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File pursuant to Rule 424(b)(4)
Registration No. 333-5723
PROSPECTUS
LOGO
1,150,000 UNITS
EACH UNIT CONSISTING OF TWO SHARES OF COMMON STOCK
AND ONE REDEEMABLE WARRANT
As described below, an additional 1,040,000 Redeemable Warrants and
1,100,615 shares of Common Stock, including the 1,040,000 shares of Common
Stock issuable upon exercise of the Redeemable Warrants are being registered
in connection with this offering on behalf of certain selling
securityholders; however, such warrants and shares will be offered by the
selling securityholders on a delayed basis and not as part of the
underwritten offering.
CD-MAX, Inc., a Delaware Corporation (the "Company"), is hereby offering
(the "Offering") 1,150,000 Units (the "Units"), each Unit consisting of two
shares of common stock, $.01 par value per share ("Common Stock"), and one
redeemable common stock purchase warrant ("Redeemable Warrant"). The shares
of Common Stock and Redeemable Warrants comprising the Units are separately
tradeable commencing upon issuance. Each Redeemable Warrant entitles the
registered holder thereof to purchase one share of Common Stock at an initial
exercise price of $4.59, subject to adjustment, at any time from issuance
until August 16, 2001. The Company shall have the right to redeem all, but
not less than all, of the Redeemable Warrants, commencing August 16, 1997 at
a price of $.05 per Redeemable Warrant on 30 days' prior written notice,
provided that the Company shall have obtained the consent of Joseph Stevens &
Company, L.P., ("Underwriter"), and the average closing bid price of the
Common Stock equals or exceeds 150% of the then exercise price per share,
subject to adjustment, for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. See "Description of Securities -- Redeemable
Warrants."
Prior to the Offering the Company's Common Stock was publicly traded on
the NASD OTC Electronic Bulletin Board ("OTC") under the symbol "CMAX." On
August 13, 1996, the closing bid price for the Common Stock on the OTC was
$5.00. See "Market for Common Equity and Related Stockholders Matters." Prior
to the Offering, there has been a limited public market for the Common Stock
and no public market for the Units or the Redeemable Warrants, and there can
be no assurance that such a market will develop after the completion of the
Offering or, if developed, that it will be sustained. For information
regarding the factors considered in determining the public offering price of
the Units and the exercise price and other terms of the Redeemable Warrants,
see "Risk Factors," "Description of Securities" and "Underwriting." The
Units, the Common Stock and the Redeemable Warrants have been approved for
quotation on the Nasdaq SmallCap Market ("Nasdaq") under the symbols "MAXXU,"
"MAXX" and "MAXXW," respectively.
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS,"
COMMENCING ON PAGE 9, AND "DILUTION."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
Price to Underwriting Proceeds to
Public Discounts(1) Company(2)
- --------------------------------------------------------------------------------
Per Unit $6.125 $.6125 $5.5125
- --------------------------------------------------------------------------------
Total(3) . $7,043,750 $704,375 $6,339,375
================================================================================
(1) Does not include additional compensation payable to the Underwriter in
the form of a 3% non-accountable expense allowance or the Company's
agreement to sell to the Underwriter warrants to purchase 115,000 Units
(the "Underwriter's Warrants") and to retain the Underwriter as a
financial consultant. In addition, see "Underwriting" for information
concerning indemnification and contribution arrangements with the
Underwriter and other compensation payable to the Underwriter.
(2) Before deducting expenses of the Offering estimated at $611,313 payable
by the Company, including the non-accountable expense allowance payable
to the Underwriter.
(3) The Company has granted to the Underwriter an option (the "Over-Allotment
Option"), exercisable for a period of 45 days after the date of this
Prospectus, to purchase up to 172,500 additional Units upon the same
terms and conditions set forth above, solely to cover over- allotments,
if any. If the Over-Allotment Option is exercised in full, the Total
Price to Public, Underwriting Discounts and Proceeds to Company will be
$8,100,312.50, $810,031.25 and $7,290,281.25, respectively. See
"Underwriting."
The Units are being offered by the Underwriter, subject to prior sale,
when, as and if delivered to and accepted by the Underwriter, and subject to
approval of certain legal matters by its counsel and subject to certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
the Offering and to reject any order in whole or in part. It is expected that
delivery of the Units offered hereby will be made against payment, at the
offices of Joseph Stevens & Company, L.P., New York, New York, on or about
August 21, 1996.
JOSEPH STEVENS & COMPANY, L.P.
August 16, 1996.
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(continued from cover page)
This Prospectus also relates to 1,040,000 Redeemable Warrants (the
"Selling Securityholder Warrants"), and 1,100,615 shares of Common Stock,
including the 1,040,000 shares of Common Stock issuable upon exercise of the
Selling Securityholder Warrants (collectively the "Selling Securityholder
Shares"). The Selling Securityholder Warrants will be issued at the closing
of the Offering to certain security holders (the "Selling Securityholders")
upon the automatic conversion of certain outstanding warrants (the "Bridge
Warrants") issued to the Selling Securityholders in private financings
consummated in February, March, April and May 1996 (the "Bridge Financings"),
and in 1995 (the "1995 Financings"). Neither the Selling Securityholder
Warrants nor the Selling Securityholder Shares may be sold for a period of
eighteen (18) months from the effective date of the Registration Statement
without the prior written consent of the Underwriter. The Selling
Securityholder Warrants and the Selling Securityholder Shares are not being
underwritten in the Offering. The Company will not receive any proceeds from
the sale of the Selling Securityholder Warrants or the Selling Securityholder
Shares by the holders thereof, although the Company will receive proceeds
from the exercise, if any, of the Selling Securityholder Warrants (the offer
by the Selling Securityholders of the Selling Securityholder Shares and the
Selling Securityholder Warrants is referred to herein as the "Concurrent
Offering"). See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources," "Recent Bridge
Financings" and "Selling Securityholders."
TO CALIFORNIA RESIDENTS ONLY:
The Units, consisting of Common Stock and Redeemable Warrants of the
Company may only be offered and sold to (i) persons with a net worth,
individually or jointly with his or her spouse, of at least $250,000
(exclusive of home, home furnishings and automobiles) and an annual income of
at least $65,000 or (ii) persons with a net worth, individually or jointly
with his or her spouse, of at least $500,000 (exclusive of home, home
furnishings and automobiles).
The Units, consisting of Common Stock and Redeemable Warrants, offered
hereby have been registered by a limited qualification and cannot be offered
for resale or resold in the State of California unless registered for sale.
The exemption afforded by Section 25104(h) of the California Securities Law
shall be withheld by the Commissioner of Corporations and the Company is not
permitted to apply for the exemption afforded by 25101(b) until after 90 days
from the date the Securities and Exchange Commission declares the offering of
the Units, consisting of Common Stock and Redeemable Warrants, effective.
The Company intends to furnish to the registered holders of the Units,
Redeemable Warrants and Common Stock, annual reports containing financial
statements audited by its independent auditors and quarterly reports for the
first three quarters of each fiscal year containing unaudited interim
financial information.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in
its entirety by reference to the detailed information, including the
financial statements and notes thereto, appearing elsewhere in this
Prospectus. Unless otherwise indicated, all references to the Company and to
shares of Common Stock of the Company: (a) gives affect to the occurrence of
the following events, all of which occurred in April 1996, (i) the
reincorporation of the Company in Delaware, (ii) the merger into the Company
of its wholly owned subsidiary, CD-MAX, Inc., and the change of the Company's
name to CD-MAX, Inc.; (iii) the consummation of a 1 for 30 share exchange,
and a change in par value to $0.01 per share, (iv) the elimination of the
Class B Common Stock, (v) the elimination of certain grant-back and buy back
rights held by members of management and the Class B shareholders, (vi) the
cancellation of options to purchase 100,000 shares of Common Stock previously
issued to management and the issuance to management of warrants to purchase
990,000 shares of Common Stock; (b) assumes no exercise of (i) the
Underwriter's Over-Allotment Option to purchase up to 172,500 Units; (ii) the
Underwriter's Warrants to purchase up to 115,000 Units; (iii) the Redeemable
Warrants included in the Units; (iv) 1,040,000 Redeemable Warrants issuable
in exchange for the outstanding Bridge Warrants upon consummation of the
Offering and (c) gives effect to the cancellation of common stock purchase
warrants previously granted to the Underwriter in connection with the Second
Bridge Financing (as hereinafter defined).
THE COMPANY
The Company, a development stage company with minimal revenues to date, is
engaged in the business of developing and marketing the CD-MAX(TR) System,
based upon its proprietary technology, which is designed to allow publishers
of professional, corporate, library and educational CD-ROM based information
to sell their information to end-users on a usage basis. Publishers in these
fields currently sell CD-ROM titles for a fixed fee, normally as an annual
subscription. The Company believes that the CD-MAX System has the potential
to increase the revenues of CD-ROM publishers by reducing copyright and
license abuse and enabling them to expand into new markets. The CD-MAX System
consists of proprietary metering and encryption software and billing
services. The CD-MAX System is being adapted for use on the Internet and is
expected to be commercially available during 1996 under the name NET-
MAX(TR).
The Company's strategy is to achieve broad market acceptance of its CD-MAX
System in its target markets and to create a range of services based on
proprietary technology which is expected to produce a continuous revenue
stream. The Company has targeted publishers in the professional, corporate,
library and educational fields as its initial markets. According to InfoTech,
Inc., a leading CD-ROM market research firm, these publishers were estimated
to account for 75% of the approximately $9 billion U.S. CD-ROM software
market for 1995. The U.S. CD-ROM software market is projected to grow 60% in
1996 to over $14 billion, with the worldwide CD-ROM software market
increasing to over $23 billion. The Company is focusing its initial marketing
efforts in the U.S. and Canada. Subsequent marketing efforts may be extended
to European markets. The Company has received an unrestricted export license
from the Department of Commerce. This license allows it to export its
software to most countries in the world, unlike many other hardware and
software encryption methods, which may not be exported due to federal export
restrictions.
Electronic information is currently distributed primarily by three
methods: 1) CD-ROM 2) online services and 3) the Internet. Currently,
professional and business information delivered on CD-ROM is generally sold
on a flat fee or subscription basis for unlimited use. The Company believes
that such forms of access can be inefficient and expensive for many
end-users. Unmetered usage may also prevent publishers from maximizing
revenues from heavy users, particularly users on networks. The second method,
online services, may be advantageous for timely information, such as stock
quotes, but, due to the high costs of building and maintaining a mainframe
computer installation and the high costs of transmission, online is usually a
more expensive alternative to CD-ROM. Hybrid CD-ROM/online systems attempt to
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maximize the advantages of both methods of distribution, by combining the
timeliness of online systems with the lower costs of CD-ROM. The Internet is
the third and newest method of distribution. It has only recently been
developed for commercial use and faces similar problems as CD-ROM, including
the need for security and metering services.
The CD-MAX System monitors the amount and type of information accessed
from an encrypted CD-ROM. The usage data is stored in encrypted form on the
computer's hard disk. The CD-MAX System can retrieve this data from the
end-user via modem. The Company can then update the necessary security codes
and bill the end-user on behalf of the publisher. CD-MAX withholds new
security codes if the end- user does not pay the applicable charges which
will terminate access to the CD-ROM. For those personal computers without a
modem, the Company offers alternate billing arrangements.
Information contained on published CD-ROMs is located via the use of
special software on the CD-ROM known as a "search and retrieval engine." The
CD-MAX System is compatible with many popular search and retrieval engines.
The Company has entered into agreements with Dataware Technologies, Inc., and
Folio Corporation, major search and retrieval software firms, to facilitate
the compatibility of the CD-MAX metering and encryption capabilities with the
Dataware and Folio search and retrieval engines.
As of the date hereof, the Company has four contracts with customers for
its CD-MAX System. In March, 1995, the Company entered into a contract with
Mitchell International, a unit of Thomson Publishing that publishes
automobile repair manuals. Mitchell is working with their CD-ROM product "On-
Demand Computerized Repair Information" under the name "Metered On-Demand"
using the CD-MAX System. To date, this contract has resulted in minimal
revenues to the Company due to the fact that this product is still being test
marketed. In July, 1995, the Company entered into a contract with Disclosure,
Incorporated, a major provider of financial and legal information about
public companies to the investment and legal communities. Its CD-ROM title
"New Issues" is the first of four titles under contract and intended to be
sold under the name "Metered New Issues." This product has completed testing
and had its initial commercial shipment in late July, 1996. In May, 1996, the
Company entered into a contract with Credential Information and Verification
Services, Inc. ("CIVS"), a health care information services company, to adapt
the CD-Max System to a data base to be marketed by CIVS using the Dataware
search and retrieval engine. This contract is in its development
(pre-testing) stage. An officer, director and principal shareholder of the
Company is an officer, director and principal shareholder of CIVS, see
"Certain Transactions." In July, 1996, the Company entered into a contract
with Information Handling Services, Inc. ("IHS"), a publisher of CD-ROM data
bases, to adapt the CD-MAX System to one of its data bases. The contract with
IHS is also in the development (pre-testing) stage. Each of these contracts
requires the publisher to pay fees for billing services and to pay CD-MAX a
percentage of all revenues generated through the use of CD-MAX encrypted
products.
The Company's predecessor InfoServe, Inc., formerly known by different
names, was initially created to engage in the business of acquiring mining
properties for exploration and development. In 1974, mining operations ceased
and the Company's predecessor forfeited its charter which was not reinstated
until 1982. Subsequent to reinstatement the Company's predecessor began to
seek new business opportunities.
On December 29, 1993, the Company's predecessor InfoServe, Inc., a public
shell company incorporated in Montana, acquired the outstanding stock of
Signal Security Technologies Inc. (Sigtek) in exchange for 701,566 shares of
common stock. Sigtek was a privately held company formed on July 1, 1993. For
accounting purposes the acquisition was treated as a recapitalization of
Sigtek with Sigtek as the acquirer (a reverse acquisition). The historical
financial statements prior to December 29, 1993 are those of Sigtek.
Effective December 29, 1993, Sigtek merged with CD-MAX, Inc., a subsidiary of
InfoServe, Inc.
In March 1996, the Board of Directors and stockholders of InfoServe, Inc.,
a Montana corporation, approved the mergers of InfoServe, Inc. and its
wholly-owned subsidiary, CD-Max, Inc. into a new Delaware corporation, CDMII,
Inc. (CDMII). As part of the merger, the Board of Directors and stockholders
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approved a 1 for 30 stock exchange under which the holders of InfoServe, Inc.
stock would receive one share of stock in CDMII for 30 shares of stock in
InfoServe, Inc. The mergers of InfoServe, Inc. and CD-MAX, Inc. into CDMII
were effective as of April 15, 1996. Subsequently, the name of CDMII was
changed to CD-MAX, Inc.
THE OFFERING
Units Offered.................. 1,150,000 Units, each Unit consisting of two
shares of Common Stock and one Redeemable
Warrant. The Common Stock and Redeemable
Warrants will be separately tradeable
immediately upon issuance. See "Description
of Securities-- Units." Each Redeemable
Warrant entitles the holder to purchase one
share of Common Stock for $4.59 per share,
subject to adjustment, exercisable from the
date of issuance until August 16, 2001. The
Company may redeem the Redeemable Warrants
commencing August 16, 1997 at a redemption
price of $0.05 per Redeemable Warrant on
thirty days' prior written notice, provided
that (i) the average closing bid price (or
last sales price) of the Common Stock as
reported on Nasdaq (or on such exchange on
which the Common Stock is then traded)
equals or exceeds 150% of the exercise price
per share, subject to adjustment, for any 20
trading days within a period of 30
consecutive trading days ending on the fifth
trading day prior to the date on which the
notice of redemption is given and (ii) the
Company shall have obtained written consent
from the Underwriter to redeem the
Redeemable Warrants. See "Description of
Securities--Redeemable Warrants."
Securities Offered by Selling
Securityholders.............. 1,040,000 Redeemable Warrants ("Selling
Securityholders Warrants"), which will be
issued to the Selling Securityholders upon
the automatic conversion of the outstanding
Bridge Warrants, and an aggregate of
1,100,615 shares ("Selling Securityholders
Shares") 1,040,000 of which are issuable
upon exercise of such Selling
Securityholders Warrants. The Selling
Securityholders Warrants and the Selling
Securityholders Shares being registered for
the account of the Selling Securityholders
at the Company's expense are not being
underwritten in the Offering. The Company
will not receive any proceeds from the sale
of these securities, although it will
receive proceeds from the exercise, if any,
of the Selling Securityholders Warrants. See
"Recent Bridge Financings," "Certain
Transactions" and "Selling Securityholders".
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Common Stock Outstanding Before
Offering..................... 2,047,300 shares(1)
Common Stock Outstanding After
Offering..................... 4,373,270 shares(1)(2)
Redeemable Warrants Outstanding
After Offering............... 2,190,000 Redeemable Warrants(3)
Use of Proceeds................ Repayment of Bridge Financings: $1,080,000;
payment of deferred management salaries:
$258,497; sales and marketing: $900,000;
product development: $1,800,000; and working
capital: $1,689,565. See "Use of Proceeds."
Risk Factors................... The purchase of the Units offered hereby
involves a high degree of risk and immediate
substantial dilution. See "Risk Factors" and
"Dilution."
Nasdaq Symbols................. Units: MAXXU
Common Stock: MAXX
Redeemable Warrants: MAXXW
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(1) Does not include (i) 125,193 shares reserved for issuance upon the
exercise of outstanding warrants at exercise prices ranging from $.30 to
$22.50 per share; (ii) 990,000 shares reserved for issuance upon the
exercise of warrants granted to management at an exercise price of $9.19
per share; (iii) 86,345 shares reserved for issuance upon the exercise of
stock options granted pursuant to the Company's 1993 Stock Incentive Plan
at exercise prices ranging from $7.00 per share to $45.00 per share (the
Company intends, subject to the completion of this Offering and the terms
of the 1993 Stock Incentive Plan, to reduce the exercise price of
approximately 42,800 of these options to $3.50 per share); (iv) 113,655
shares reserved for issuance upon the exercise of options which may be
granted under the Company's 1993 Stock Incentive Plan and (v) 25,970
shares reserved for issuance upon the exercise of warrants to be issued
as anti-dilutive securities after the date of this Offering to a director
and two principal shareholders in accordance with the terms of a private
financing. See "Management," "Certain Transactions," "Description of
Securities," and "Underwriting."
(2) Includes 25,970 shares to be issued as anti-dilutive securities after the
date of this Offering to a director and two principal shareholders in
accordance with the terms of a private financing. See "Certain
Transactions."
(3) Includes 1,040,000 Selling Securityholder Warrants.
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CD-MAX, INC.
SUMMARY FINANCIAL DATA
The summary financial information set forth below is derived from the
financial statements appearing elsewhere in this Prospectus and represents
the financial results of the Company. Such information should be read in
conjunction with such financial statements, including the Notes thereto.
<TABLE>
<CAPTION>
Period from
July 1, 1993
Year ended June 30, (Inception) to
1994 1995 1996 June 30, 1996
------------ -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ................ $ -- $ 2,500 $ 13,394 $ 15,894
Costs and expenses:
Selling ................. 112,455 120,285 208,757 441,497
General and administrative 710,952 689,597 725,748 2,126,297
Research and development . 107,135 277,120 655,124 1,039,379
Depreciation and
amortization .......... -- -- 83,401 83,401
------------ -------------- -------------- ---------------
Total costs and expenses ..... 930,542 1,087,002 1,673,030 3,690,574
Other income (expense)
Interest income ......... 547 3,962 13,586 18,095
Interest expense ........ -- (1,875) (69,283) (71,158)
------------ -------------- -------------- ---------------
Net loss ..................... $(929,995) $(1,082,415) $(1,715,333) $(3,727,743)
============ ============== ============== ===============
</TABLE>
<TABLE>
<CAPTION>
June 30, 1995 June 30, 1996
--------------- --------------------------------
Pro Forma
Actual As Adjusted(1)
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<S> <C> <C> <C>
Working capital (deficit) ....................... $ (8,686) $(1,130,280) $ 4,564,448
Total assets .................................... 326,868 483,124 4,802,735
Total liabilities ............................... 335,554 1,498,521 193,358
Deficit accumulated during the development stage . (2,012,410) (3,727,743) (3,831,031)
Stockholders' equity (deficit) .................. (8,686) (1,015,397) 4,609,377
</TABLE>
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(1) Adjusted to give effect to (i) the receipt of the net proceeds of this
Offering, after deducting estimated offering expenses, and (ii) the
initial application of such proceeds as described herein, and (iii) an
expense of $69,954 of unamortized debt issuance costs relating to the
Second Bridge Financing and an expense of $33,334 in additional interest
expense related to the debt incurred in the Bridge Financings. See "Use
of Proceeds."
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RISK FACTORS
An investment in the Units involves a high degree of risk and should be
made only by investors who can afford the loss of their entire investment.
Prospective investors, prior to making an investment in the securities,
should consider carefully the following risk factors and the other
information included in this Prospectus.
Accumulated Deficit; Limited Operating History; Expectation of Future
Losses; Independent Auditors' Report Regarding Company's Ability to Continue
as a Going Concern. The Company commenced operations in July 1993, is a
development stage company, and has a very limited operating history. From
inception through June 30, 1996, the Company recognized insignificant
revenues, and had accumulated operating losses of approximately $3,727,743.
At June 30, 1996, the Company had a working capital deficit of approximately
$1,130,280 and stockholders' deficit of approximately $1,015,397. The Company
has continued to operate at a loss since June 30, 1996, and it expects to
continue to operate at a loss until such time, if ever, as operations
generate sufficient revenues to cover its costs. For the short-term, the
Company expects that its losses will increase. The likelihood of the success
of the Company must be considered in light of the difficulties and risks
inherent in a new business. There can be no assurance that revenues will
increase significantly in the future or that the Company will ever achieve
profitable operations. The report of the Company's independent auditors
contains an explanatory paragraph expressing substantial doubt regarding the
Company's ability to continue as a going concern. Among the factors cited by
the auditors as raising substantial doubt as to the Company's ability to
continue as a going concern are that the Company is currently in its
development stage, has not generated revenues or obtained profitable
operations to date. See the Financial Statements and the notes thereto.
Uncertainty of Commercialization of the CD-MAX System; Limited Number of
Customers; Need for Market Acceptance. The CD-MAX System has not achieved any
substantial commercial acceptance. While the Company has agreements with four
database publishers for the use of the Company's technology and services,
none of these contracts has yet generated any substantial revenues for the
Company, or wide-scale acceptance by the publishers' respective customers.
