)
Net loss....................................... -- -- -- (251,893) (251,893)
--------- ----- ----------- -------------- --------------
Balance, December 31, 1994..................... 720,000 720 4,280 (679,895) (674,895)
Issuance of warrants in conjunction with
convertible note and the original issue
discount associated with the note's conversion
feature, net of associated costs (Note 4)..... -- -- 499,823 -- 499,823
Issuance of common shares in exchange for
services (Note 8)............................. 21,000 21 41,979 -- 42,000
Net loss....................................... -- -- -- (691,518) (691,518)
--------- ----- ----------- -------------- --------------
Balance, December 31, 1995..................... 741,000 $ 741 $ 546,082 $ (1,371,413) $ (824,590)
--------- ----- ----------- -------------- --------------
--------- ----- ----------- -------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
LEGACY SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................. $ (962) $ (251,893) $ (691,518)
Adjustments to reconcile net loss to net cash used for operating
activities:
Accrued interest................................................... 30,127 40,758 43,570
Provision for doubtful accounts.................................... -- 10,300 7,600
Depreciation....................................................... 7,245 18,170 21,159
Amortization of software development costs......................... -- -- 13,939
Amortization of deferred loan fees................................. -- -- 8,752
Amortization of original issue discount............................ -- -- 168,900
Increase (decrease) in cash from changes in:
Accounts receivable, net........................................... (19,817) 143,679 2,642
Other assets....................................................... -- (2,000) (5,099)
Accounts payable and accrued expenses.............................. 60,399 (9,754) 65,583
Development expense co-funding billings in excess of development
expense co-funding recognized..................................... (141,162) 25,780 28,857
------------ ------------ -------------
Net cash used for operating activities........................... (64,170) (24,960) (335,615)
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment................................... (10,697) (57,679) (44,707)
Software development costs........................................... -- -- (90,446)
------------ ------------ -------------
Net cash used for investing activities........................... (10,697) (57,679) (135,153)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on private placement of convertible note.................... -- -- 1,000,000
Borrowings on notes payable.......................................... 112,500 220,000 252,326
Payments of notes payable............................................ (35,000) (120,000) (246,441)
Registration and financing costs..................................... -- -- (190,677)
------------ ------------ -------------
Net cash provided by financing activities........................ 77,500 100,000 815,208
------------ ------------ -------------
INCREASE IN CASH AND CASH EQUIVALENTS.................................. 2,633 17,361 344,440
CASH AND CASH EQUIVALENTS, at beginning of period...................... 756 3,389 20,750
------------ ------------ -------------
CASH AND CASH EQUIVALENTS, at end of period............................ $ 3,389 $ 20,750 $ 365,190
------------ ------------ -------------
------------ ------------ -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest........................................................... $ 12,000 $ 11,000 $ 51,000
Income taxes....................................................... 1,000 1,000 1,000
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
LEGACY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Legacy Software, Inc. (the "Company") develops consumer software products
for the rapidly growing "edutainment" market. An edutainment product combines
entertainment and education content for home and educational use, in which
learning is an integral part of playing a game.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an initial maturity of three
months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are recorded net of allowances for potential credit
losses of $10,000 and $7,600 at December 31, 1994 and 1995.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation on property and equipment is computed using the straight-line
method over the estimated useful lives of the assets, which is generally five
years.
DEFERRED OFFERING COSTS
Deferred offering costs represent costs incurred in connection with the
Company's proposed public offering. These costs will be offset against the
proceeds from the public offering if the offering is successfully completed or
will be expensed if the offering is abandoned.
DEFERRED LOAN COSTS
Deferred loan costs represent costs incurred in connection with the issuance
of a convertible note payable (See Note 4). The costs are being amortized on a
straight line basis over the estimated life of the loan.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes"
under which deferred tax assets and liabilities are provided on differences
between financial reporting and taxable income using the enacted tax rates.
Under SFAS 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods. A
valuation allowance is recognized, if on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax asset will not
be realized.
REVENUE RECOGNITION
Royalty revenues consist of royalties earned on sales of software developed
with a co-development partner, from which the Company earns a specified
percentage of the sales price or a specified dollar amount per unit. Due to the
Company's inability to reasonably estimate returns on its software
F-7
<PAGE>
LEGACY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
product developed with a co-development partner, the Company will not recognize
royalty revenue on this product on the accrual basis of accounting unless the
amount of future returns can be reasonably estimated in accordance with
Statement of Financial Accounting Standards No. 48 (SFAS 48). The Company will
not recognize royalty revenue from its co-development partner unless it can
comply with SFAS 48. Royalty revenues on consignment shipments made by the
co-development partner are only recognized when both (i) the Company receives
evidence of product sell-through from its co-development partner and (ii) the
Company can comply with SFAS 48. The Company will determine if it can recognize
revenue in accordance with SFAS 48 by reviewing and analyzing, among other
things, (i) the Company's and IBM's experience on EMERGENCY ROOM title sales and
returns to date, (ii) additional information and data on the EMERGENCY ROOM
title which the Company anticipates receiving from IBM, (iii) sales and returns
of the Company's past products and other information relating thereto, (iv)
information regarding significant purchasers of the Company's products, (v)
sales and returns of comparable computer software products of other developers
and other information relating thereto and (vi) computer software industry data
and practices. No royalty revenue from the software product developed with the
co-development partner has been recognized in the Statement of Operations for
the years ended December 31, 1993, 1994 and 1995. Software sales, which consist
of sales of Company-owned software by the Company, are recorded at the time of
shipment provided that no significant vendor and post-contract support
obligations remain outstanding and collection of the resulting receivable is
deemed probable by management. Any insignificant post-contract support
obligations and provisions for estimated returns, including distributors' stock
balancing rights and liability under price protection programs, are accrued for
at the time of sale.
Consulting revenue is recognized as services are performed.
PRODUCT DEVELOPMENT COSTS
The Company records product development costs net of any co-funded
development expenses recognized into operations under co-development agreements.
Co-funded development expenses under co-development agreements to develop
software are recognized as a ratio of related product development costs as these
costs are incurred. This ratio is calculated by dividing total estimated co-
funded development expenses to be received by total estimated product
development costs. Co-funded development expenses are not recognized into the
Statement of Operations until all contractual repayment contingencies, such as
the unconditional repayment of co-funded development expenses upon termination
of a co-development contract without cause, have been eliminated. Under the
current co-development agreements, the Company is only obligated to repay all
co-funded development expenses if the Company materially breaches its
obligations under the agreements. In addition, the agreements taken as a whole
as well as how these agreements are functioning demonstrates that the
relationship between the Company and its co-development partner is one of shared
risk on each software project. As contracts can extend over one or more
accounting periods, revisions in costs or co-funded development expenses
estimated during the course of the work are adjusted during the accounting
period in which the facts that require such revisions become known. The effects
of these changes in estimates are then recognized prospectively throughout the
remaining contract life. The liability "development expense co-funding billings
in excess of development expense co-funding recognized" represents billings
under co-development agreements in excess of amounts recognized into the
Statement of Operations. As of December 31, 1994, the Company was a party to one
co-development contract, which specified that (i) the Company has granted its
co-development partner an exclusive license to, among other things, use,
manufacture, sell and distribute the software title, (ii) the co-development
partner has a right of first refusal on derivative works within 12 months of
acceptance of the title by the co-development partner, (iii) the co-development
partner is contractually obligated to pay the Company a royalty based on a fixed
percentage of product revenue (net of returns and
F-8
<PAGE>
LEGACY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
allowances), or a fixed dollar amount if bundled with other software, within 60
days after the conclusion of each calendar quarter and (iv) the co-development
partner was obligated to pay the Company additional development expense
co-funding payments of $130,000 in the future as the Company completed future
development milestones, which were paid during 1995. As of December 31, 1995, in
addition to the above co-development contract, the Company was also a party to a
second co-development contract with the same co-development partner. The terms
of the second agreement are identical to the first agreement, except that (i)
the co-development partner may terminate this agreement without cause, however
the co-development partner would be obligated to pay the Company for any
co-development services rendered up to the termination date and (ii) the royalty
structure is different from the first contract. As of December 31, 1995,
$650,000 of the total contractual future development expense co-funding had not
been paid to the Company under the DA License Agreement. This co-funding will be
earned and received in the future by the Company as it completes development
milestones set forth in the DA License Agreement. In addition, the Company has
not recognized any royalty revenues from products under these contracts for the
years ended December 31, 1993, 1994 and 1995.
Statement of Financial Accounting Standards No. 86 provides for the
capitalization of certain software development costs once technological
feasibility has been established upon completion of a detail program design. All
costs capitalized are net of related development expense co-funding, and the
Company ceases capitalizing such costs when the product derived from the project
is available for general release to customers. These costs are amortized on a
product-by-product basis at the greater of the amount computed using (a) the
ratio of current revenues for a product to the total of current and anticipated
future revenues or (b) the straight-line method over the remaining estimated
economic life of the product. The current product underlying the balance of
software development costs has an estimated economic life of fifteen months. The
Company evaluates the recoverability of any software development costs
capitalized by comparing the net realizable value, determined pursuant to
management's estimates of future product cash flows, with the unamortized
balance of software development costs. During 1995, the Company capitalized
$90,446 of software development costs, $13,939 of which has been amortized into
operations for the year ended December 31, 1995.
EARNINGS PER SHARE
Earnings per share is based upon the weighted average number of common
shares and common stock equivalents outstanding during each period, as adjusted
for the effect of the application of Securities and Exchange Commission Staff
Accounting Bulletin (SAB) No. 83. Pursuant to SAB No. 83, common stock issued by
the Company at a price less than the initial public offering price during the
twelve months immediately preceding the initial filing of the offering together
with common stock options and convertible debt issued during such period with an
exercise price less than the initial public offering price, are treated as
outstanding for all periods presented. Earnings per share is computed using a
treasury stock method, under which the number of shares outstanding reflects an
assumed use of the proceeds from the issuance of such shares and from the
assumed exercise of such options and convertible debt, to repurchase shares of
the Company's common stock at the initial public offering price. Except for the
provisions of SAB No. 83 described above, common stock equivalents have been
excluded in all years presented in the Statements of Operations when the effect
of their inclusion would be anti-dilutive.
The earnings per share is computed after giving retroactive effect to the
144 shares to 1 share stock split, 28,200 shares of common stock issued to
individuals in exchange for services rendered, the
F-9
<PAGE>
LEGACY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
conversion of stock options to purchase 210,000 shares of common stock and
warrants to purchase 200,000 shares of common stock and conversion of $700,000
of convertible debt into 534,351 shares of common stock (see Note 4).
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard establishes new guidelines regarding when impairment
losses on long-lived assets, which include plant and equipment, certain
identifiable intangible assets and goodwill, should be recognized and how
impairment losses should be measured. The Company does not expect adoption to
have a material effect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting
Standards Board (FASB) is effective for specific transactions entered into after
December 15, 1995, while the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard establishes a fair value method of accounting for
stock-based compensation plans and for transactions in which an entity acquires
goods or services from nonemployees in exchange for equity instruments. At the
present time, the Company has not determined if it will change its accounting
policy for stock based compensation or only provide the required financial
statement disclosures. As such, the impact on the Company's financial position
and results of operations is currently unknown.
NOTE 2 -- GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As of December 31, 1995, the
Company had a working capital deficiency of $162,097 and a shareholders'
deficiency of $824,590. In addition, the Company has sustained substantial
losses throughout the three most current periods presented. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management plans to generate funds necessary to continue to operate the Company
through a public offering of the Company's common stock. There is no assurance
that the public offering will be successful. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount of liabilities that might be necessary
should the Company be unable to continue in existence.
Continuation of the Company as a going concern is dependent on the Company
obtaining funds in order to market and expand its operations. Management plans
to generate these funds through a public offering of the Company's common stock.
Management expects that the public offering will generate approximately
$4,772,000 after the deduction of all offering related expenses and commissions.
F-10
<PAGE>
LEGACY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
------------ -------------
<S> <C> <C>
Computers and equipment................. $ 91,885 $ 136,592
Furniture and fixtures.................. 2,016 2,016
------------ -------------
93,901 138,608
Less accumulated depreciation........... 33,352 54,511
------------ -------------
Totals.............................. $ 60,549 $ 84,097
------------ -------------
------------ -------------
</TABLE>
NOTE 4 -- LONG TERM DEBT
On November 21, 1995, the Company entered into a $1,000,000 convertible note
payable to a trust company (the "Convertible Note") bearing interest at 10%
payable monthly secured by all of the Company's personal assets. Principal of
$300,000 is due the earlier of November 21, 1996 or upon completion of the
initial public offering, however if the Company fails to consummate a public
offering of its common stock by November 21, 1996, and such failure is not a
result of actions within control of the Company, the $300,000 will mature on
November 21, 1997. Principal of $700,000 is convertible at the option of the
trust company into common stock at a per share conversion price of $1.31. As a
condition of the public offering, the trust company has agreed with the Company
to convert such $700,000 principal of the note upon closing of the public
offering. In connection with this note, the Company also granted the trust
company a warrant to purchase 200,000 shares of common stock, subject to
adjustment under certain circumstances, at an initial purchase price of $1.31
per share. Of the $1,000,000 of total proceeds, $506,702 was allocated to the
note's conversion feature and the warrants and represents the original issue
discount on the Convertible Note. The unamortized original issue discount was
$337,802 as of December 31, 1995. The Company's long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
------------ -------------
<S> <C> <C>
Unsecured note payable to related party bearing interest at 10.5%; all accrued
interest and principal due March 31, 1997.......................................... $ 260,051 $ 260,051
Unsecured note payable to shareholder bearing interest at 16.7%; all accrued
interest and principal due March 31, 1997.......................................... 38,200 73,200
Unsecured note payable to shareholder bearing interest at 10.5%; all accrued
interest and principal due March 31, 1997.......................................... 73,200 73,200
Unsecured note payable to individual bearing interest at 9%; interest payable
monthly with outstanding principal payable over the course of one year commencing
on July 1, 1996.................................................................... 100,000 120,885
Note payable to bank bearing interest at 10.5% collateralized by accounts receivable
of the company..................................................................... 50,000 --
Convertible note payable to a trust company......................................... -- 662,198
------------ -------------
Total notes payable................................................................. 521,451 1,189,534
Accrued interest.................................................................... 104,980 148,550
------------ -------------
Total notes payable and accrued interest............................................ 626,431 1,338,084
Less current portion................................................................ 75,000 332,842
------------ -------------
Long-term portion................................................................... $ 551,431 $ 1,005,242
------------ -------------
------------ -------------
</TABLE>
F-11
<PAGE>
LEGACY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- LONG TERM DEBT (CONTINUED)
The aggregate maturities of long-term debt and accrued interest maturing in
succeeding years is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
- ------------- -------------
<S> <C>
1996.................................... $ 360,442
1997.................................... 1,315,444
-------------
$ 1,675,886
-------------
-------------
</TABLE>
NOTE 5 -- INCOME TAXES
As of December 31, 1995, the Company has available approximately $942,000 of
federal net operating loss carryforwards that expire at various dates through
2009. The Tax Reform Act of 1986 contains provisions which limit the federal net
operating loss carryforwards available that can be used in any given year in the
event of certain occurrences, which include significant ownership changes.
The Company provides a valuation allowance for deferred tax assets when it
is more likely than not, based on available evidence, that some portion or all
of the deferred tax assets will not be realized. In management's opinion, it
cannot determine if it is more likely than not that the Company will generate
sufficient future taxable income before 2010, the year after all currently
available net operating loss carryforwards expire, to utilize all of the
Company's deferred tax assets. A valuation allowance has been recognized for the
full amount of the deferred tax asset of $174,000 and $377,000 at December 31,
1994 and 1995.
NOTE 6 -- COMMITMENTS
The Company leases its facility on a month-to-month basis.
Total rent expense for the years ended December 31, 1993, 1994 and 1995 was
$24,600, $22,500, and $30,000.
NOTE 7 -- SIGNIFICANT CUSTOMER
The Company had the following significant customers for the years ended
December 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUE FOR THE
YEARS ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Customer A.................................................... 46% -- --
Customer B.................................................... 16% -- --
Customer C.................................................... -- 27% --
Customer D.................................................... -- 27% --
Customer E.................................................... -- -- 12%
</TABLE>
NOTE 8 -- PROPOSED PUBLIC OFFERING
In conjunction with the Company's proposed initial public offering, the
following events have occurred:
CAPITAL STOCK TRANSACTIONS
On October 31, 1995, pursuant to a unanimous written consent of the Board of
Directors and stockholders, the Company amended its articles of incorporation to
authorize the Company to issue 10,000,000 shares of common stock and effected a
stock split of the Company's common stock on a 144 shares to 1 share basis. All
share and per share data have been retroactively adjusted to reflect these
events.
F-12
<PAGE>
LEGACY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- PROPOSED PUBLIC OFFERING (CONTINUED)
AGREEMENT WITH INVESTMENT BANKER
In November 1995, the Company signed a financial advisor and consulting
agreement with an investment banker for the private placement of a $1,000,000
convertible note ("Convertible Note") to be followed by a contemplated public
stock offering of the Company's common stock. As compensation, the investment
banker received a $50,000 placement fee on completion of the Convertible Note
financing, and will receive an underwriting fee of approximately 10% of the
gross proceeds of the public offering, a non-accountable expense allowance equal
to 2% of the gross proceeds of the offering and warrants for 92,800 shares
exercisable at 150% of the initial public offering price. The Company utilized
the services of the investment banker on a consulting basis from the closing
date of the private placement until March 20, 1996, at a monthly fee of $5,000.
FINDER'S FEE
The Company has agreed to pay a finder's fee to a consultant for
introductions made to the Company's investment banker. The fee consists of
$50,000 paid from the proceeds of the $1,000,000 Convertible Note discussed
above, $25,000 payable from the proceeds of the Company's proposed initial
public offering and 7,200 shares of common stock. The Company has allocated the
$50,000 paid to such consultant among deferred loan fees, deferred offering
costs and as a reduction to the original issue discount allocated to additional
paid in capital arising from the Convertible Note. As the $25,000 payment and
the ownership by the consultant of the 7,200 shares of common stock is
contingent upon the successful completion of the initial public offering, the
Company has not given either of these transactions accounting recognition.
