<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1998
REGISTRATION STATEMENT NO. 333-47715
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
REGISTRY MAGIC INCORPORATED
(Name of Small Business Issuer in Its Charter)
---------------------
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<S> <C> <C>
FLORIDA 7372 65-0623427
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Number) Identification No.)
</TABLE>
ONE SOUTH OCEAN BLVD., SUITE 206
BOCA RATON, FL 33432
(561) 367-0408
(Address and Telephone Number of Principal Executive Offices)
---------------------
WALT NAWROCKI, PRESIDENT
REGISTRY MAGIC INCORPORATED
ONE SOUTH OCEAN BOULEVARD, SUITE 206
BOCA RATON, FLORIDA 33432
(561) 367-0408
(Name, Address and Telephone Number of Agent For Service)
---------------------
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
JAMES SCHNEIDER, ESQ. FRAN STOLLER, ESQ.
MATTHEW MILLER, ESQ. JULIE YOO, ESQ.
ATLAS, PEARLMAN, TROP & BORKSON, P.A. BACHNER, TALLY, POLEVOY & MISHER, LLP
200 EAST LAS OLAS BOULEVARD, SUITE 1900 380 MADISON AVENUE
FORT LAUDERDALE, FL 33301 NEW YORK, NY 10017-2590
TELEPHONE: (954) 763-1200 TELEPHONE: (212) 687-7000
FACSIMILE NO. (954) 766-7800 FACSIMILE NO. (212) 682-5729
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
---------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number of the earlier effective registration statement for the same offering.
[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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==========================================================================================================================
TITLE OF EACH SHARES PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value........... 1,840,000(2) $7.25 $13,340,000 $3,936
- --------------------------------------------------------------------------------------------------------------------------
Representative's Warrants each to
purchase one share of Common Stock,
$.001 par value....................... 160,000 $.001 $160 (3)
- --------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value........... 160,000(4) $9.06 $1,449,600 $428.00
- --------------------------------------------------------------------------------------------------------------------------
Amount Due.............................. $4,364.00
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Assumes the Underwriters' over-allotment option to purchase up to 240,000
additional shares of Common Stock is exercised in full.
(3) None pursuant to Rule 457(g).
(4) Issuable upon exercise of the Representative's Warrants, together with such
indeterminate number of shares of Common Stock as may be issuable by reason
of the anti-dilution provisions contained therein.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 22, 1998
PROSPECTUS
(REGISTRY MAGIC INCORPORATED LOGO)
1,600,000 Shares of Common Stock
---------------------
Registry Magic Incorporated (the "Company") is hereby offering 1,600,000
shares of common stock, $.001 par value (the "Common Stock"). Prior to this
offering (the "Offering"), there has been no public market for the Common Stock
of the Company. The initial public offering price will be determined by
negotiation between the Company and Commonwealth Associates, as representative
(the "Representative") of the several underwriters (the "Underwriters"). See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. It is anticipated that the initial public
offering price will be between $7.00 and $7.25 per share.
The Company has applied for listing of the Common Stock on The Nasdaq
SmallCap Market ("Nasdaq") under the symbol "RMAG."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION, AND SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING
ON PAGE 6 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
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===================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................ $ $ $
- -------------------------------------------------------------------------------------------------------------------
Total(3)............................. $ $ $
===================================================================================================================
</TABLE>
(1) Does not include additional underwriting compensation to be received by the
Representative in the form of: (i) warrants to purchase up to 160,000 shares
of Common Stock exercisable for a period of four years commencing one year
from the date of the Prospectus at a price equal to 125% of the initial
public offering price (the "Representative's Warrants"); (ii) a non-
accountable expense allowance equal to 1.5% of the gross proceeds of the
Offering; and (iii) a financial advisory fee (the "Advisory Fee") equal to
2% of the gross proceeds of the Offering (assuming exercise of the
over-allotment option described below). The Company has agreed to indemnify
the Underwriters against certain liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of the Offering payable by the Company,
including the non-accountable expense allowance and the Advisory Fee,
estimated at $ ($ if the Underwriters' over-allotment option
is exercised in full). See "Underwriting."