There can be no assurance that these contracts, or other contracts obtained
in the future, may not be terminated before obtaining any substantial
revenues for the Company. The CD-MAX System has only been test marketed by
one of these publishers, and it has not yet been placed in full commercial
operation by any of such publishers. There can be no assurance that the
results of testing by these or other publishers will be satisfactory. The
Company's ability to market the CD-MAX System successfully will depend on the
Company convincing potential customers of the benefits of the CD-MAX System.
Although the Company is engaged in negotiations and discussions with a number
of other potential customers, there can be no assurance that any such
discussions will lead to significant sales of the CD-MAX System, or that the
CD-MAX System will attain significant market acceptance. See "Business."
Long Lead Time in Implementing Contracts; Unknown Profitability. The
Company's experience to date has demonstrated that the process of identifying
a potential customer of the Company's products and services, entering into a
contract with such a customer, customizing the Company's products and
services to meet the customer's needs, allowing the customer to test market
the product, and ultimately completing the final product for the customer is
a lengthy process that is expected to take at least six months, and possibly
much longer. The Company's pricing of its products and services is based upon
the Company's estimates of what publishers will be willing to pay for such
products and services, and an amount sufficient to return profits to the
Company. There can be no assurance that these estimates will prove to be
correct.
Limited Marketing Capabilities. The Company's operating results will
depend to a large extent on its ability to successfully market the CD-MAX
System to publishers. In addition, the Company's revenue stream is dependent
upon the revenue generated by a publisher's customer's use of the CD-MAX
System, over which the Company will have no control. The Company currently
has limited marketing capability. The Company intends to use a portion of the
proceeds of the Offering to hire additional sales and marketing personnel and
outside consultants to market the CD-MAX System. There can be no assurance
that any marketing efforts undertaken by the Company will be successful or
will result in any significant sales of the CD-MAX System. See "Business."
Need for Additional Financing. Although the Company believes that the net
proceeds from this Offering, together with funds expected to be generated
from operations, will be sufficient to finance the Company's work-
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ing capital requirements for twelve (12) months following the completion of
this Offering, it is likely that the Company will not generate sufficient
revenues to fund its operations after such period, and will need additional
financing. Further, the Company may be required to seek additional financing
during such twelve (12) month period in the event of delays, cost overruns or
unanticipated expenses associated with a company in such an early stage of
developing and marketing its product. The Company has no commitments to
provide additional financing, if required, and there can be no assurance that
any additional financing will be available if needed or, if available, will
be on terms acceptable to the Company. In the event such necessary financing
is not obtained, the Company will be materially adversely affected and will
have to cease or substantially reduce operations. See "Use of Proceeds."
Dependence on Key Person. The Company's success depends upon the continued
contributions of its executive officers, sales and marketing personnel and
technical personnel, particularly John David Wiedemer, the inventor of the
CD-MAX System. The Company has a key-man term life insurance policy in the
amount of $1,000,000 on the life of John David Wiedemer. Although the Company
has entered into an employment agreement with Mr. Wiedemer expiring in 1998,
competition for qualified personnel is intense and the loss of services of
Mr. Wiedemer could materially adversely affect the Company. There can be no
assurance that the Company will be able to retain existing personnel or
attract additional qualified personnel. See "Management."
Lack of Proprietary Protection. The Company does not currently have any
patent protection for the CD-MAX System. The Company believes that commercial
protection of its products will depend primarily upon the CD-MAX System
proprietary software remaining a trade secret and maintaining copyright
protection. In order to protect its trade secrets, the Company is taking
measures which in its opinion are appropriate procedures to protect its
rights. The Company is also maintaining its copyright rights in this
proprietary software. In any case, there can be no assurance that the
Company's technology will remain secret or that others will not develop
similar technology and use such technology to compete with the Company. Also,
copyright protection does not normally prevent competitors from making
functionally similar products. The CD-MAX System is based upon proprietary
software and related technical data licensed by the Company from an officer
of the Company. In the event that such officer is terminated by the Company
without cause and certain other conditions exist, the officer will have the
right to obtain a sublicense for the proprietary software and related
technical data. Such right will not exist until the year 1999. Although the
Company believes that its technology does not infringe upon the proprietary
hardware or software of others, it is possible that others may have or may be
granted patents claiming products or processes that are necessary for or
useful to the development of the CD-MAX System and that legal actions could
be brought against the Company claiming infringement. In the event that the
Company is unsuccessful against such a claim, it may be required to obtain
licenses to such patents or to other patents or proprietary technology in
order to develop or market the CD-MAX System. There can be no assurance that
the Company will be able to obtain such licenses on commercially reasonable
terms, if at all. See "Business-Proprietary Rights and Intellectual
Property."
Competition. The business of selling encryption and metering services for
CD-ROMs, and for the Internet is in its early stages and is subject to
competition from other companies, substantially all of which have greater
financial and other resources than the Company. The Company is aware of other
companies that are developing metering and encryption systems that are in
some ways similar to the Company's system. In addition, the Company believes
that it is possible to provide some of the same benefits that the CD-MAX
System will offer by other means. It is also possible that other companies
may be developing systems comparable to the CD-MAX System. There can be no
assurance that either existing or new competitors will not develop
technologies that are superior to or more cost-effective than the Company's
systems or that otherwise achieve greater market acceptance. There can be no
assurance that the Company will be able to compete successfully against
existing competitors or future entrants into the market. The Company operates
in an environment that is characterized by rapidly evolving technology. There
can be no assurance that either existing or new competitors will not develop
technologies that are superior to or more cost-effective than the Company's
system or that otherwise achieve greater market acceptance. There can be no
assurance that the Company will be able to compete successfully against
existing competitors or future entrants into the market. See "Business -
Competition."
Rapid Technological Change; New Product Introductions. The market for the
Company's technology is characterized by rapidly changing technology and
frequent new product introductions. Even if the Company's
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<PAGE>
technology gains initial market acceptance, the Company's success will
depend, among other things, upon its ability to enhance its product and to
develop and introduce new products and services that keep pace with
technological developments, respond to evolving customer requirements and
achieve continued market acceptance. There can be no assurance that the
Company will be able to identify, develop, manufacture, market or support new
products or offer new services successfully, that such new products or
services will gain market acceptance, or that the Company will be able to
respond effectively to technological changes or product announcements by
competitors. Any failure by the Company to anticipate or respond adequately
to technological developments and customer requirements or any significant
delays in product development or introductions could result in a loss of
market share or revenues. The Company has devoted a substantial amount of its
efforts to adapting its technology to the CD-ROM medium. There can be no
assurance that CD-ROM technology will not be replaced by other distribution
and access technologies or that any such replacement will not render the
Company's technology obsolete or require substantial time and expense by the
Company to adapt its technology, if at all possible. In 1996, the Company is
planning to introduce a version of the CD-MAX System, called NET-MAX, that
will work on the Internet. However, there can be no assurance of its
successful development or market acceptance. See "Business - Marketing."
Control by Insiders. Upon completion of this Offering, the executive
officers and directors will beneficially own shares of the Company's capital
stock representing approximately 28.23% of the total voting power of the
Company, (assuming the sale of an aggregate of 138,056 Redeemable Warrants by
certain officers and directors in the Concurrent Offering), and may be able
to elect all the Company's directors and thereby direct the policies of the
Company. See "Principal Stockholders," "Selling Securityholders," and
"Description of Securities."
Management's Broad Discretion in Use of Proceeds. Although the Company
intends to apply the net proceeds of the Offering in the manner described
under "Use of Proceeds," it has broad discretion as to the specific
allocation of the net proceeds, the timing of expenditures and all other
aspects of the use thereof.
Repayment of Indebtedness. Approximately nineteen percent (19%) of the net
proceeds of the Offering have been allocated for the repayment of the Bridge
Notes which were issued in the Bridge Financings and are currently
outstanding in the aggregate principal amount of $1,080,000.
Benefits From Offering to Officers, Directors and Principal Shareholders;
Conflicts of Interest. Approximately $258,497 or five percent (5%) of the net
proceeds of the Offering have been allocated for the repayment of the
deferred compensation of the four executive officers of the Company, and, of
the $1,080,000 of aggregate principal amount of Bridge Notes to be repaid
from the proceeds of this Offering, $337,500 is to paid to officers,
directors and principal stockholders. Accordingly, these officers, directors
and principal stockholders will benefit directly to the extent that the net
proceeds of the Offering are used to pay deferred compensation or to repay
the Bridge Notes. Conflicts between the personal interest of such officers,
directors and principal stockholders and the Company may be created as a
result thereof. The Company's Chief Financial Officer is a principal
stockholder, chief operating officer, and a director of a health care
information services company. Although, in the opinion of the Company, his
employment by this other company has had not an impact on his services to the
Company, conflicts may arise with respect to the allocation of his time
between his duties for the Company and for this other company. Additionally,
the Company has entered into a contract to provide its services to this other
company. While the Company's Chief Financial Officer did not participate in
either company's board of directors consideration of this contract, conflicts
may also arise as a result of this contract. See "Recent Bridge Financings,"
"Use of Proceeds," "Management," "Certain Transactions," "Principal
Stockholders," and "Selling Securityholders."
Limitation of Director Liability. The Company's Certificate of
Incorporation provides that a director of the Company will not be personally
liable to the Company or its stockholders for monetary damages for breach of
the fiduciary duty of care as a director, including breaches which constitute
gross negligence, subject to certain limitations imposed by the Delaware
General Corporation Law. Thus, under certain circumstances, neither the
Company nor the stockholders will be able to recover damages even if
directors take actions which harm the Company. See "Management--Limitation of
Liability of Directors and Officers and Indemnification."
Future Sales of Common Stock. Of the 4,373,270 shares of Common Stock to
be outstanding upon completion of this Offering, 2,691,052 shares of Common
Stock, including the 2,300,000 shares underlying the
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<PAGE>
units offered hereby, will be freely tradeable without restriction under the
Securities Act of 1933, as amended (the "Securities Act") except for any
shares of Common Stock purchased by an "affiliate" of the Company (as that
term is defined under the rules and regulations of the Securities Act), which
will be subject to the resale limitations of Rule 144 under the Securities
Act. The remaining 1,682,218 shares of Common Stock outstanding are
"restricted stock" as that term is defined under Rule 144 under the
Securities Act and under certain circumstances may be sold without
registration pursuant to such rule. The Company is unable to predict the
effect that sales made under Rule 144, or otherwise, may have on the then
prevailing market price of the Company's securities although any future sales
of substantial amounts of securities pursuant to Rule 144 could adversely
affect prevailing market prices. Holders of 1,661,406 of such restricted
stock, including each of the Company's officers, directors and principal
stockholders have agreed not to, directly or indirectly, issue, offer to
sell, grant an option for the sale of, assign, transfer, pledge, hypothecate
or otherwise encumber or dispose of (collectively "Transfer") any of their
shares of Common Stock or securities convertible into or exchangeable or
exercisable for Common Stock for a period commencing on the date of this
Prospectus and ending eighteen months after the effective date of this
Offering, without the prior written consent of the Underwriter. See
"Principal Stockholders," "Shares Eligible For Future Sale" and
"Underwriting."
The Redeemable Warrants underlying the Units offered hereby and the shares
of Common Stock underlying such Redeemable Warrants, upon exercise thereof,
will be freely tradeable without restriction under the Securities Act, except
for any Redeemable Warrants of shares of Common Stock purchased by an
"affiliate" of the Company, which will be subject to the resale limitations
of Rule 144 under the Securities Act. In addition, 1,040,000 Redeemable
Warrants and 1,100,615 shares of Common Stock, including the 1,040,000 shares
of Common Stock underlying such Redeemable Warrants, are being registered on
behalf of the Selling Securityholders. The Selling Securityholders have
agreed not to Transfer such Redeemable Warrants, or shares of Common Stock,
for a period of eighteen (18) months from the effective date of the
Registration Statement, without the prior written consent of the Underwriter.
In addition, without the consent of the Underwriter, the Company has
agreed not to sell or offer for sale any of its securities for a period of 18
months following the effective date of the Registration Statement, except
pursuant to outstanding options and warrants and pursuant to the Company's
existing option plans and no option shall have an exercise price that is less
than the fair market value per share of Common Stock on the date of grant.
In addition, 200,000 shares of Common Stock will be available for issuance
upon the exercise of options which may be granted under the Company's Stock
Incentive Plan and 1,141,163 shares of Common Stock will be issuable upon the
exercise of other outstanding warrants. To the extent that options or
warrants are exercised, dilution to the interests of the Company's
shareholders may occur. Moreover, the terms upon which the Company will be
able to obtain additional equity capital may be adversely affected, since the
holders of the outstanding options or warrants can be expected to exercise
them, to the extent they are able to, at a time when the Company would, in
all likelihood, be able to obtain any needed capital on terms more favorable
to the Company than those provided in the options or warrants. See
"Management," "Certain Transactions", "Description of Securities", and
"Shares Eligible for Future Sale."
Absence of Dividends. The Company has not paid any cash dividends on its
Common Stock and does not intend to declare or pay cash dividends in the
foreseeable future. The Company expects that it will retain all available
earnings, if any, to finance and expand its business. See "Dividend Policy."
Dilution; Disparity of Consideration. Purchasers of Units offered hereby
will incur an immediate and substantial dilution in the net tangible book
value of the Common Stock. Dilution represents the difference between the
price of the Common Stock sold hereby and the pro forma net tangible book
value per share of the Company after the Offering. Additional dilution to
future net tangible book value per share may occur upon exercise of the
Redeemable Warrants, the Underwriter's Warrants, certain options that may be
issued or exercised under the Company's stock option plan and other
outstanding warrants. The immediate dilution per share of Common Stock to
purchasers of the Units offered hereby is $2.01 per share, or 66% per share.
Certain existing stockholders, including officers and directors, acquired
their shares for nominal consideration and, accordingly, new investors will
bear a disproportionate share of the risks inherent in an investment in the
Company. See "Dilution."
Absence of Public Market; Arbitrary Determination of Offering Price;
Possible Volatility of Stock Price. Prior to this Offering, there has been no
public market for the Units or the Redeemable Warrants. There is
12
<PAGE>
a limited public market for the Company's Common Stock. There is no assurance
that a more active market will develop, or, if one does develop, that it will
be sustained. The offering price for the Units has been arbitrarily
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. Market prices for the Company's Common Stock
following this 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
digital information market, the overall economy and the financial markets.
See "Market Price for Common Equity and Related Stockholder Matters" and
"Underwriting."
Lack of Experience of Underwriter. Joseph Stevens & Company, L.P.
commenced operations in May 1994 and does not have extensive experience as an
underwriter of public offerings of securities. Joseph Stevens & Company,
L.P., has acted as the managing underwriter for four firm commitment public
offerings. The Underwriter is a relatively small firm and no assurance can be
given that the firm will be able to participate as a market maker in the
Units, the Common Stock, or the Redeemable Warrants, and no assurance can be
given that any broker-dealer will make a market in the Units, the Common
Stock or the Redeemable Warrants. See "Underwriting."
Underwriter's Potential Influence in the Market. It is anticipated that a
significant amount of the Units will be sold to customers of the Underwriter.
Although the Underwriter has advised the Company that it intends to make a
market in the Units, Common Stock and Redeemable Warrants, it will have no
legal obligation to do so. The prices and the liquidity of the Units, Common
Stock and Redeemable Warrants may be significantly affected by the degree, if
any, of the Underwriter's participation in the market. Moreover, if the
Underwriter sells the securities issuable upon exercise of the Underwriter's
Warrants, it may be required under the Exchange Act, as amended, to
temporarily suspend its market-making activities. No assurance can be given
that any market activities of the Underwriter, if commenced, will continue
for any minimum or significant period of time, and the withdrawal of the
Underwriter from market making activities in any of such securities could
materially adversely affect the prevailing market prices therefor. See
"Underwriting."
Possible Adverse Effects of Authorization of Preferred Stock. The
Company's Certificate of Incorporation authorizes the issuance of shares of
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without stockholder approval (but subject to
applicable government regulatory restrictions), to issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could
adversely affect the voting power or other rights of the holders of the
Company's Common Stock. In the event of issuance, the preferred stock could
be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company. Although the
Company has no present intention to issue any shares of its preferred stock
there can be no assurance that the Company will not do so in the future. See
"Management," "Principal Stockholders" and "Description of Securities."
No Public Trading Market; Possible Delisting from Nasdaq SmallCap Market;
Disclosure Relating to Low Priced Stocks. Prior to the Offering there has
been no public trading market for the Units or the Redeemable Warrants and
there has been only a limited trading market for the Common Stock. The Units,
the Common Stock and the Redeemable Warrants have been approved for quotation
on Nasdaq; however, there can be no assurance that a trading market will
develop or, if developed, that it will be maintained. In addition, there can
be no assurance that the Company will in the future meet the maintenance
criteria for continued quotation of the securities on Nasdaq SmallCap Market.
The continued quotation criteria for Nasdaq SmallCap Market include, among
other things, $2,000,000 in total assets, $1,000,000 in capital and surplus,
a public float of 100,000 shares with a market value equal to $200,000, two
market makers and a minimum bid price of $1.00 per share of common stock. If
an issuer does not meet the $1.00 minimum bid price standard, it may,
however, remain on Nasdaq if the market value of its public float is at least
$1,000,000 and the issuer has at least $2,000,000 in equity. If the Company
were removed from Nasdaq, trading, if any, in the Units, the Common Stock or
the Redeemable Warrants would thereafter have to be conducted in the
over-the-counter market in the so-called "pink sheets" or, if then available,
the NASD's OTC Electronic Bulletin Board. As a result, an investor would find
it more difficult to dispose of, and to obtain accurate quotations as to the
value of such securities.
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<PAGE>
In addition, if the Common Stock is delisted from trading in Nasdaq and
the trading price of the Common Stock is less than $5.00 per share, trading
in the Common Stock would also be subject to the requirements of Rule 15g-9
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Under such rule, broker/dealers who recommend such
low-priced securities to persons other than established customers and
accredited investors must satisfy special sales practice requirements,
including a requirement that they make an individualized written suitability
determination for the purchaser and receive the purchaser's written consent
prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosure in connection with any
trades involving a stock defined as a penny stock (generally, according to
recent regulations adopted by the Securities and Exchange Commission (the
"Commission"), any equity security not traded on an exchange or quoted on
Nasdaq that has a market price of less than $5.00 per share, subject to
certain exceptions), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and
the risks associated therewith. Such requirements could severely limit the
market liquidity of the Units, the Common Stock and the Redeemable Warrants
and the ability of purchasers in the Offering to sell their securities in the
secondary market. There can be no assurance that the Units, the Common Stock
and the Redeemable Warrants will not be delisted or treated as a penny stock.
Prior to completion of this Offering, the Company's Common Stock was subject
to Rule 15g-9 under the Exchange Act.
Potential Adverse Effect of Redemption of Redeemable Warrants. The
Redeemable Warrants are redeemable by the Company with the prior written
consent of the Underwriter at a price of $.05 per Warrant commencing August
16, 1997, provided that (i) 30 days prior written notice is given to the
holders of the Redeemable Warrants and (ii) the closing bid price per share
of the Common Stock as reported on Nasdaq (or the last sale price, if quoted
on a national securities exchange) for any 20 trading days within a period of
30 consecutive trading days, ending on the fifth day prior to the date of the
notice of redemption, has been at least 150% of the then exercise price per
share, subject to adjustment in certain events. The holders of the Redeemable
Warrants will automatically forfeit their rights to purchase the shares of
Common Stock issuable upon exercise of such Redeemable Warrants unless the
Redeemable Warrants are exercised before they are redeemed. Notice of
redemption of the Redeemable Warrants could force the holders to exercise the
Redeemable Warrants and pay the respective exercise prices at a time when it
may be disadvantageous for them to do so, to sell the Redeemable Warrants at
the market price when they might otherwise wish to hold the Redeemable
Warrants, or to accept the redemption price which is likely to be
substantially less than the market value of the Redeemable Warrants at the
time of redemption. See "Description of Securities -- Redeemable Warrants."
Current Prospectus and State Blue Sky Registration Required to Exercise
Redeemable Warrants. Holders will have the right to exercise the Redeemable
Warrants and purchase shares of Common Stock only if a current prospectus
relating to such shares is then in effect and only if the shares are
qualified for sale under the securities laws of the applicable state or
states, or there is an exemption from the applicable qualification
requirements. The Company has undertaken and intends to file and keep
effective and current a prospectus which will permit the purchase and sale of
the Common Stock underlying the Redeemable Warrants, but there can be no
assurance that the Company will be able to do so. Although the Company
intends to qualify for sale the shares of Common Stock underlying the
Redeemable Warrants in those states in which the securities are to be
offered, no assurance can be given that such qualification will occur. The
Redeemable Warrants may be deprived of any value if a prospectus covering the
shares issuable upon the exercise thereof is not kept effective and current
or if such underlying shares are not, or cannot be, registered in the
applicable states. Although the Company does not presently intend to do so,
the Company reserves the right to call the Redeemable Warrants for redemption
whether or not a current prospectus is in effect or such underlying shares
are not, or cannot be, registered in the applicable states. See "Description
of Securities -- Redeemable Warrants."
Forward-Looking Statements and Associated Risk. This prospectus contains
forward-looking statements within the meaning of section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding, among other items (i) the Company's
growth strategies, (ii) the impact of the Company's products and anticipated
trends in the Company's business, and (iii) the Company's ability to enter
into contracts with publishers and strategic partners. These forward-looking
statements are based largely on the Company's expectations and are subject to
a number of risks and uncertainties, certain of which are
14
<PAGE>
beyond the Company's control. Actual results could differ materially from
these forward-looking statements as a result of the factors described in
"Risk Factors," including, among others, regulatory or economic influences.
In light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this Prospectus will in fact
transpire or prove to be accurate.
THE COMPANY
The Company's predecessor was originally incorporated in Montana in 1931,
and for many years prior to December, 1993 it had been a shell corporation
with no business or assets. In December, 1993, the Company changed its name
to InfoServe, Inc. and formed a subsidiary, CD-MAX, Inc. In April 1996, the
Company merged into a newly formed Delaware corporation, and merged CD-MAX,
Inc. into the Company and changed the Company's name to CD-MAX, Inc. The
Company's executive offices are located at 11480 Sunset Hills Road, Suite
110, Reston, Virginia 22090; its telephone number is (703) 471-5755, and its
facsimile number is (703) 471-2806.