EMPLOYMENT AGREEMENTS
In October and November 1995 and January 1996, six members of management of
the Company entered into five year employment agreements with the Company. The
employment agreements entitle the employees to receive an annual base salary
which will automatically increase by amounts up to $40,000 effective March 1,
1996. Subsequent to the initial public offering this base salary will be
reviewed and adjusted by the Board of Directors to be in accordance with
salaries earned by officers in similarly situated companies. If the salary
levels granted under these employment agreements had been in effect as of
January 1, 1993, total expenses in the Statements of Operations would have been
$193,850, $121,000 and $88,250 higher for the years ended December 31, 1993,
1994 and 1995.
COMPENSATION RESTRUCTURING
On November 17, 1995, the Company restructured the compensation agreement of
the technical expert utilized during the Company's latest completed software
development project. As compensation for services performed, the expert will
receive an option to purchase 50,000 shares of Company common stock at no cost
on the successful completion of an initial public offering within nine months of
this agreement, or will be given a $150,000 unsecured promissory note bearing
interest at 10% per annum. This note will be payable in twelve equal monthly
installments. At December 31, 1994 and 1995, the Company had recorded accrued
expenses of $100,000 for the fair market value of these services.
MANAGEMENT CONSULTING
In exchange for consulting services being rendered throughout 1995, the
Company issued 21,000 shares of common stock to an individual. The Company
recorded expenses during 1995 of $42,000 for the fair market value of these
services.
REINCORPORATION IN DELAWARE
On December 15, 1995, the Company formed a new company, Legacy Software
Acquisition, Inc. ("Acquisition"), in the state of Delaware for the ultimate
purpose of making the Company a Delaware
F-13
<PAGE>
LEGACY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- PROPOSED PUBLIC OFFERING (CONTINUED)
corporation. The equity structure of Acquisition, which authorizes 10,000,000
shares of $.001 par value common stock and 5,000,000 shares of $.001 par value
preferred stock, will be the ultimate equity structure of the Company. All
shareholders' deficiency accounts have been retroactively adjusted to reflect
this event.
ADDITIONAL SOFTWARE TITLES
During November 1995, the Company entered into a license agreement with a
company to co-develop one additional software title. In January 1996, the
Company entered into a letter agreement with a company to prepare the design
specification for a contemplated software title.
NOTE 9 -- STOCK OPTION AND PURCHASE PLANS
1995 STOCK OPTION/STOCK ISSUANCE PLAN
The 1995 Stock Option Plan/Stock Issuance Plan (the "Option Plan") was
adopted by the Board of Directors and approved by the stockholders on November
9, 1995. 521,800 shares of common stock have been authorized for issuance under
the Option Plan. In no event may any one participant in the Option Plan receive
option grants or direct stock issuances for more than 250,000 shares in the
aggregate. In January, 1996, 240,000 options were granted to current
stockholders at an exercise price of $6.00 per share. These options vest 50%
immediately on being granted and 50% evenly over the next two years. In
addition, on the same date, 160,000 options were granted to key employees of the
Company at an exercise price of $5.10 per share and 40,000 options were granted
to the Company's outside directors at an exercise price of $6.00 per share.
These options vest evenly over the next four years.
The Option Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals may, at the
discretion of the Plan Administrator, which is the Stock Option Committee of the
Company's Board of Directors, be granted options to purchase shares of Common
Stock at an exercise price not less than 85% of their fair market value on the
grant date; (ii) the Stock Issuance Program under which such individuals may, in
the Plan Administrator's discretion, be issued shares of common stock directly,
through the purchase of shares at a price not less than 85% of their fair market
value at the time of issuance or as a bonus tied to the performance of services;
and (iii) the Automatic Option Grant Program under which option grants will
automatically be made at periodic intervals to eligible non-employee Board
members to purchase shares of Common Stock at an exercise price equal to 100% of
the fair market value on the grant date.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Stock Option Committee. The Stock Option Committee as
Plan Administrator will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances, the time or times
when such option grants or stock issuances are to be made, the number of shares
subject to each such grant or issuance, the status of any granted option as
either an incentive stock option or a non-statutory stock option under the
Federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding.
Under the Automatic Option Grant Program, each individual serving as a
non-employee Board member on the date the Underwriting Agreement for this
offering is executed will receive an option grant on such date for 10,000 shares
of common stock at an exercise price equal to $6.00 per share, provided such
individual has not otherwise been in the prior employ of the Company. Each
individual who first becomes a non-employee Board member thereafter will receive
a 10,000 share option grant on the date such individual joins the Board provided
such individual has not been in the prior employ of the Company. In addition, at
each Annual Stockholders Meeting, beginning with the 1997 Annual
F-14
<PAGE>
LEGACY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- STOCK OPTION AND PURCHASE PLANS (CONTINUED)
Meeting, each individual who is to continue to serve as a non-employee Board
member after the meeting will receive an additional option grant to purchase
2,500 shares of Common Stock whether or not such individual has been in the
prior employ of the Company.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors on January 15, 1996 and approved by the stockholders
on January 15, 1996. The Purchase Plan is designed to allow eligible employees
of the Company and participating subsidiaries to purchase shares of Common
Stock, at semi-annual intervals, through their periodic payroll deductions under
the Purchase Plan, and a reserve of 150,000 shares of Common Stock has been
established for this purpose. Employees will be eligible to participate if they
are employed by the Company for at least 20 hours per week and five (5) months
per calendar year.
The Purchase Plan will be implemented in a series of successive offering
periods, which will commence subsequent to the initial public offering, each
with a maximum duration of 24 months. Payroll deductions may not exceed 15% of
base salary for each semi-annual period. The purchase price per share will be
eighty-five percent (85%) of the lower of (i) the fair market value of the
Common Stock on the participant's entry into the offering period or (ii) the
fair market value on the semi-annual purchase date. Each outstanding purchase
right will be exercised immediately prior to a merger or consolidation of the
Company.
F-15
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
COMMON STOCK TO WHICH IT RELATES, OR AN OFFER IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AT ANY TIME AFTER THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 4
Risk Factors................................... 8
Use of Proceeds................................ 22
Dividend Policy................................ 22
Dilution....................................... 23
Capitalization................................. 24
Selected Financial Data........................ 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 26
Business....................................... 38
Management..................................... 51
Certain Transactions........................... 58
Principal Stockholders......................... 59
Description of Capital Stock................... 61
Shares Eligible for Future Sale................ 63
Underwriting................................... 66
Legal Matters.................................. 68
Experts........................................ 68
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL [ ], 1996, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
1,000,000 SHARES
LEGACY SOFTWARE, INC.
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
JB OXFORD
& COMPANY
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 6, 1996
PROSPECTUS
SHARES
LEGACY SOFTWARE, INC. [LOGO]
COMMON STOCK
------------------
All of the shares (the "Shares") of common stock, par value $0.001
per share (the "Common Stock"), offered hereby are being sold by a certain
stockholder (the "Selling Stockholder") of Legacy Software, Inc. ("Legacy" or
the "Company"). See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling Stockholder.
Prior to the initial public offering of 1,000,000 shares of Common Stock by the
Company pursuant to the Registration Statement of which this Prospectus is a
part (the "Public Offering"), there has been no public trading market for the
Common Stock of the Company and there can be no assurance that such a market
will develop for the Common Stock after the completion of the Public Offering.
It is currently estimated that the initial Public Offering price per share of
Common Stock will be between $5.50 and $6.50. The Public Offering price for the
Common Stock was determined by negotiation between the Company and the
Underwriter (as defined below) and is not necessarily related to the Company's
asset value, net worth or other established criteria of value. The Underwriter
may make a market in the Common Stock of the Company upon closing of the Public
Offering, but there is no assurance that the Underwriter will be successful in
its efforts. The failure of market makers to make a market or the loss of market
makers for the Common Stock will have a material adverse effect on the market
for the Common Stock. See "Risk Factors" and "Underwriting."
The Selling Stockholder is subject to a lock-up agreement with the
Underwriter pursuant to which they will not, without the prior written consent
of the Underwriter, offer, sell, or otherwise dispose of any of such securities
for a period of 365 days following the closing of the Public Offering. The
Company has agreed to use its best efforts to keep the Registration Statement,
of which this Prospectus is a part, effective in order to permit resales of the
Shares, and it is expected that such resales will be made upon expiration of or
by release by the Underwriter from such lock-up agreements from time to time in
the over-the-counter market or otherwise. Upon such expiration or release, the
Selling Stockholder and the Underwriter may sell the Shares from time to time in
the over-the-counter market in regular brokerage transactions, in transactions
directly with market makers, in certain privately negotiated transactions, or
through a combination of such methods at fixed prices, which may be changed, at
market prices prevailing at the time of sale or at negotiated prices. The
Selling Stockholder may effect such transactions by selling Shares to or through
broker-dealers, and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholder or the
purchasers of Shares from whom such broker-dealers may act as agent, or to whom
they sell as principal, or both (which compensation, as to a particular
broker-dealer, may be in excess of customer commissions).
The Company has applied for inclusion of the Common Stock on The Nasdaq
SmallCap Market under the symbol "LGCY," subject to official notice of issuance.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. AN INVESTMENT IN THE COMMON STOCK SHOULD BE
CONSIDERED ONLY BY PERSONS WHO CAN SUFFER THE LOSS OF THEIR ENTIRE
INVESTMENT.
SEE "RISK FACTORS" ON PAGE 8 AND "DILUTION."
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
A-1
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDER
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock as of May 6, 1996, as adjusted to reflect
the sale of the shares offered hereby (assuming no exercise of the Underwriter's
over-allotment option), (i) by each person known to the Company to beneficially
own more than 5% of the outstanding shares of the Common Stock, (ii) by each of
the Company's directors, (iii) by each of the Company's Named Executive
Officers, (iv) by all directors and executive officers of the Company as a group
and (v) by the Selling Stockholder. The number of shares beneficially owned by
each director and executive officer is determined under rules of the Securities
and Exchange Commission, and such information is not necessarily indicative of
beneficial ownership for any other purpose. Unless otherwise indicated, each
person has sole voting and investment power (or shares such powers with his or
her spouse) with respect to the shares set forth in the following table. Because
the Selling Stockholder has agreed not to sell its shares of Common Stock which
are registered for resale for a 12-month period following completion of the
Public Offering, the percent of shares of Common Stock owned after the Public
Offering gives effect to the Public Offering, but not to the resale of the
shares of Common Stock registered by the Selling Stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED AFTER
OWNED PRIOR TO SHARES BENEFICIALLY SECONDARY DISTRIBUTION
PUBLIC OFFERING AND NUMBER OF OWNED AFTER BY THE SELLING
SECONDARY DISTRIBUTION (2) SHARES PUBLIC OFFERING (2) STOCKHOLDER
--------------------------- REGISTERED ----------------------- ----------------------
NAME AND ADDRESS (1) NUMBER PERCENT (3) FOR RESALE NUMBER PERCENT (3) NUMBER PERCENT
- ------------------------------------- ------------- ------------ ----------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Ariella J. Lehrer, Ph.D.............. 138,000(4) 10.36% 0 138,000 5.92% 138,000 5.92%
Stanley Wojtysiak.................... 338,000(5) 25.36% 0 338,000 14.49% 338,000 14.49%
William E. Sliney.................... 0 0% 0 0 0% 0 0%
Curtis A. Hessler.................... 0 0% 0 0 0% 0 0%
Arthur G. Hiller..................... 0 0% 0 0 0% 0 0%
Daniel D. Phillips................... 0 0% 0 0 0% 0 0%
Ivan Rosenberg....................... 21,000 1.64% 0 21,000 0.92% 21,000 0.92%
E.B.C. Trust Corporation (6)......... 734,351(7) 49.53% 734,351 734,351 29.58% 0 0%
10, rue Princesse Florestine
MC 98000 Monaco
D&A Lehrer Children Trust............ 200,000(8) 15.59% 0 200,000 8.76% 200,000 8.76%
1300 Woodland Road
York, PA 17403
John W. Miller....................... 164,000(9) 12.59% 0 164,000 7.12% 164,000 7.12%
All directors and executive officers
as a group
(7 persons)......................... 497,000(10) 47.60% 0 549,500 27.89% 549,500 27.89%
</TABLE>
- ------------------------
(1) Unless otherwise indicated, the stockholder's address is at the Company's
principal executive offices.
(2) Percentage ownership is based on: (i) before the Public Offering 1,282,551
shares of Common Stock outstanding as of May 6, 1996 plus any shares
issuable pursuant to options or warrants held by the person or class in
question which may be exercised within 60 days of May 6, 1996; (ii) after
the Public Offering, 2,732,551 shares of Common Stock and (iii) after sale
of 734,351 shares of Common Stock by the Selling Stockholder (the "Secondary
Distribution").
(3) Assumes no exercise of the Underwriter's over-allotment option. Beneficial
ownership is determined in accordance with the rules of the Commission. In
computing the number of shares beneficially owned by a person (or group) and
the percentage ownership of that person (or group), shares of Common Stock
subject to options held by that person (or group) that are currently
exercisable or exercisable within 60 days of May 6, 1996 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of
A-2
<PAGE>
each other person (or group). Except as indicated in the footnotes to this
table and pursuant to applicable community property laws, each stockholder
named in this table has sole voting and investment power with respect to the
shares set forth opposite such stockholder's name.
(4) Includes 50,000 shares which Dr. Lehrer has the right to acquire within 60
days after May 6, 1996 by exercise of stock options vested pursuant to the
1995 Stock Option/Stock Issuance Plan.
(5) Includes 50,000 shares which Mr. Wojtysiak has the right to acquire within
60 days after May 6, 1996 by exercise of stock options vested pursuant to
the 1995 Stock Option/Stock Issuance Plan.
(6) The beneficial owners of EBC's capital stock are Richard MacLellan and
Michael Woolf.
(7) Assumes conversion of the Convertible Note upon the closing of the Public
Offering into 534,531 shares of Common Stock and gives effect to the
exercise of the Warrants into 200,000 shares of Common Stock. See "Certain
Transactions."
(8) Ariella J. Lehrer, Ph.D., has no voting or investment power over or
beneficial ownership with respect to the D&A Lehrer Children Trust.
(9) Includes 20,000 shares which Mr. Miller has the right to acquire by exercise
of stock options vested pursuant to the 1995 Stock Option/Stock Issuance
Plan.
(10) Includes 100,000 shares which certain members of the group have the right
to acquire within 60 days after May 6, 1996 by exercise of stock options
vested pursuant to the 1995 Stock Option/ Stock Issuance Plan.
A-3
<PAGE>
PLAN OF DISTRIBUTION
The Selling Stockholder may sell Shares from time to time directly or
through underwriters, dealers or agents, including JB Oxford & Company, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Selling Stockholder and/or the purchasers of Shares for
whom they may act as agent. The Selling Stockholder and any such underwriters,
dealers or agents that participate in the distribution of Shares may be deemed
to be underwriters, and any profit on the sale of the Shares by them and any
discounts, commissions or concessions received by them may be deemed to be
underwriting discounts and commissions under the Securities Act. To the extent
required at the time a particular offer of Shares is made, a supplement to this
Prospectus will be distributed which will set forth the number of Shares being
offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, the purchase price paid by any underwriter,
including JB Oxford & Company, for Shares purchased from the Selling
Stockholder, any discounts, commissions and other items constituting
compensation from the Selling Stockholder and any discounts, commissions or
concessions allowed or re-allowed or paid to dealers, including the proposed
selling price to the public.
The Selling Stockholder is subject to a lock-up agreement with JB Oxford &
Company pursuant to which it will not, without the prior written consent of JB
Oxford & Company, offer, sell or otherwise dispose of any of such securities for
a period of 365 days following the closing of the Public Offering. The Company
has agreed to use its best efforts to keep the Registration Statement, of which
this Prospectus is a part, effective in order to permit resales of the Shares,
and it is expected that such resales will be made upon the expiration of or by
release by the Underwriter from such lock-up agreement from time to time in The
Nasdaq SmallCap Market or otherwise. Upon such expiration or release, Shares may
be sold from time to time in The Nasdaq SmallCap Market in regular brokerage
transactions, in transactions directly with market makers, in certain privately
negotiated transactions, or through a combination of such methods at fixed
prices, which may be changed, at market prices prevailing at the time of sale or
at negotiated prices. The Selling Stockholder may effect such transactions by
selling Shares to or through broker-dealers, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholder or the purchasers of Shares for whom such broker-dealers may
act as agent, or to whom they sell as principal, or both (which compensation, as
to a particular broker-dealer, may be in excess of customer commissions).
The Underwriter was organized as a broker-dealer in 1993 and the Public
Offering is the first public offering underwritten by the Underwriter. The
Underwriter acted as placement agent for the Company in connection with the
private placement of the Convertible Note on November 21, 1995 and received a
placement fee of $50,000. On November 21, 1995, the Company entered into a
consulting agreement with JB Oxford & Company ("Consulting Agreement"), pursuant
to which JB Oxford & Company acted as a financial consultant to the Company.
Under the terms of such agreement, JB Oxford & Company performed certain
investment banking and financial advisory services in consideration of a $5,000
cash fee payable each month commencing December 1, 1995. The Consulting
Agreement was terminated on March 20, 1996. JB Oxford & Company has also acted
as Underwriter of 1,000,000 shares of the Company's Common Stock on ,
1996, and in connection therewith received (i) Underwriting Discounts and
Commissions of $ , (ii) a non-accountable expense allowance of $
and (iii) a five-year warrant to purchase up to shares of Common Stock
exercisable at $ per share (the "JBO Warrant"). The JBO Warrant is
non-exercisable until , 1997, and will not be transferable prior to its
initial exercise date except to successors in interest to the Underwriter,
officers of the Underwriter and members of the selling group and officers and
partners thereof.
The JBO Warrant contains anti-dilution provisions providing for appropriate
adjustment in the event of certain events, including any combination,
recapitalization, reclassification, stock dividend or stock split. The JBO
Warrant does not entitle the Underwriter to any rights as a stockholder of the
Company until such warrant is exercised and shares of Common Stock are purchased
thereunder.
A-4
<PAGE>
The Company and each of its officers, directors, stockholders and option
holders have agreed not to issue, sell, make any short sale of, grant any option
for the purchase of, or otherwise transfer or dispose of, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for or
file a registration statement with respect to shares of the Common Stock for a
period of 365 days after the date of this Prospectus, without the prior written
consent of the Underwriter. The Underwriter currently has no plans to release
any portion of the securities subject to lock-up agreements. When determining
whether or not to release shares from the lock-up agreements, the Underwriter
will consider, among other factors, the stockholder's reasons for requesting the
release, the number of shares for which the release is being requested and
market conditions at the time.
Prior to the Public Offering, there has been no established market for the
Common Stock of the Company. JB Oxford & Company may make a market in the Common
Stock of the Company, but there is no assurance that it will be successful in
its efforts. The loss of market makers or failure of market makers to make a
market for the Common Stock will have a material adverse effect on the market
for the Common Stock. See "Risk Factors -- Absence of Public Market; Possible
Volatility of Stock Price" and "-- Underwriter's Influence on the Market May
Have Adverse Consequences." There can be no assurance that an active trading
market will develop for the Common Stock or that the Common Stock will trade in
the public market subsequent to the Public Offering at or above the Public
Offering price.
The Common Stock will be listed on The Nasdaq SmallCap Market, subject to
official notice of issuance.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the Shares may not simultaneously engage in
market-making activities with respect to the Common Stock for a period of two
business days prior to the commencement of such distribution. In addition, and
without limiting the foregoing, the Selling Stockholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including, without limitation, Rules 10b-6 and 10b-7. All of the
foregoing may affect the marketability of, and JB Oxford & Company's ability to
engage in market-making activities with respect to, the Shares.
The Company will pay all of the expenses (estimated to be approximately
$ ) incident to the offering and sale of the Shares other than
commissions and discounts of underwriters, dealers or agents. Under agreements
entered into with the Company, the Selling Stockholders and any underwriter they
may utilize, including, without limitation, JB Oxford & Company, will be
indemnified by the Company against certain civil liabilities, including
liabilities under the Securities Act.
In order to comply with certain states' securities laws, if applicable, the
Shares will be sold in such jurisdictions only through registered or licensed
brokers or dealers. In certain states the Shares may not be sold unless the
Shares have been registered or qualify for sale in such state or an exemption
from registration or qualification is available and is complied with.
The Company has agreed to use its best efforts to keep the Registration
Statement of which this Prospectus forms a part continuously effective and
usable for a period of two years from the date on which the Commission declares
such Registration Statement effective or such shorter period which will
terminate when all the Shares covered by such Registration Statement have been
sold pursuant to such Registration Statement.
A-5
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
COMMON STOCK TO WHICH IT RELATES, OR AN OFFER IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AT ANY TIME AFTER THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 4
Risk Factors................................... 8
Use of Proceeds................................ 22
Dividend Policy................................ 22
Dilution....................................... 23
Capitalization................................. 24
Selected Financial Data........................ 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 26
Business....................................... 38
Management..................................... 51
Certain Transactions........................... 58
Principal and Selling Stockholders............. 59
Description of Capital Stock................... 61
Shares Eligible for Future Sale................ 63
Plan of Distribution........................... 66
Legal Matters.................................. 68
Experts........................................ 68
Index to Financial Statements.................. F-1
</TABLE>
734,351 SHARES
LEGACY SOFTWARE, INC.
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
JB OXFORD
& COMPANY
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
A-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses to be paid by the
Company in connection with the sale of Common Stock being registered. All of the
amounts shown are estimates except the registration fee and the NASD filing fee.
No portion of the following expenses will be borne by the Selling Stockholders.
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
SEC registration fee............................................. $ *
NASD filing fee.................................................. *
Nasdaq SmallCap Market listing fee............................... *
Blue sky fees and expenses....................................... *
Accounting fees and expenses..................................... *
Legal fees and expenses of the Company........................... *
Printing and engraving........................................... *
Transfer agent and registrar fees and expenses................... *
Miscellaneous.................................................... *
-----------
Total.......................................................... $ *
-----------
-----------
</TABLE>
- ------------------------
*To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Section 102(b)(7) of the Delaware General Corporation
Law (the "DGCL"), which permits a corporation in its certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty, except
(i) for any breach of the director's fiduciary duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions), or
(iv) for any transaction from which the director derived an improper personal
benefit. The Registrant's Certificate of Incorporation contains provisions
permitted by Section 102(b)(7) of the DGCL
Reference is made to Section 145 of the DGCL which provides that a
corporation may indemnify any person, including directors and officers, who are,
or are threatened to be made, parties to any threatened, pending or completed
legal action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was a director, officer, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
director, officer, employee or agent acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the corporation's best
interests and, with respect to any criminal actions or proceedings, had no
reasonable cause to believe that his or her conduct was unlawful. A Delaware
corporation may indemnify directors and/or officers in an action or suit by or
in the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the director or
officer is adjudged to be liable to the corporation. Where a director or officer
is successful on the merits or otherwise in the defense of any action referred
to above, the corporation must indemnify him or her against the expenses which
such director or officer actually and reasonably incurred.
II-1
<PAGE>
The Registrant's Certificate of Incorporation filed as Exhibit 3.1 to this
Registration Statement provides for indemnification of directors of the
Registrant to the fullest extent permitted by the DGCL.
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriter has agreed to indemnify the directors,
officers and controlling persons of the Registrant against certain civil
liabilities that may be incurred in connection with the Public Offering,
including certain liabilities under the Securities Act of 1933, as amended (the
"Securities Act").
The Bylaws of the Company contain provisions requiring indemnification of
directors and officers to the maximum extent permitted by Delaware Law.
The Registrant may provide liability insurance for each director and officer
for certain losses arising from claims or charges made against them while acting
in their capacities as directors or officers of the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) There have been no sales of unregistered securities by the Registrant
during the past three years, except the following issuances:
(i) On November 7, 1995, the Company issued to Ariella J. Lehrer,
Stanley Wojtysiak and John W. Miller of 288,000, 288,000 and 144,000 shares
of Common Stock, respectively, in connection with the 144 to 1 stock split
effected by the Company. These securities were issued in reliance on Section
3(a)(9) of the Act.
(ii) On November 17, 1995, to Elizabeth Nolan, M.D. ("Nolan"), of an
option to purchase an aggregate of 50,000 shares of Common Stock at an
exercise price of $3.00 per share to be paid by the Company for compensation
for consulting services rendered to the Registrant in connection with
development of the EMERGENCY ROOM product, pursuant to the terms of that
certain Option Agreement and that certain Compensation Agreement, each dated
November 17, 1995, by and between the Company and Nolan. These securities
were issued in reliance on Rule 701 promulgated under Section 3(b) of the
Act.
(iii) On November 20, 1995, to Ivan Rosenberg of 21,000 shares of Common
Stock for management consulting services rendered to the Registrant during
1995. These securities were issued in reliance on Rule 701 promulgated under
Section 3(b) of the Act.
(iv) On November 21, 1995, the Company issued to E.B.C. Trust Corporation
("EBC"), a third party lender, a convertible note payable by the Company to
EBC in the original principal amount of $1,000,000 (the "Convertible Note")
in connection with a Loan and Security Agreement entered into on such date
by the Company and EBC. Interest on the Convertible Note accrues at the rate
of 10% per annum and is payable monthly, beginning on December 1, 1995;
provided, however, that the Company is required to prepay $300,000 of the
principal of the Convertible Note with the proceeds of the Public Offering.
In addition, conversion of the remaining $700,000 in principal amount of the
Convertible Note into 534,531 shares of Common Stock of the Company at the
per share conversion price of $1.31 is a condition to the closing of the
Public Offering. Also on November 21, 1995, the Company granted EBC warrants
to purchase 200,000 shares (the "EBC Warrant Shares") of Common Stock,
subject to adjustment under certain circumstances, at an initial purchase
price of $1.31 per share. EBC was also granted certain rights with respect
to registration under the Securities Act of the shares of Common Stock into
which the Convertible Note is convertible and of the EBC Warrant Shares.
These securities were issued in reliance on Section 4(2) of the Act.
(v) On January 15, 1996, the Company granted to each of Curtis A.
Hessler, Arthur G. Hiller, Daniel D. Phillips and Ivan M. Rosenberg, the
Company's outside directors, options to purchase
II-2
<PAGE>
10,000 shares of Common Stock at an exercise price of $6.00 per share under
the Company's 1995 Stock Option/Stock Issuance Plan. These securities were
issued in reliance on Rule 701 promulgated under Section 3(b) of the Act.
(vi) On January 15, 1996, the Company granted to six key employees
(Ariella Lehrer -- options for 100,000 shares; Stanley Wojtysiak -- options
for 100,000 shares; William Sliney -- options for 50,000 shares; John Miller
-- options for 40,000 shares; Gregory Ackerman -- options for 50,000 shares;
and Craig Brannon -- options for 10,000 shares) options to purchase an
aggregate of 400,000 shares of Common Stock at an average weighted exercise
price of $5.72 per share (240,000 shares of Common Stock at the exercise
price of $6.00 per share and 110,000 shares of Common Stock at the exercise
price of $5.10 per share). These securities were issued in reliance on Rule
701 promulgated under Section 3(b) of the Act.
(vii) On January 23, 1996, the Company issued to Ilona Foyer 7,200 shares
of Common Stock for consulting services rendered to the Company during 1995.
These securities were issued in reliance on Rule 701 promulgated under
Section 3(b) of the Act.
(viii) On May , 1996, the Company issued to EBC 534,351 shares of Common
Stock upon conversion of $700,000 of principal amount of the Convertible
Note at the per share conversion price of $1.31. These securities were
issued in reliance on Section 4(2) of the Act.
(b) There were no underwriters employed in connection with any of the
transactions set forth in Section (a).
(c) The issuances of the securities set forth in this Item 15 were deemed to
be exempt from registration under the Securities Act in reliance on Section 4(2)
of the Act, Regulation D promulgated thereunder or Rule 701 promulgated under
Section 3(b) of the Act as transactions by an issuer not involving any public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under Rule 701. In all such transactions,
the recipients of securities represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and options issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ----------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1# Plan of Merger
3.1# Certificate of Incorporation, as amended.
3.2# Bylaws.
4.1# Specimen form of stock certificate for Common Stock.
5.1 Opinion of Brobeck, Phleger & Harrison LLP as to the legality of
the securities being registered.
10.1# 1995 Stock Option/Stock Issuance Plan.
10.2# Form of Stock Option Agreement.
10.3# 1995 Employee Stock Purchase Plan
10.4# Form of Employment, Confidential Information, and Invention
Assignment Agreement.
10.5# Employment Agreement, dated November 10, 1995, by and between the
Registrant and Ariella J. Lehrer, Ph.D.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ----------
<C> <S>
10.6# Employment Agreement, dated November 10, 1995, by and between the
Registrant and Stanley Wojtysiak.
10.7# Employment Agreement, dated October 16, 1995, by and between the
Registrant and William E. Sliney.
10.8# Employment Agreement, dated November 10, 1995, by and between the
Registrant and John W. Miller.
10.9# Employment Agreement, dated November 10, 1995, by and between the
Registrant and Gregory Ackerman.
10.10# Employment Agreement, dated January 2, 1996, by and between the
Registrant and Heidi Chung.
10.11# Fee Agreement, dated December 11, 1995, by and between the
Registrant and Heidi Chung.
10.12+# Multimedia Rights License Agreement, dated January 4, 1995, by
and between IBM and the Registrant, as amended by Amendment No.
1 dated March 14, 1995 and Amendment No. 2 dated July 14, 1995.
10.13+# Development and Licensing Agreement, dated November 16, 1995, by
and between International Business Machine Corporation and the
Registrant.
10.14+# Letter Agreement, dated January 17, 1996, by and between the
Registrant and International Business Machines Corporation.
10.15# Form of Indemnification Agreement for Officers and Directors.
10.16# Fee Agreement, dated September 29, 1995, by and between Ilona
Foyer, an individual, a/k/a Ilona Foyer & Associates and the
Registrant.
10.17# Option Agreement, dated November 17, 1995, by and between
Elizabeth Nolan, M.D. and the Registrant.
10.18# Compensation Agreement, dated November 17, 1995, by and between
Elizabeth Nolan, M.D. and the Registrant.
10.19# Form of Consulting Agreement, dated December 1, 1993, by and
between Elizabeth Nolan, M.D. and the Registrant.
10.20# Promissory Note, dated November 1, 1989, by the Registrant for
the benefit of Stanley Wojtysiak, as amended by the Addendums to
Promissory Note, dated December 1, 1993, and Amendment to
Promissory Note, dated November 10, 1995.
10.21# Promissory Note, dated August 1, 1989, by the Registrant for the
benefit of Ariella Lehrer, as amended by the Addendums to
Promissory Note, dated June 1, 1995, and Amendment to Promissory
Note, dated November 10, 1995.
10.22# Promissory Note, dated February 1, 1991, by the Registrant for
the benefit of Irving Lehrer, as amended by the Addendums to
Promissory Note dated March 1, 1995, and Amendment to Promissory
Note, dated November 10, 1995.
10.23# Promissory Note, dated May 13, 1995, by the Registrant for the
benefit of Benjamin Elkin, as amended by Addendum, dated August
4, 1995, by the Registrant for the benefit of Benjamin Elkin.
10.24# Promissory Note, dated November 21, 1995, by the Registrant for
the benefit of E.B.C. Trust Corporation, as amended by Amendment
of Note Agreement, dated as of November 21, 1995, by and between
the Registrant and E.B.C.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ----------
<C> <S>
10.25# Loan and Security Agreement, dated November 21, 1995, by and
between the Registrant and E.B.C. Trust Corporation.
10.26# Warrant Agreement, dated November 21, 1995, by and between the
Registrant and E.B.C. Trust Corporation.
10.27# Warrant Certificate, dated November 21, 1995, by the Registrant
for the benefit of E.B.C. Trust Corporation.
10.28# Subordination Agreement, dated November 21, 1995, by and among
the Registrant, Ariella Lehrer, Stanley Wojtysiak and E.B.C.
Trust Corporation.
10.29# Registration Rights Agreement, dated November 21, 1995, by and
between the Registrant and E.B.C. Trust Corporation.
10.30# Letter Agreement, dated November 21, 1995, by and between the
Registrant and JB Oxford and Company.
10.31# Letter of Intent, dated December 14, 1995, by and between Kee
Joon Kim and the Registrant.
10.32# Consulting Agreement, dated February 1, 1996, between the
Registrant and The Crossroads Group, Inc.
10.33# Letter of Intent, dated March 15, 1996, between the Registrant
and International Business Machines Corporation.
10.34 Promissory Note, dated April 12, 1996, by the Registrant for the
benefit of Ivan M. Rosenberg.
11.1 Statement regarding computation of per share earnings.
23.1 Independent Certified Public Accountants' Report on Schedules and
Consent.
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit
5.1 hereto).
24.1# Power of Attorney (see signature page of this Registration
Statement).
</TABLE>
- ------------------------
#Previously filed.
*To be filed by amendment
+Portions of this Exhibit have been deleted pursuant to the Company's request
for confidential treatment pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
(b) The following financial statement schedules are filed herewith:
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
- --------- -----------------------------------------------------------------
<C> <S>
II Allowances for Doubtful Accounts and Notes Receivable
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes therein.
ITEM 17. UNDERTAKINGS.
(1) For purposes of determining liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance on Form 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(b)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE>
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to certain provisions set forth in the DGCL, the Certificate
of Incorporation or the Bylaws of the registrant, Indemnification Agreements
entered into between the registrant and its officers and directors, 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 Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
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 hereunder, 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 be governed by the final adjudication
of such issue.
(3) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California on this 6th day of May, 1996.
LEGACY SOFTWARE, INC.
By: /s/ ARIELLA J. LEHRER
-----------------------------------
Ariella J. Lehrer, Ph.D.
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ ---------------
Chairman of the Board,
/s/ ARIELLA J. LEHRER President, and Chief
------------------------------------------- Executive Officer (Principal May 6, 1996
Ariella J. Lehrer, Ph.D. Executive Officer)
Chief Financial Officer Vice
/s/ WILLIAM E. SLINEY President of Finance,
------------------------------------------- Treasurer and Director May 6, 1996
William E. Sliney (Principal Financial and
Accounting Officer)
*
------------------------------------------- Secretary and Director May 6, 1996
Stanley Wojtysiak
*
------------------------------------------- Director May 6, 1996
Curtis A. Hessler
*
------------------------------------------- Director May 6, 1996
Daniel D. Phillips
*
------------------------------------------- Director May 6, 1996
Arthur G. Hiller
*
------------------------------------------- Director May 6, 1996
Ivan M. Rosenberg
By: /s/ WILLIAM E. SLINEY
---------------------------------------
William E. Sliney
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders of
Legacy Software, Inc.
Our report to Legacy Software, Inc. dated January 17, 1996, which is
contained in the Prospectus constituting part of this Registration Statement,
included the audit of the schedule listed under Item 16(b) for the years ended
December 31, 1993, 1994 and 1995. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based upon our audit.
In our opinion, such schedule presents fairly, in all material respects, the
information set forth therein.
The accompanying financial statement schedule has been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2, the
Company had a working capital deficiency of $162,097 and a shareholder's
deficiency of $824,590 as of December 31, 1995. These matters raise substantial
doubt as to the Company's ability to continue as a going concern. The Company's
future operations are dependent upon generating funds to finance the marketing
and expansion of its operations and the repayment of notes payable. Management
plans to generate these funds through an initial public offering of the
Company's common stock as more fully discussed in Note 2. There is no assurance
that the public offering will be successful. The financial statement schedule
does not include any adjustments that might result from the outcome of this
uncertainty.
BDO SEIDMAN, LLP
Los Angeles, California
January 17, 1996
S-1
<PAGE>
SCHEDULE II
LEGACY SOFTWARE, INC.
ALLOWANCES FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND DEDUCTIONS BALANCE AT
DESCRIPTION PERIOD EXPENSES (A) END OF PERIOD
- ---------------------------------------------------------------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Reserves and Allowances Deducted From Asset Accounts:
Allowance for Uncollectible Accounts Receivable
Year ended December 31, 1993................................ $ 0 -- -- $ 0
Year ended December 31, 1994................................ 0 $ 10,300 -- 10,300
Year ended December 31, 1995................................ 10,300 7,600 $ 10,300 7,600
</TABLE>
- ------------------------
(a) Write-off of uncollectible accounts
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
- ---------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement.