RECENT BRIDGE FINANCINGS
In February, and March 1996, Steven P. Schnipper, a director of the
Company, and two principal stockholders of the Company, advanced an aggregate
of $200,000 to the Company, and in April 1996 the same investors advanced an
aggregate of $100,000 to the Company (the "First Bridge Financing"). The
initial $100,000 was advanced pursuant to a one-year, 10% promissory note
that was repaid from the net proceeds of the Second Bridge Financing, as
described below. In addition, the Company issued an aggregate of (i) $180,000
principal amount of promissory notes (the "First Bridge Notes") which bear
interest at the rate of 10% per annum and are due and payable upon the
earlier of (a) the consummation of a public financing of the Company through
the sale of equity securities from which the Company receives gross proceeds
of at least $3,000,000 or (b) May 16, 1997, and (ii) 170,000 Common Stock
purchase warrants (the "First Bridge Warrants"), each First Bridge Warrant
entitling the holder to purchase one share of Common Stock at an initial
exercise price of $3.37 (subject to adjustment upon the occurrence of certain
events) during the three-year period commencing May 16, 1997. See "Certain
Transactions."
On May 16, 1996, the Company consummated a $1,000,000 bridge financing
(the "Second Bridge Financing", collectively the First Bridge Financing and
the Second Bridge Financing are referred to as the "Bridge Financings"),
pursuant to which it issued an aggregate of (i) $900,000 principal amount of
promissory notes (the "Second Bridge Notes", collectively the First Bridge
Notes and the Second Bridge Notes are referred to as the "Bridge Notes")
which bear interest at the rate of 10% per annum and are due and payable upon
the earlier of (a) the consummation of a public financing of the Company
through the sale of equity securities from which the Company receives gross
proceeds of at least $3,000,000 or (b) May 16, 1997, and (ii) 600,000
warrants with an aggregate purchase price of $100,000, (the "Second Bridge
Warrants", collectively the First Bridge Warrants, the Second Bridge Warrants
and 300,000 warrants issued in connection with certain financings consummated
in 1995 (the "1995 Financings") are referred to as the "Bridge Warrants")
each Second Bridge Warrant entitling the holder to purchase one share of
Common Stock at an initial exercise price of $3.37 (subject to adjustment
upon the occurrence of certain events) during the three-year period
commencing May 16, 1997.
The net proceeds of $1,144,546 from the Bridge Financings were applied by
the Company to pay off the first $100,000 advanced under the First Bridge
Financing, reduce accounts payable and accrued liabilities, and fund working
capital. Upon the consummation of this Offering, each outstanding Bridge
Warrant shall automatically, without any action by the holder thereof, be
converted into a Redeemable Warrant (sometimes hereinafter referred to as the
"New Warrant") having terms identical to those of the Redeemable Warrants
underlying the Units offered hereby. The New Warrants and the underlying
shares of Common Stock issuable upon exercise of the New Warrants are being
registered under the Securities Act in the Registration Statement of which
this Prospectus is a part. The Company intends to use a portion of the
proceeds of this Offering to repay the entire principal amount of, and
accrued interest on, the Bridge Notes. See "Use of Proceeds."
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<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Units
offered by the Company hereby after deducting underwriting discounts and
expenses payable by the Company, are estimated to be $5,728,062 ($6,647,273
if the Over-allotment Option is exercised in full). The Company presently
intends to use the net proceeds (assuming no exercise of the Over-allotment
Option) as follows:
<TABLE>
<CAPTION>
Dollar
Amount Percentage
------------ ------------
<S> <C> <C>
Repay Bridge Notes(1)(2) ..... $1,080,000 19%
Payment of Deferred Management
Salaries(3) ................. 258,497 5%
Sales and Marketing(4) ....... 900,000 16%
Product Development(5) ....... 1,800,000 31%
Working Capital .............. 1,689,565 29%
------------ ------------
Total Net Proceeds ........... $5,728,062 100%
</TABLE>
- ------
(1) The Company intends to repay the aggregate principal amount of
$1,080,000, plus accrued interest thereon of the Bridge Notes (as
hereinafter defined). The Bridge Notes bear interest at the rate of 10%
per annum and mature on the earlier of (i) consummation of an offering of
the Company's securities from which the Company receives gross proceeds
of at least $3,000,000 or (ii) May 16, 1997, one year from the date of
issuance. See "Recent Bridge Financings."
(2) Of the $1,080,000 of aggregate principal amount of Bridge Notes to be
repaid, $337,500 is to be paid to officers, directors and principal
shareholders of the Company, as follows: Philip J. Gross, $22,500; Steven
P. Schnipper, $72,000; SUAN Investments, $135,000; and Stourbridge
Investments, $108,000. See "Recent Bridge Financings," "Management" and
"Principal Stockholders."
(3) The Deferred Management Salaries are to be paid to the Company's four
senior executive officers, as follows: Robert A. Wiedemer, $99,231; John
D. Wiedemer, $83,200; Philip J. Gross, $66,416; and David B. Boelio,
$9,650.
(4) The major components, and relative magnitude of the anticipated Sales and
Marketing Expenses are: primarily personnel costs, and, to a
significantly lesser extent, advertising and marketing costs, including
trade shows, and travel related to customer presentations and trade show
attendance.
(5) The major components, and relative magnitude of the anticipated Product
Development Expenses are: primarily personnel costs, and to a
significantly lesser extent the acquisition of software.
The foregoing represents the Company's best estimate of the allocation of
the net proceeds of this Offering based upon the current status of its
business operations, its current plans and current economic conditions.
Future events, including the problems, delays, expenses, and complications
frequently encountered by early stage companies as well as changes in
competitive conditions affecting the Company's business and the success or
lack thereof of the Company's marketing efforts, may make adjustments in the
allocation of funds necessary or desirable.
The Company believes that the estimated net proceeds to be received by the
Company from this Offering will be sufficient to meet the Company's cash
requirements for a period of at least 12 months following the date of this
Prospectus. Thereafter, if the Company has insufficient funds for its needs,
there can be no assurance that additional funds can be obtained on acceptable
terms, if at all. If necessary funds are not available, the Company's
business would be materially adverse affected.
The Company will not receive any of the proceeds from the sale of the
Selling Securityholder Warrants or the Selling Securityholder Shares by the
holders thereof, although the Company will receive proceeds from the
exercise, if any, of the Selling Securityholder Warrants. See "Recent Bridge
Financings," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Selling
Securityholders."
Prior to expenditure, the net proceeds will be invested in short-term
interest bearing securities, such as bank certificates of deposit, United
States government obligations, or money market instruments.
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<PAGE>
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Prior to the acquisition of CD-MAX, Inc. in December 1993, the Company was
a shell corporation without any active trading. The Company's Common Stock
trades on the NASD OTC Electronic Bulletin Board. The following table sets
forth the range of high and low bid prices for the Company's Common Stock for
the fiscal quarters indicated as reported by NASDAQ Research Services. The
prices have been adjusted to reflect the 1 for 30 share exchange of the
Company's Common Stock in April 1996. Such quotations represent inter-dealer
quotations without retail markups, markdowns or commissions and may not
necessarily represent actual transactions. Furthermore, the Company does not
believe that the quotations for the Common Stock for the periods set forth
below are true indicators of the prices at which a substantial number of
shares could be bought or sold since, during such periods, trading in the
Common Stock was relatively inactive.
Bid Prices(1)
-------------------------
High Low
--------- --------
(Fiscal Year Ending 6/30/95)
First Quarter .............. $45.00 $22.50
Second Quarter ............. 29.06 13.125
Third Quarter .............. 18.75 8.4375
Fourth Quarter ............. 16.875 9.375
(Fiscal Year Ending 6/30/96)
First Quarter .............. $13.125 $ 9.375
Second Quarter ............. 15.00 3.75
Third Quarter .............. 27.00 9.375
Fourth Quarter ............. $13.125 $ 5.00
- ------
(1) These prices have been adjusted to reflect the 1 for 30 share exchange of
the Company's Common Stock in April 1996.
At August 13, 1996, there were approximately 383 holders of record of the
Common Stock. On August 13, 1996, the closing bid price on the OTC was $5.00
for the Common Stock according to NASDAQ Research Services.
DIVIDEND POLICY
Since the acquisition of CD-MAX, Inc. in 1993, the Company has not paid
any cash dividends on its Common Stock. The Company presently intends to
retain earnings to provide for the operation and expansion of its business
and therefore does not anticipate paying cash dividends on its Common Stock
in the foreseeable future.
17
<PAGE>
DILUTION
As of June 30, 1996, the net tangible book value (deficit) of the
Company's Common Stock was $(1,085,351), or $(0.53) per share. The net
tangible book value (deficit) per share of the Company is its total tangible
assets less its total liabilities, divided by the number of shares of Common
Stock outstanding. Dilution per share represents the difference between the
amount per share paid by purchasers in the Offering and the pro forma net
tangible book value per share after the Offering. After giving effect to the
receipt and application of the net proceeds of the Offering (assuming no
value is attributed to the Redeemable Warrants included in the Units), the
pro forma as adjusted net tangible book value of the Company as of June 30,
1996, would have been $4,609,377, or $1.05 per share. This represents an
increase in net tangible book value per share of $1.58 to the Company's
existing stockholders and an immediate dilution of $2.01 per share, or 66% to
public investors in this Offering (assuming no value is attributed to the
Redeemable Warrants included in the Units). The following table illustrates
this dilution on a per share basis:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per share of Common Stock . $3.06
Net tangible book value per share before Offering ..... $ (0.53)
Pro forma increase per share attributable to new investors $ 1.58
Pro forma net tangible book value per share after Offering(1) $1.05
Dilution per share to new investors ................... $2.01
</TABLE>
The following table summarizes, as of June 30, 1996, the number and
percentage of shares of Common Stock purchased from the Company, the amount
and percentage of cash consideration paid and the average price per share
paid by existing stockholders and by new investors in the Offering.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------------------------ -------------------------------------------------------
Percentage of
Percentage of Consideration Total Average Price
Number Outstanding Shares Paid Consideration Paid Per Share
-------------- ------------------ --------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Present Stockholders . 2,073,270(1) 47% $2,286,272 25% $1.10
New Investors ...... 2,300,000 53 7,043,750(2) 75 $3.06
Total .............. 4,373,270 100% $9,330,022 100%
</TABLE>
- ------
(1) Includes 25,970 shares to be issued as anti-dilutive securities after the
date of this Offering to a director and two principal shareholders in
accordance with the terms of private financing. See "Certain
Transactions."
(2) Assumes no value for the Redeemable Warrants.
If the Underwriter's Over-Allotment Option is exercised in full, the
increase per share attributable to new investors would be $1.70, the pro
forma net tangible book value per share of Common Stock after the Offering
would be $1.17 and the dilution to new investors would be $1.89 per share or
62%.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1996, on an actual basis which reflects the restructuring of the
Company, including the 1 for 30 share exchange of the Common Stock, receipt
of $300,000 of the First Bridge Financing, of which $20,000 was allocated to
the purchase of 170,000 Bridge Warrants, the repayment of $100,000 from the
First Bridge Financing and the receipt of the net proceeds of the Second
Bridge Financing of $844,546 of which $100,000 was allocated to the purchase
of 600,000 Bridge Warrants and (ii) as of June 30, 1996 on a pro forma as
adjusted basis to reflect the sale by the Company of the Units offered hereby
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Recent Bridge Financings."
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------
Pro Forma
Actual(3) As Adjusted(4)
------------- --------------
Short-term debt:
<S> <C> <C>
10% Promissory Notes, less unamortized interest of $33,334 ....... $ 1,046,666 $ --
Long-term debt ................................................... -- --
------------- --------------
Total debt ....................................................... 1,046,666 --
------------- --------------
Stockholders' equity (deficit):
Preferred Stock, $1.00 par value; 1,000,000 shares authorized; no shares
outstanding ..................................................... -- --
Common Stock, $.01 par value; 10,000,000 shares authorized, 2,047,300(1)
shares outstanding on an actual basis, 4,373,270(1)(2) shares
outstanding on a proforma as adjusted basis ..................... 20,473 43,733
Capital in excess of par value ................................... 2,691,873 8,396,675
Deficit accumulated during the development stage ................. (3,727,743) (3,831,031)
------------- --------------
Total stockholders' equity (deficit) ............................. (1,015,397) 4,609,377
------------- --------------
Total capitalization ............................................. $ 31,269 $ 4,609,377
============= ==============
</TABLE>
- ------
(1) Does not include (i) 125,193 shares reserved for issuance upon the
exercise of outstanding warrants at exercise prices ranging from $.30 to
$22.50 per share; (ii) 990,000 shares reserved for issuance upon the
exercise of warrants granted to management at an exercise price of $9.19
per share; (iii) 86,345 shares reserved for issuance upon the exercise of
stock options granted pursuant to the Company's 1993 Stock Incentive Plan
at exercise prices ranging from $7.00 per share to $45.00 per share (the
Company intends, subject to the completion of this Offering and the terms
of the 1993 Stock Incentive Plan, to reduce the exercise price of
approximately 42,800 of these options to $3.50 per share); (iv) 113,655
shares reserved for issuance upon the exercise of options which may be
granted under the Company's 1993 Stock Incentive Plan and (v) a total of
25,970 shares reserved for issuance upon the exercise of warrants to be
issued as anti-dilutive securities after the date of this Offering to a
director and two principal shareholders in accordance with the terms of a
private financing. See "Management," "Certain Transactions," "Description
of Securities," and "Underwriting."
(2) Includes 25,970 shares to be issued as anti-dilutive securities after the
date of this Offering to a director and two principal shareholders in
accordance with the terms of a private financing. See "Certain
Transactions."
(3) As part of the Second Bridge Financing approximately $140,000 has been
reflected as deferred financing costs of which $69,954 remains
unamortized.
(4) As adjusted to reflect (i) an expense of $69,954 of unamortized debt
issuance costs relating to the Second Bridge Notes which would have
otherwise been amortized over the term of the Second Bridge Notes, and
(ii) an expense of $33,334 of additional interest expense related to the
Second Bridge Notes.
19
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for the years ended June 30, 1995 and
1996, and for the period from July 1, 1993 (Inception) through June 30, 1996
and the balance sheet data as of June 30, 1996 are derived from the financial
statements included elsewhere in this Prospectus. The statements of operation
data for the year ended June 30, 1994, and the balance sheet data as of June
30, 1994 and 1995 are derived from financial statements of the Company not
included in this Prospectus. The information set forth below should be read
in conjunction with the Company's financial statements, and Management's
Discussion and Analysis of Financial Condition, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Period from
July 1, 1993
Year ended June 30 (Inception) to
1994 1995 1996 June 30, 1996
------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues .................... $ -- $ 2,500 $ 13,394 $ 15,894
Costs and expenses:
Selling ..................... 112,455 120,285 208,757 441,497
General and administrative .. 710,952 689,597 725,748 2,126,297
Research and development .... 107,135 277,120 655,124 1,039,379
Depreciation and amortization . -- -- 83,401 83,401
------------- -------------- -------------- ---------------
Total costs and expenses ...... 930,542 1,087,002 1,673,030 3,690,574
Other income (expense)
Interest income ............. 547 3,962 13,586 18,095
Interest expense ............ -- (1,875) (69,283) (71,158)
------------- -------------- -------------- ---------------
Net loss ...................... $ (929,995) $(1,082,415) $(1,715,333) $(3,727,743)
============= ============== ============== ===============
Net loss per share(1) ......... $ (.89) $ (.91) $ (.88)
============= ============== ==============
Weighted average number of common
stock shares outstanding(1) . 1,046,540 1,192,279 1,954,255
============= ============== ==============
</TABLE>
<TABLE>
<CAPTION>
June 30,
--------------------------------------------
1994 1995 1996
----------- ------------- -------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ...................... $ 74,670 $ 321,856 $ 316,012
Working capital (deficit) ...................... (147,806) (8,686) (1,130,280)
Total assets ................................... 74,670 326,868 483,124
Total liabilities .............................. 222,476 335,554 1,498,521
Deficit accumulated during the development stage . (929,995) (2,012,410) (3,727,743)
Total stockholders' equity (deficit) ........... (147,806) (8,686) (1,015,397)
</TABLE>
- ------
(1) Computed on the basis described in Note 1 of the Notes to the Financial
Statements
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a development stage company engaged in the development and
marketing of the CD-MAX technology to publishers of digitally stored
information. The Company commenced operations in July 1993. Prior thereto,
the principals of the Company were involved in the development of the CD-MAX
technology, development of the business plan and arranging for the initial
capitalization of the Company.
From July 1, 1993 (inception) through June 30, 1996, the Company
recognized revenues from operations of $15,894 and had an accumulated deficit
of approximately $3,727,743. The Company has continued to operate at a
deficit since inception and expects to incur significant additional operating
losses until the Company generates significant revenues from operations which
are sufficient to cover its monthly operating expenses.
The Company's strategy is to achieve market acceptance of the CD-MAX
System with publishers of professional, general corporate, library and
educational materials which use CD-ROMs as the method of information
distribution. The Company has an Internet version of its service under
development and expects to introduce it in 1996. The Company has entered into
agreements with four information publishers pursuant to which it may receive
product development, transaction and licensing fees (which represent a
percentage of the revenue billed by the Company on behalf of the publisher),
provided that the publishers are successful in marketing their CD-ROMs, of
which there can be no assurance. The first commercial test of the CD-MAX
System began in August, 1995, and to date, only $15,894 in revenues have been
generated.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1996 COMPARED WITH YEAR ENDED JUNE 30, 1995
For the year ended June 30, 1996, the Company recognized revenues of
$13,394 as license fee income pursuant to its agreements with publishers. For
the year ending June 30, 1995, the Company recognized revenues of $2,500 from
operations.
The Company's operating expenses were $1,673,030 for the year ended June
30, 1996, compared to $1,087,002 for the year ended June 30, 1995. This
increase of $586,028 or 54% was attributable primarily to the following
factors:
Selling expenses were $208,757 for the year ended June 30, 1996, compared
to $120,285 for the year ended June 30, 1995. This increase of $88,472 or 74%
was attributable primarily to increased expenses associated with the design
and production of marketing materials and an increase in public relations
expenses.
General and administrative expenses were $725,748 for the year ended June
30, 1996, compared to $689,597 for the year ended June 30, 1995. This
increase of $36,151 or 5% was primarily due to a $37,239 increase in
administrative salaries (annual salary increase for key employees, additional
staff and temporary services); a $11,277 increase due to an increase in
travel (finance related activities); a $43,243 increase in legal expenses; a
$18,656 increase in Virginia office rent (twelve months versus five months
rent in prior year); and a $53,666 increase in general office expenses;
offset by a decrease of $127,930 in investors' and financial relations
expense.
Research and development expenses were $655,124 for the year ended June
30, 1996, compared to $277,120 for the year ended June 30, 1995. This
increase of $378,004 or 136% was primarily attributed to the increase of nine
additional personnel in software development and operations. This increase in
staff also resulted in an increase of equipment and related expenses.
Depreciation and amortization expense was $83,401 for the year ended June
30, 1996, compared to $0 for the year ended June 30, 1995. This increase of
$83,401 was primarily attributed to the capitalization of equipment leases
and the capitalization of debt issuance costs associated with the Second
Bridge Financing.
Due to the above, the Company had a net loss of $1,715,333 for the year
ended June 30, 1996, compared to a net loss of $1,082,415 for the year ended
June 30, 1995.
21
<PAGE>
YEAR ENDED JUNE 30, 1995 COMPARED WITH YEAR ENDED JUNE 30, 1994
For fiscal year ended June 30, 1995 ("Fiscal 1995"), the Company
recognized revenues of $2,500 as license fee income pursuant to an agreement
with a publisher. For the fiscal year ending June 30, 1994 ("Fiscal 1994"),
the Company did not recognize any revenue from operations.
The Company's operating expenses were $1,087,002 in Fiscal 1995, compared
to $930,542 in Fiscal 1994. The increase of $156,460 or 17% was attributable
primarily to the growth in the Company's operations. More specifically to the
following factors:
Selling expenses were $120,285 for Fiscal 1995, compared to $112,455 for
Fiscal 1994. The increase of $7,830 or 7% was primarily due to an increase in
public relations expense.
General and administrative expenses were $689,597 for Fiscal 1995,
compared to $710,952 for Fiscal 1994. The decrease of $21,355 or 3% was due
primarily to a $64,130 increase in salaries, where management received or
accrued salaries for 12 months of Fiscal 1995, versus nine months for Fiscal
1994, a $131,125 decrease in financial public relations expense, and a
$45,640 increase in general office expenses.
Research and development expenses were $277,120 for Fiscal 1995, compared
to $107,135 for Fiscal 1994. This increase of $169,985 or 159% was primarily
attributable to an increase in head count and temporary services in the
software development and operations areas. The Company opened its Northern
Virginia Operations Center late in Fiscal 1994, and only incurred nominal
office related costs for this facility in Fiscal 1994, versus Fiscal 1995.
Due to the above, the Company had a net loss of $1,082,415 in Fiscal 1995,
compared to a net loss of $929,995 in Fiscal 1994.
RECENT PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock- Based Compensation" which is effective for the
Company's 1997 financial statements. SFAS No. 123 allows companies to account
for stock-based compensation under either the new provisions of SFAS 123 or
the provisions of APB No. 25, but requires pro forma disclosure in the
footnotes to the financial statements as if the measurement provisions of
SFAS No. 123 had been adopted. At this time, the Company intends to continue
accounting for its stock based compensation in accordance with the provisions
of APB No. 25. As such, the implementation of SFAS No. 123 will not
materially impact the financial position or results of operations of the
Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced net losses and negative cash flow from
operations since its inception and at June 30, 1996 had a working capital
deficiency of $1,130,280. Other than routine trade payables, the Company's
primary liability is for accrued expenses of $341,220, which as of June 30,
1996, represents back salary due management of $258,497, fringe benefit
accruals of $19,299, and other accruals of $63,424.
The Company has financed its operations primarily through funds obtained
from the sale of Common Stock in private placement transactions of $2,286,272
and the deferral of management salaries, which as of June 30, 1996, amounted
to $258,497. During the period July 1, 1995 through June 30, 1996, the
Company received $1,825,000 of additional financing through the sale of
equity and the issuance of debt securities to fund the Company's operations
until this Offering is completed.
The Company has no material capital commitments. Most of its capital
assets consist of computers and related peripheral equipment which have
either been purchased or leased. The Company's obligations under its
equipment leases are not material. The Company does have employment
agreements with four of its senior executives which call for annual salaries
of approximately $56,000 to $79,500 per year per individual. And, the Company
has office lease obligations for its offices in Murray Hill, NJ and Reston,
VA, in the aggregate of $95,889 in Fiscal 1997 and $65,112 in Fiscal 1998.
22
<PAGE>
At June 30, 1996, the Company had available net operating loss carry
forwards of approximately $2,800,000 to offset future taxable income for
federal tax purposes. The utilization of the loss carry forwards to reduce
future income taxes will depend upon the Company's ability to generate
sufficient taxable income prior to the expiration of the net operating loss
carry forwards. The carry forwards expire in the year 2008 through 2010.
However, the Internal Revenue Code of 1986, as amended, (the "Code") limits
the maximum annual use of net operating loss and tax credit carry forwards in
certain situations where changes occur in the stock ownership of a
corporation. As a result of this Offering, a change in ownership is likely to
occur which would substantially restrict the Company's use of the net
operating loss carry forwards for federal and state income tax purposes. See
Note 5 to Financial Statements.
The report of the Company's independent auditors on the Company's
financial statements as of June 30, 1996 and for the years ended June 30,
1995 and 1996 and for the period from July 1, 1993 (inception) to June 30,
1996, contains an explanatory paragraph expressing substantial doubt with
respect to the ability of the Company to continue as a going concern. The
Company believes that the net proceeds from this Offering will be sufficient
to finance the Company's working capital requirements for 12 months following
the completion of the Offering. See "Use of Proceeds." There can be no
assurance that the Company will generate sufficient revenues or be able to
raise additional capital to fund its operations after such period.
23
<PAGE>
BUSINESS
The Company, a development stage company with minimal revenues to date, is
engaged in the business of developing and marketing the CD-MAX(TR) System,
based upon its proprietary technology, which is designed to allow publishers
of professional, corporate, library and educational CD-ROM based information
to sell their information to end-users on a usage basis. Publishers in these
fields currently sell CD-ROM titles for a fixed fee, normally as an annual
subscription. The Company believes that the CD-MAX System has the potential
to increase the revenues of CD-ROM publishers by reducing copyright and
license abuse and enabling them to expand into new markets. The CD-MAX System
consists of proprietary metering and encryption software and billing
services. The CD-MAX System is being adapted for use on the Internet and is
expected to be commercially available during 1996 under the name NET-MAX(TR).
The Company's strategy is to achieve broad market acceptance of its CD-MAX
System in its target markets and to create a range of services based on
proprietary technology which is expected to produce a continuous revenue
stream. The Company has targeted publishers in the professional, corporate,
library and educational fields as its initial markets. The Company is
focusing its initial marketing efforts in the U.S. and Canada. Subsequent
marketing efforts may be extended to European markets. The Company has
received an unrestricted export license from the Department of Commerce. This
license allows it to export its software to most countries in the world,
unlike many other hardware and software encryption methods, which may not be
exported, due to federal export restrictions.
Electronic information is currently distributed primarily by three
methods: 1) CD-ROM 2) online services and 3) the Internet. Currently,
professional and business information delivered on CD-ROM is generally sold
on a flat fee or subscription basis for unlimited use. The Company believes
that such forms of access can be inefficient and expensive for many
end-users. Unmetered usage may also prevent publishers from maximizing
revenues from heavy users, particularly users on networks. The second method,
online services, may be advantageous for timely information, such as stock
quotes, but, due to the high costs of building and maintaining a mainframe
computer installation and the high costs of transmission, online is usually a
more expensive alternative to CD-ROM. Hybrid CD-ROM/online systems attempt to
maximize the advantages of both methods of distribution, by combining the
timeliness of online systems with the lower costs of CD-ROM. The Internet is
the third and newest method of distribution. It has only recently been
developed for commercial use and faces similar problems as CD-ROM, including
the need for security and metering services.
The CD-MAX System monitors the amount and type of information accessed
from an encrypted CD-ROM. The usage data is stored in encrypted form on the
computer's hard disk. The CD-MAX System can retrieve this data from the
end-user via modem. The Company can then update the necessary security codes
and bill the end- user on behalf of the publisher. CD-MAX withholds new
security codes if the end-user does not pay the applicable charges which will
terminate access to the CD-ROM. For those personal computers without a modem,
the Company offers alternate billing arrangements.
Information contained on published CD-ROMs is located via the use of
special software on the CD-ROM known as a "search and retrieval engine." The
CD-MAX System is compatible with many popular search and retrieval engines.
The Company has entered into agreements with Dataware Technologies, Inc., and
Folio Corporation, major search and retrieval software firms, to facilitate
the compatibility of the CD-MAX metering and encryption capabilities with the
Dataware and Folio search and retrieval engines.
The Company has been working with industry leaders and associations to
gain industry acceptance of the CD-MAX System. The Company was the only
information security and metering firm invited to speak at the Information
Industry Association's Annual Investor's Conference in June, 1995. Company
management was also invited to chair three sessions at the Information
Industry Association's annual conference in September, 1995. An article in
CD-ROM Professional written by two of the Company's executives, received an
award for Best Article at the annual Online/CD-ROM convention in October,
1995.
The Company's executive offices are located at 11480 Sunset Hills Road,
Suite 110, Reston, Virginia 22090; its telephone number at this location is
(703) 471-5755.
INDUSTRY BACKGROUND
The sale of electronic information on CD-ROMs is a large and growing
market. The Company has targeted publishers of professional, corporate,
library and educational fields as its initial markets. According to InfoTech,
24
<PAGE>
Inc., a leading CD-ROM market research firm, these publishers were estimated
to account for 75% of the approximately $9 billion U.S. CD-ROM software
market for 1995. The U.S. CD-ROM software market is projected to grow 60% in
1996 to over $14 billion, with the worldwide CD-ROM software market
increasing to over $23 billion.
Sales of CD-ROM hardware generate sales of CD-ROM software. InfoTech
reports that approximately 12 million CD-ROM drives were installed in the
U.S. in 1994 and more than 20 million were installed in 1995, an increase in
excess of 60%. Additionally, CD-ROM drives are increasingly being installed
in networks where one CD-ROM drive may serve dozens or even hundreds of
users.
The introduction of the new high density CD-ROM drives, known as Digital
Video Disk ("DVD"), which are expected to ship in mid-year 1996, may expand
the CD-ROM market further by expanding the capacity of a CD-ROM by 700% or
more. DVD is expected to also allow for greater use of full-motion video
which will enhance the value of CD-ROM titles, particularly interactive
training titles.
DISTRIBUTION OF ELECTRONIC INFORMATION
Currently, electronic information databases are primarily distributed in
three ways: CD-ROM, online services and the Internet.
CD-ROM: CD-ROM titles in the professional, corporate, library and
educational markets are currently sold on a fixed fee basis, normally as an
annual subscription where the user usually receives a new disc (or set of
discs) monthly or quarterly. For many titles, the price exceeds $2,000 per
year. Without usage billing services, a publisher's customers are faced with
a difficult "all or nothing" purchase decision. Many potential customers who
need occasional access may be unwilling to commit to the large up-front costs
under the current pricing system. Furthermore, the tremendous information
storage capacity of optical technology allows multiple databases on one
CD-ROM. Current technology and practices, however, discourage publishers from
offering multiple databases on one CD-ROM since the total cost for the
databases to the end-user could be prohibitive.
Even when publishers charge a higher flat fee for network licenses, they
are finding network users can easily abuse their network licenses by
unauthorized use. The CD-MAX System is designed to capture all use for
billing purposes in order to prevent unrecorded sharing of data from a CD-ROM
and to provide the publishers with the option of billing network users based
upon usage.
CD-ROM publishers face the problem of piracy of their CD-ROM based
information. Recently developed low cost writable optical technologies and
high-capacity cartridge tape drives make it possible to copy all or part of a
CD-ROM easily and inexpensively. The applications software industry suffers
substantial losses of potential revenue due to piracy. Providers of
information on CD-ROMs are becoming equally susceptible, but are at greater
risk because of the much higher price of their products. The Company's
proprietary encryption software is designed to address this problem.
Online: An alternative to CD-ROM is online information services. These
services often cost many times what a comparable CD-ROM would cost. Online
information costs are high because the provider must pass along the
telecommunications costs and the cost of maintaining a mainframe computer
installation that must be large enough to handle peak periods, but is often
not used to capacity.
Some publishers currently offer a hybrid CD-ROM/online service. In a
hybrid environment, users receive a subscription to the CD-ROM product for
which they receive monthly updates. All of the searches for information would
normally begin with the CD-ROM. Only if the user wanted information that was
issued since the last monthly CD-ROM update would he need to go online for
the most recent information. In this way, online time is minimized and the
low cost and large storage capacity of CD-ROM is maximized. The Company
believes the hybrid CD-ROM/online distribution method will ultimately become
a dominant method of distribution for professional and business information.
Internet: Closely related to the CD-ROM industry is the Internet market.
The Internet market for published information has only recently developed and
is not as large as the current CD-ROM market, but, it may become a
multi-billion dollar industry. Professional, corporate, library and
educational information publishers on the Internet have a similar need for
metering and security technology as CD-ROM publishers. The Company is
25
<PAGE>
in the process of developing the Internet version of its CD-MAX System, under
the name NET-MAX. It expects to introduce a commercial version of NET-MAX in
1996. There can be no assurance that the Company will develop this product,
or that it will find any commercial acceptance.
THE CD-MAX SYSTEM
The CD-MAX System consists of software installed on the end-user's
computer, which includes an encrypted file structure containing security
codes and transaction tracking programs, and an encrypted CD-ROM. The CD-MAX
System is installed on the end-user's computer by means of a short CD-MAX
program contained on the CD-ROM itself, or on an accompanying diskette.
Information on a CD-ROM may be protected from unauthorized use by
encrypting the data on the CD-ROM. The Company employs a proprietary data
encryption process to protect CD-ROM information. CD-ROM files are encrypted
on a pre-master disk from which the CD-ROMs are then pressed in the
manufacturing process.
An encrypted CD-ROM will be accessible only when three elements interact
and match properly: (1) the encrypted CD-ROM, (2) security codes contained in
the metering software, and (3) electronic code updates gained through
registration and reauthorization with the CD-MAX billing center. When a
CD-MAX encrypted CD-ROM is read by an authorized end-user, the proper
security codes unlock the information automatically. The Company's encryption
technique produces no discernible effect on a CD-ROM's performance.
Once the CD-MAX System is installed (in either single-user or network
settings), any use of a CD-MAX encrypted CD-ROM is recorded for
transaction-tracking and billing purposes. The CD-MAX System automatically
monitors and records information transactions according to the publisher's
specifications and stores them in a file on the user's hard disk. The stored
transaction data is periodically retrieved via modem, with minimal customer
involvement. The Company's billing operations then process the data, prepare
and mail billing statements, and accept payment of fees from end-users. For
users who do not have a modem, the CD-MAX System can be used with alternative
arrangements, with usage information retrieved via diskette.
Security codes are changed whenever transaction data is retrieved from the
end-user. Transaction data retrieval is based on the user's credit limit or
an expiration date. To prevent non-paying users from accessing the CD-ROM
information, the system will not function without access to the new codes.
The CD-MAX system is designed to monitor and record end-user transaction
data; therefore, trends and patterns of use can be reported to publishers for
each of their CD-ROM databases. Publishers may learn how their customers use
databases, which databases are used frequently and which are used
infrequently for marketing and product development purposes. The Company
includes transaction reports to publishers with its billing services.
The CD-MAX System is customized to the needs of each publisher. This
process involves consulting with the publisher to determine product
parameters such as pricing, data measurement goals and possible marketing
enhancements. Publishers typically rely on outside firms to pre-master and
master the software files contained on a CD-ROM. The Company's involvement in
the production process is limited to encrypting the pre-mastered files and
testing for errors. The Company provides support to end-users and publishers
with a telephone help- line.
CD-MAX Billing Services: On behalf of publishers, the Company bills and
accepts payment of transaction fees from all users of CD-ROM based
information sources which use the CD-MAX System. The Company currently offers
two alternatives for billing: after-use and pay-in-advance billing.
For after-use billing, the user's computer accesses the Company's billing
computer via a standard modem at the end of a billing period. Upon access,
the Company downloads the transaction information and calculates billing
accordingly. If bills are not paid within a predetermined period of time, the
Company will not download new access codes and the CD-MAX System will
automatically terminate access to the CD-ROM until the bill has been paid and
new codes are downloaded to the user's computer. For most publishers,
after-use billing is the preferred option. Although the Company does not
assume liability for unpaid customer invoices, it charges publishers a
percentage only of revenues collected.
26
<PAGE>
For pay-in-advance billing, users are required to contact the Company and
pay for a certain amount of transactions, normally via credit card or check
debit. The Company then updates the access control codes in the CD-MAX
software. The software tracks the transactions and notifies the user when the
advances have been depleted.
ARCHITECTURE OF THE PRIMARY ELEMENTS OF CD-MAX SYSTEM
The primary elements of the CD-MAX System are data encryption, metering
and security.
Data Encryption. Data encryption is a method of generating and expanding
codes. An algorithm reads the code, expands it and combines it with the
unencrypted text (the "plaintext") to create encrypted text (the
"cyphertext"). This cyphertext is unreadable by the user without the
appropriate code and algorithm to decrypt the data. The reverse process is
decryption, which reads the code, expands it and combines it with the
cyphertext to create the plaintext. The CD-MAX System uses a proprietary
encryption method specifically designed for information on CD-ROMs. The
CD-MAX System has no discernible effect on retrieval times and provides a
high level of security relative to the value of the information on the disc.
The encryption method is not designed to stop all attempts to break it, but
rather to provide an economic level of security that is intended to deter all
normal unauthorized access to the information. In addition, the Company's
encryption method has been approved by the U.S. Department of Commerce for an
unrestricted export license so that, unlike other encryption methods, the
CD-MAX System can be exported outside the United States.
Once integrated with the publisher's search and retrieval engine, the
CD-MAX System decrypts data continuously, provided that the user has either
paid for data retrieval or established credit with the CD-MAX billing center.
To facilitate encrypted information updates, the Company has created an
Automated Encryption Program, which allows publishers to encrypt additional
data without the Company's intervention.
Metering. Metering is a method of measuring and recording information. The
CD-MAX System measures and records actual data access, which allows
publishers to charge on a "One Chargeable Unit" ("OCU") basis. An OCU is a
small data segment. The ability to meter by OCU gives the publisher
flexibility in pricing information. Retrieving, printing and transferring
(copying) data are the main functions recorded. Each time an OCU is retrieved
from the database, information about that OCU is recorded in a transaction
file. The CD-MAX system automatically calculates the transaction charges,
according to specific base prices and transaction fees the publisher chooses.
Security. The CD-MAX System provides security at many different levels.
Security begins with the proprietary CD-ROM encryption technology employed to
protect CD-ROM information. User login security is provided to prevent
unauthorized users from retrieving data, as well as giving the publisher's
customers the ability to charge departments within their organizations for
their transactions. Installation diskette security protects publishers from
lost revenues since users must register with the CD-MAX billing center in
order to retrieve the data. Authorization codes are entered into the user's
CD-MAX system during reauthorization. The transaction data cannot be read by
ordinary means as it is encrypted using a special one-way encryption process
that is decrypted at the CD-MAX facility.
ARCHITECTURE OF THE NET-MAX SYSTEM FOR THE INTERNET
The Company is in the process of developing an Internet version of the
CD-MAX System, to be named NET-MAX. There can be no assurance that this
Internet product will be successfully developed or commercialized. Based upon
the Company's development to date, it is expected that the architecture of
the NET-MAX System will be as follows:
The publisher's data will be prepared with embedded NET-MAX encryption
tags in the Internet source document. The data will then be stored at the
publisher's web site. Data tagged with the NET-MAX encryption tag will be
stored in encrypted format and will be unreadable to a unauthorized user.
To retrieve the NET-MAX encrypted data, the Company will make available a
complex set of programs that administer tracking, metering and security on
the user's computer (the "metering stub") which can be down-
27
<PAGE>
loaded from an Internet Web Site. When the NET-MAX metering stub is
installed, the user will be required to register with the CD-MAX billing
center. All sensitive transactions will be subject to encryption using
available Internet encryption software, such as the Netscape standard Secure
Sockets Layer.
The metering stub inserts itself into the protocol layer looking at each
packet destined for the user's web browser. Once a NET-MAX encryption tag is
found in the data stream, the metering stub determines the appropriate
charges and communicates this to a metering server at the Company's facility.
If the user's authorization codes are accepted by the Company's metering
server, the decryption of the packet is accomplished at the user site.
Without the NET-MAX metering stub, the data is unreadable to the web browser.
Many browsers save the publisher's Internet document. The CD-MAX metering
stub also intercepts requests to store the data into the local hard disk and
ensures that the data remains stored in encrypted format. When the data is
again requested from the local hard disk, the metering stub decrypts the
data. Depending on the publisher's requirements, verification and approval
from the NET-MAX metering server may be required prior to data decryption.
The publisher's data is safe from unauthorized users even when it has been
downloaded from the publisher's web site.
Finally, users can send the encrypted data by mail to another user
(redistribution). If that user is also registered with the Company, the
NET-MAX metering stub will intercept requests to read that file. Once the
CD-MAX metering server recognizes the new user's authorization codes, the
encrypted data is decrypted. The publisher's data remains inaccessible to
unauthorized users.
MARKETING
The primary method of marketing the CD-MAX System to publishers is the
Company's internal sales force. All end-user marketing will be done by the
publishers. Presently the Company's sales force consists of two people. The
Company expects to increase the sales force to four persons in the second
half of 1996, assuming available resources. Based on the nature of the
Company's initial target markets, the Company believes that a four person
sales force will be sufficient for the foreseeable future.
Information contained on published CD-ROMs is located and retrieved via
the use of special software included on the CD-ROM known as a "search and
retrieval engine." There are a small number of companies that sell search and
retrieval engines to a large number of CD-ROM publishers. The Company's
marketing strategy includes working with search and retrieval engine software
companies to have the CD-MAX System incorporated into their software. The
Company believes this strategy will provide the CD-MAX System with the
approval of the search and retrieval software companies and convince
publishers that the CD-MAX System is compatible with the search and retrieval
software. The Company has entered into agreements with Dataware Technologies,
Inc., and Folio Corporation, major search and retrieval software firms, to
facilitate the compatibility of the CD-MAX metering and encryption
capabilities with the Dataware and Folio search and retrieval engines. The
agreements provide for the Company to work with Dataware and Folio to share
proprietary information for the integration of their respective products so
as to facilitate joint service offerings. The Company is currently
negotiating with several potential customers who are users of the Folio and
Dataware search and retrieval engines, and it has recently entered into a
contract with a customer that intends to use the Dataware search and
retrieval engine. Neither Dataware nor Folio is under any obligation to make
their search and retrieval software compatible with the CD-MAX System.
The Company has been working with industry leaders and associations to
gain industry acceptance of the CD-MAX System. The Company was the only
information security and metering firm invited to speak at the Information
Industry Association's Annual Investor's Conference in June, 1995. Company
management was also invited to chair three sessions at the Information
Industry Association's annual conference in September, 1995. An article in
CD-ROM Professional that was written by two of the Company's executives
received an award for Best Article at the annual Online/CD-ROM convention in
October, 1995.
The Company has utilized trade advertising to increase its name
recognition within its target market. The Company advertises in major
industry publications. The Company has also retained a public relations firm.
To expand its contacts within the industry, the Company has created an
advisory board comprised of senior executives who have been employed at large
publishing firms. See "Management -- Advisory Board."
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<PAGE>
PRINCIPAL CONTRACTS
As of the date hereof, the Company has four contracts with customers for
its CD-MAX System. In March, 1995, the Company entered into a contract with
Mitchell International, a unit of Thomson Publishing that publishes
automobile repair manuals. Mitchell is working with their CD-ROM product
"On-Demand Computerized Repair Information" under the name "Metered
On-Demand" using the CD-MAX System. To date, this contract has resulted in
minimal revenues to the Company due to the fact that the product is still
being test marketed. In July, 1995, the Company entered into a contract with
Disclosure, Incorporated, a major provider of financial and legal information
about public companies to the investment and legal communities. Its CD-ROM
title "New Issues" is the first of four titles under contract and intended to
be sold under the name "Metered New Issues." This product has completed
testing and had its initial commercial shipment in late July, 1996. In May,
1996, the Company entered into a contract with Credential Information and
Verification Services, Inc. ("CIVS"), a health care information services
company, to adapt the CD-Max System to a data base to be marketed by CIVS
using the Dataware search and retrieval engine. This contract is in its
development (pre-testing) stage. An officer, director and principal
shareholder of the Company is an officer, director and principal shareholder
of CIVS, see "Certain Transactions." In July, 1996, the Company entered into
a contract with Information Handling Services, Inc. ("IHS"), a publisher of
CD-ROM data bases, to adapt the CD-MAX System to one of its data bases. The
contract with IHS is also in its development (pre-testing) stage. Each of
these contracts requires the publisher to pay fees for billing services and
to pay CD-MAX a percentage of all revenues generated through the use of
CD-MAX encrypted products.
COMPETITION
The Company is aware of other companies that are developing metering and
encryption systems that are in some ways similar to the Company's system. In
addition, the Company believes that it is possible to provide some of the
same benefits that the CD-MAX System will offer by other means. It is also
possible that other companies may be developing systems comparable to the
CD-MAX System. There can be no assurance that either existing or new
competitors will not develop technologies that are superior to, or more
cost-effective than, the Company's system or that otherwise achieve greater
market acceptance. There can be no assurance that the Company will be able to
compete successfully against existing competitors or future entrants into the
market.
No security and pricing/billing technology has yet emerged as the standard
for the CD-ROM industry. Individual information providers, however, have
begun to actively seek solutions to the security-related problem of license
abuse, and to the pricing issues that arise when multiple databases are
loaded onto one CD-ROM. Both software and hardware solutions are currently
available from the Company's competitors, and each category is profiled
below.
Software-only systems. Software-based security systems have been available
to the software and information industries for a number of years. These
systems provide security in the form of copy protection, but do not have any
capability for usage-based pricing. Only a few CD-ROM publishers in CD-MAX's
target markets use software based security systems.