2.1# Plan of Merger.
3.1# Certificate of Incorporation, as amended.
3.2# Bylaws.
4.1# Specimen form of stock certificate for Common Stock.
5.1 Opinion of Brobeck, Phleger & Harrison LLP as to the legality
of the securities being registered.
10.1# 1995 Stock Option/Stock Issuance Plan.
10.2# Form of Stock Option Agreement.
10.3# 1995 Employee Stock Purchase Plan.
10.4# Form of Employment, Confidential Information, and Invention
Assignment Agreement.
10.5# Employment Agreement, dated November 10, 1995, by and between
the Registrant and Ariella J. Lehrer, Ph.D.
10.6# Employment Agreement, dated November 10, 1995, by and between
the Registrant and Stanley Wojtysiak.
10.7# Employment Agreement, dated October 16, 1995, by and between
the Registrant and William E. Sliney.
10.8# Employment Agreement, dated November 10, 1995, by and between
the Registrant and John W. Miller.
10.9# Employment Agreement, dated November 10, 1995, by and between
the Registrant and Gregory Ackerman.
10.10# Employment Agreement, dated January 2, 1996, by and between
the Registrant and Heidi Chung.
10.11# Fee Agreement, dated December 11, 1995, by and between the
Registrant and Heidi Chung.
10.12+# Multimedia Rights License Agreement, dated January 4, 1995, by
and between IBM and the Registrant, as amended by Amendment
No. 1 dated March 14, 1995 and Amendment No. 2 dated July 14,
1995.
10.13+# Development and Licensing Agreement, dated November 16, 1995,
by and between International Business Machine Corporation and
the Registrant.
10.14+# Letter Agreement, dated January 17, 1996, by and between the
Registrant and International Business Machines Corporation.
10.15# Form of Indemnification Agreement for Officers and Directors.
10.16# Fee Agreement, dated September 29, 1995, by and between Ilona
Foyer, an individual, a/k/a Ilona Foyer & Associates and the
Registrant.
10.17# Option Agreement, dated November 17, 1995, by and between
Elizabeth Nolan, M.D. and the Registrant.
10.18# Compensation Agreement, dated November 17, 1995, by and
between Elizabeth Nolan, M.D. and the Registrant.
10.19# Form of Consulting Agreement, dated December 1, 1993, by and
between Elizabeth Nolan, M.D. and the Registrant.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
- ---------- ----
<C> <S> <C>
10.20# Promissory Note, dated November 1, 1989, by the Registrant for
the benefit of Stanley Wojtysiak, as amended by the Addendums
to Promissory Note, dated December 1, 1993, and Amendment to
Promissory Note, dated November 10, 1995.
10.21# Promissory Note, dated August 1, 1989, by the Registrant for
the benefit of Ariella Lehrer, as amended by the Addendums to
Promissory Note, dated June 1, 1995, and Amendment to
Promissory Note, dated November 10, 1995.
10.22# Promissory Note, dated February 1, 1991, by the Registrant for
the benefit of Irving Lehrer, as amended by the Addendums to
Promissory Note dated March 1, 1995, and Amendment to
Promissory Note, dated November 10, 1995.
10.23# Promissory Note, dated May 13, 1995, by the Registrant for the
benefit of Benjamin Elkin, as amended by Addendum, dated
August 4, 1995, by the Registrant for the benefit of Benjamin
Elkin.
10.24# Promissory Note, dated November 21, 1995, by the Registrant
for the benefit of E.B.C. Trust Corporation, as amended by
Amendment of Note Agreement, dated as of November 21, 1995,
by and between the Registrant and E.B.C......................
10.25# Loan and Security Agreement, dated November 21, 1995, by and
between the Registrant and E.B.C. Trust Corporation.
10.26# Warrant Agreement, dated November 21, 1995, by and between the
Registrant and E.B.C. Trust Corporation.
10.27# Warrant Certificate, dated November 21, 1995, by the
Registrant for the benefit of E.B.C. Trust Corporation.
10.28# Subordination Agreement, dated November 21, 1995, by and among
the Registrant, Ariella Lehrer, Stanley Wojtysiak and E.B.C.
Trust Corporation.
10.29# Registration Rights Agreement, dated November 21, 1995, by and
between the Registrant and E.B.C. Trust Corporation.
10.30# Letter Agreement, dated November 21, 1995, by and between the
Registrant and JB Oxford and Company.
10.31# Letter of Intent, dated December 14, 1995, by and between Kee
Joon Kim and the Registrant.
10.32# Consulting Agreement, dated February 1, 1996, between the
Registrant and The Crossroads Group, Inc.
10.33# Letter of Intent, dated March 15, 1996, between the Registrant
and International Business Machines Corporation.
10.34 Promissory Note, dated April 12, 1996, by the Registrant for
the benefit of Ivan M. Rosenberg.............................
11.1 Statement regarding computation of per share earnings.........
23.1 Independent Certified Public Accountants' Report on Schedules
and Consent..................................................
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1 hereto).
24.1# Power of Attorney (see signature page of this Registration
Statement).
</TABLE>
- ------------------------
#Previously filed.
*To be filed by amendment
+Portions of this Exhibit have been deleted pursuant to the Company's request
for confidential treatment pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
<PAGE>
1,000,000 Shares
LEGACY SOFTWARE, INC.
Common Stock ($.001 Par Value)
UNDERWRITING AGREEMENT
May __, 1996
JB OXFORD & COMPANY
9665 Wilshire Blvd., Third Floor
Beverly Hills, CA 90212
Dear Sirs:
Legacy Software, Inc., a Delaware corporation (the "Company"),
proposes to sell an aggregate of 1,000,000 shares of Common Stock, par value
$.001, of the Company (the "Firm Shares"), to J.B. Oxford & Company
("Underwriter"). The Company also proposes to sell to the Underwriter not more
than 115,000 additional shares of Common Stock, par value $.001, of the Company
(the "Additional Shares"), if requested by the Underwriter as provided in
Section 2 hereof. The Firm Shares and the Additional Shares are herein
collectively called the Shares. The shares of Common Stock of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the Common Stock.
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively called the
"Act"), a registration statement on Form S-1 (File number 333-1054) including a
prospectus relating to the Shares, which may be amended. The registration
statement, as amended at the time when it becomes effective, including
information (if any) deemed to be part of the registration statement at the time
of effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to
as the "Registration Statement"; and the prospectus in the form first used to
confirm sales of shares is hereinafter referred as the "Prospectus".
2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the
representations and warranties contained in this Agreement,
<PAGE>
and subject to its terms and conditions, the Company agrees to issue and sell
1,000,000 Firm Shares, and the Underwriter agrees to purchase from the Company
at a price per share of $ (the "Purchase Price") the number of Firm
Shares (subject to such adjustments to eliminate fractional shares as the
Underwriter may determine). In addition, the Company agrees to issue to the
Underwriter the Warrants set forth in the Warrant Agreement attached hereto as
Annex II.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, (i) the Company agrees to
issue and sell up to 150,000 Additional Shares and (ii) the Underwriter shall
have a one-time right to purchase up to an aggregate 150,000 Additional Shares
from the Company at the Purchase Price. Additional Shares may be purchased
solely for the purpose of covering over-allotments made in connection with the
offering of the Firm Shares. The Underwriter may exercise its right to purchase
any Additional Shares by giving written notice thereof to the Company at any
time within 30 days after the date of this Agreement. The notice shall specify
the aggregate number of Additional Shares to be purchased and the date for
payment and delivery thereof. The date specified in the notice shall be a
business day (i) no earlier than the Closing Date (as hereinafter defined), (ii)
no later than ten business days after such notice has been given and (iii) no
earlier than three business days after such notice has been given.
The Company hereby agrees that it shall not, and that it shall deliver
an agreement executed by each stockholder listed on Annex I hereto, pursuant to
which each such person agrees not to, issue, sell, make any short sale of, grant
any option for the purchase of, or otherwise transfer or dispose of, any shares
of common stock of the Company or any securities convertible into or exercisable
or exchangeable for or file a Registration Statement with respect to shares of
Common Stock, except to the Underwriter pursuant to this Agreement, for a period
of 365 days after the date of the Prospectus without the Underwriter's prior
written consent.
3. TERMS OF PUBLIC OFFERING. The Company has been advised that the
Underwriter proposes (i) to make a public offering of the Shares as soon after
the effective date of the Registration Statement as in the Underwriter's
judgment is advisable and (ii) initially to offer the Shares upon the terms set
forth in the Prospectus.
4. DELIVERY AND PAYMENT. Delivery to the Underwriter of and payment
for the Firm Shares shall be made at _____ a.m., Los Angeles time, on the third
business day (the "Closing Date") following the date of the initial public
offering, at the offices of Brobeck, Phleger & Harrison LLP, counsel to the
Company
- 2 -
<PAGE>
("Brobeck"). The Closing Date and the location of delivery of and the form of
payment for the Firm Shares may be varied by agreement between the parties
hereto.
Delivery to the Underwriter of and payment for any Additional Shares
to be purchased by the Underwriter shall be made at such place as the
Underwriter shall designate at _____ a.m., Los Angeles time, on the date
specified in the exercise notice given by the Underwriter pursuant to Section 2
(the "Option Closing Date"). The Option Closing Date and the location of
delivery of and the form of payment for the Additional Shares may be varied by
agreement between the Underwriter and the Company.
Certificates for the Shares shall be registered in such names and
issued in such denominations as the Underwriter shall request in writing not
later than two full business days prior to the Closing Date or the Option
Closing Date, as the case may be. Such certificates shall be made available to
the Underwriter for inspection not later than _____ a.m., Los Angeles time, on
the business day preceding the Closing Date or the Option Closing Date, as the
case may be. Certificates in definitive form evidencing the Shares shall be
delivered to the Underwriter on the Closing Date or the Option Closing Date, as
the case may be, with any transfer taxes thereon duly paid by the Company, for
the account of the Underwriter, against payment of the Purchase Price therefor
by certified or official bank checks payable in New York Clearing House next day
funds to the order of the Company.
5. AGREEMENTS OF THE COMPANY. The Company agrees with the
Underwriter:
(a) To use its best efforts to cause the Registration Statement to
become effective at the earliest possible time.
(b) To advise the Underwriter promptly and, if requested by the
Underwriter, to confirm such advice in writing, (i) when the Registration
Statement has become effective and when any post-effective amendment to it
becomes effective, (ii) of any request by the Commission for amendments to
the Registration Statement or amendments or supplements to the Prospectus
or for additional information, (iii) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement
or of the suspension of qualification of the Shares for offering or sale in
any jurisdiction, or the initiation of any proceeding for such purposes,
and (iv) of the happening of any event during the period referred to in
paragraph (e) below which makes any statement of a material fact made in
the Registration Statement or the Prospectus untrue or which requires the
making of any additions to or changes in the Registration Statement or the
Prospectus in order to make
- 3 -
<PAGE>
the statements therein not misleading. If at any time the Commission shall
issue any stop order suspending the effectiveness of the Registration
Statement, the Company will make every reasonable effort to obtain the
withdrawal or lifting of such order at the earliest possible time.
(c) To furnish to the Underwriter, without charge, two (2) signed
copies of the Registration Statement as first filed with the Commission and
of each amendment to it, including all exhibits, and to furnish to the
Underwriter such number of conformed copies of the Registration Statement
as so filed and of each amendment to it, without exhibits, as the
Underwriter may reasonably request.
(d) Not to file any amendment or supplement to the Registration
Statement, whether before or after the time when it becomes effective, or
to make any amendment or supplement to the Prospectus of which the
Underwriter shall not previously have been advised or to which the
Underwriter shall reasonably object; and to prepare and file with the
Commission, promptly upon the Underwriter's reasonable request, any
amendment to the Registration Statement or supplement to the Prospectus
which may be necessary or advisable in connection with the distribution of
the Shares by the Underwriter, and to use its best efforts to cause the
same to become promptly effective.
(e) Promptly after the Registration Statement becomes effective, and
from time to time thereafter for such period as in the opinion of counsel
for the Underwriter a prospectus is required by law to be delivered in
connection with sales by an underwriter or a dealer, to furnish the
Underwriter and any dealer as many copies of the Prospectus (and of any
amendment or supplement to the Prospectus) as such Underwriter or dealer
may reasonably request.
(f) If during the period specified in paragraph (e) any event shall
occur as a result of which, in the opinion of counsel for the Underwriter,
it becomes necessary to amend or supplement the Prospectus in order to make
the statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser of the Shares, not misleading, or if
it is necessary to amend or supplement the Prospectus to comply with any
law, forthwith to prepare and file with the Commission an appropriate
amendment or supplement to the Prospectus so that the statements in the
Prospectus, as so amended or supplemented, will not in the light of the
circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with law, and to furnish to each Underwriter and to
such dealers as the Underwriter shall specify, such number of copies
thereof as such Underwriter or dealers may reasonably request.
- 4 -
<PAGE>
(g) Prior and subsequent to any public offering of the Shares, to
cooperate with the Underwriter and counsel for the Underwriter in
connection with the registration or qualification of the Shares for offer
and sale by the Underwriter and by dealers under the state securities or
Blue Sky laws of such jurisdictions of the United States as the Underwriter
may request, to continue such qualification in effect so long as required
for distribution of the Shares and to file such consents to service of
process or other documents as may be necessary in order to effect such
registration or qualification, provided that in no event shall the Company
be obligated to qualify to do business in any jurisdiction where it is not
now so qualified or to take any actions which would subject it to general
taxation in any jurisdiction where it is not now so subject.
(h) To mail and make generally available to its stockholders as soon
as reasonably practicable an earnings statement covering a period of at
least twelve months after the effective date of the Registration statement
(but in no event commencing later than 90 days after such date) which shall
satisfy the provisions of Section 11(a) of the Act, and to advise the
Underwriter in writing when such statement has been so made available.
(i) During the period of five years after the date of this Agreement,
(i) to mail as soon as reasonably practicable after the end of each fiscal
year to the record holders of its Common Stock a financial report of the
Company and its subsidiaries, if any, on a consolidated basis (and a
similar financial report of all unconsolidated subsidiaries, if any), all
such financial reports to include a consolidated balance sheet, a
consolidated statement of operations, a consolidated statement of cash
flows and a consolidated statement of shareholders' equity as of the end of
and for such fiscal year, together with comparable information as of the
end of and for the preceding year, certified by independent certified
public accountants, and (ii) to mail and make generally available as soon
as practicable after the end of each quarterly period (except for the last
quarterly period of each fiscal year) to such holders, a consolidated
balance sheet, a consolidated statement of operations and a consolidated
statement of cash flows (and similar financial reports of all
unconsolidated subsidiaries, if any) as of the end of and for such period,
and for the period from the beginning of such year to the close of such
quarterly period, together with comparable information for the
corresponding periods of the preceding year.
(j) During the period referred to in paragraph (i), to furnish to the
Underwriter as soon as available a copy of
- 5 -
<PAGE>
each report or other publicly available information of the Company mailed
to the holders of Common Stock or filed with the Commission and such other
publicly available information concerning the Company and its subsidiaries,
if any, as the Underwriter may reasonably request.
(k) To pay all costs, expenses, fees and taxes incident to (i) the
preparation, printing, filing and distribution under the Act of the
Registration Statement (including financial statements and exhibits), each
preliminary prospectus and all amendments and supplements to any of them
prior to or during the period specified in paragraph (e), (ii) the printing
and delivery of the Prospectus and all amendments or supplements to it
during the period specified in paragraph (e), (iii) the printing and
delivery of this Agreement, the Preliminary and Supplemental Blue Sky
Memoranda and all other agreements, memoranda, correspondence and other
documents printed and delivered in connection with the offering of the
Shares (including in each case any disbursements of counsel for the
Underwriter relating to such printing and delivery), (iv) the registration
or qualification of the Shares for offer and sale under the securities or
Blue Sky laws of the several states (including in each case the fees and
disbursements of counsel for the Underwriter relating to such registration
or qualification and memoranda relating thereto), (v) filings and clearance
with the National Association of Securities Dealers, Inc. in connection
with the offering, (vi) the listing of the Shares on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ")
SmallCap Market System, and (vii) furnishing such copies of the
Registration Statement, the Prospectus and all amendments and supplements
thereto as may be requested for use in connection with the offering or sale
of the Shares by the Underwriter or by dealers to whom Shares may be sold.
(l) To use its best efforts to qualify its Common Stock on the NASDAQ
SmallCap Market System (or on a national securities exchange) and to
maintain the inclusion of such Common Stock in the NASDAQ SmallCap Market
System (or on a national securities exchange) for a period of five years
after the effective date of the Registration Statement.
(m) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company
prior to the Closing Date or the Option Closing Date, as the case may be,
and to satisfy all conditions precedent to the delivery of the Shares.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the Underwriter that:
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<PAGE>
(a) (i) On the day the Registration Statement goes effective under
the Act and thereafter, the Registration Statement and any amendments
thereto will comply in all material respects with the provisions of the Act
and will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading; and (ii) the Prospectus and any
supplements thereto as of their respective dates will not contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties contained in this paragraph (a) shall not
apply to statements or omissions in the Registration Statement or the
Prospectus (or any supplement or amendment to them) based upon information
relating to the Underwriter furnished to the Company in writing by or on
behalf of the Underwriter.
(b) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation and has the corporate power and authority to carry on its
business as it is currently being conducted and to own, lease and operate
its properties, and is duly qualified and is in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the
nature of its business or its ownership or leasing of property requires
such qualification, except where the failure to be so qualified would not
have a material adverse effect on the Company.
(d) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid, non-assessable
and not subject to any preemptive or similar rights; and the Shares to be
issued and sold by the Company hereunder have been duly authorized and,
when issued and delivered to the Underwriter against payment therefor as
provided by this Agreement, will have been validly issued and will be fully
paid and non-assessable, and the issuance of such Shares will not be
subject to any preemptive or similar rights.
(e) The authorized capital stock of the Company, including the Common
Stock, conforms as to legal matters to the description thereof contained in
the Prospectus.
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<PAGE>
(f) The Company is not in violation of its charter or bylaws or in
default in the performance of any obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of
indebtedness or in any other agreement, indenture or instrument material to
the conduct of the business of the Company to which the Company is a party
or by which its property is bound.
(g) The execution, delivery and performance of this Agreement,
compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby (i) will not require
any consent, approval, authorization or other order of any court,
regulatory body, administrative agency or other governmental body (except
as such may be required under the securities or Blue Sky laws of the
various states), (ii) will not conflict with or constitute a breach of any
of the terms or provisions of, or a default under, (x) the charter or
bylaws of the Company or (y) any agreement, indenture or other instrument
to which it is a party or by which it is bound, or (iii) will not violate
or conflict with any laws, administrative regulations or rulings or court
decrees applicable to the Company and its property, except in the case of
clause (i), (ii)(y) and (iii) for failures to obtain consent, approval,
authorization or other orders, conflicts, breaches or violations which in
the individual or in the aggregate would not have a material adverse effect
on the Company.
(h) Except as otherwise set forth in the Prospectus, there are no
material legal or governmental proceedings pending to which the Company is
a party or of which any of its respective property is the subject, and, to
the best of the Company's knowledge, no such proceedings are threatened or
contemplated. No contract or document of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement is not so described or filed as
required.
(i) The Company has not violated any environmental, safety or similar
law applicable to its business, nor any federal or state law relating to
discrimination in the hiring, promotion or pay of employees nor any
applicable federal or state wages and hours laws, nor any provisions of the
Employee Retirement Income Security Act or the rules and regulations
promulgated thereunder, which in each case might result in any material
adverse change in the business, prospects, financial condition or results
of operation of the Company.
(j) Except as otherwise set forth in the Prospectus or is not
material to the business, prospects, financial
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<PAGE>
condition or results of operation of the Company, the Company has good and
marketable title, free and clear of all liens, claims, encumbrances and
restrictions except liens for taxes not yet due and payable, to all
property and assets described in the Registration Statement as being owned
by it. All leases to which the Company is a party are valid and binding
and no default has occurred or is continuing thereunder, which might result
in any material adverse change in the business, prospects, financial
condition or results of operation of the Company, and the Company enjoys
peaceful and undisturbed possession under all such leases to which it is a
party as lessee with such exceptions as do not materially interfere with
the use made by the Company.
(k) The Company maintains reasonably adequate insurance, including,
but not limited to, key person life insurance.
(l) BDO Seidman, LLP ("BDO Seidman") are independent public
accountants with respect to the Company as required by the Act.
(m) The financial statements, together with related schedules and
notes forming part of the Registration Statement and the Prospectus (and
any amendment or supplement thereto), present fairly in all material
respects the consolidated financial position, results of operations and
changes in financial position of the Company on the basis stated in the
Registration Statement at the respective dates or for the respective
periods to which they apply; such statements and related schedules and
notes have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein; and the other financial and statistical information and
data set forth in the Registration Statement and the Prospectus (and any
amendment or supplement thereto) is, in all material respects, accurately
presented and prepared on a basis consistent with such financial statements
and the books and records of the Company.
(n) The Company has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own, lease and operate its properties and to conduct its
business in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus; the Company has
fulfilled and performed all of its material obligations with respect to
such permits and no event has occurred which allows, or after notice or
lapse of time would allow, revocation or termination thereof or results in
any other
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<PAGE>
material impairment of the rights of the holder of any such permit, subject
in each case to such qualification as may be set forth in the Prospectus;
and, except as described in the Prospectus, such permits contain no
restrictions that are materially burdensome to the Company.
(o) The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(p) Except as otherwise set forth in the Registration Statement or
Prospectus, no holder of any security of the Company has any right to
require registration of shares of Common Stock or any other security of the
Company.
7. INDEMNIFICATION. (a) The Company agrees to indemnify, defend
and hold harmless the Underwriter and each person, if any, who controls the
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all losses, claims, damages, liabilities and judgments caused by
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to the Underwriter set forth in the section entitled "Underwriting" and the
statements with respect to stabilization on page 1 of the Registration
Statements which were furnished in writing to the Company by or on behalf of the
Underwriter.
The amount paid or payable by a party as a result of the losses,
expenses, liabilities and claims referred to above shall be deemed to include
any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any claim or action.
(b) In case any action shall be brought against the Underwriter or
any person controlling such Underwriter, based upon any preliminary prospectus,
the Registration Statement or the Prospectus or any amendment or supplement
thereto and with respect to which indemnity may be sought against the Company,
the Underwriter shall promptly notify the Company in writing of such action
(provided, that the failure to give such notice shall not relieve the Company of
any liability which it may have pursuant to this Agreement, unless it shall be
determined by a court of
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<PAGE>
competent jurisdiction by final judgment that such failure has resulted in the
forfeiture of substantive rights or defenses by the indemnifying party, but only
to the extent and the amount that such forfeiture impacts any final judgment
against the Underwriter) and the Company shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to such indemnified
party and payment of all fees and expenses. The Underwriter or any such
controlling person shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of the Underwriter or such controlling person
unless (i) the employment of such counsel has been specifically authorized in
writing by the Company, (ii) the Company has failed to assume the defense and
employ counsel or (iii) the named parties to any such action (including any
impleaded parties) include both such Underwriter or such controlling person and
the Company, as the case may be, and such Underwriter or such controlling person
shall have been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the Company, as the case may be, (in which case the Company shall
not have the right to assume the defense of such action on behalf of such
Underwriter or such controlling person, it being understood, however, that the
Company shall not, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for all such Underwriter and controlling persons, which firm shall be
designated the Underwriter and that all such fees and expenses shall be
reimbursed as they are incurred). If at any time an indemnified party shall
have requested an indemnifying party to reimburse the indemnified party for fees
and expenses of counsel as contemplated by the second sentence of this
paragraph, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 10 business days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying party
shall not have reimbursed the indemnified party in accordance with such request
prior to the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
(c) The Underwriter agrees to indemnify, defend and hold harmless the
Company, its directors and its officers who
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<PAGE>
sign the Registration Statement, and any person controlling the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the
same extent as the foregoing indemnity from the Company to the Underwriter but
only with reference to information relating to the Underwriter furnished in
writing by or on behalf of such Underwriter for use in the Registration
Statement, the Prospectus or any preliminary prospectus. In case any action
shall be brought against the Company, any of its directors, any such officer or
any person controlling the Company based on the Registration Statement, the
Prospectus or any preliminary prospectus and in respect of which indemnity may
be sought against the Underwriter, the Underwriter shall have the rights and
duties given to the Company, except that if the Company shall have assumed the
defense thereof the Underwriter shall not be required to do so, but may employ
separate counsel therein and participate in the defense thereof but the fees and
expenses of such counsel shall be at the expense of such Underwriter, and the
Company, its directors, any such officers and any person controlling the Company
shall have the rights and duties given to the Underwriter, by Section 7(b)
hereof.
(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party in respect of any losses, claims, damages,
liabilities or judgments referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities and judgments (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriter on the other hand from the offering of the Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Underwriter in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Underwriter shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company, and the total underwriting discounts and commissions received by the
Underwriter, bear to the total price to the public of the Shares, in each case
as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company and the Underwriter shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission to state a material fact relates to information supplied by
the Company or the Underwriter and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
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<PAGE>
The amount paid or payable by a party as a result of the losses,
expenses, liabilities and claims referred to above shall be deemed to include
any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any claim or action.
(e) The Company hereby designates [NAME OF COMPANY], [ADDRESS OF
COMPANY], (a Delaware corporation) as its authorized agent, upon which process
may be served in any action, suit or proceeding which may be instituted in any
state or federal court in the State of California by the Underwriter or person
controlling the Underwriter asserting a claim for indemnification or
contribution under or pursuant to this Section 7, and the Company will accept
the jurisdiction of such court in such action, and waives, to the fullest extent
permitted by applicable law, any defense based upon lack of personal
jurisdiction or venue. A copy of any such process shall be sent or given to the
Company, at the address for notices specified in Section 10 hereof.
8. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The several obligations
of the Underwriter to purchase the Firm Shares under this Agreement are subject
to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained
in this Agreement shall be true and correct on the Closing Date with the
same force and effect as if made on and as of the Closing Date.
(b) The Registration Statement shall have become effective not later
than 2:00 p.m., Los Angeles time, on the date of this Agreement or at such
later date and time the parties may approve in writing, and at the Closing
Date no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall
have been commenced or shall be pending before or contemplated by the
Commission.
(c) (i) Since the date of the latest balance sheet included in the
Registration Statement and the Prospectus, there shall not have been any
material adverse change, or any development involving a prospective
material adverse change, in the condition, financial or otherwise, or in
the earnings, affairs or business prospects, whether or not arising in the
ordinary course of business, of the Company, (ii) since the date of the
latest balance sheet included in the Registration Statement and the
Prospectus there shall not have been any change, or any development
involving a prospective material adverse change, in the capital stock or in
the long-term debt of the Company from that set forth in the Registration
Statement and Prospectus, (iii) the Company
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<PAGE>
shall have no liability or obligation, direct or contingent, which is
material to the Company, other than those reflected in the Registration
statement and the Prospectus and (iv) on the Closing Date the Underwriter
shall have received a certificate dated the Closing Date, signed by
_____________ and _____________, in their capacities as the ______________
and _______________ of the Company, confirming the matters set forth in
paragraphs (a), (b), and (c) of this Section 8.
(d) The Underwriter shall have received on the Closing Date an
opinion (satisfactory to the Underwriter and counsel for the Underwriter),
dated the Closing Date, from Brobeck, Phleger & Harrison LLP, counsel for
the Company, to the effect that:
i) the Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of its jurisdiction
of incorporation and has the corporate power and authority required to
carry on its business as it is currently being conducted and to own
its properties;
ii) the Company is duly qualified and is in good standing as a
foreign corporation authorized to do business in each jurisdiction in
which the nature of its business or its ownership or leasing of
property requires such qualification, except where the failure to be
so qualified would not have a material adverse effect on the Company;
iii) all the outstanding shares of common stock have been duly
authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights;
iv) the Shares to be issued and sold by the Company hereunder
have been duly authorized, and when issued and delivered to the
Underwriter against payment therefor as provided by this Agreement,
will have been validly issued and will be fully paid and
non-assessable, and the issuance of such Shares is not subject to any
preemptive or similar rights;
v) this Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement of the
Company enforceable in accordance with its terms (except as rights to
indemnity and contribution hereunder may be limited by applicable
law);
vi) the authorized capital stock of the Company, including the
Common stock, conforms as to legal
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<PAGE>
matters to the description thereof contained in the Registration
Statement and the Prospectus;
vii) the Registration statement has become effective under the
Act, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the knowledge of such counsel,
pending before or contemplated by the Commission;
viii) the statements under the captions "_______________________
___________ ", "____________________", "_____________________________
__________________", "_______________________" " ____________________
_____________ ", "_________________________________________________",
"Description of Capital Stock" and "Underwriting" in the Prospectus
and Items 14 and 15 of Part II of the Registration Statement insofar
as such statements constitute a summary of legal matters documents or
proceedings referred to therein, fairly present the information called
for with respect to such legal matters, documents and proceedings;
ix) the Company is not in violation of its charter or bylaws
and, to such counsel's knowledge after due inquiry, the Company is not
in default in the performance of any obligation, agreement or
condition contained in any bond, debenture, note or any other evidence
of indebtedness or in any other agreement, indenture or instrument
material to the conduct of the business of the Company to which the
Company is a party or by which it property is bound;
x) the execution, delivery and performance of this Agreement by
the Company, compliance by the Company with all the provisions hereof
and the consummation of the transactions contemplated hereby will not
require any consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental
body (except as such may be required under the Act or other securities
or Blue Sky laws) and will not conflict with or constitute a breach of
any of the terms or provisions of, or a default under, the charter or
bylaws of the Company or any agreement, indenture or other instrument
to which the Company is a party or by which the Company's properties
are bound, or violate or conflict with any laws, administrative
regulations or rulings or court decrees applicable to the Company or
it's properties;
xi) after due inquiry, such counsel does not know of any legal
or governmental proceeding pending or threatened to which the Company
is a party or to which
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<PAGE>
any of it's property is subject which is required to be described in
the Registration Statement or the Prospectus and is not so described,
or of any contract or other document which is required to be described
in the Registration Statement or the Prospectus or is required to be
filed as an exhibit to the Registration Statement which is not
described or filed as required;
xii) to such counsel's knowledge, after due inquiry, the Company
has not violated any environmental, safety or similar law applicable
to its business, nor any federal or state law relating to
discrimination in the hiring, promotion or pay of employees nor any
applicable federal or state wages and hours laws, nor any provisions
of the Employee Retirement Income Security Act or the rules and
regulations promulgated thereunder, which in each case might result in
any material adverse change in the business, prospects, financial
condition or results of operation of the Company;
xiii) to such counsel's knowledge, after due inquiry, except as
otherwise set forth in the Registration Statement or such as are not
material to the business, prospects, financial condition or results of
operation of the Company, the Company has good and marketable title,
free and clear of all liens, claims, encumbrances and restrictions
except liens for taxes not yet due and payable, to all property and
assets described in the Registration Statement as being owned by it
(except for UCC Financing Statement No. 953256065 dated November 20,
1995 listing the Company as debtor and E.B.C. Trust Corporation
("EBC") as secured party issued in connection with that certain bridge
financing between the Company and EBC);
xiv) to such counsel's knowledge, after due inquiry, all leases
to which the Company is a party are valid and binding and no default
has occurred or is continuing thereunder, which might result in any
material adverse change in the business, prospects, financial
condition or results of operation of the Company, and the Company
enjoys peaceful and undisturbed possession under all such leases to
which it is a party as lessee with such exceptions as do not
materially interfere with the use made by the Company;
xv) the Company has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits")
as are necessary to own, lease and operate its properties and to
conduct its business in the manner described in the Prospectus,
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<PAGE>
subject to such qualifications as may be set forth in the Prospectus;
to such counsel's knowledge, after due inquiry, the Company has
fulfilled and performed all of its material obligations with respect
to such permits and no event has occurred which allows, or after
notice or lapse of time would allow, revocation or termination thereof
or results in any other material impairment of the rights of the
holder of any such permit, subject in each case to such qualification
as may be set forth in the Prospectus; and, except as described in the
Prospectus, such permits contain no restrictions that are materially
burdensome to the Company;
xvi) the Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended;
xvii) to such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, after due inquiry no holder of
any security of the Company has any right to require registration of
shares of Common stock or any other security of the Company;
xviii) except for the order of the Commission making the
Registration Statement effective and permits and similar
authorizations required under the securities or Blue Sky laws of
certain states, no consent, approval, authorization or other order of
any regulatory body, administrative agency or other governmental body
is legally required for the valid issuance and sale of the Shares to
the Underwriter as contemplated by this Agreement or the public
offering of the Shares contemplated by the Prospectus;
xix) (1) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for financial statements as to
which no opinion need be expressed) comply as to form in all material
respects with the Act, and (2) such counsel believes that (except for
financial statements, as aforesaid) the Registration Statement and the
prospectus included therein at the time the Registration Statement
became effective did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and that the
Prospectus, as amended or supplemented, if applicable (except for
financial statements, as aforesaid) does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
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<PAGE>
circumstances under which they were made, not misleading;
In giving such opinion with respect to the matters covered by clause
(xix) such counsel may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification except as
specified.
(e) The Underwriter shall have received on the Closing Date an
opinion, dated the Closing Date, of Morgan, Lewis & Bockius LLP, counsel
for the Underwriter, as to the matters referred to in clauses
___________________________. In giving such opinion with respect to the
matters covered by clause (xix) such counsel may state that their opinion
and belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are without
independent check or verification except as specified.
(f) The Underwriter shall have received a letter on and as of the
Closing Date, in form and substance satisfactory to the Underwriter, from
BDO Seidman, independent public accountants, with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Prospectus and substantially in the form and substance of
the letter delivered to the Underwriter by BDO Seidman on the date of this
Agreement.
(g) The Company shall not have failed at or prior to the Closing Date
to perform or comply with any of the agreements herein contained and
required to be performed or complied with by the Company at or prior to the
Closing Date.
The several obligations of the Underwriter to purchase Additional Shares
hereunder are subject to the delivery to the Underwriter on the Option Closing
Date of such documents as the Underwriter may reasonably request with respect to
the good standing of the Company, the due authorization and issuance of the
Additional Shares and other matters related to the issuance of the Additional
Shares.
9. EFFECTIVE DATE OF AGREEMENT AND TERMINATION. This Agreement shall
become effective upon the later of (i) execution of this Agreement and (ii) when
notification of the effectiveness of the Registration Statement has been
released by the Commission.
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<PAGE>
This Agreement may be terminated at any time prior to the Closing Date
by the Underwriter by written notice to the Company if any of the following has
occurred: (i) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, any adverse change or development
involving a prospective adverse change in the condition, financial or otherwise,
of the Company or the earnings, affairs, or business prospects of the Company,
whether or not arising in the ordinary course of business, which would, in the
Underwriter's judgment, make it impracticable to market the Shares on the terms
and in the manner contemplated in the Prospectus, (ii) any outbreak or
escalation of hostilities or other national or international calamity or crisis
or material change in economic conditions, if the effect of such outbreak,
escalation calamity, crisis or change on the financial markets of the United
States or elsewhere would, in the Underwriter's judgment, make it impracticable
to market the Shares on the terms and in the manner contemplated in the
Prospectus, (iii) the suspension or material limitation of trading in securities
on the New York Stock Exchange, the American Stock Exchange, the NASDAQ National
Market System or NASDAQ SmallCap Market System or limitation on prices for
securities on any such exchange, National Market System or SmallCap Market
System, (iv) the enactment, publication, decree or other promulgation of any
federal or state statute, regulation, rule or order of any court or other
governmental authority which in the Underwriter's opinion materially and
adversely affects, or will materially and adversely affect, the business or
operations of the Company, (v) the declaration of a banking moratorium by either
federal or California authorities or (vi) the taking of any action by any
federal, state or local government or agency in respect of its monetary or
fiscal affairs which in the Underwriter's opinion has a material adverse effect
on the financial markets in the United States.
10. MISCELLANEOUS. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (a) if to the Company, to Legacy
Software, Inc., 8521 Reseda Blvd., Northridge, California, 91324, attention:
Ariella Lehrer, Ph.D., with a copy to Brobeck, Phleger & Harrison LLP, 550 South
Hope Street, Los Angeles, California 90071, attention: V. Joseph Stubbs, Esq.