CD-MAX has encountered only three firms that are actively selling
software-based security systems to CD-ROM providers. Rainbow Technologies,
Inc. ("Rainbow"), TestDrive Corporation and Softbank, Inc. These systems all
allow catalogs of software programs to be distributed on CD-ROM, either
gratis or at a nominal subscription price. Customers may review descriptions
and trial versions of individual products at their convenience, with the
option of unlocking access to any program they desire. Sellers take credit
card payment and provide pass codes over the telephone. This approach is
viewed as most acceptable for selling large quantities of low- priced
consumer educational and entertainment programs, since they are usually
self-contained and require small amounts of memory. Simple unlocking systems,
such as Rainbow's VendorSystem and the others, do not, however, adequately
address the pricing, security and customer-convenience needs of high-priced
CD-ROM databases that contain large numbers of records and require ongoing
copyright protection. The Company believes it is unlikely that CD-MAX's
target markets will adopt the approach offered by these three companies.
Hardware-based security systems. The introduction of a hardware element
into a security system increases the level of security that can be attained,
since protection of codes no longer rests solely on software barriers.
29
<PAGE>
Hardware security systems, such as Rainbow's Sentinel Hardware Key, are
commonly used to protect high- priced workstation software. End-users insert
a hardware plug into the parallel port of their computer in order to gain
access to the software program. Since the security codes are both fixed and
proprietary, each software program that uses this approach requires a
separate hardware plug in the parallel port of the computer. This type of
hardware system lacks a metering capability.
The Company knows of two companies that have developed hardware-based
security systems which have metering capability. Wave Systems Corp. ("Wave")
uses a board that is installed in the user's computer. In addition to
metering, the board facilitates the use of Data Encryption Standard ("DES"),
a government encryption standard developed in the 1970's. CD-MAX uses a
proprietary approach that the Company believes is more flexible and
appropriate for information sold on CD-ROM and does not require additional
hardware. Wave is also attempting to adopt an alternative approach that uses
a proprietary microchip, instead of a board, which would be installed in the
user's computer at the time the computer is manufactured. This would require
the cooperation of computer manufacturers. As of the date hereof, to the
Company's knowledge, no manufacturer has agreed to install Wave's microchip
in their computers. Wave is also currently attempting to develop a
satellite-based information delivery system.
InfoSafe Systems, Inc. ("InfoSafe") has developed an encryption system to
meter CD-ROM usage and bill customers accordingly. Certain elements of
InfoSafe's Keystone System -- principally the encryption of files and use of
a hardware device -- are similar to Wave's approach. InfoSafe's system uses
an external control box that connects to a Small Computer System Interface
("SCSI") port on a computer.
PROPRIETARY RIGHTS AND INTELLECTUAL PROPERTY
The CD-MAX System is based upon software and related technical data that
the Company believes is a "trade secret." The Company believes that
commercial protection of its products will depend primarily upon the CD-MAX
System proprietary software remaining a trade secret and on copyright
protection. In order to protect trade secrets, the Company is taking
measurements which in its opinion are appropriate procedures to protect its
rights. The Company is also maintaining its copyright rights in this
proprietary software. In any case, there can be no assurance that the
Company's technology will remain secret or that others will not develop
similar technology and use such technology to compete with the Company. While
the Company has certain rights with respect to patents (see discussion below)
those patents do not cover the CD-MAX System as it is presently configured.
Prior to the formation of CD-MAX, John David Wiedemer, Senior Vice
President, Operations, developed the technology, which led to the creation of
the CD-MAX System. In connection with the formation of the CD-MAX System, he
entered into an exclusive, 99 year, worldwide, master license with CD-MAX to
certain intellectual property, technology and patents (the "Intellectual
Property") free and clear of any liens or claims (the "Master License").
The Intellectual Property includes rights to certain patents, and the
following non-patented intellectual property: a demonstration program
(original and subsequent versions), a hardware card (original and subsequent
versions), and software outlines, including an Overview of Software
Components of CD-MAX System (July 15, 1993); Functional Program Description
(August 25, 1993); and Preliminary Notes on Billing System Design (Sept. 21,
1993). None of the patents have been and none of the patents can be filed in
Europe.
The field of use of the Intellectual Property covered by the Master
License is for text and related multimedia information on any electronic
medium, including the Internet, online and CD-ROM market. The Master License
includes standard default provisions, such as the reversion of the license to
the licensor (or assigns), should CD-MAX file for bankruptcy or not protect
and defend from infringement any of the intellectual property covered by the
license. The Master License also permits John David Wiedemer to compete with
the Company after 1999, if he is terminated by the Company without cause and
if the Company fails to have gross revenues from sales of products and
services using the Intellectual Property, as adjusted for transaction related
taxes, returns, refunds, bad debts, and direct payments to third parties for
the material being distributed ("Adjusted Gross Revenues"), of at least
$3,000,000 in 1999, $4,000,000 in 2000, and $5,000,000 in 2001, and each year
after 2001 Adjusted Gross Revenues equal to the prior year's Adjusted Gross
Revenues requirement plus 15%,
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adjusted for inflation. The Master License provides for a royalty to a
Royalty Trust (the beneficiaries of which include John David Wiedemer, Robert
Wiedemer, members of their family, David B. Boelio, Philip J. Gross and
Weldon P. Rackley) of 1.25% of the Adjusted Gross Revenues of CD-MAX in
excess of $15 million but under $100 million per year, and 2.5% of the
Adjusted Gross Revenues on amounts over $100 million. However, no royalties
are due or payable unless the closing bid price for the Company's Common
Stock has been at least $52.50, as adjusted for any stock dividends, stock
splits or recapitalization, for a thirty calendar day period, and the
Company's net income during any fiscal year is at least equal to three
percent (3%) of the shareholders' equity after payment of the royalty. See
"Certain Transactions."
The above referred to patents do not cover the CD-MAX System as it is
currently configured, and thus the Company does not currently have any patent
protection for the CD-MAX System.
RESEARCH AND DEVELOPMENT
The Company is engaged in research and development efforts aimed at
improving and expanding the potential markets for its products. The Company's
research and development resources consist of a nine person product
development staff. Primary projects presently being researched and developed
include: adapting the CD-MAX System to the Internet; product enhancements to
the CD-MAX System relating to the user interface, tracking capabilities, and
the system security; expanding potential computer platforms that can be used
with the CD-MAX System; improving the efficiency and capability of the back
end support software, including improvement in usage reporting and market
research capabilities for publishers; improving testing, customer service and
publisher support capabilities; planning improvements necessary to allow for
rapid growth in operations and development; and support for the marketing
efforts, which include improved product demonstrations and demonstration
support capabilities.
EMPLOYEES.
The Company has nineteen (19) full time employees. Two employees are in
marketing, four are in management and administrative positions, and thirteen
(13) are in product research and development. Management considers its
employee relations to be satisfactory.
FACILITIES.
The Company leases space for offices in Murray Hill, New Jersey
(approximately 1,650 square feet) on a five (5) year lease expiring in
January, 2000 and Reston, Virginia (approximately 4,400 square feet) on a two
year lease. The Company also owns or leases office equipment and personal
computers.
LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings.
31
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS.
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position with Company
-------------------------- ----- -----------------------------------------------------
<S> <C> <C>
Robert A. Wiedemer ....... 36 President, Chief Executive Officer, Chairman of Board
Philip J. Gross .......... 44 Secretary, Treasurer, Vice President-Chief Financial
Officer, Director
John David Wiedemer, Ph.D. . 42 Senior Vice President, Operations, Director
David B. Boelio .......... 42 Executive Vice President, Marketing and Sales
Steven P. Schnipper ...... 25 Director
Weldon P. Rackley ........ 60 Director
</TABLE>
Robert A. Wiedemer, Chairman of the Board since 1995, President, Chief
Executive Officer and a Director of the Company since 1993. Together with his
brother John David Wiedemer, Mr. Wiedemer co-founded the Company. From March
1990 until June 1993, he worked with Dr. Wiedemer in the development of the
CD-MAX technology. Mr. Wiedemer received his B.A. from the University of
Texas and a Master's Degree in Business from the University of
Wisconsin-Madison with a specialty in Marketing.
Philip J. Gross, Secretary/Treasurer, Chief Financial Officer, and
Director since 1993. From 1986 until 1989 Mr. Gross was chief financial
officer, treasurer and secretary of America Online. From 1985 until May,
1994, he was a director of National Digital Corporation of McLean, Virginia,
a digital photo transmission company. From 1990 through June, 1993, Mr. Gross
was chief financial officer of Phone Base Systems of Vienna, Virginia, a
telecommunications firm. From 1991 to the present, he has been the chief
operating officer and a director of Credential Information and Verification
Services, Inc. of Rockville, Maryland, a health care credential information
services company. Mr. Gross is a Certified Public Accountant. He holds AB and
MBA degrees from Syracuse University.
John David Wiedemer, Ph.D., a Director, since 1995, and Senior Vice
President--Operations since 1993. Dr. Wiedemer co-founded the Company with
his brother Robert Wiedemer. From March 1990 until June 1993, Dr. Wiedemer
was involved in efforts to develop the CD-MAX technology. Dr. Wiedemer holds
Ph.D. and Masters degrees in economics from the University of
Wisconsin-Madison, and a Bachelor of Arts degree (Magna cum laude) from the
University of Pennsylvania.
David B. Boelio, Executive Vice President, Marketing and Sales since July,
1993. From 1990 until June, 1992 he was vice-president, editor in chief at
Macmillan Publishing of New York City. From June, 1992 through July, 1993, he
was a self employed consultant to the publishing industry. He holds a BA
degree from the University of Michigan.
Steven P. Schnipper, Director since 1995. Since 1992, he has been a
financial consultant, working with individual and corporate clients. From
1993 to November, 1994, Mr. Schnipper was employed by the City of Elizabeth,
NJ designing, implementing and troubleshooting computerized systems and
applications. Mr. Schnipper holds BA and MBA degrees from Rutgers University.
Prior to 1992, Mr. Schnipper was a student.
Weldon P. Rackley, Director since May 1996. From 1991 to November 1994 he
was executive director of AMACOM Books, the book publishing division of the
American Management Association, located in New York City, and from November
1994 to the present he has been the managing director of publications for the
American Management Association.
ADVISORY BOARD
The CD-MAX Advisory Board consists of the persons set forth below. The
Advisory Board members serve one year terms from the date of their
appointment and receive options to purchase the Company's Common Stock in
consideration of their service on the Advisory Board. The Company policy is
to annually grant stock options to members of the Advisory Board. The number
of options to be granted is at the discretion of the Company's Board of
Directors.
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<PAGE>
John H. Davis, the former chairman and chief executive officer of The
Thomson Corporation's Book/Reference Group, retired from Thomson in 1993.
Previously he held executive positions with Simon & Schuster, Inc. and its
subsidiary, Prentice-Hall, Inc., including president of the Simon & Schuster
Higher Education Group and president of the Prentice-Hall College Division.
Until 1993, Mr. Davis served as treasurer of the Board of Directors of the
Association of American Publishers ("AAP") and as a member of its Executive
Committee. In May, 1994, he received the AAP's James F. Leisy Achievement
Award in recognition of the positive influence he has exerted on the careers
of many publishing industry executives.
James D. Ramsey, III is president and chief executive officer of Evoke,
Inc., a new venture serving the information needs of various professional and
corporate markets. From 1991 to 1994, Mr. Ramsey was senior vice president of
Research Institute of America ("RIA"), a publisher of tax information owned
by The Thomson Corporation. As general manager of RIA's electronic publishing
unit, he bore primary responsibility for planning and executing the company's
move from print into CD-ROM-based distribution of information.
William Saffady, Ph.D. is a Professor in the School of Information Science
and Policy, State University of New York at Albany. As the author of over 30
books and dozens of articles, Dr. Saffady is a recognized authority on many
aspects of information management, including the use of optical discs and the
cost of online search services.
Fraser P. Seitel is managing partner of Emerald Partners, communications
counselors, and senior counselor to Burston-Marsteller. For 21 years, Mr.
Seitel was a communications executive of the Chase Manhattan Bank, resigning
in 1992 after 10 years as senior vice president and director of public
affairs. Mr. Seitel teaches and lectures extensively on the field of public
relations. He is the author of the Prentice-Hall textbook, The Practice of
Public Relations.
William E. Strum served until recently as Vice President of Advanced
Products and Tools at America Online, Inc., where he developed future
strategies for enhanced browser, server and Internet server products.
Previously, Mr. Strum was president and chief technical officer of Media
Cybernetics, Inc., a producer and marketer of imaging and multimedia software
products. Mr. Strum is currently providing business development consulting
services to companies involved in Internet and interactive technologies.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during the fiscal
year ended June 30, 1996, to the Company's Chief Executive Officer. No other
officer, director, or employee earned more than $100,000 for the fiscal year
ended June 30, 1996.
<TABLE>
<CAPTION>
Annual Compensation Long-Term
---------------------------------------- --------------
Compensation
Name and Other Annual Awards
Principal Position Salary Bonus Compensation Options
------------------------------------ ------------ ------- -------------- --------------
<S> <C> <C> <C>
Robert A. Wiedemer, President, Chief
Executive Officer(1) .............. $79,500(2) -- --(3) --
</TABLE>
- ------
(1) The named executive officer did not receive any annual compensation,
stock options, restricted stock awards, stock appreciation rights, long
term incentive plan payouts, or any perquisites or other personal
benefits, securities or property that exceeded the lesser of $50,000 or
10% of the salary and bonus for such officer during the fiscal year ended
June 30, 1996.
(2) Payment of a portion of the salary due to Mr. R. Wiedemer since 1994 as
of the date of this Offering, totaling $99,231, has been deferred until
such time as the Company has adequate funding. The Company intends to pay
Mr. Wiedemer's deferred salary from the net proceeds of this Offering.
(3) In April, 1996 the Company issued to Mr. R. Wiedemer 247,500 ten year
common stock purchase warrants exercisable at a price of $9.19 per share
any time after December 1, 1996, and only at such time as the Common
Stock has traded for twenty days in any thirty day period at a closing
bid price equal to or greater than $9.19, as adjusted for any stock
splits or recapitalizations. See "Management -- Management Warrants."
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<PAGE>
EMPLOYMENT CONTRACTS
CD-MAX has entered into employment agreements with Messrs. Boelio, Gross,
J.D. Wiedemer, and R. Wiedemer which terminate on October 1, 1998. Each
employment agreement provides for automatic one-year renewals subject to
earlier termination by either party with or without cause on certain terms
and conditions. Each agreement is terminable by either the employee or the
Company by notice at least 90 days prior to the end of the term or any
renewal term. If the agreement is terminated by the Company prior to the end
of the term or any renewal thereof without cause, as such term is defined in
the agreement, the Company must pay the employee his base salary for six (6)
months thereafter as severance pay. In addition, the Company may terminate
the agreement for breach of the agreement, including neglect of duty,
malfeasance or misfeasance, or inability to perform specified duties upon 30
days prior notice. Each employee has agreed with the Company that the
employee shall not, directly or indirectly, in the United States in
geographical locations in which the Company does or is in the process of
extending its capability to market and sell its products, for a period of 18
months after termination, engage in any competitive business, or solicit
customers of the Company in competition with the Company. Each of the
employment contracts provides for the payment of a base salary, and at the
Company's discretion, a bonus. The base salary for Messrs. J.D. Wiedemer, R.
Wiedemer and D. Boelio is $60,000 per year and for Mr. P. Gross $45,000 per
year. Mr. D. Boelio's contract provides for automatic increases in his base
salary upon the Company achieving certain sales goals, and for automatic
bonuses to be paid upon the Company achieving specified objectives, however,
no specific objectives have yet been established for fiscal year 1997. The
salaries for fiscal year 1997 of the senior executive officers are
approximately: R. Wiedemer, $79,500; J.D. Wiedemer. $75,000; P. Gross,
$56,000; and D. Boelio, $80,000.
Robert A. Wiedemer is employed as President and Chief Executive Officer,
is in charge of all operations, and entrusted with the direction,
administration, and implementation of the Company's plans and policies. John
David Wiedemer is employed as Senior Vice President of Operations and is
responsible for supervising and managing the Company's product development.
David B. Boelio is the Executive Vice President, Marketing and Sales and is
responsible for supervising and managing the Company's marketing and sales
activities. Philip J. Gross is employed as Chief Financial Officer and is
responsible for all accounting records, all other economic and financial
information and systems of the Company, and for apprising the President and
the Board of Directors of all corporate financial information relevant to
their determinations. Mr. Gross is also employed as the chief operating
officer of a health care information service company. Mr. Gross does not
devote a fixed amount of time to the Company's business, but instead devotes
such time as is necessary to carry out his functions to the Company. There
can be no assurance that the demands upon Mr. Gross from his employment by
the Company and the other company will not create a conflict of interest
between Mr. Gross and the Company, or that such demands may not result in the
Company having less availability of Mr. Gross' services,
STOCK INCENTIVE PLAN
In September, 1993, the Board of Directors adopted, and in December, 1993,
the stockholders approved, the 1993 Stock Incentive Option Plan (the "Plan"),
which provides for the grant of options to purchase an aggregate of 200,000
shares of the Company's Common Stock. The Plan provides for the grant to key
employees of incentive stock options within the meaning of Section 422 of the
Code, and for the grant of non-qualified stock options, and restricted stock
awards to eligible executive officers, directors, consultants and key
employees of the Company. The Plan, which expires in 2003, is administered by
the Board of Directors or a committee designated by the Board of Directors.
The purposes of the Plan are to ensure the retention of existing executive
personnel, key employees and consultants of the Company, to attract and
retain new executive personnel, key employees and consultants and to provide
additional incentive by permitting such individuals to participate in the
ownership of the Company. The criteria to be utilized by the Board of
Directors or committee in granting options pursuant to the Plan will be
consistent with these purposes. Senior management of the Company is not
expected to participate in this Plan; however, they have been granted
Management Warrants which are described below.
Incentive stock options granted under the Plan may be exercisable for a
period of up to 10 years or from the date of grant at an exercise price which
is not less than the fair market value of the Common Stock on the date of the
grant, except that the term of an incentive stock option granted under the
Plan to a stockholder own-
34
<PAGE>
ing more than 10% of the outstanding Common Stock may not exceed five years
and its exercise price may not be less than 110% of the fair market value of
the Common Stock on the date of the grant. To the extent that the aggregate
fair market value, as of the date of grant, of the shares of which incentive
stock options become exercisable for the first time by an optionee during the
calendar year exceeds $100,000, the portion of such option which is in excess
of the $100,000 limitation will be treated as a non-qualified stock option.
Upon the exercise of an option, payment may be made by cash, check or any
other means that the Board or the committee determines. No option may be
granted under the Plan after December 2003.
To date the Company has issued 86,345 stock options to its non-management
directors, key employees, and consultants exercisable at a prices ranging
from $7.00 to $45.00 per share. The Company has not issued any restricted
stock awards. The Company intends, subject to the completion of the Offering
and the terms of the 1993 Stock Incentive Plan, to reprice approximately
42,800 stock options granted under the 1993 Stock Incentive Plan to current,
nonexecutive, employees and members of the Advisory Board, to an exercise
price of $3.50 per share.
MANAGEMENT WARRANTS
In April, 1996, the Company issued to its senior management an aggregate
of 990,000 ten year, common stock purchase warrants that are exercisable
after December 1, 1996 and only at such time as the Common Stock has traded
for twenty days in any thirty business day period at a closing bid price
equal to or greater than $9.19, as adjusted for any stock splits or
recapitalizations, provided, however, that if the Company does not consummate
a public offering of its securities by December 31, 1997, the warrants shall
expire. The exercise price of these Warrants is $9.19 per share, subject to
adjustment for stock splits or recapitalizations.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS AND INDEMNIFICATION
The Certificate of Incorporation limits, to the fullest extent now or
hereafter permitted by the Delaware General Corporation Law, liability of the
Company's directors to the Company or its stockholders for monetary damages
arising from a breach of their fiduciary duties as directors in certain
circumstances. This provision presently limits a director's liability except
where a director (i) breaches his or her duty of loyalty to the Company or
its stockholders, (ii) fails to act in good faith or engages in intentional
misconduct or a knowing violation of law, (iii) authorizes payment of an
unlawful dividend or stock purchase or redemption or (iv) obtains an improper
personal benefit. This provision does not prevent the Company or its
stockholders from seeking equitable remedies, such as injunctive relief or
recision. If equitable remedies are found not to be available to stockholders
in any particular case, stockholders may not have any effective remedy
against actions taken by directors that constitute negligence or gross
negligence.
The Certificate of Incorporation also authorizes the Company to indemnify
its directors, officers or other persons serving at the request of the
Company against liabilities arising from their services in such capacities to
the fullest extent permitted by law, including payment in advance of a final
disposition of a director's or officer's expenses or attorneys' fees incurred
in defending any action, suit or proceeding, other than in the case of an
action, suit or proceeding brought by the Company on its own behalf against
an officer. Presently, the Delaware General Corporation Law provides that to
be entitled to indemnification an individual shall have acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
Company's best interests.
The Company currently maintains director and officer liability insurance.
CERTAIN TRANSACTIONS
In July, 1993, John David Wiedemer and Robert Wiedemer formed CD-MAX for
the purpose of developing the CD-MAX System. Prior to that time they had
engaged in limited development efforts through a number of different entities
owned entirely by Messrs. Wiedemer and members of their family.
CD-MAX entered into the Master License Agreement with John David Wiedemer
which agreement gave CD-MAX rights in certain specified Intellectual
Property. The Master License includes standard license provisions, such as
the reversion of the license to the licensor (or assigns), should CD-MAX file
for bankruptcy or not protect and defend from infringement any of the
intellectual property covered by the license. The Master
35
<PAGE>
License provides for a royalty to a Royalty Trust of 1.25% of the Adjusted
Gross Revenues of CD-MAX in excess of $15 million, but under $100 million per
year, and 2.5% of the adjusted gross revenues on amounts over $100 million.
However, no royalties are due or payable until such time as the closing bid
price for the Company's Common Stock is at least $52.50, as adjusted for any
stock dividends, stock splits or recapitalization, for a thirty calendar day
period, and the Company's net income during any fiscal year after payment of
the royalty is at least equal to three percent (3%) of the shareholders'
equity after payment of the royalty. The Master License also permits John
David Wiedemer to compete with the Company after 1999, if he is terminated by
the Company without cause and if the Company fails to have Adjusted Gross
Revenues from sales of products and services using the Intellectual Property
of at least $3,000,000 in 1999, $4,000,000 in 2000, and $5,000,000 in 2001
(the "Minimum Revenue Goal"), and each year after 2001 Adjusted Gross
Revenues equal to the prior year's Minimum Revenue Goal plus 15%, adjusted
for inflation. See "Business -- Proprietary Rights and Intellectual
Property."