(b) if to the Underwriter, to JB Oxford & Company, Inc., 9665 Wilshire Blvd,
Third Floor, Beverly Hills, California, 90212, attention Robert Schultz, with a
copy to Morgan, Lewis & Bockius LLP, 801 South Grand Avenue, Suite 2200, Los
Angeles, California 90017, attention: John F. Hartigan, Esq., or in any case to
such other address as the parties to be notified may have requested in writing.
The respective indemnities, representations, warranties and other
statements of the Company, its officers and directors and of the Underwriter set
forth in or made pursuant to this
- 19 -
<PAGE>
Agreement shall remain operative and in full force and effect, and will survive
delivery of and payment for the Shares, regardless of (i) any investigation, or
statement as to the results thereof, made by or on behalf of the Underwriter or
by or on behalf of the Company, its officers or directors or any controlling
person of the Company, (ii) acceptance of the Shares and payment for them
hereunder and (iii) termination of this Agreement.
If this Agreement shall be terminated by the Underwriter because of
any failure or refusal on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company agrees to reimburse
the Underwriter for all out-of-pocket expenses (including the fees and
disbursements of counsel) reasonably incurred by them.
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriter, any controlling persons referred to herein and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from the Underwriter merely because of such purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of California.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the Underwriter.
Very truly yours,
LEGACY SOFTWARE, INC.
By______________________________________
Title:
ACCEPTED AND AGREED:
JB OXFORD & COMPANY
By_______________________________________
Title:
- 20 -
<PAGE>
ANNEX I
Required Stockholder Lock-ups
-----------------------------
Ariella J. Lehrer, Ph.D
Stanley Wojtysiak
William E. Sliney
Curtis A. Hessler
Arthur G. Hiller
Daniel D. Phillips
Ivan Rosenberg, Ph.D
E.B.C Trust Corporation
D&A Lehrer Children Trust
John Miller
Elizabeth Nolan, M.D.
Ilona Foyer
Craig Brannon
Heidi Chung
Gregory Ackerman
Barry Pogorel
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<PAGE>
ANNEX II
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LEGACY SOFTWARE, INC.
AND
JB OXFORD & COMPANY
___________________________
WARRANT AGREEMENT
___________________________
Dated May _____, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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<PAGE>
DATED MAY __, 1996
TABLE OF CONTENTS
SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . 3
SECTION 3. ISSUANCE OF WARRANTS. . . . . . . . . . . . . . . . . . . . . . 5
SECTION 4. REGISTRATION, TRANSFER AND EXCHANGE OF CERTIFICATES . . . . . . 5
SECTION 5. MUTILATED OR MISSING WARRANT CERTIFICATES . . . . . . . . . . . 6
SECTION 6. DURATION AND EXERCISE OF WARRANTS . . . . . . . . . . . . . . . 6
SECTION 7. NO FRACTIONAL SHARES. . . . . . . . . . . . . . . . . . . . . . 7
SECTION 8. PAYMENT OF TAXES. . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 9. WARRANT HOLDER RIGHTS; DIVIDENDS AND DISTRIBUTIONS. . . . . . . 7
SECTION 10. RESERVATION AND ISSUANCE OF WARRANT SHARES. . . . . . . . . . . 7
SECTION 11. OBTAINING OF GOVERNMENTAL APPROVALS AND STOCK EXCHANGE
LISTINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 12. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES
PURCHASABLE . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 13. NOTICES TO WARRANT HOLDERS. . . . . . . . . . . . . . . . . . 11
SECTION 14. RESTRICTIONS ON TRANSFER. . . . . . . . . . . . . . . . . . . 12
SECTION 15. COVENANTS OF ISSUER . . . . . . . . . . . . . . . . . . . . . 15
SECTION 16. AMENDMENTS AND WAIVERS. . . . . . . . . . . . . . . . . . . . 17
SECTION 17. SPECIFIC PERFORMANCE. . . . . . . . . . . . . . . . . . . . . 17
SECTION 18. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 19. BINDING EFFECT. . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 20. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 21. COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 22. CALIFORNIA LAW. . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 23. BENEFITS OF THIS WARRANT AGREEMENT. . . . . . . . . . . . . . 19
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SECTION 24. SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 25. NONWAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 26. ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . 19
EXHIBIT A - Form of Warrant Certificate
EXHIBIT B - Warrant Register
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<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT dated April __, 1996, between LEGACY SOFTWARE, INC.,
a Delaware corporation ("ISSUER"), and JB OXFORD & COMPANY, a Utah corporation
("JBO").
PREAMBLE
In connection with JBO acting as the underwriter for that certain
proposed public offering ("Offering") of 1,000,000 shares of Common Stock, par
value $.001 per share, of the Issuer, the parties hereto have agreed that the
Issuer will sell to JBO, for a nominal purchase price, a five-year warrant to
purchase up to 100,000 shares of Common Stock.
In order to induce JBO to act as the underwriter of the Offering,
Issuer has agreed to execute and deliver this Warrant Agreement and to issue to
JBO the Warrants hereinafter described.
Accordingly, in consideration of the premises, and for other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 11.
DEFINITIONS
The following terms used herein shall have the meanings indicated
below, unless the context otherwise requires:
"CLOSING DATE" shall mean the date of the closing of the Issuer's IPO
under the Registration Statement.
"COMMISSION" shall mean the Securities and Exchange Commission or any
entity succeeding to any or all of its functions.
"COMMON STOCK" shall mean the Common Stock, par value $0.001, of
Issuer.
"CONTRACTUAL OBLIGATION" shall mean, as to any Person, any provision
of any security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.
"CONVERTIBLE SECURITIES" shall mean any stock or other securities
convertible into or exchangeable for shares of Common Stock.
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<PAGE>
"CURRENT MARKET PRICE PER SHARE" on any date shall be deemed to be:
(i) the average of the daily closing prices for the 10 consecutive trading days
immediately preceding such date; PROVIDED, that if such closing prices are
determined with reference to NQB as set forth below, the Current Market Price
Per Share on any date shall be deemed to be the average of the daily closing bid
and asked prices for the 30 consecutive trading days immediately preceding such
date. The closing price for each day shall be as reported on the Composite
Transactions Tape, or if the Common Stock is not reported on the Composite
Transactions Tape, the last sale price regular way of the Common Stock on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading or, in case no such sale takes place on such day, the
average of the closing bid and asked prices regular way, in either case on such
securities exchange or, if the Common Stock is not listed or admitted to trading
on such an exchange, the closing sales price, or if there is no closing sales
price, the average of the closing bid and asked prices, in the over-the-counter
market as reported by the National Association of Securities Dealers' Automated
Quotation System ("NASDAQ"), or, if not so reported, as reported by the National
Quotation Bureau, Incorporated ("NQB"), or any successor thereof; or
(ii) if no such prices are furnished, the fair market value per Warrant or Non
Public Warrant Share, as the case may be, being purchased, as determined by an
independent investment banking firm mutually selected by the Issuer and the
holders of a majority of the Warrants and Non Public Warrant Shares, as the case
may be, being purchased.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, or any successor federal statute.
"EXERCISE PRICE" shall mean the exercise price of a Warrant, which
shall be [$9.00] per Warrant Share, subject to adjustment as provided in
Section 12.
"EXPIRATION DATE" shall mean _________, 2001, or, if such day is not a
Business Day, the next succeeding Business Day.
"GOVERNMENTAL AUTHORITY" shall mean any federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, or any court, or any arbitrator or arbitration board whose
rulings are judicially recognized as lawful and binding in each case whether of
the United States or foreign.
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<PAGE>
"IPO" shall mean the date upon which the Issuer first issues shares of
capital stock pursuant to an effective registration statement under the
Securities Act.
"NON-PUBLIC WARRANT SHARES" shall mean Warrant Shares that have not
been sold to the public and are required to bear the legend set forth in
Section 14(b).
"REGISTRATION STATEMENT" shall mean that certain Registration
Statement on Form S-1 (Registration No. 333-1054) filed with the Commission on
February 7, 1996, as amended, that went effective on _____, 1996, in connection
with the offering of 1,000,000 shares of Common Stock of the Issuer.
"REQUIREMENT OF LAW" shall mean as to any Person, the Certificate of
Incorporation and By-Laws or other organizational or governing documents of such
Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject.
"RIGHTS" shall mean any rights to subscribe for or to purchase, or any
options or warrants for the purchase of, shares of Common Stock or Convertible
Securities. The term "Rights" shall include, without limitation, the Warrants.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or
any successor statute, and the rules and regulations promulgated thereunder.
"UNDERWRITING AGREEMENT" shall mean that certain Underwriting
Agreement dated May ___, 1996 between JBO and the Issuer.
"WARRANT" shall mean a warrant issued pursuant to this Warrant
Agreement entitling the record holder thereof to purchase from Issuer at the
Warrant Office one share (subject to adjustment as provided in Section 12) of
Common Stock at the Exercise Price at any time before 5:00 P.M., local time, on
the Expiration Date.
"WARRANT CERTIFICATE" shall mean a certificate evidencing one or more
Warrants, substantially in the form of EXHIBIT A hereto, with such changes
therein as may be required to reflect any adjustments made pursuant to
Section 12.
"WARRANT OFFICE" shall mean the office or agency of Issuer at which
the Warrant Register shall be maintained and where the Warrants may be presented
for exercise, exchange, substitution and transfer, which office or agency will
be the office of Issuer and which office or agency may be changed by
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<PAGE>
Issuer pursuant to notice in writing to the Persons named in the Warrant
Register as the holders of the Warrants.
"WARRANT REGISTER" shall mean the register, substantially in the form
of EXHIBIT B hereto, maintained by Issuer at the Warrant Office.
"WARRANT SHARES" shall mean the shares of Common Stock issuable or
issued upon exercise of the Warrants, as the number of such shares may be
adjusted from time to time pursuant to Section 12.
SECTION 12.
REPRESENTATIONS AND WARRANTIES
Issuer hereby represents and warrants as follows:
(a) Issuer is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware, has the corporate
power and authority to execute and deliver this Warrant Agreement and the
Warrant Certificates, to issue the Warrants and to perform its obligations under
this Warrant Agreement and the Warrant Certificates.
(b) The execution, delivery and performance by Issuer of this Warrant
Agreement and the Warrant Certificates, the issuance of the Warrants and the
issuance of the Warrant Shares upon exercise of the Warrants have been duly
authorized by all necessary corporate action and do not and will not violate, or
result in a breach of, or constitute a default under, or require any consent
under, or result in the creation of a lien upon the assets of Issuer pursuant
to, any Requirement of Law or any Contractual Obligation binding upon Issuer.
(c) This Warrant Agreement has been duly executed and delivered by
Issuer and constitutes the legal, valid and binding obligation of Issuer,
enforceable in accordance with its terms, subject to the effect of any
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and to equitable principles relating to
the availability of equitable remedies. When the Warrants and Warrant
Certificates have been issued as contemplated hereby, each of the Warrants and
the Warrant Certificates will constitute the legal, valid and binding obligation
of Issuer, enforceable in accordance with its terms, subject to the effect of
any bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and to equitable principles relating to
the availability of equitable remedies.
(d) The Warrant Shares, when issued upon exercise of the Warrants in
accordance with the terms hereof, will be validly
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<PAGE>
issued, fully paid and nonassessable and free of preemptive rights.
(e) All of the assertions, facts and statements contained in the
Registration Statement including, but not limited to, those contained in the
"Capitalization" and "Description of Capital Stock" sections are true, accurate
and complete.
SECTION 13.
ISSUANCE OF WARRANTS
Issuer hereby agrees to issue and deliver to JBO on the Closing Date
Warrants evidencing rights to purchase 100,000 Warrant Shares, subject to
adjustment as provided in Section 12, at any time on or before 5:00 P.M., local
time, on the Expiration Date at a price per share equal to the Exercise Price.
On the Closing Date, simultaneously with the closing of the transaction
contemplated by the Underwriting Agreement, Issuer shall deliver to JBO one or
more Warrant Certificates evidencing the Warrants.
SECTION 14.
REGISTRATION, TRANSFER AND EXCHANGE OF CERTIFICATES
(a) Issuer shall maintain at the Warrant Office the Warrant Register
for registration of the Warrants and Warrant Certificates and transfers thereof.
On the Closing Date, Issuer shall register the outstanding Warrants and Warrant
Certificates in the name of JBO. Issuer may deem and treat the registered
holder(s) of the Warrant Certificates as the absolute owner(s) thereof and the
Warrants represented thereby (notwithstanding any notation of ownership or other
writing on the Warrant Certificates made by any Person) for the purpose of any
exercise thereof or any distribution to the holder(s) thereof, and for all other
purposes, and Issuer all not be affected by any notice to the contrary.
(b) Subject to Section 14, Issuer shall register the transfer of any
outstanding Warrants in the Warrant Register upon surrender of the Warrant
Certificate(s) evidencing such Warrants to Issuer at the Warrant Office,
accompanied (if so required by it) by a written instrument or instruments of
transfer in form satisfactory to it, duly executed by the registered holder or
holders thereof or by the duly appointed legal representative thereof. Upon any
such registration of transfer, new Warrant Certificate(s) evidencing such
transferred warrants shall be issued to the transferee(s) and the surrendered
Warrant Certificate(s) shall be canceled. If less than all the warrants
evidenced by Warrant Certificate(s) surrendered for transfer are to be
transferred, new Warrant Certificate(s) shall be issued to
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<PAGE>
the holder surrendering such Warrant Certificate(s) evidencing such remaining
number of Warrants.
(c) Warrant Certificates may be exchanged at the option of the
holder(s) thereof, when surrendered to Issuer at the Warrant Office, for another
Warrant Certificate of like tenor and representing in the aggregate a like
number of Warrants. Warrant Certificates surrendered for exchange shall be
canceled.
(d) No charge shall be made for any such transfer or exchange except
for any tax or other governmental charge imposed in connection therewith.
Except as provided in Sections 14(b) and (c), each Warrant Certificate issued
upon transfer or exchange shall bear the legend set forth in Section 14(b) if
the Warrant Certificate presented for transfer or exchange bore such legend.
SECTION 15.
MUTILATED OR MISSING WARRANT CERTIFICATES
If any Warrant Certificate shall be mutilated, lost, stolen or
destroyed, Issuer shall issue, in exchange and substitution for and upon
cancellation of the mutilated Warrant Certificate, or in lieu of and
substitution for the Warrant Certificate lost, stolen or destroyed, a new
Warrant Certificate of like tenor and representing an equivalent number of
Warrants, but only upon receipt of evidence satisfactory to Issuer of such loss,
theft or destruction of such Warrant Certificate and, if requested, indemnity
satisfactory to it. No service charge shall be made for any such substitution,
but all expenses and reasonable charges associated with procuring such indemnity
and all stamp, tax and other governmental duties that may be imposed in relation
thereto shall be borne by the holder such Warrant Certificate. Each Warrant
Certificate issued in any such substitution shall bear the legend set forth in
Section 14(b) if the Warrant Certificate for which such substitution was made
bore such legend.
SECTION 16.
DURATION AND EXERCISE OF WARRANTS
(a) The Warrants evidenced by a Warrant Certificate shall be
exercisable in whole or in part by the registered holder thereof on any Business
Day at any time on or after the first anniversary of the Closing Date and prior
to 5:00 P.M., local time, on the Expiration Date.
(b) Subject to the provisions of this Warrant Agreement, upon
presentation of the Warrant Certificate evidencing the Warrants to be exercised,
with the form of election to purchase on the reverse thereof duly completed and
signed by the registered holder or holders thereof, to the issuer
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<PAGE>
at the Warrant Office, and upon payment of the aggregate Exercise Price for the
number of Warrant Shares in respect of which such Warrants are being exercised
in lawful money of the United States of America, Issuer shall issue and cause to
be delivered to or upon the written order of the registered holder(s) of such
Warrants and in such name or names as such registered holder(s) may designate, a
certificate for the Warrant Share or Warrant Shares issued upon such exercise of
such Warrants. Any Person(s) so designated to be named therein shall be deemed
to have become holder(s) of record of such Warrant Share or Warrant Shares as of
the date of exercise of such Warrants.
(c) If less than all of the Warrants evidenced by a Warrant
Certificate are exercised at any time, a new Warrant Certificate or Certificates
shall be issued for the remaining number of Warrants evidenced by such Warrant
Certificate. Each new Warrant Certificate so issued shall bear the legend set
forth in Section 14(b) if the Warrant Certificate presented in connection with
partial exercise thereof bore such legend. All Warrant Certificates surrendered
upon exercise of warrants shall be canceled.
SECTION 17.
NO FRACTIONAL SHARES
Issuer shall not be required to issue fractional shares of Common
Stock upon exercise of the Warrants but may pay for any such fraction of a share
an amount in cash equal to the Current Market Price Per Share of such share
multiplied by such fraction.
SECTION 18.
PAYMENT OF TAXES
Issuer will pay all taxes (other than any applicable income or similar
taxes payable by the holders of the Warrants or Warrant Shares) attributable to
the initial issuance of Warrant Shares upon the exercise of the Warrants;
PROVIDED that Issuer shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issue of any Warrant Certificate or
any Certificate for Warrant Shares in a name other than that of the registered
holder of a Warrant Certificate surrendered upon the exercise of a Warrant, and
Issuer shall not be required to issue or deliver such certificates unless or
until the person or persons requesting the issuance thereof shall have paid to
Issuer the amount of such tax or shall have established to the satisfaction of
Issuer that such tax has been paid.
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<PAGE>
SECTION 19.
WARRANT HOLDER RIGHTS; DIVIDENDS AND DISTRIBUTIONS
The Warrants shall not (prior to exercise hereof) confer upon the
holders thereof the right to vote as stockholders of Issuer or any other right
as stockholders of Issuer. In the event Issuer shall make a distribution or pay
any dividend to all holders of Common Stock in cash, evidences of its
indebtedness or assets, the Warrants shall not confer upon the holders thereof
the right to any such distribution or dividend.
SECTION 20.
RESERVATION AND ISSUANCE OF WARRANT SHARES
(a) Issuer will at all times have authorized, and reserve and keep
available, free from preemptive rights, for the purpose of enabling it to
satisfy any obligation to issue Warrant shares upon the exercise of the
Warrants, the number of shares of Common Stock deliverable upon exercise of all
outstanding Warrants.
(b) Before taking any action which would cause an adjustment pursuant
to Section 12 hereof reducing the Exercise Price below the then par value (if
any) of the Warrant Shares issuable upon exercise of the Warrants, Issuer will
take any corporate action which may be necessary in order that Issuer may
validly and legally issue fully paid and nonassessable Warrant Shares at the
Exercise Price as so adjusted.
(c) Issuer covenants that all Warrant Shares will, upon issuance in
accordance with the terms of this Warrant Agreement, be fully paid and
nonassessable and free from all taxes with respect to the issuance thereof and
from all liens, charges and security interests created (whether by affirmative
action or inaction) by Issuer.
SECTION 21.
OBTAINING OF GOVERNMENTAL APPROVALS
AND STOCK EXCHANGE LISTINGS
Issuer will, at its own expense, (a) obtain and keep effective any and
all permits, consents and approvals of Governmental Authorities which may from
time to time be required of Issuer in order to satisfy its obligations
hereunder, and (b) take all action which may be necessary so that the Warrant
Shares, immediately upon their issuance upon the exercise of Warrants, will be
listed on each securities exchange, if any, on which the Common Stock is then
listed.
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<PAGE>
SECTION 22.
ADJUSTMENT OF EXERCISE PRICE AND
NUMBER OF WARRANT SHARES PURCHASABLE
Prior to the Expiration Date, the Exercise Price and the number of
Warrant Shares purchasable upon the exercise of each Warrant are subject to
adjustment from time to time upon the occurrence of any of the events enumerated
in this Section 12.
(a) In the event that Issuer shall at any time after the date of this
Agreement (i) declare a dividend on Common Stock in shares or other securities
of Issuer (other than debt securities covered by Section 9), (ii) split or
subdivide the outstanding Common Stock, (iii) combine the outstanding Common
Stock into a smaller number of shares, or (iv) issue by reclassification of its
Common Stock any shares or other securities of Issuer (other than debt
securities covered by Section 9), then, in each such event, the number of
Warrant Shares purchasable upon exercise of each Warrant immediately prior
thereto shall be adjusted so that the holder shall be entitled to receive the
kind and number of such shares or other securities of Issuer which the holder
would have owned or have been entitled to receive after the happening of any of
the events described above had such Warrant been exercised immediately prior to
the happening of such event (or any record date with respect thereto). Such
adjustment shall be made whenever any of the events listed above shall occur.
An adjustment made pursuant to this paragraph (a) shall become effective
immediately after the effective date of the event retroactive to the record
date, if any, for the event.
(b) No adjustment in the number of Warrant Shares shall be required
unless such adjustment would require an increase or decrease of at least 1% in
the aggregate number of Warrant Shares purchasable upon exercise of all
Warrants; PROVIDED that any adjustments which by reason of this Section 12(b)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment; PROVIDED, however, that notwithstanding the
foregoing, all such adjustments shall be made no later than three years from the
date of the first event that would have required an adjustment but for this
paragraph. All calculations under this Section 12 shall be made to the nearest
cent or to the nearest hundredth of a share, as the case may be.
(c) If at any time, as a result of an adjustment made pursuant to
this Section 12, the holder of any Warrant thereafter exercised shall become
entitled to receive any shares of Issuer other than shares of Common Stock,
thereafter the number of such other shares so receivable upon exercise of any
Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with
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<PAGE>
respect to the Warrant Shares contained in this Section 12, and the
provisions of this Agreement with respect to the Warrant Shares shall apply
on like terms to such other shares.
(d) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, the Exercise Price per Warrant Share
payable upon exercise of each Warrant shall be adjusted by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, the numerator
of which shall be the number of Warrant Shares purchasable upon the exercise of
each Warrant immediately prior to such adjustment, and the denominator of which
shall be the number of Warrant Shares purchasable immediately after such
adjustment.
(e) In the event of any capital reorganization of Issuer, or of any
reclassification of the Common Stock (other than a reclassification referred to
in paragraph (a) (iv) above), or in case of the consolidation of Issuer with or
the merger of Issuer with or into any other corporation or of the sale of the
properties and assets of Issuer as, or substantially as, an entirety to any
other corporation, each Warrant shall, after such capital reorganization,
reclassification of Common Stock, consolidation, merger or sale, and in lieu of
being exercisable for Warrant Shares, be exercisable, upon the terms and
conditions specified in this Warrant Agreement, for the number of shares of
stock or other securities or assets to which a holder of the number of Warrant
Shares purchasable upon exercise of such Warrant immediately prior to such
capital organization, reclassification of Common Stock, consolidation, merger or
sale would have been entitled upon such capital organization, reclassification
of Common Stock, consolidation, merger or sale; and in any such case, if
necessary, the provisions set forth in this Section 12 with respect to the
rights thereafter of the holders of the Warrants shall be appropriately adjusted
so as to be applicable, as nearly as they may reasonably be, to any shares of
stock or other securities or assets thereafter deliverable on the exercise of
the Warrants. Issuer shall not effect any such consolidation, merger or sale,
unless prior to or simultaneously with the consummation thereof, the successor
corporation (if other than Issuer) resulting from such consolidation or merger
or the corporation purchasing such assets or the appropriate corporation or
entity shall assume, by written instrument, the obligation to deliver to holder
of each Warrant the shares of stock, securities or assets to which, in
accordance with the foregoing provisions, such holder may be entitled and all
other obligations of Issuer under this Warrant Agreement. The provisions of
this paragraph (e) shall apply to successive reorganizations, reclassifications,
consolidations, mergers and sales.
(f) Irrespective of any adjustments in the Exercise Price or the
number or kind of shares purchasable upon exercise
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<PAGE>
of the Warrants, Warrant Certificates theretofore or thereafter issued may
continue to express the same Exercise Price per share and number and kind of
shares as are stated on the Warrant Certificates initially issuable pursuant to
this Agreement.
(g) If any question shall at any time arise with respect to the
calculation of the amount of the adjusted Exercise Price or number of Warrant
Shares issuable upon exercise, such question shall be determined by the
independent auditors of Issuer and such determination shall be binding upon
Issuer and the holders of the Warrants and Warrant Shares.
(h) In case any event that affects all shareholders in the same class
of shares as the Warrant Shares shall occur as to which the other provisions of
this Section 12 are not strictly applicable or the failure to make any
adjustment would result in an unfair enlargement or dilution of the purchase
rights represented by the Warrants in accordance with the essential intent and
principles hereof, then, in each such case, the independent auditors of Issuer
shall give its opinion as to the adjustment, if any, on a basis consistent with
the essential intent and principles established in this Section 12, necessary to
preserve, without enlargement or dilution, the purchase rights presented by the
Warrants. Upon receipt of such opinion, Issuer shall promptly mail a copy
thereof to the registered holders of the Warrants and shall make the adjustment
described therein.
SECTION 23.
NOTICES TO WARRANT HOLDERS
Upon any adjustment of the Exercise Price or number of Warrant Shares
issuable upon exercise pursuant to Section 12, Issuer shall promptly, but in any
event within 10 days thereafter, cause to be given to each of the registered
holders of the Warrants, at its address appearing on the Warrant Register by
first-class mail, postage prepaid, a certificate signed by its President or
Chief Financial Officer setting forth the Exercise Price as so adjusted and/or
number of Warrant Shares issuable upon the exercise of each Warrant as so
adjusted and describing in reasonable detail the facts accounting for such
adjustment and the method of calculation used. Where appropriate, such
certificate may be given in advance and included as a part of the notice
required to be mailed under the other provisions of this Section 13.
In the event:
(a) Issuer shall authorize the grant of Rights or the offer or
issuance of Common Stock or Convertible Securities to holders of
Common Stock; or
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<PAGE>
(b) Issuer shall declare a dividend or other distribution to all
holders of Common Stock payable in evidences of its indebtedness,
securities, cash or assets; or
(c) of any consolidation or merger to which Issuer is a party and for
which approval of any stockholders of Issuer is required, or of
the conveyance or transfer of the properties and assets of Issuer
substantially as an entirety, or of any capital reorganization or
reclassification or change of the Common Stock (other than a
change in par value, or from par value to no par value, or from
no par value to par value, or as a result of a subdivision or
combination); or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of Issuer; or
(e) Issuer shall authorize any other action which would require an
adjustment of the Exercise Price or number of Warrant Shares
issuable upon exercise pursuant to Section 12;
then Issuer shall cause to be given to each of the registered holders of the
Warrants at its address appearing on the Warrant Register, at least 12 business
days prior to the applicable record date hereinafter specified (or as
expeditiously as possible after the occurrence of any involuntary dissolution,
liquidation or winding up referred to in clause (d) above), by first-class mail,
postage prepaid, a written notice stating (i) the date as of which the holders
of record of Common Stock to be entitled to receive any such rights, warrants or
distribution are to be determined, or (ii) the date on which any such
consolidation, merger, conveyance, transfer, dissolution, liquidation or winding
up is expected to become effective (or has become effective, in the case of any
involuntary dissolution, liquidation or winding up), and the date as of which it
is expected that holders of record of Common Stock shall be entitled to exchange
their shares for securities or other property, if any, deliverable upon such
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up. The failure to give the notice required by this
Section 13 or any defect therein shall not affect the legality or validity of
any distribution, right, warrant, consolidation, merger, conveyance, transfer,
dissolution, liquidation or winding up, or vote upon any action.
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<PAGE>
SECTION 24.
RESTRICTIONS ON TRANSFER
(a) JBO represents that it is acquiring the Warrants (and upon any
exercise of the Warrants, each holder represents that it will be acquiring the
Warrant Shares) for its own account, for investment and not with a view to any
distribution public offering within the meaning of the Securities Act but
subject to any requirement of law that the disposition of its property shall at
all times be within its control. JBO acknowledges that the Warrants and the Non
Public Warrant Shares issuable upon exercise thereof have not been registered
under the Securities Act and agrees that it will not sell or otherwise transfer
any of its Warrants or Non Public Warrant Shares except upon the terms and
conditions specified herein.
(b) (i) JBO agrees, and each subsequent transferee described in
paragraph (ii) below shall agree, that it will not transfer any Warrants or Non
Public Warrant Shares except:
(A) pursuant to Rule 144 under the Securities Act;
(B) pursuant to Rule 144A under the Securities Act;
(C) pursuant to Regulation S under the Securities Act;
(D) pursuant to any other exemption from, or otherwise in a
transaction not subject to, the registration
requirements of the Securities Act (as confirmed in an
opinion of counsel to the transferor, which counsel
shall be reasonably acceptable to Issuer, to the effect
that the proposed transfer may be effected without
registration under the Securities Act);
(E) a transfer by JBO to any Affiliate or wholly owned
subsidiary of JBO (including any partnership or limited
partnership of which JBO or any Affiliate thereof is a
general partner); or
(F) pursuant to an effective registration statement under
the Securities Act.
(ii) Each Warrant Certificate and each certificate for the
Warrant Shares issued to JBO or to a subsequent
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<PAGE>
transferee pursuant to Section 14(b) (i) (B), (D) (unless the legal opinion
delivered in connection therewith is to the effect that the first paragraph of
such legend is not required in order to ensure compliance with the Securities
Act) or (E) shall include a legend in substantially the following form:
THE WARRANTS AND UNDERLYING SHARES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION
FROM, OR OTHERWISE IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF SUCH ACT.
IN ADDITION, THE WARRANTS AND UNDERLYING SHARES MAY BE TRANSFERRED
ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THE WARRANT
AGREEMENT, DATED _______________, BETWEEN ISSUER AND THE INITIAL
HOLDER OF THE WARRANTS NAMED THEREIN, A COMPLETE AND CORRECT COPY OF
WHICH IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF ISSUER
AND WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND
WITHOUT CHARGE.
(c) The restrictions set forth in Section 14(b) shall terminate and
cease to be effective with respect to any Warrants or Warrant Shares
registered under the Securities Act or transferred pursuant to clause (A),
(C) or (F) of Section 14(b)(i). Whenever such restrictions shall so terminate
the holder of such Warrants and/or Warrant Shares shall be entitled to
receive from Issuer, without expense (other than transfer taxes, if any),
Warrant Certificates or certificates for such Warrant Shares not bearing the
legend set forth in Section 14(b) at which time Issuer will rescind any
transfer restrictions relating thereto.
(d) With a view to making available to JBO and subsequent holders of
the Non Public Warrant Shares the benefits of certain rules and regulations of
the Commission (including, without limitation, Rule 144 and Rule 144A under the
Securities Act) which may permit the sale of Non Public Warrant Shares without
registration, Issuer agrees to take any and all such actions as may be required
of it by applicable law, rule or regulation to make available to JBO and such
subsequent holders such benefits, including without limitation, to:
(i) make and keep public information available as those terms
are understood and defined in Rule 144 under the Securities Act or any successor
provision thereto;
(ii) so long as Rule 144A is available to JBO and, such holders,
make and keep available the information specified in Rule 144A(d)(4) under the
Securities Act or any successor provision thereto;
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<PAGE>
(iii) file with the Commission in a timely manner all reports
and other documents required of Issuer under the Securities Act and the Exchange
Act; and
(iv) so long as JBO or any other holder owns any Warrants or Non
Public Warrant Shares, furnish to each such holder forthwith upon request a
written statement by Issuer as to its compliance with the information or
reporting requirements of Rule 144 and Rule 144A or any successor provision
thereto, and of the Securities Act and the Exchange Act, a copy of the most
recent annual or quarterly report of Issuer filed with the Commission, and such
other reports and documents of Issuer and other information in the possession of
or reasonably obtainable by Issuer as such holder may reasonably request in
availing itself of any rule or regulation of the Commission allowing such holder
to sell any such securities without registration;
PROVIDED, HOWEVER, that Issuer shall have no obligation under this Section 14(d)
until (i) in the case of Rule 144, after such time as a public market exists for
the Common Stock, and (ii) in the case of Rule 144A, after such time as JBO or
such holders desire to avail themselves of the benefits of Rule 144A and such
Rule is available to JBO or such holders.
(e) Notwithstanding any of the foregoing, neither the Warrants nor
the Warrant Shares may be sold, transferred, assigned, pledged or hypothecated
by JBO for a period of one year following the Closing Date; PROVIDED HOWEVER,
that such restriction shall not apply to transfers permitted by Section 44 (a)
of Article III of the Rules of Fair Practice of the National Association of
Securities Dealers, Inc.
SECTION 25.
COVENANTS OF ISSUER
(a) Issuer shall furnish to JBO and upon request to each holder of
Warrants and Non Public Warrant Shares as soon as available but in any event
within one hundred five (105) days after the end of each Fiscal Year (commencing
with the Fiscal Year ending December 31, 1996) consolidated and consolidating
balance sheets, income statements and cash flow statements of Issuer and its
Subsidiaries, if any, showing its financial condition as at the end of such
Fiscal Year and the results of its operations for such Fiscal Year, all the
foregoing financial statements (other than the consolidating schedules) to be
audited by independent public accountants, and prepared in accordance with GAAP.
(b) Issuer shall furnish to JBO and upon request to each holder of
Warrants and Non Public Warrant Shares as soon as available but in any event
within thirty (30) days after the end of each month, commencing with January
1996 (and 45 days after
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<PAGE>
the end of the first three (3) Fiscal Quarters in each Fiscal Year and 60 days
after the end of each Fiscal Year), the unaudited consolidated (and at the end
of each of the first three (3) Fiscal Quarters in each Fiscal Year,
consolidating) balance sheets, income statements and cash flow statements (along
with comparisons to budget and, except with respect to months during Issuer's
first Fiscal Year, comparisons to the corresponding month in the previous Fiscal
Year) showing the financial condition as at the end of such month, and the
results of operations for such month, and for the then elapsed portion of the
Fiscal Year, for Issuer and its Subsidiaries, in each case prepared in
accordance with GAAP, subject to normal year-end adjustments; PROVIDED, HOWEVER,
that after an IPO, the Issuer shall only be required to provide such information
on a quarterly basis 45 days after the end of the first three Fiscal Quarters in
each Fiscal Year and 105 days after the end of each Fiscal Year.
(c) Issuer shall promptly (but in any event within 10 days) furnish
to JBO and each other holder of Warrants and Non Public Warrant Shares copies of
(i) all reports, if any, to the holders of any equity interests in Issuer, (ii)
all documents, if any, filed by Issuer or any of its Subsidiaries with the
Commission under the Securities Act or the Exchange Act (other than on Form S-8
or 8-A or similar forms), and (iii) all notices or statements sent or received
by Issuer or any of its Subsidiaries to or from any stockholders of Issuer.
(d) Issuer shall not, and shall not permit any Subsidiary to,
directly or indirectly, purchase, acquire or lease any material property from,
or acquire any Indebtedness of, or sell, transfer or lease any material property
to, or issue any Indebtedness to, any Affiliates except on terms and conditions
substantially as favorable as would be obtained on an arm's-length basis.
Issuer shall not engage in any business other than the businesses in which
Issuer is engaged on the date hereof and reasonably related businesses.
(e) Issuer shall give JBO reasonable advance notice of all meetings
of the board of directors of Issuer, shall allow one representative of the
holders of Warrants and/or Non Public Warrant Shares to attend and observe such
meetings, and shall, if such meeting is held more than 25 miles from the
executive office of the Issuer in Los Angeles County, pay the reasonable out-of-
pocket costs and expenses of one such representative in connection therewith.
(f) Neither Issuer nor any Subsidiary shall liquidate, dissolve,
recapitalize or consolidate with, merge with, or otherwise acquire all or any
portion of the assets or properties of any other Person (unless such acquisition
is of a business permitted by the last sentence of paragraph (d) above), except
that any Subsidiary of Issuer may merge with and into Issuer or
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<PAGE>
with and into another Subsidiary of Issuer, with Issuer being the surviving
corporation, so long as the holders of Warrants and/or Warrant Shares receive
prior written notice thereof.
(g) Issuer shall not amend its Articles of Incorporation or By-Laws
so as to adversely affect the powers or special rights of the holders of Warrant
Shares, except with the consent of the holders of a majority of the Warrants
and/or Non Public Warrant Shares.