In December, 1995, the Company issued 80,825 shares of Common Stock and
80,825 warrants to purchase Common Stock with an exercise price of $6.60 per
share to Steven P. Schnipper, a director of the Company, and two other
existing shareholders of the Company, Suan Investments and Stourbridge
Investments, Ltd., in return for their guarantee to provide interim financing
of up to $300,000 to the Company. The stock and warrant issuance was the
result of negotiations between the Company and the investors and represents
the repricing of the investors' earlier equity investments in the Company.
This is subject to further adjustment if the price per share of the public
offering is less than the effective price per share ($3.30) paid by these
investors. Based upon the initial public offering price of $6.125 per Unit,
the shares and warrants issued will be adjusted by issuing an additional
25,970 shares of Common Stock and an additional 25,970 warrants.
Pursuant to their guarantees, in February, March and April 1996, Steven P.
Schnipper, and the two principal stockholders of the Company, advanced an
aggregate of $300,000 to the Company. In exchange for the initial $100,000
advance of the First Bridge Financing, the Company issued 50,000 Bridge
Warrants and a one- year, 10% promissory note that was repaid from the net
proceeds of the Second Bridge Financing. For the remaining $200,000 the
Company issued an aggregate of (i) $180,000 principal amount of promissory
notes which bear interest at the rate of 10% per annum and are due and
payable upon the earlier of (a) the consummation of a public financing of the
Company through the sale of equity securities from which the Company receives
gross proceeds of at least $3,000,000 or (b) May 16, 1997, and (ii) 120,000
Bridge Warrants. See "Recent Bridge Financings."
Some of the Company's officers, directors and principal shareholders (or
their family members) purchased an aggregate of $200,000 of the Second Bridge
Financing on terms identical to the other investors in that offering. See
"Selling Securityholders."
In May, 1996, the Company entered into a contract with Credential
Information and Verification Services, Inc. ("CIVS"), a health care
information services company, to adapt the CD-MAX System to a data base to be
marketed by CIVS using the Dataware search and retrieval engine. This
contract is in its development (pre- testing) stage. Philip J. Gross, an
officer, director and principal shareholder of the Company is also an officer
and director and principal shareholder of CIVS, and also works on a part-time
basis for CIVS. Mr. Gross abstained from voting as a director on the
Company's and CIVS' approval of the contract.
Each of the transactions between the Company and each officer and
shareholder of the Company was made on terms no less favorable to the Company
than those that were available from unaffiliated third parties. All future
transactions, including loans, between the Company and its officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the Board of Directors, including a majority of independent and
disinterested outside directors on the Board of Directors, and will be on
terms no less favorable to the Company than those that could be obtained from
unaffiliated third parties.
36
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of Common Stock as of July 31, 1996, and as adjusted to
reflect the sale of the 2,300,000 shares of Common Stock offered hereby, by
(i) each stockholder known by the Company to own beneficially five percent or
more of the outstanding Common Stock, (ii) each director, (iii) each "Named
Executive" officer, and (iv) all executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
Percentage of Outstanding
Shares of Common Stock
-------------------------
Name and
Addresses of Shares Beneficially Prior to After
Beneficial Owners Owned(1) Offering Offering
------------------------------ ------------------- ---------- -----------
<S> <C> <C> <C>
David B. Boelio 223,487 10.92% 5.11%
Philip J. Gross 197,986(2) 9.60% 4.18%(3)
John D. Wiedemer 477,062(4) 23.30% 10.91%
Robert A. Wiedemer 187,950(5) 9.18% 4.30%
Wiedemer Charitable Trust 230,050(6) 11.24% 5.26%
c/o John D. Wiedemer, Trustee
Steven P. Schnipper 256,003(7) 11.50% 3.26%(8)
Weldon P. Rackley 70,575 3.45% 1.61%
Stourbridge Investments, Ltd. 213,057(9) 9.71% 1.44%(10)
c/o Private Trust Ltd.
P.O. Box N-65
Nassau, Bahamas
Suan Investments 504,341(11) 21.38% 5.04(12)
c/o Ernest Gottdiener
911 Sterner Road
Hillside, NJ 07205
All Executive Officers and
Directors as a group
(six persons) 1,413,063(13) 63.03% 28.23%(14)
</TABLE>
- ------
(1) Beneficial ownership has been determined in accordance with Rule 13d-3 of
the Securities Exchange Act of 1934, as amended. Generally, a person is
deemed to be the beneficial owner of a security if he has the right to
acquire voting or investment power within 60 days. Except as otherwise
noted, each individual or entity has sole voting and investment power
over the securities listed.
(2) Includes 15,000 shares of Common Stock issuable upon exercise of
Redeemable Warrants to be issued upon consummation of this Offering in
exchange for Bridge Warrants. See "Recent Bridge Financings" and "Selling
Securityholders."
(3) Assumes the sale of 15,000 Redeemable Warrants in the Concurrent
Offering. See "Selling Securityholders."
(4) Robert A. Wiedemer and John D. Wiedemer are brothers. Includes 230,050
shares owned by the Wiedemer Charitable Residual Trust over which Mr.
John David Wiedemer exercises voting control, and in which he has a
beneficial interest.
(5) Robert A. Wiedemer and John D. Wiedemer are brothers. Does not include
any shares owned by the Wiedemer Charitable Residual Trust in which Mr.
Robert Wiedemer has a beneficial interest but does not exercise any
voting or investment control.
(6) John D. Wiedemer is the trustee of this trust and he and Robert A.
Wiedemer have a beneficial interest in the trust.
(7) Includes 19,152 shares subject to Common Stock options exercisable at
$9.00 per share, 37,397 shares subject to Common Stock warrants that are
immediately exercisable at prices ranging from $.30 to $6.00
37
<PAGE>
per share, and 123,056 shares of Common Stock issuable upon exercise of
Redeemable Warrants to be issued upon consummation of this Offering in
exchange for Bridge Warrants. Does not include 5,925 shares, and 5,925
warrants to be issued as anti-dilutive securities after the date of this
Offering in accordance with the terms of a private financing. See "Recent
Bridge Financings," "Certain Transactions" and "Selling Securityholders."
(8) Assumes the sale of 123,056 Redeemable Warrants in the Concurrent
Offering. Includes 5,925 shares, and 5,925 warrants to be issued as
anti-dilutive securities after the date of this Offering in accordance
with the terms of a private financing. See "Certain Transactions" and
"Selling Securityholders."
(9) Includes 11,000 shares subject to Common Stock warrants that are
immediately exercisable at $6.00, and 136,612 shares of Common Stock
issuable upon exercise of Redeemable Warrants to be issued upon
consummation of this Offering in exchange for Bridge Warrants. Does not
include 5,076 shares, and 5,076 warrants to be issued as anti-dilutive
securities after the date of this Offering in accordance with the terms
of a private financing. See "Recent Bridge Financings," "Certain
Transactions" and "Selling Securityholders." To the best of the Company's
knowledge, the person exercising voting and investment control of these
securities is Kalis Shvarcbir, the president of Stourbridge Investments,
Ltd.
(10) Assumes the sale of 136,612 Redeemable Warrants and 23,842 shares of
Common Stock in the Concurrent Offering. Includes 5,076 shares, and
5,076 warrants to be issued as anti-dilutive securities after the date
of this Offering in accordance with the terms of a private financing.
See "Certain Transactions" and "Selling Securityholders."
(11) Includes 32,439 shares subject to Common Stock warrants that are
immediately exercisable at $6.00 per share, and 278,896 shares of Common
Stock issuable upon exercise of Redeemable Warrants to be issued upon
consummation of this Offering in exchange for Bridge Warrants. Does not
include 14.969 shares, and 14,969 warrants to be issued as anti-dilutive
securities after the date of this Offering in accordance with the terms
of a private financing. See "Recent Bridge Financings," "Certain
Transactions" and "Selling Securityholders." To the best of the
Company's knowledge, the persons exercising voting and investment
control of these securities are Benjamin Bundheim and Ernest Gottdiener,
respectively, the president and vice president of SUAN Investments.
(12) Assumes the sale of 278,896 Redeemable Warrants and 32,442 shares of
Common Stock in the Concurrent Offering. Includes 14,969 shares, and
14,969 warrants to be issued as anti-dilutive securities after the date
of this Offering in accordance with the terms of a private financing.
See "Certain Transactions" and "Selling Securityholders."
(13) Includes 19,152 shares subject to Common Stock options exercisable at
$9.00 per share and 37,397 shares subject to Common Stock warrants that
are immediately exercisable at prices ranging from $.30 to $6.00 per
share, and 138,056 shares of Common Stock issuable upon exercise of
Redeemable Warrants to be issued upon consummation of this Offering in
exchange for Bridge Warrants. Does not include 5,925 shares, and 5,925
warrants to be issued as anti-dilutive securities after the date of this
Offering in accordance with the terms of a private financing. See
"Recent Bridge Financings," "Certain Transactions" and "Selling
Securityholders."
(14) Assumes the sale of 138,056 Redeemable Warrants in the Concurrent
Offering. Includes 5,925 shares, and 5,925 warrants to be issued as
anti-dilutive securities after the date of this Offering in accordance
with the terms of a private financing. See "Certain Transactions" and
"Selling Securityholders."
38
<PAGE>
SELLING SECURITYHOLDERS
An aggregate of 1,040,000 Redeemable Warrants which will be issued to
certain Selling Securityholders in exchange for the Bridge Warrants, together
with 1,040,000 shares of Common Stock issuable upon their exercise, and an
additional 60,615 shares of Common Stock are being registered under the
Registration Statement, at the expense of the Company, for the account of
such Selling Securityholders. See "Recent Bridge Financings" and "Shares
Eligible for Future Sale." Sales of such Redeemable Warrants and shares of
Common Stock may depress the price of the Common Stock or Redeemable Warrants
in any market that may develop for such securities.
The following table sets forth information with respect to persons for
whom the Company is registering the Selling Securityholder Warrants and the
Selling Securityholder Shares for resale to the public in the Concurrent
Offering. Beneficial ownership of Redeemable Warrants and Common Stock by
such Selling Securityholders after the Offering will depend on the number of
securities sold by each Selling Securityholder in the Concurrent Offering.
See "Certain Transactions."
<TABLE>
<CAPTION>
Amount of Securities Being
Beneficial Ownership Prior to the Offerings Registered for Resale
------------------------------------------------- --------------------------------------------------
Redeemable Warrants(2) Common Stock Redeemable Warrants(2) Common Stock
-------------------------- --------------------- --------------------------- --------------------
Selling Securityholder Number Percentage Number Percentage Number Percentage(3) Number Percentage(3)
- ---------------------- ------ ---------- ------ ---------- ------ ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Norman B. and Gail B.
Antin 15,000 1.4% -- -- 15,000 * -- --
Mark Banach 4,781 * 6,713 * 4,781 * 966 *
Edwin R. Bindseil 15,000 1.4% -- -- 15,000 * -- --
Elliot Y. Braun 15,000 1.4% -- -- 15,000 * -- --
Dominick Casale 30,000 2.8% -- -- 30,000 1.4% -- --
D'Arbra Fetzer 15,000 1.4% -- -- 15,000 * -- --
Michael Gauss 9,562 * 13,426 * 9,562 * 1,932 *
Morton and DeVera
Gordon 15,000 1.4% -- -- 15,000 * -- --
Martin J. Gross 9,000 * -- -- 9,000 * -- --
Philip J. Gross 15,000 1.4% 182,986 8.9% 15,000 * -- --
Stanley J. Gross 6,000 * 367 * 6,000 * -- --
Fred Kassner 60,000 5.7% -- -- 60,000 2.7% -- --
Ery W. and Helga L.
Kehaya 15,000 1.4% -- -- 15,000 * -- --
Paul E. Keitel 15,000 1.4% -- -- 15,000 * -- --
Bernard P. Kolkana 15,000 1.4% -- -- 15,000 * -- --
Cecil Lee 15,000 1.4% -- -- 15,000 * -- --
Ernest P. Lee 15,000 1.4% -- -- 15,000 * -- --
Edward Leibowitz 15,000 1.4% -- -- 15,000 * -- --
S. Alan Lisenby 15,000 1.4% -- -- 15,000 * -- --
Hawk Management and
Financial Services,
Inc. 30,000 2.8% -- -- 30,000 1.4% -- --
Alfred Palagonia 15,000 1.4% -- -- 15,000 * -- --
Brett Raymer 60,000 5.7% -- -- 60,000 2.7% -- --
Richard B. Schechter,
DMD 15,000 1.4% -- -- 15,000 * -- --
Steven P. Schnipper 123,056 11.8% 132,947(5) 6.3% 123,056 5.6% -- *
Harold Staenberg 5,180 * 8,605 * 5,180 * 1,047 *
Stourbridge
Investments, Ltd. 136,612 13.1% 76,445(7) 3.7% 136,612 6.2% 23,872 *
Suan Investments 278,896 26.8% 225,445(9) 10.8% 278,896 12.7% 32,442 *
Walter E. Scott 15,000 1.4% -- -- 15,000 * -- --
Murray Sussman IRA 15,000 1.4% -- -- 15,000 * -- --
Saeed S. Toghraie 15,000 1.4% -- -- 15,000 * -- --
Jay Varon 1,913 * 2,685 * 1,913 * 386 *
Alan Young 15,000 1.4% -- -- 15,000 * -- --
--------- ---- ------- ---- --------- ---- ------ ---
1,040,000 100.% 649,618 30.4% 1,040,000 42.5% 60,615 1.4%
========= ==== ======= ==== ========= ==== ====== ===
</TABLE>
<PAGE>
Beneficial Ownership After
the Offerings(1)(4)
---------------------------
Common Stock
---------------------------
Selling Securityholder Number Percentage(3)
- ---------------------- ------ ------------
Norman B. and Gail B.
Antin -- --
Mark Banach 5,747 *
Edwin R. Bindseil -- --
Elliot Y. Braun -- --
Dominick Casale -- --
D'Arbra Fetzer -- --
Michael Gauss 11,494 *
Morton and DeVera
Gordon -- --
Martin J. Gross -- --
Philip J. Gross 182,986 4.2%
Stanley J. Gross 367 *
Fred Kassner -- --
Ery W. and Helga L.
Kehaya -- --
Paul E. Keitel -- --
Bernard P. Kolkana -- --
Cecil Lee -- --
Ernest P. Lee -- --
Edward Leibowitz -- --
S. Alan Lisenby -- --
Hawk Management and
Financial Services,
Inc. -- --
Alfred Palagonia -- --
Brett Raymer -- --
Richard B. Schechter,
DMD -- --
Steven P. Schnipper 144,797(6) 3.3%
Harold Staenberg 7,558 *
Stourbridge
Investments, Ltd. 62,755(8) 1.4%
Suan Investments 222,941(10) 5.1%
Walter E. Scott -- --
Murray Sussman IRA -- --
Saeed S. Toghraie -- --
Jay Varon 2,299 *
Alan Young -- --
-------- ----
640,944 14.6%
======== ====
- ------
The symbol "*" indicates that the interest is less than 1%.
(footnotes on following page)
39
<PAGE>
(footnotes to chart on page 38)
(1) Assuming no purchase by any Selling Securityholder of Common Stock or
Redeemable Warrants offered in the Offering.
(2) Assumes conversion of the outstanding Bridge Warrants to Redeemable
Warrants upon the Closing of the Offering.
(3) Percentage based upon securities to be outstanding after offering.
(4) Assumes the sale of all Selling Securityholder Warrants and Shares, which
results in no Redeemable Warrants being held by the Selling
Securityholders at the conclusion of the Offering and the Concurrent
Offering.
(5) Does not include 5,925 shares, and 5,925 warrants to be issued as
anti-dilutive securities after the date of this Offering in accordance
with the terms of a private financing.
(6) Includes 5,925 shares, and 5,925 warrants to be issued as anti-dilutive
securities after the date of this Offering in accordance with the terms
of a private financing.
(7) Does not include 5,076 shares, and 5,076 warrants to be issued as
anti-dilutive securities after the date of this Offering in accordance
with the terms of a private financing.
(8) Includes 5,076 shares, and 5,076 warrants to be issued as anti-dilutive
securities after the date of this Offering in accordance with the terms
of a private financing.
(9) Does not include 14,969 shares, and 14,969 warrants to be issued as
anti-dilutive securities after the date of this Offering in accordance
with the terms of a private financing.
(10) Includes 14,969 shares, and 14,969 warrants to be issued as
anti-dilutive securities after the date of this Offering in accordance
with the terms of a private financing.
There are no material relationships between any of the Selling
Securityholders and the Company or any of its predecessors or affiliates
except (i) Philip J. Gross is an officer and director of the Company, and
Martin J. Gross and Stanley J. Gross are his relatives; (ii) Steven P.
Schnipper is a director of the Company; and (iii) Suan Investments is a
principal stockholder of the Company. The Securities offered by the Selling
Securityholders are not being underwritten by the Underwriter. The Selling
Securityholders may sell the Selling Securityholder Warrants and/or the
Selling Securityholder Shares at any time on or after the date hereof,
provided prior consent is given by the Underwriter. In addition, the Selling
Securityholders have agreed with the Company that, during the period ending
on the second anniversary of the effective date of the Registration
Statement, the Selling Securityholders will not sell such securities other
than through the Underwriter, and that the Selling Securityholders shall
compensate the Underwriter in accordance with its customary compensation
practices. Subject to these restrictions, the Company anticipates that sales
of the Selling Securityholder Warrants and/or the Selling Securityholder
Shares may be effected from time to time in transactions (which may include
block transactions) in the over-the-counter market, in negotiated
transactions, or a combination of such methods of sale, at fixed prices that
may be changed, at market prices prevailing at the time of sale, or at
negotiated prices. The Selling Securityholders may effect such transactions
by selling the Selling Securityholder Warrants and/or the Selling
Securityholder Shares directly to purchasers or through broker-dealers that
may act as agents or principals. Such broker-dealers may receive compensation
in the form of discounts, concessions or commissions from the Selling
Securityholders and/or the purchasers of the Selling Securityholder Warrants
and/or the Selling Securityholder Shares for whom such broker-dealers may act
as agents or to whom they sell as principals, or both (which compensation as
to a particular broker-dealer might be in excess of customary commissions).
The Selling Securityholders and any broker-dealers that act in connection
with the sale of the Selling Securityholder Warrants and/or the Selling
Securityholder Shares as principals may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act and any commission
received by them and any profit on the resale of such securities as
principals might be deemed to be underwriting discounts and commissions under
the Act. The Selling Securityholders may agree to indemnify any agent, dealer
or broker-dealer that participates in transactions involving sales of such
securities against certain liabilities, including liabilities arising under
the Securities Act. The Company will not receive any proceeds from the sales
of the Selling Securityholder Warrants and/or the Selling Securityholder
Shares by the Selling Securityholders, although the Company will receive
proceeds from the exercise of the Selling Securityholder Warrants. Sales of
the Selling Securityholder Warrants and/or the Selling Securityholder Shares
by the Selling Securityholders, or even the potential of such sales, would
likely have an adverse effect on the market price of the Units, the
Redeemable Warrants and Common Stock.
40
<PAGE>
At the time a particular offer of Selling Securityholder Warrants and/or
the Selling Securityholder Shares is made, except as herein contemplated, by
or on behalf of the Selling Securityholder, to the extent required, a
Prospectus will be distributed which will set forth the number of Selling
Securityholder Warrants and/or the Selling Securityholder Shares being
offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, if any, the purchase price paid by any
underwriter for shares purchased from the Selling Securityholder and any
discounts, commissions or concessions allowed or reallowed or paid to
dealers.
Under the Exchange Act, and the regulations thereunder, any person engaged
in a distribution of the securities of the Company offered by this Prospectus
may not simultaneously engage in market-making activities with respect to
such securities of the Company during the applicable "cooling-off" period
(two or nine days) prior to the commencement of such distribution. In
addition, and without limiting the foregoing, the Selling Securityholders
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, in connection with transactions in such securities, which provisions
may limit the timing of purchases and sales of such securities by the Selling
Securityholders.
41
<PAGE>
DESCRIPTION OF SECURITIES
UNITS
Each Unit consists of two shares of Common Stock, $.01 par value, of the
Company, together with one Redeemable Warrant. The Common Stock and the
Redeemable Warrants may only be purchased as Units in the Offering, but are
immediately detachable and separately tradeable.
AUTHORIZED EQUITY SECURITIES
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, $.01 par value, and 1,000,000 shares of preferred stock, $1.00
par value (the "Preferred Stock"). As of the date hereof, there were
outstanding 2,047,300 shares of Common Stock and no outstanding shares of
Preferred Stock. The following summary description of capital stock of the
Company is qualified in its entirety by reference to the Company's
Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), and its Bylaws, as amended (the "Bylaws").
PREFERRED STOCK
The Company's Certificate of Incorporation provides for the issuance of
1,000,000 shares of Preferred Stock none of which are currently outstanding.
The Board of Directors, within the limitations and restrictions contained in
the Certificate of Incorporation and without further action by the Company's
stockholders, has the authority to issue shares of Preferred Stock from time
to time in one or more series and to fix the number of shares and the
relative rights, conversion rights, voting rights, and terms of redemption,
liquidation preferences and any other preferences, special rights and
qualifications of any such series. Any issuance of Preferred Stock could,
under certain circumstances, have the effect of delaying, deferring or
preventing a change in control of the Company and may adversely affect the
rights of holders of Common Stock. The Company has no present plans to issue
any shares of Preferred Stock.
COMMON STOCK
The holders of Common Stock have the right to cast one vote for each share
held of record on all matters submitted to a vote of holders of Common Stock,
including the election of directors. The Common Stock votes together as a
single class on all matters on which stockholders may vote, except when class
voting is required by applicable law, or the terms of any other security
issued by the Company.
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors, from funds legally available therefore,
subject to the rights of holders of any outstanding Preferred Stock. In the
event of the liquidation, dissolution or winding up of the affairs of the
Company, all assets and funds of the Company remaining after the payment of
all debts and other liabilities, subject to the rights of the holders of any
outstanding Preferred Stock, shall be distributed, pro rata, among the
holders of the Common Stock. Holders of Common Stock are not entitled to
preemptive, subscription, cumulative voting or conversion rights, and there
are no redemption or sinking fund provisions applicable to the Common Stock.
All outstanding shares of Common Stock are fully paid and non-assessable.