(h) If any Warrants held by JBO are about to expire unexercised and,
in the opinion of counsel for JBO, JBO is not then permitted by applicable law
to hold shares of voting or non-voting common stock as contemplated herein, then
Issuer and JBO shall in good faith negotiate a replacement warrant which expires
at the close of business on 90 days after the Expiration Date, and grants JBO
the right to obtain, at the Exercise Price, the number of shares of Common Stock
which JBO would have been able to obtain upon exercise of the Warrants
immediately prior to their expiration if JBO had not been prohibited by
applicable law from then exercising the Warrants. Issuer agrees to take such
additional action as is necessary to effectuate the foregoing.
(i) So long as any of the Warrants shall remain outstanding, Issuer
shall not in any manner grant (whether directly or by assumption in a merger or
otherwise) any rights or warrants to subscribe for or to purchase, or any
options for the purchase of, Common Stock or any stock or securities convertible
into or exchangeable for Common Stock containing provisions designed to protect
against dilution thereof which at such time are or thereafter will become more
advantageous to the holders thereof than the provisions contained in Section 12
protecting the holders of Warrants from dilution thereof.
SECTION 26.
AMENDMENTS AND WAIVERS
Any provision of this Warrant Agreement may be amended, supplemented,
waived, discharged or terminated by a written instrument signed by Issuer and
the holders of a majority of the outstanding Warrants (or in the case of
Sections 14 through 25, the holders of a majority of the outstanding Warrants
and Non Public Warrant Shares); PROVIDED that the Exercise Price may not be
increased, the number of Warrant Shares issuable upon exercise of the Warrants
may not be reduced (except pursuant to Section 12(b)(ii) hereof), the Expiration
Date may not be changed to an earlier date and this Section may not be amended
except with the consent of the holders of all outstanding Warrants and/or Non
Public Warrant Shares, as the case may be.
- 17 -
<PAGE>
SECTION 27.
SPECIFIC PERFORMANCE
The holders of the Warrants and/or Non Public Warrant Shares shall
have the right to specific performance by Issuer of the provisions of this
Warrant Agreement. Issuer hereby irrevocably waives, to the extent that it may
do so under applicable law, any defense based on the adequacy of a remedy at law
which may be asserted as a bar to the remedy of specific performance in any
action brought against Issuer for specific performance of this Warrant Agreement
by the holders of the Warrants and/or Non Public Warrant Shares.
SECTION 28.
NOTICES
(a) Any notice or demand to be given or made by the holders to or on
Issuer pursuant to this Warrant Agreement shall be sufficiently given or made if
sent by mail, first-class or registered, postage prepaid, addressed to Issuer at
the Warrant Office.
(b) Any notice to be given by Issuer to the holders of the Warrants
or the Warrant Shares shall be sufficiently given if sent by first-class mail,
postage prepaid, addressed to such holder as such holder's name and address
shall appear on the Warrant Register or the Common Stock registry of Issuer, as
the case may be.
SECTION 29.
BINDING EFFECT
This Warrant Agreement shall be binding upon and inure to the sole and
exclusive benefit of Issuer, its successors and assigns, JBO and the registered
holders from time to time of the Warrants and the Warrant Shares.
SECTION 30.
TERMINATION
This Warrant Agreement shall terminate and be of no further force and
effect at the close of business on the Expiration Date or the date on which none
of the Warrants shall be outstanding (whether by reason of the exercise thereof
or the redemption thereof by Issuer), except that the provisions of Sections 15
and 16(h) shall continue in full force and effect after such termination.
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<PAGE>
SECTION 31.
COUNTERPARTS
This Warrant Agreement may be executed in one or more separate
counterparts and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.
SECTION 32.
CALIFORNIA LAW
THIS WARRANT AGREEMENT AND EACH WARRANT CERTIFICATE SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, AS
APPLIED TO AGREEMENTS MADE AND PERFORMED WITHIN THE STATE OF CALIFORNIA, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW. ISSUER HEREBY IRREVOCABLY SUBMITS TO
THE JURISDICTION OF ANY CALIFORNIA STATE COURT SITTING IN THE COUNTY OF LOS
ANGELES OR ANY FEDERAL COURT SITTING IN THE COUNTY OF LOS ANGELES IN RESPECT OF
ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE WARRANT
AGREEMENT OR THE WARRANT CERTIFICATES, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN
RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE
AFORESAID COURTS. ISSUER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY
EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY OBJECTION THAT IT
MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PURCHASER TO SERVE PROCESS IN ANY
MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED
AGAINST ISSUER IN ANY OTHER JURISDICTION.
SECTION 33.
BENEFITS OF THIS WARRANT AGREEMENT
Nothing in this Warrant Agreement shall be construed to give to any
Person other than Issuer and the registered holders of the Warrants and the
Warrant Shares any legal or equitable right, remedy or claim under this Warrant
Agreement.
SECTION 34.
SEVERABILITY
Any provision of this Warrant Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such provision and such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of this Warrant
Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction.
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<PAGE>
SECTION 35.
NONWAIVER
No course of dealing or any delay or failure to exercise any right,
power or remedy hereunder on the part of a holder of a Warrant shall operate as
a waiver of or otherwise prejudice such holder's rights, powers or remedies
hereunder.
SECTION 36.
ENTIRE AGREEMENT
This Warrant Agreement and the documents referred to herein contain
the entire agreement of the parties and supersede any and all prior agreements
among the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be duly executed and delivered by their proper and duly authorized
officers, as of the date and year first above written.
LEGACY SOFTWARE, INC.
By:_________________________________
Name:
Title:
JB OXFORD & COMPANY
By:_________________________________
Name:
Title:
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<PAGE>
EXHIBIT A TO WARRANT AGREEMENT
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS AND UNDERLYING SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION FROM OR
OTHERWISE IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS
OF SUCH ACT. IN ADDITION, THE WARRANTS AND UNDERLYING SHARES MAY BE
TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THE
WARRANT AGREEMENT DATED __________, 1996, BETWEEN ISSUER AND THE INITIAL
HOLDER OF THE WARRANTS THEREIN NAMED, A COMPLETE AND CORRECT COPY OF
WHICH IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF ISSUER AND
WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT
CHARGE.
WARRANT CERTIFICATE
Evidencing Warrants
to Purchase Common Stock
LEGACY SOFTWARE, INC.
No. W-2 100,000 Warrants
This Warrant Certificate certifies that JB OXFORD & COMPANY ("JBO") or
registered assigns, is the registered holder of Warrants (the "WARRANTS") to
purchase Common Stock, par value $.001 ("COMMON STOCK"), of Legacy Software,
Inc., a California corporation ("ISSUER"). Each Warrant entitles the holder,
but only subject to the conditions set forth herein and in the Warrant Agreement
referred to below, to purchase from Issuer at any time after the first
registered public offering of Common Stock and prior to 5:00 P.M., local time,
on __________, or, if such day is not a Business Day, the next succeeding
Business Day (the "EXPIRATION DATE"), one fully paid and nonassessable share of
the Common Stock of Issuer (collectively, the "WARRANT SHARES") at a price (the
"EXERCISE PRICE") of $9.00 per Warrant Share payable in lawful money of the
United States of America, upon surrender of this Warrant Certificate, execution
of the annexed Form of Election to Purchase and payment of the Exercise Price at
the office of Issuer at 8521 Reseda Boulevard, Northridge, California 91324, or
such other address as Issuer may specify in writing to the registered holder of
the Warrants evidenced hereby (the "WARRANT OFFICE"). The Exercise Price and
number of Warrant Shares purchasable upon exercise of the Warrants are subject
to adjustment upon the occurrence of certain events as set forth in the Warrant
Agreement referred to below.
EXHIBIT A TO WARRANT AGREEMENT - PAGE 1
<PAGE>
Issuer may deem and treat the registered holder(s) of the Warrants
evidenced hereby as the absolute owner(s) thereof (notwithstanding any notation
of ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof and of any distribution to the holder(s) hereof, and for all
other purposes, and Issuer shall not be affected by any notice to the contrary.
Warrant Certificates, when surrendered at the Warrant Office by the
registered holder hereof in person or by a legal representative duly authorized
in writing, may be exchanged, in the manner and subject to the limitations
provided in the Warrant Agreement, but without payment of any service charge,
for another Warrant Certificate or Warrant Certificates of like tenor evidencing
in the aggregate a like number of Warrants.
Upon due presentment for registration of transfer of this Warrant
Certificate at the Warrant Office, a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued in exchange for this Warrant Certificate to the
transferee(s) and, if less than all the Warrants evidenced hereby are to be
transferred, to the registered holder hereof, subject to the limitations
provided in the Warrant Agreement, without charge except for any tax or other
governmental charge imposed in connection therewith.
This Warrant Certificate is one of the Warrant Certificates referred
to in the Warrant Agreement dated ________________, between Issuer and JBO (the
"WARRANT AGREEMENT"). Said Warrant Agreement is hereby incorporated by
reference in and made a part of this Warrant Certificate and is hereby referred
to for a description of the rights, limitation of rights, obligations, duties
and immunities thereunder of Issuer and the holders.
IN WITNESS WHEREOF, Issuer has caused this Warrant Certificate to be
signed by its duly authorized officers and has caused its corporate seal to be
affixed hereunto.
LEGACY SOFTWARE, INC.
By:_________________________________
Name:
Title:
(CORPORATE SEAL)
ATTEST:
________________________
Secretary
EXHIBIT A TO WARRANT AGREEMENT - PAGE 2
<PAGE>
ANNEX TO WARRANT CERTIFICATE
[FORM OF ELECTION TO PURCHASE]
(To be executed upon exercise of warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase the number and type of
Warrant Shares as stated below and herewith tenders payment for such Warrant
Shares to the order of Issuer in the amount of $__________ in accordance with
the terms hereof. The undersigned requests that a certificate for such Warrant
Shares be registered in the name of _____________ whose address is
________________________ and that such certificate be delivered to
_________________________ whose address is ________________________. If said
number of Warrant Shares is less than all of the Warrant Shares purchasable
hereunder, the undersigned requests that a new Warrant Certificate representing
the remaining balance of the Warrant Shares be registered in the name of
______________________ whose address is __________________________ and that such
Warrant Certificate be delivered to whose address is___________________________.
Number of Shares of
Common Stock: _______
Signature:___________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate)
Date: ___________________________
<PAGE>
EXHIBIT B TO WARRANT AGREEMENT
LEGACY SOFTWARE, INC.
WARRANT REGISTER
Names and
Original Number Addresses
Warrant of Warrants and of Warrant
Certificate No. Warrant Shares Holders
- --------------- --------------- ----------
W-1 200,000 E.B.C. Trust Corporation
10, rue Princesse
Florestine
MC98000 Monaco
ATTENTION: MR. RICHARD MACLELLAN
---------------------------------
W-2 100,000 JB Oxford & Company
9665 Wilshire Boulevard
Suite 300
Beverly Hills, California 90212
ATTENTION: MR. ROBERT SCHULTZ
------------------------------
<PAGE>
Exhibit 5.1
May 6, 1996
Legacy Software, Inc.
8521 Reseda Boulevard
Northridge, California 91324
Re: Registration Statement on Form S-1
File No. 333-1054
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File
No. 333-1054) originally filed by Legacy Software, Inc. (the "Company") with the
Securities and Exchange Commission (the "Commission") on February 7, 1996, as
amended by Amendment No. 1 thereto filed on March 26, 1996, Amendment No. 2
thereto filed on April 23, 1996 and Amendment No. 3 thereto filed on May __,
1996 (the "Registration Statement"), in connection with the registration under
the Securities Act of 1933, as amended, of 1,150,000 shares (the "Shares") of
the Company's common stock, par value $.001 per share (the "Common Stock"). The
Shares include an over-allotment option granted to the Underwriter by the
Company to purchase an aggregate of 150,000 additional shares of the Company's
Common Stock and are to be sold to the Underwriter as described in the
Registration Statement for resale to the public. As your counsel in connection
with this transaction, we have examined the proceedings taken and are familiar
with the proceedings proposed to be taken by you in connection with the sale and
issuance of the Shares.
It is our opinion that, upon conclusion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, the Shares, when issued and sold in the
manner described in the Registration Statement, will be legally and validly
issued, fully paid and nonassessable.
<PAGE>
May 6, 1996
Legacy Software, Inc. Page 2
We consent to the reference to our firm under the caption "Legal
Matters" in the Registration Statement and to the filing of this opinion as an
exhibit to the Registration Statement.
Very truly yours,
/s/ Brobeck, Phleger & Harrison LLP
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
EXHIBIT 10.34
PROMISSORY NOTE
$14,000.00 April 12, 1996
FOR VALUE RECEIVED, the undersigned (the "BORROWER") hereby promises to
pay to the order of Legacy Software, Inc. (the "LENDER"), the principal sum
of Fourteen Thousand Dollars ($14,000.00) plus interest accrued thereon as
provided hereunder. Principal and accrued interest shall be due and payable
in arrears monthly. Interest shall accrue at the simple rate of ten percent
(10%) per annum on the outstanding principal amount hereof from the date
hereof until paid in full.
Principal and accrued interest on this Promissory Note shall be due and
payable in twenty-four (24) monthly installments beginning on May 1, 1996,
and continuing on the 1st day of each month thereafter until paid in full.
All payments shall be made in lawful money of the United States of America at
the principal offices of the Lender or at such other place as the Lender may
from time to time designate in writing to the Borrower. Payment shall be
credited first to the accrued interest then due and payable and the remainder
applied to principal. Prepayment of principal, together with accrued
interest, may be made at any time without penalty.
This Note shall be governed by and construed in accordance with the laws
of the State of California as applied to agreements among California
residents entered into and to be performed entirely within California.
The entire unpaid principal balance of this Note and any accrued but
unpaid interest may, at the option of the Lender, become immediately due and
payable upon (i) the failure of the Borrower to make any installment payment
hereunder when and as the same shall become due and payable, (ii) the
commission of any act of bankruptcy by the Borrower, (iii) the execution by
the Borrower of a general assignment for the benefit of creditors, (iv) the
filing by or against the Borrower of any petition in bankruptcy or any
petition for relief under the provisions of the federal bankruptcy act or any
other state or federal law for the relief of debtors and the continuation of
such petition without dismissal for a period of sixty (60) days or more, (v)
the appointment of a receiver or trustee to take possession of any property
or assets of the Borrower, or (vi) the attachment of or execution against any
property or assets of the Borrower.
If any action at law or in equity, including an action for declaratory
relief, is brought to enforce or interpret this Promissory Note, the
prevailing party shall be entitled to reasonable attorneys' fees, which may
be set by the court or arbitrator in the same action or in a separate action
brought for that purpose. Further, the prevailing party shall be entitled to
additional awards of attorneys' fees for services reasonably rendered and
costs incurred in enforcing such judgment or award and/or in collection any
monies awarded therein.
<PAGE>
The Borrower hereby expressly waives presentment, demand for payment,
dishonor, notice of dishonor, protest, notice of protest and any other
formality.
THE BORROWER:
/s/ Ivan M. Rosenberg
----------------------------------------
Ivan M. Rosenberg
<PAGE>
EXHIBIT 11.1
LEGACY SOFTWARE, INC.
COMPUTATION OF EARNINGS PER SHARE AND
WEIGHTED AVERAGE COMMON STOCK SHARES OUSTANDING
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
RECONCILIATION OF NET LOSS PER STATEMENT OF OPERATIONS TO
AMOUNT USED IN EARNINGS PER SHARE COMPUTATION:
Net loss per statement of operations........................ $ (691,518)
Add -- Interest on $700,000 of convertible debt (1)......... 11,233
-----------------
Net loss, as adjusted....................................... (680,285)
Add -- Pro forma employment agreement expense (5)........... 88,250
-----------------
Pro forma net loss, as adjusted............................. $ (768,535)
-----------------
-----------------
</TABLE>
<TABLE>
<CAPTION>
ALL PERIODS
PRESENTED IN
THE REGISTRATION
STATEMENT
-----------------
<S> <C>
WEIGHTED AVERAGE COMMON STOCK SHARES OUTSTANDING (2):
Common Stock and common stock equivalents
Common Stock granted during the year ended and subsequent to
December 31, 1995.......................................... 28,200
Stock options granted subsequent to December 31, 1995....... 210,000
Warrants granted prior to December 31, 1995................. 200,000
Convertible debt to be converted prior to the Public
Offering................................................... 534,351
-----------------
Total securities.......................................... 972,551
Assumed buyback of Common Stock shares (3)................ (296,333)
-----------------
Total common stock equivalents.............................. 676,218
Weighted average shares issued (4).......................... 720,000
-----------------
Weighted average shares outstanding......................... 1,396,218
-----------------
-----------------
</TABLE>
- ------------------------
(1) Adjustment to net loss has been shown without any tax effect due to the
Company's net operating loss carryforward having a 100% valuation allowance
offsetting it for financial statement purposes.
(2) Weighted average shares outstanding are computed using the treasury stock
method, by which the number of shares outstanding reflects an assumed use of
proceeds, from the assumed exercise of possible common stock equivalents, to
repurchase shares of the Company's Common Stock at the Public Offering
price.
(3) Assumed buyback of Common Stock shares:
Common stock is assumed to be repurchased at the Public Offering price
<TABLE>
<S> <C>
Weighted average purchase price per share of common stock........... $ 0.00
Weighted average exercise price per share of stock options.......... $ 3.89
Weighted average exercise price per share of warrants............... $ 1.31
Weighted average conversion per share of convertible debt........... $ 1.31
</TABLE>
(4) Gives retroactive effect to the Company's Common Stock split on a 144 shares
to 1 share basis. In addition, common shares assumed to be issued within one
year of the Public Offering have been included in the above calculation and
not in this line item.
(5) Reflects a proforma adjustment of $88,250 for increased compensation expense
as a result of assuming employment agreements entered into during 1995 and
1996 had been in effect as of January 1, 1995.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Shareholders of
Legacy Software, Inc.
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-1 of our report dated November 8, 1995, except
for Note 8 which is as of January 17, 1996, relating to the financial statements
and schedule of Legacy Software, Inc. which are contained in that Prospectus.
Our report contains an explanatory paragraph regarding uncertainties as to the
Company's ability to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
Los Angeles, California
May 5, 1996