REDEEMABLE WARRANTS
At the conclusion of the Offering the Company will have outstanding
2,190,000 Redeemable Warrants (2,362,500 if the Over-Allotment Option is
exercised). Each of the Redeemable Warrants expires five years from the date
of this Prospectus, and entitles the holder to purchase one share of Common
Stock for $4.59 per share, subject to adjustment in certain events. The
Redeemable Warrants are redeemable by the Company with the prior written
consent of the Underwriter at a price of $.05 per Redeemable Warrant
commencing August 16, 1997, provided that (i) 30 days prior written notice is
given to the holders of the Redeemable Warrants (the "Warrantholders") and
(ii) the closing bid price per share of the Common Stock as reported on
Nasdaq (or the last sale price, if quoted on a national securities exchange)
for any 20 trading days within a period of 30 consecutive trading days,
ending on the fifth day prior to the date of the notice of redemption, has
been at least 150% of the then exercise price, subject to adjustment in
certain events. The Warrantholders shall have exercise rights until the close
of the business day immediately preceding the date fixed for redemption.
42
<PAGE>
The Warrants provide for adjustment of the exercise price and for a change
in the number of shares issuable upon exercise to protect holders against
dilution in the event of a stock dividend, stock split, combination or
reclassification of the Common Stock.
The exercise prices of the Redeemable Warrants were determined by
negotiation between the Company and the Underwriter thereof and should not be
construed to be predictive of or to imply that any price increases in the
Company's securities will occur.
The Warrants do not confer upon the Warrantholder any voting or other
rights of a stockholder of the Company.
OTHER WARRANTS
As of the date of this Prospectus the Company had outstanding warrants to
purchase an aggregate of 125,193 shares of Common Stock which are exercisable
for various periods of time up through the year 2006, at exercise prices
ranging from $0.30 per share to $22.50 per share. In April 1996, the Company
issued to its senior management 990,000 Warrants to purchase Common Stock
with an exercise price of $9.19 per share. See "Management-Management
Warrants." A total of 25,970 warrants will be issued as anti-dilutive
securities after the date of this Offering to a director and two principal
shareholders in accordance with the terms of a private financing, See
"Certain Transactions." The warrants provide for adjustment of the exercise
price and for a change in the number of shares issuable upon exercise to
protect holders against dilution in the event of a stock dividend, stock
split, combination or reclassification of the Common Stock. The exercise
prices of the warrants were determined by negotiation between the Company and
the purchasers thereof and should not be construed to be predictive of or to
imply that any price increases in the Company's securities will occur. The
warrants do not confer upon the warrantholder any voting or other rights of a
stockholder of the Company.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned
(x) by persons who are directors and also officers and (y) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or subsequent to such date, the
business combination is approved by the board of directors and authorized at
an annual or special meeting of stockholders, and not by written consent, by
the affirmative vote of at least 66-2/3% of the outstanding voting stock that
is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder;
or (v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
The Transfer Agent and Registrar for the Units, Common Stock and
Redeemable Warrants is Continental Stock Transfer & Trust Company, New York
City ("Continental"). Continental can be reached at (212) 509-4000.
Continental will also act as Warrant Agent for the Redeemable Warrants.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Of the 4,373,270 shares of Common Stock to be outstanding upon completion
of this Offering, approximately 2,691,052 shares of Common Stock, including
the 2,300,000 shares underlying the units offered hereby, will be freely
tradeable without restriction under the Securities Act of 1933, as amended
(the "Securities Act") except for any shares of Common Stock purchased by an
"affiliate" of the Company (as that term is defined under the rules and
regulations of the Securities Act), which will be subject to the resale
limitations of Rule 144 under the Securities Act. The remaining 1,682,218
shares of Common Stock outstanding are "restricted stock" as that term is
defined under Rule 144 under the Securities Act and under certain
circumstances may be sold without registration pursuant to such rule. In
general, under Rule 144, as currently in effect, a person (or persons whose
shares are aggregated), with respect to restricted securities that satisfy a
two-year holding period, may sell within any three-month period a number of
restricted shares which does not exceed the greater of 1% of the then
outstanding shares of such class of securities or the average weekly trading
volume during the four calendar weeks prior to such sale. Sales under Rule
144 are also subject to certain requirements as to the manner of sale, notice
and the availability of current public information about the Company. Rule
144 also permits, under certain circumstances, the sale of shares by a person
who is not an affiliate of the Company, with respect to restricted securities
that satisfy a three-year holding period, without regard to the volume or
other resale limitations. The above is a brief summary of Rule 144 and is not
intended to be a complete description of the Rule.
The Company is unable to predict the effect that sales made under Rule
144, or otherwise, may have on the then prevailing market price of the
Company's securities although any future sales of substantial amounts of
securities pursuant to Rule 144 could adversely affect prevailing market
prices. Holders of 1,661,406 shares of such restricted stock, including each
of the Company's officers, directors and principal stockholders have agreed
not to, directly or indirectly, issue, offer to sell, grant an option for the
sale of, assign, transfer, pledge, hypothecate or otherwise encumber or
dispose of (collectively "Transfer") any of their shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock
for a period commencing on the date of this Prospectus and ending eighteen
months after the effective date of this Offering, without the prior written
consent of the Underwriter. See "Principal Stockholders," and "Underwriting."
The Redeemable Warrants underlying the Units offered hereby and the shares
of Common Stock underlying such Redeemable Warrants, upon exercise thereof,
will be freely tradeable without restriction under the Securities Act, except
for any Redeemable Warrants of shares of Common Stock purchased by an
"affiliate" of the Company, which will be subject to the resale limitations
of Rule 144 under the Securities Act. In addition, 1,040,000 Redeemable
Warrants and the shares of Common Stock underlying such Redeemable Warrants
are being registered on behalf of the Selling Securityholders. Holders of
such Redeemable Warrants have agreed not to Transfer such Redeemable
Warrants, or the underlying shares of Common Stock, for a period of eighteen
(18) months from the effective date of the Registration Statement, without
the prior written consent of the Underwriter.
In addition, without the consent of the Underwriter, the Company has
agreed not to sell or offer for sale any of its securities for a period of 18
months following the effective date of the Registration Statement, except
pursuant to outstanding options and warrants and pursuant to the Company's
existing option plans and no option shall have an exercise price that is less
than the fair market value per share of Common Stock on the date of grant.
In addition, 200,000 shares of Common Stock will be available for issuance
upon the exercise of options which may be granted under the Company's Stock
Option Plan and, in addition to the 1,040,000 Redeemable Warrants being
registered on behalf of the Selling Securityholders, 1,141,163 shares of
Common Stock will be issuable upon the exercise of other outstanding
warrants. To the extent that options or warrants are exercised, dilution to
the interests of the Company's shareholders may occur. Moreover, the terms
upon which the Company will be able to obtain additional equity capital may
be adversely affected, since the holders of the outstanding options or
warrants can be expected to exercise them, to the extent they are able to, at
a time when the Company would, in all likelihood, be able to obtain any
needed capital on terms more favorable to the Company than those provided in
the options or warrants. See "Management," "Certain Transactions", and
"Description of Securities."
44
<PAGE>
UNDERWRITING
Joseph Stevens & Company, L.P. (the "Underwriter") has entered into an
Underwriting Agreement with the Company pursuant to which, and subject to the
terms and conditions thereof, it has agreed to purchase from the Company, and
the Company has agreed to sell to the Underwriter, on a firm commitment
basis, all of the Units offered by the Company hereby.
The Company has been advised that the Underwriter initially proposes to
offer the Units to the public at the public offering price set forth on the
cover page of this Prospectus and that the Underwriter may allow to certain
dealers who are members of the National Association of Securities Dealers,
Inc. ("NASD") concessions not in excess of $.15 per Unit, of which amount a
sum not in excess of $.05 per Unit may in turn be reallowed by such dealers
to other dealers. After the commencement of the Offering, the public offering
price, concessions and reallowances may be changed. The Underwriter has
informed the Company that it does not expect sales to discretionary accounts
by the Underwriter to exceed five percent of the securities offered by the
Company hereby.
The Company has granted to the Underwriter an option, exercisable within
45 days of the date of this Prospectus, to purchase from the Company at the
initial public offering price, less underwriting discounts and the
non-accountable expense allowance, all or part of an additional 172,500 Units
on the same terms and conditions of the Offering for the sole purpose of
covering over-allotments, if any.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay to the Underwriter a non-accountable expense allowance equal to
three percent of the gross proceeds derived from the sale of the Units
underwritten, $25,000 of which has been paid to date.
Upon the exercise of any Redeemable Warrants more than one year after the
date of this Prospectus, which exercise was solicited by the Underwriter, and
to the extent not inconsistent with the guidelines of the NASD and the Rules
and Regulations of the Commission, the Company has agreed to pay the
Underwriter a commission which shall not exceed five percent of the aggregate
exercise price of such Redeemable Warrants in connection with bona fide
services provided by the Underwriter relating to any warrant solicitation. In
addition, the individual must designate the firm entitled to such warrant
solicitation fee. However, no compensation will be paid to the Underwriter in
connection with the exercise of the Redeemable Warrants if (a) the market
price of the Common Stock is lower than the exercise price of the Redeemable
Warrants, (b) the Redeemable Warrants were held in a discretionary account or
(c) the Redeemable Warrants are exercised in an unsolicited transaction.
Unless granted an exemption by the Commission from its Rule 10b-6 promulgated
under the Exchange Act, the Underwriter and any soliciting broker-dealers
will be prohibited from engaging in any market-making activities with regard
to the Company's securities for the period from nine (9) business days (or
such applicable periods as Rule 10b-6 may provide) prior to any solicitation
of the exercise of the Redeemable Warrants until the later of the termination
of such solicitation activity or the termination (by waiver or otherwise) of
any right the Underwriter or the soliciting broker-dealers may have to
receive a fee for the exercise of warrants following such solicitation. As a
result, the Underwriter and any soliciting broker-dealers may be unable to
continue to provide a market for the Company's Units, Common Stock or
Redeemable Warrants during certain periods while the Redeemable Warrants are
exercisable. If the Underwriter has engaged in any of the activities
prohibited by Rule 10b-6 during the periods described above, the Underwriter
undertakes to waive unconditionally its rights to receive a commission on the
exercise of such Redeemable Warrants.
Of the 4,373,270 shares of Common Stock to be outstanding upon completion
of the Offering, the holders of 1,661,406 shares of Common Stock, including
each officer, director and principal stockholder, have agreed (i) not to,
directly or indirectly, issue, offer to sell, sell, grant an option for the
sale of, transfer, pledge, assign, hypothecate, or otherwise encumber or
dispose of (collectively, "Transfer"), any securities issued by the Company,
including shares of Common Stock or securities convertible into or
exchangeable or exercisable for or evidencing any right to purchase or
subscribe for any shares of Common Stock for a period of eighteen (18) months
from the effective date of the Registration Statement (the "Lock-Up Period"),
without the prior written consent of the Underwriter and (ii) that, for
twenty-four (24) months following the effective date of the Registration
Statement, any sales of the Company's securities shall be made through the
Underwriter in accordance with its customary brokerage practices either on a
principal or agency basis. An appropriate legend shall be marked on the face
of certificates representing all such securities.
45
<PAGE>
In connection with the Offering, the Company has agreed to issue and sell
to the Underwriter and/or its designees, at the closing of the Offering, for
nominal consideration, five (5) year Underwriter's Warrants (the
"Underwriter's Warrants") to purchase 115,000 Units. The Underwriter's
Warrants are exercisable at any time during a period of four (4) years
commencing twelve months after their issuance at a price of $10.11 per Unit.
The shares of Common Stock, Redeemable Warrants, and shares of Common Stock
underlying the Redeemable Warrants issuable upon the exercise of the
Underwriter's Warrants are identical to those offered to the public. The
Underwriter's Warrants contain anti-dilution provisions providing for
adjustment of the number of warrants and exercise price under certain
circumstances. The Underwriter's Warrants grant to the holders thereof and to
the holders of the underlying securities certain rights of registration of
the securities underlying the Underwriter's Warrants.
In connection with the Second Bridge Financing, the Company paid to the
Underwriter, as placement agent, $100,000 in cash as commissions, a
non-accountable expense allowance of $30,000 and warrants (the "Placement
Agent's Warrants") to purchase 150,000 shares of Common Stock at an exercise
price of $3.37 per share commencing May 16, 1997. The Placement Agent's
Warrants have been canceled prior to the consummation of the Offering and are
not being replaced with new warrants.
The Company has agreed that for five (5) years from the effective date of
the Registration Statement, the Underwriter may designate one person for
election to the Company's Board of Directors (the "Designation Right"). As of
the date of this Prospectus, the Underwriter has not exercised its
Designation Right. In the event that the Underwriter elects not to exercise
its Designation Right, then it may designate one person to attend all
meetings of the Company's Board of Directors for a period of five (5) years.
The Company has agreed to reimburse the Underwriter's designee for all
out-of-pocket expenses incurred in connection with the designee's attendance
at meetings of the Board of Directors. The Company has also agreed to retain
the Underwriter as the Company's financial consultant for a period of
twenty-four (24) months from the date hereof and to pay the Underwriter a
monthly retainer of $2,000, all of which is payable in advance on the closing
date set forth in the Underwriting Agreement.
Prior to this Offering, there has been a limited public market for the
Common Stock and no public market for the Units or the Redeemable Warrants.
Accordingly, the initial public offering price of the Units and the terms of
the Redeemable Warrants were determined by negotiation between the Company
and the Underwriter. Among the factors considered in determining such prices
and terms, in addition to the prevailing market conditions, included the
history of and the prospects for the industry in which the Company competes,
the market price of the Common Stock, an assessment of the Company's
management, the prospects of the Company, its capital structure and such
other factors that were deemed relevant. The offering price does not
necessarily bear any relationship to the assets, results of operations or net
worth of the Company.
The Underwriter commenced operations in May 1994 and therefore does not
have extensive expertise as an underwriter of public offerings of securities.
In addition, the Underwriter is a relatively small firm and no assurance can
be given that the Underwriter will be able to participate as a market maker
in the Units, the Common Stock or in the Redeemable Warrants, and no
assurance can be given that any broker-dealer will make a market in the
Units, the Common Stock or the Redeemable Warrants. The Underwriter has acted
as the managing underwriter for four firm commitment public offerings.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a
copy of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
Certain legal matters with respect to the issuance of the securities
offered hereby will be passed upon for the Company by Lewis, Goldberg & Ball,
A Professional Corporation, Suite 360, 1320 Old Chain Bridge Road, McLean,
Virginia 22101. Certain legal matters relating to intellectual property law
will be passed upon for the Company by Quarles & Brady, Suite 600, One South
Pinckney Street, Madison, Wisconsin. Certain legal matters in connection with
the Offering will be passed upon for the Underwriter by Orrick, Herrington &
Sutcliffe, 666 Fifth Avenue, New York, New York 10103-0001.
46
<PAGE>
EXPERTS
The financial statements of CD-MAX, Inc. (formerly InfoServe, Inc.) at
June 30, 1996, and for each of the two fiscal years in the period ended June
30 1996, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon (which contains an explanatory paragraph regarding substantial
doubt about the Company's ability to continue as a going concern mentioned in
Note 8 to the financial statements) appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form SB-2 (the "Registration Statement"),
under the Securities Act, relating to the securities offered hereby has been
filed by the Company with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and
the securities offered hereby, reference is made to such Registration
Statement, exhibits and schedules. Statements contained in this Prospectus as
to the contents of any contract or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as exhibits to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without
charge at the Commission's principal offices in Washington, D.C., and copies
of all or any part thereof may be obtained from the Commission upon the
payment of certain fees prescribed by the Commission.
Following the Offering, the Company will be subject to the information
requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and
in accordance therewith will file periodic reports, proxy statements and
other information with the Commission. Such reports, proxy statements and
other information concerning the Company may be inspected or copied at the
public reference facilities at the Commission located at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and at the Commission's Regional
Offices in New York, 7 World Trade Center, 13th Floor, New York, New York
10048, and in Chicago, Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such documents can be
obtained at the public reference section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
47
<PAGE>
CD-MAX, INC.
(FORMERLY INFOSERVE, INC.)
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors .................................................... F-2
Balance Sheet as of June 30, 1996 .................................................................... F-3
Statements of Operations for the years ended June 30, 1995 and 1996 and for the period from July 1, 1993
(inception) through June 30, 1996 ................................................................... F-4
Statements of Stockholders' Deficit for the years ended June 30, 1995 and 1996 ....................... F-5
Statements of Cash Flows for the years ended June 30, 1995 and 1996 and for the period from July 1, 1993
(inception) through June 30, 1996 ................................................................... F-6
Notes to Financial Statements ........................................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
CD-MAX, Inc.
We have audited the accompanying balance sheet of CD-MAX, Inc., formerly
InfoServe, Inc., (a development stage company) as of June 30, 1996, and the
related statements of operations, stockholders' deficit, and cash flows for
the years ended June 30, 1995 and 1996 and for the period July 1, 1993
(inception) to June 30, 1996. 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 examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CD-MAX, Inc. (formerly
InfoServe, Inc.) at June 30, 1996, and the results of its operations and its
cash flows for the two years then ended June 30, 1996 and for the period July
1, 1993 (inception) to June 30, 1996 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that
CD-MAX, Inc. (formerly InfoServe, Inc.) will continue as a going concern. As
more fully described in Note 8, the Company is still in its development
stage, is not generating significant revenue from the sale of its products
and has not attained profitable operations. The success of the Company is
dependent on obtaining additional financing and the ability of the Company to
generate revenues which are sufficient to cover operating expenses, the
likelihood of which cannot be determined at this time. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 8. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Vienna, Virginia
July 11, 1996 ERNST & YOUNG LLP
F-2
<PAGE>
CD-MAX, INC.
(FORMERLY INFOSERVE, INC.)
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
ASSETS
June 30,
1996
-----------
Current assets:
Cash $296,012
Accounts receivable 5,994
Short-term investments 20,000
Prepaid expenses 25,263
-----------
Total current
assets 347,269
Computer equipment 67,518
Less accumulated depreciation (13,446)
-----------
54,072
Other assets 11,829
Debt issuance costs, net 69,954
-----------
Total assets $483,124
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $48,861
Accrued expenses 341,220
Unearned royalties 17,180
Notes payable 875,000
Notes payable to related parties 171,666
Current portion of capital lease obligations 23,622
-------------
Total current liabilities 1,477,549
Capital lease obligations, net of current portion 20,972
Stockholders' deficit:
Preferred stock, $1.00 par value; 1,000,000
shares authorized; no shares issued and
outstanding --
Common stock, $.01 par value; 10,000,000
shares authorized; 2,047,300 shares issued
and outstanding at June 30, 1996 20,473
Capital in excess of par value 2,691,873
Deficit accumulated during the development
stage (3,727,743)
-------------
Total stockholders' deficit (1,015,397)
-------------
Total liabilities and stockholders' deficit $483,124
=============
See accompanying notes.
F-3
<PAGE>
CD-MAX, INC.
(FORMERLY INFOSERVE, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from July 1,
Year ended June 30, 1993 (inception) to
1995 1996 June 30, 1996
--------------- --------------- -------------------
<S> <C> <C> <C>
Revenues $2,500 $13,394 $15,894
Costs and expenses:
Selling 120,285 208,757 441,497
General and administrative 689,597 725,748 2,126,297
Research and development 277,120 655,124 1,039,379
Depreciation and
amortization -- 83,401 83,401
--------------- --------------- -------------------
Total costs and expenses 1,087,002 1,673,030 3,690,574
--------------- --------------- -------------------
Other income (expense):
Interest income 3,962 13,586 18,095
Interest expense (1,875) (69,283) (71,158)
--------------- --------------- -------------------
Net loss $ (1,082,415) $ (1,715,333) $ (3,727,743)
=============== =============== ===================
Net loss per share $(.91) $(.88)
=============== ===============
Weighted average number of common
shares outstanding 1,192,279 1,954,255
=============== ===============
</TABLE>
See accompanying notes.
F-4
<PAGE>
CD-MAX, INC.
(FORMERLY INFOSERVE, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIT
PERIOD FROM JULY 1, 1993 (INCEPTION) THROUGH JUNE 30, 1996
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock During the Total
-------------------------- Capital in excess Development Stockholders'
Shares Par Value of par value Stage Deficit
----------- ----------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1993 ..................... 34 $ -- $ 100 $ -- $ 100
Entries to record reverse acquisition, December
29, 1993:
Issuance of common stock ............... 701,566 7,015 (7,015) -- --
Adjustment to record existing capitalization
of public shell company .............. 330,403 3,304 (3,304) -- --
Conversion of debt to equity, December 31, 1993 200 2 2,998 -- 3,000
Conversion of debt to equity, December 31, 1993 30,769 308 170,281 -- 170,589
Issuance of compensatory stock options,
December, 1993 ......................... -- -- 171,000 -- 171,000
Conversion of debt to equity, June 30, 1994 . 4,861 49 437,451 -- 437,500
Net loss .................................. -- -- -- (929,995) (929,995)
----------- ----------- ----------------- -------------- ---------------
Balance at June 30, 1994 .................... 1,067,833 10,678 771,511 (929,995) (147,806)
Issuance of common stock, November 14, 1994 11,494 115 49,885 -- 50,000
Conversion of debt to equity, December 15, 1994 13,333 133 450,367 -- 450,500
Conversion of debt to equity, February 21, 1995 6,226 62 27,021 -- 27,083
Issuance of common stock, March 31, 1995 .. 2,299 23 9,977 -- 10,000
Issuance of common stock, April 28, 1995 .. 5,747 58 24,942 -- 25,000
Issuance of common stock, June 30, 1995 ... 143 2 7,498 -- 7,500
Issuance of common stock, June 30, 1995 ... 333,590 3,336 (3,336) -- --
Issuance of common stock, June 30, 1995 ... 133,333 1,333 578,667 -- 580,000
Compensatory stock options earned during 1995 -- -- 71,452 -- 71,452
Net loss .................................. -- -- -- (1,082,415) (1,082,415)
----------- ----------- ----------------- -------------- ---------------
Balance at June 30, 1995 .................... 1,573,998 15,740 1,987,984 (2,012,410) (8,686)
Issuance of common stock, August 5, 1995 .. 120,690 1,207 523,793 -- 525,000
Issuance of common stock, August 5, 1995 .. 217,242 2,172 (2,172) -- --
Issuance of common stock, December 15, 1995 80,825 808 (808) -- --
Issuance of common stock, December 15, 1995 54,545 546 (546) -- --
Issuance of warrants in connection with the
Bridge Loan Agreement, March 31, 1996 .. -- -- 20,000 -- 20,000
Allocation of interest in connection with the
Bridge Loan Agreement, March 31, 1996 .. -- -- 29,167 -- 29,167
Issuance of warrants in connection with the
Private Placement, May 16, 1996 ........ -- -- 84,455 -- 84,455
Additional interest expense associated with
warrants issued during 1996 ............ -- -- 50,000 -- 50,000
Net loss .................................. -- -- -- (1,715,333) (1,715,333)
----------- ----------- ----------------- -------------- ---------------
Balance at June 30, 1996 .................... 2,047,300 $20,473 $2,691,873 $(3,727,743) $(1,015,397)
=========== =========== ================= ============== ===============
</TABLE>
See accompanying notes.
F-5
<PAGE>
CD-MAX, INC.
(FORMERLY INFOSERVE, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
July 1, 1993
Year ended June 30, (inception) to
1995 1996 June 30, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Operating activities:
Net loss $ (1,082,415) $ (1,715,333) $ (3,727,743)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization -- 83,401 83,401
Issuance of compensatory stock options 71,452 -- 242,452
Interest expense associated with warrants
issued in connection with the Bridge Loan
Agreement -- 20,833 20,833
Interest expense associated with warrants
issued in connection with the Private
Placement -- 25,000 25,000
Changes in operating assets and liabilities:
Accounts receivable -- (5,994) (5,994)
Prepaid expenses (5,012) (20,251) (25,263)
Deposits -- (11,829) (11,829)
Debt issuance costs -- (139,909) (139,909)
Accounts payable (39,727) (26,613) 48,861
Accrued expenses 162,388 98,640 343,303
Unearned royalties 17,500 (320) 17,180
--------------- --------------- ---------------
Net cash used in operating activities (875,814) (1,692,375) (3,129,708)
Investing activities:
Purchase of equipment (1,085) (1,085)
Purchase of short-term investments (20,000) -- (20,000)
--------------- --------------- ---------------
Net cash used in investing activities (20,000) (1,085) (21,085)
Financing activities:
Net proceeds from notes payable 450,500 1,180,000 1,655,500
Net proceeds from issuance of warrants -- 104,455 104,455
Principal payments on notes payable -- (100,000) (100,000)
Principal payments on capital lease obligations -- (21,839) (21,839)
Net cash proceeds from issuance of common stock 672,500 525,000 1,808,689
--------------- --------------- ---------------
Net cash provided by financing activities 1,123,000 1,687,616 3,446,805
--------------- --------------- ---------------
Net increase (decrease) in cash 227,186 (5,844) 296,012
Cash at beginning of period 74,670 301,856 --
--------------- --------------- ---------------
Cash at end of period $301,856 $296,012 $296,012
=============== =============== ===============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
During the year ended June 30, 1996, $79,167 of the notes payable proceeds
was allocated to capital in excess of par and will be charged to interest
expense over the term of the related notes payable. In addition, the Company
capitalized $66,433 of equipment under capital leases.
During the year ended June 30, 1995, two loans were converted into 19,559
shares of common stock. The principal balances of the loans amounted to
$450,500 and $25,000. Accrued interest of $2,083 related to the $25,000 note
payable was also converted to equity.
During the year ended June 30, 1994, three loans were converted into 35,830
shares of common stock. The principal balances of the loans amounted to
$437,500, $3,000 and $170,589.
See accompanying notes.
F-6
<PAGE>
CD-MAX, INC.
(FORMERLY INFOSERVE, INC.)
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
CD-MAX, Inc., formerly InfoServe, Inc., (the "Company") is engaged in the
business of developing and marketing the CD-MAX(TM) System, based upon its
proprietary technology, which is designed to allow publishers of
professional, corporate, library and educational CD-ROM based information to
sell their information to end- users on a usage basis. The CD-MAX System
consists of proprietary metering and encryption software and billing
services. The Company believes that the CD-MAX System has the potential to
increase revenues of CD-ROM publishers by reducing copyright and license
abuse and to enable them to expand into new markets. The CD-MAX System is
being adapted for use on the Internet and is expected to be commercially
available during 1996, under the name NET-MAX(TR).
On December 29, 1993, CD-MAX, Inc., (formerly InfoServe, Inc.), a public
shell company incorporated in Montana, acquired the outstanding stock of
Signal Security Technologies Inc. ("Sigtek") in exchange for 701,566 shares
of common stock. Sigtek was a privately held company formed on July 1, 1993.
For accounting purposes the acquisition was treated as a recapitalization of
Sigtek with Sigtek as the acquirer (a reverse acquisition). The historical
financial statements prior to December 29, 1993 are those of Sigtek.
Effective December 29, 1993, Sigtek merged with CD-MAX, Inc., (formerly
InfoServe, Inc.).
In March 1996, the Board of Directors and stockholders of InfoServe, Inc., a
Montana corporation, approved the mergers of InfoServe, Inc. and its
wholly-owned subsidiary, CD-MAX, Inc. into a new Delaware corporation, CDMII,
Inc. ("CDMII"). As part of the merger, the Board of Directors and
stockholders approved a 1 for 30 stock exchange under which the holders of
InfoServe, Inc. stock would receive one share of stock in CDMII for 30 shares
of stock in InfoServe, Inc. The mergers of InfoServe, Inc. and CD-MAX, Inc.
into CDMII were effective as of April 15, 1996. Subsequently, the name of
CDMII was changed to CD-MAX, Inc. All references in the accompanying
financial statements to the number of shares of common stock and per-share
amounts have been restated to reflect the stock exchange.
NET LOSS PER SHARE
The Company's net loss per share calculations are based upon the weighted
average number of shares of Common Stock outstanding. Other shares of common
stock issuable upon the exercise of stock options or warrants have been
excluded from the computation because the effect of their inclusion would be
antidulitive. In subsequent periods, stock options and warrants under the
treasury stock method will be included to the extent they are dilutive.
INCOME TAXES
The Company provides for income taxes in accordance with the liability
method. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
CASH
For the purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time
of purchase to be cash equivalents.
F-7
<PAGE>
CD-MAX, INC.
(formerly InfoServe, Inc.)
(A Development Stage Company)
Notes to Financial Statements - (Continued)
1. Organization and Significant Accounting Policies - (Continued)
SHORT-TERM INVESTMENTS
The short-term investments are stated at cost, which as of June 30, 1996
approximates market, and consists of a certificate of deposit.
COMPUTER EQUIPMENT
Computer equipment, held under capital leases, is recorded at cost.
Depreciation and amortization is calculated using the straight-line method
over the lesser of the estimated useful life of three years or the lease
term.
DEBT ISSUANCE COSTS
Debt issuance costs are costs associated with the private placement of debt
and warrants. Amortization expense is calculated using the straight-line
method over the estimated term of the debt.
RECENT PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" which is effective for the
Company's 1997 financial statements. SFAS No. 123 allows companies to account
for stock-based compensation under either the new provisions of SFAS No. 123
or the provisions of APB No. 25, but requires pro forma disclosure in the
footnotes to the financial statements as if the measurement provisions of
SFAS No. 123 had been adopted. The Company intends to continue accounting for
its stock-based compensation in accordance with the provisions of APB No. 25.
As such, the implementation of SFAS No. 123 will not materially impact the
financial position or results of operations of the Company.
USE OF ESTIMATES
The preparation of the 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.
PRODUCT DEVELOPMENT COSTS
Through June 30, 1996, the Company expensed its product development costs as
research and development costs. It will continue to expense such costs until
such time as the realizability of the Company's software is established.
REVENUE RECOGNITION
The Company recognizes license revenue upon completion of each CD-ROM. The
Company records transaction and transaction related revenues in the month in
which the services are provided.
During the years ended June 30, 1995 and 1996, the Company's total revenues
were derived from one and three customers, respectively.
F-8
<PAGE>
CD-MAX, INC.
(formerly InfoServe, Inc.)
(A Development Stage Company)
Notes to Financial Statements - (Continued)
2. STOCKHOLDERS' DEFICIT
FINANCING TRANSACTIONS
On May 16, 1996, the Company completed a private placement (the "Private
Placement") to raise approximately $1,000,000 from current and new investors.
The Company sold 20 units of which each unit consisted of a $45,000 unsecured
promissory note and 30,000 warrants. The $45,000 promissory note bears
interest at an annual rate of 10% and the principal balance plus accrued
interest is due on the earlier of (1) the closing of a public offering, which
results in net proceeds to the Company of at least $3,000,000 or (2) one year
from the issuance date. Each warrant is exercisable to purchase one share of
common stock at a price equal to $3.37 commencing May 16, 1997. Upon closing
of the Public Offering, the warrants will convert to redeemable warrants if
redeemable warrants are included in the Public Offering. The Company
allocated approximately $50,000 of the promissory note proceeds to the
warrants issued. The $50,000 allocated to the warrants will be amortized to
interest expense using the effective interest method over the period (three
months) the related debt is expected to be outstanding. The effect of this
allocation results in an effective interest rate of 35%. As of June 30, 1996,
the Company has recognized $25,000 of additional interest expense.
On December 15, 1995, the Company executed an agreement (the "Bridge Loan
Agreement") with a group of existing stockholders to provide up to $300,000
of interim financing under terms similar to the Private Placement of
$1,000,000. In conjunction with this interim financing, the existing
stockholders received a total of 170,000 warrants to purchase common stock at
a price of $3.37 per share (See Warrants). In addition, the investors
renegotiated the price of their earlier investments in the Company, which
occurred in August, 1995. This renegotiation was based on management's
estimate of the fair market value of the common stock expected to be sold in
the anticipated public offering. As a result of this re-negotiation and to
effect the negotiated decrease in price per share to $3.30, the investors
were issued 80,825 shares of common stock and warrants to purchase 80,825
shares of common stock (currently exercisable at $6.60 per share). This is
subject to further adjustment if the price per share of the public offering
is less than the effective price per share ($3.30) paid by these investors.
The investors provided this interim financing to the Company between February
and April 1996. In the event of a public offering, the warrants will be
exchanged for warrants sold in the public offering. The Company repaid
$100,000 of the total amount due with the proceeds from the Private
Placement.
In August 1995, the Company issued warrants to purchase 120,690 shares of
common stock in connection with the private placement of $525,000 to certain
existing stockholders. In connection with this private placement, 22,444
warrants were also issued as payment for finders' fees. The warrants are
currently exercisable, and the exercise price for the warrants ranges from
$.30 to $8.70 per share.
During June 1995, the Company issued 143 shares of common stock to a
financial advisory firm in lieu of a $7,500 retainer.
During the years ended June 30, 1995 and 1996, the Company issued 333,590 and
271,242 shares, respectively, of common stock to Class B stockholders in
accordance with the anti-dilution provision related to the Sigtek
transaction. (See Note 1). These issued shares related to all equity
issuances during the years ended June 30, 1995 and 1996, respectively. All
Class B stockholders, which consisted of employees of the Company and outside
stockholders, were afforded the identical anti-dilution right. In March,
1996, all shares of Class B common stock were converted to common stock,
pursuant to the merger transactions discussed in Note 1.
Common stock was issued to the founders of Sigtek on the reverse acquisition
date. Additionally, at the reverse acquisition date, the issued and
outstanding common shares of the public shell company became common shares of
CD-MAX, Inc. (formerly InfoServe, Inc.).
F-9
<PAGE>
CD-MAX, INC.
(formerly InfoServe, Inc.)
(A Development Stage Company)
Notes to Financial Statements - (Continued)
2. Stockholders' Deficit - (Continued)
COMMON STOCK OPTIONS
The Company adopted the CD-MAX, Inc., (formerly InfoServe, Inc.) Stock
Incentive Plan (the "Plan") in 1993. The Plan provides for the issuance of
incentive stock options, nonqualified options and restricted stock to key
employees, consultants and directors. Exercise prices for incentive stock
options may not be less than fair market value on the date of grant.
Two-hundred thousand shares (200,000) of common stock have been reserved for
possible issuance under the Plan.
Stock option activity for the years ended June 30, 1995 and 1996 is as
follows:
Outstanding Options
-------------------
Number
of Shares
----------
Balance at June 30, 1994 14,668
Options granted 116,011
----------
Balance at June 30, 1995 130,679
Options granted 55,666
Options cancelled (100,000)
----------
Balance at June 30, 1996 86,345
==========
Options exercisable at June 30, 1996 37,251
==========
Exercise prices of the options range from $7.00 to $45.00 per share. The
options generally vest on a time-based schedule over a period of one to three
years and expire over a period of five to ten years.
During the years ended June 30, 1994 and 1995, the Company recognized
compensation, marketing, and investor relations expenses amounting to
$171,000 and $71,452, respectively, in connection with options granted. These
charges represent the differences between the exercise price of the options
and the public bid price of the related shares on the date of grant.
RESERVE FOR COMMON STOCK
In connection with the stock options and warrants, the Company has reserved
2,535,193 shares of common stock for issuance as of June 30, 1996.
WARRANTS
In connection with the closing of the Private Placement (See Financing
Transactions), the Company issued warrants to purchase 600,000 shares of
common stock at a price of $3.37 per share. The purchase price of these
warrants was $100,000. In addition, the Company allocated $50,000 of the
notes payable proceeds to the warrants issued. The $50,000 allocated to the
warrants is being amortized to interest expense using the effective interest
method over the period (three months) the related debt is expected to be
outstanding. The effect of this allocation results in an effective interest
rate of 35%. As of June 30, 1996, the Company had recognized additional
interest expense of $25,000 related to this allocation.
On April 17, 1996, the Company issued warrants to purchase 990,000 shares of
common stock to four employees. The warrants are exercisable after October 1,
1996 and only at such time as the Common Stock has traded for twenty days in
any thirty business day period at a closing bid equal to or greater than
$9.19; however if the
F-10
<PAGE>
CD-MAX, INC.
(formerly InfoServe, Inc.)
(A Development Stage Company)
Notes to Financial Statements - (Continued)
2. Stockholders' Deficit - (Continued)
WARRANTS -- (CONTINUED)
Company does not consummate a public offering by December 31, 1997, the
warrants will expire. The warrants are exercisable at $9.19 per share.
Additionally, 100,000 options to purchase common stock which had previously
been granted to these four employees, were canceled.
In connection with the execution of the Bridge Loan Agreement in December
1995 (See Financing Transactions), the Company issued warrants to purchase
170,000 shares of common stock at a price of $3.37 per share. The purchase
price of these warrants was $20,000. In addition, the Company allocated
$29,167 of the interim bridge loan proceeds to the warrants issued. The
$29,167 allocated to the warrants is being amortized to interest expense
using the effective interest method over the period (four to five months) the
related debt is expected to be outstanding. The effect of this allocation
results in an effective interest rate of 35%. As of June 30, 1996, the
Company had recognized additional interest expense of $20,833 related to this
allocation.
In July 1995, the Company issued 1,200 warrants to a software development
firm in connection with a settlement of a contract. In September 1995, the
Company issued 609 warrants to a vendor in lieu of fees owed to this vendor.
These warrants are currently exercisable at a price of $.30 per share. The
expenses associated with the contract settlement and fees to the vendor are
considered immaterial to the financial statements.
During 1995, the Company received $1,142,583 in additional capital from
private investors through the sale of 172,432 shares of common stock. In
conjunction with these equity placements, the Company issued warrants for the
purchase of 172,432 shares of common stock. The warrants are currently
exercisable at prices ranging from $8.70 to $22.50 per share. Also, the
Company granted warrants to purchase 26,667 shares of common stock to certain
individuals for assisting in these equity placements. The warrants are
currently exercisable at prices ranging from $0.30 to $8.70 per share.
3. COMMITMENTS
The Company leases office space in Murray Hill, New Jersey, pursuant to an
operating lease which terminates in December, 2000; and in Reston, Virginia,
the Company leases office space under a lease which terminates in December,
1997. Additionally, the Company leases various office and computer equipment
under noncancelable operating and capital leases.
At June 30, 1996, there was $66,433 of computer equipment held under capital
leases. Accumulated amortization of the equipment amounted to $13,446 at June
30, 1996. Amortization expense related to capital leases is classified as
depreciation and amortization in the statements of cash flows. The non-cash
portion of this transaction has been excluded from the statements of cash
flows.
Rent expense for the years ended June 30, 1995 and 1996, and for the period
from July 1, 1993 (inception) to June 30, 1996 was $48,007, $66,663 and
$135,696, respectively.
Future minimum lease payments under noncancelable operating leases are as
follow as of June 30, 1996:
Year ending June 30:
--------------------
1997 $95,889
1998 65,112
1999 36,576
2000 36,576
2001 12,192
---------
$246,345
=========
F-11
<PAGE>
CD-MAX, INC.
(formerly InfoServe, Inc.)
(A Development Stage Company)
Notes to Financial Statements - (Continued)
Future minimum lease payments under noncancelable capital leases as of June
30, 1996 are $29,315 in 1997, $15,962 in 1998, and $8,062 in 1999 less $8,745
in interest.
4. ACCRUED EXPENSES
The Company partially funded its operations through the deferral of
compensation by management. As of June 30, 1996, the Company owed four of its
executives a total of $258,497 in accrued compensation. This amount is
classified as accrued expenses on the balance sheet.
5. INCOME TAXES
Net deferred income tax assets are as follows:
June 30,
1995 1996
----------- -------------
Start-up costs $169,000 $ 156,000
Operating loss carryforwards 442,000 1,128,000
Accrued expenses 134,000 131,000
Other 31,000 31,000
----------- -------------
Deferred tax assets 776,000 1,446,000
Valuation allowance (776,000) (1,446,000)
----------- -------------
Net deferred tax assets $ -- $ --
=========== =============
The valuation allowance increased by $670,000 from June 30, 1995 to June 30,
1996 primarily as a result of an increase in operating loss carryforwards due
to ongoing net losses.
At June 30, 1995 and 1996, the Company has net operating loss carryforwards
amounting to approximately $1,104,000 and $2,819,000, respectively. Operating
loss carryforwards expire in 2008 through 2011.
6. RELATED PARTY TRANSACTIONS
An officer of CD-MAX, Inc. (formerly InfoServe, Inc.) granted a license to
the Company under which the Company has been assigned certain proprietary and
intellectual property rights to certain U.S. patents and other business and
technological know-how related to the Company's CD-MAX(TM) business. Under
the terms of the license agreement, the Company will pay specified royalties
to a royalty trust, the beneficiaries of which include that officer, certain
other members of his family, and certain other officers and directors of the
Company. No amounts are currently due or have been paid pursuant to the
agreement.
As part of the merger agreement between Sigtek and CD-MAX, Inc. (formerly
InfoServe, Inc.), the Company assumed a $3,000 loan made by an officer to
Sigtek. This loan was satisfied in 1993 in return for the issuance of 200
shares of common stock to the officer. In 1994, a family member of an officer
of CD-MAX, Inc. (formerly InfoServe, Inc.), loaned the Company $25,000.
During 1995, the loan and accrued interest of $2,083 were converted into
6,226 shares of common stock.
During 1996, the Company entered into the Bridge Loan agreements with
existing significant stockholders (See Financing Transactions).
7. 401(K) PLAN
On July 1, 1995, the Company adopted a 401(k) Plan (the "Plan"). The Plan,
which covers all employees who have completed six months of service,
stipulates that employees may elect an amount between 1% and 15% of their
total compensation to contribute to the Plan. Contributions were made by the
Company in the amount of $6,404 during the year ended June 30, 1996.
F-12
<PAGE>
CD-MAX, INC.
(formerly InfoServe, Inc.)
(A Development Stage Company)
Notes to Financial Statements - (Continued)
8. MANAGEMENT PLANS
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. However, the Company does not have significant cash or other
material assets, nor does it have an established source of revenues
sufficient to cover its operating costs and to allow it to continue as a
going concern. During the year ended June 30, 1995, the Company raised equity
capital amounting to approximately $1.1 million from several investors.
During the year ended June 30, 1996, the Company raised $525,000 in
additional equity capital from several private investors. The Company has
also borrowed periodically from officers and other related parties. During
February to April 1996, the Company raised $300,000 in interim bridge
financing (See Note 2), as well as successfully completed a Private Placement
to raise approximately $1,000,000 in exchange for $900,000 of promissory
notes and warrants to purchase 600,000 shares of common stock (see Note 2).
The Company has filed a registration statement with the Securities and
Exchange Commission to raise approximately $7 million. If this offering is
not consummated, the Company must obtain financing from current investors or
other private and public investors, significantly reduce its development
activities, or generate revenues from sale of products. However, there can be
no assurance that the Company will be able to obtain the required financing.
9. EVENT (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT AUDITOR'S REPORT
In August 1996, the Company decided, subject to the completion of the
offering and the terms of the 1993 Stock Incentive Plan, to reduce the
exercise price to $3.50 per share, of certain stock options previously
granted to former and current directors, employees and advisors of the
Company.
F-13
<PAGE>
===============================================================================
No underwriter, dealer, salesperson or any other person has been
authorized to give any information or to make any representations other than
those contained in this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Company or any Underwriter. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the date
hereof or that the information contained herein is correct as of any date
subsequent to the date hereof. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any securities offered hereby by
anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make such offer or
solicitation.
------
TABLE OF CONTENTS
Page
--------
Prospectus Summary ........................ 4
Risk Factors .............................. 9
The Company ............................... 15
Recent Bridge Financings .................. 15
Use of Proceeds ........................... 16
Market for Common Equity and Related
Stockholder Matters ...................... 17
Dividend Policy ........................... 17
Dilution .................................. 18
Capitalization ............................ 19
Selected Financial Data ................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................... 21
Business .................................. 24
Management ................................ 32
Certain Transactions ...................... 35
Principal Stockholders .................... 37
Selling Securityholders ................... 39
Description of Securities ................. 42
Shares Eligible for Future Sale ........... 44
Underwriting .............................. 45
Legal Matters ............................. 46
Experts ................................... 47
Additional Information .................... 47
Index to Financial Statements ............. F-1
Until September 10, 1996, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may
be required to deliver a Prospectus. This delivery requirement is in addition
to the obligations of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
===============================================================================
<PAGE>
===============================================================================
LOGO
1,150,000 Units
Each Unit Consisting
of
Two Shares of Common Stock
and
One Redeemable Warrant
------
PROSPECTUS
------
JOSEPH STEVENS & COMPANY, L.P.
August 16, 1996
===============================================================================