(3) The Company has granted to the Underwriters a 45-day option (which may be
exercised by the Representative, individually) to purchase up to 240,000
additional shares of Common Stock on the same terms and conditions as set
forth above, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
---------------------
The shares of Common Stock are being offered by the Underwriters subject to
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify the Offering and to reject any order in whole or in
part. It is expected that delivery of certificates representing the Common Stock
will be made against payment therefor at the offices of Commonwealth Associates,
830 Third Avenue, New York, New York 10022 on or about , 1998. See
"Underwriting."
---------------------
COMMONWEALTH ASSOCIATES
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
[DIAGRAMS]
[Logo of a telephone receiver]
Conversational Speech Recognition Technologies & Products
- --------------------------------------------------------------------------------
[Five emblems of magazine and show awards received for Virtual Operator]
- --------------------------------------------------------------------------------
Virtual Operator(TM)
Speech recognition call routing system
Answers and routes calls like a live operator. Callers just
say the name of the party or department they want and they are
connected. Works 24-hours a day, answers up to twelve calls at
the same time and frees up employees to handle other tasks.
[Picture of an operator with telephone head phones in a circle]
[Picture of a computer and monitor displaying an operator with head phones]
The Virtual Operator is "Plug and Play"
and sold as a complete turnkey solution
including hardware, software and support.
[Picture of a computer screen]
[Logo for Virtual Operator(TM)
this is a machine?(TM) with a
swirl]
Customizing and maintaining the system is
simple. All you do is type in the name ... no
speech recognition skills are required.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON STOCK FOLLOWING THE
PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK
OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, OR THE
IMPOSITION OF PENALTY BIDS. SEE "UNDERWRITING" FOR A DESCRIPTION OF THESE
ACTIVITIES.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. Except as otherwise noted, all share and
per share data and information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed under "Risk Factors."
THE COMPANY
Registry Magic Incorporated is engaged in the development and marketing of
proprietary applications software incorporating core speech recognition
technology. The Company's products are designed to enable a user to perform
tasks or retrieve information by speaking into a telephone or to a computer in a
natural conversational manner. The Company recently introduced the Virtual
Operator(TM) ("Virtual Operator") -- a speech driven auto-attendant for the
commercial marketplace that has received a number of industry awards including
"Product of the Year" for 1997 by both CTI Magazine and Teleconnect Magazine,
"Best of Show" at the 1998 CT Expo and is a finalist for a Computerworld
Smithsonian Award in the category of Business & Related Services. The Company
has developed prototypes for two additional telephone-based speech recognition
products which it intends to introduce during calendar 1998 -- a voice driven
speed dialing product and a conversational personal assistant that performs
voice mail, facsimile and e-mail retrieval, as well as auto-attendant and speed
dialing functions. The Company anticipates that it will initially market these
products primarily through a distribution network of independent resellers,
although it will also seek to license its proprietary applications software to
telephone switch and voice-mail manufacturers, among others, on an original
equipment manufacturer (OEM) basis.
The Company's goal is to continue to develop applications software that
simulates the manner in which people communicate by incorporating the following
key attributes into its products: (i) speaker independence (the ability to
understand almost anyone); (ii) continuous speech (the ability to understand
language at a natural pace rather than one word at a time); (iii) barge-in (the
ability to allow a user to talk through or interrupt a prompt); and (iv) key
word spotting (the ability to recognize relevant speech and ignore the balance).
The Company's strategy is to establish alliances with corporate partners to
develop specific customer solutions incorporating the Company's proprietary
applications software and generate revenue on a recurring basis. For example,
the Company has entered into a letter of intent with a national shopping mall
operator for the development of conversational kiosk systems incorporating the
Company's applications software and full motion video which, if successful, will
provide the Company with a percentage of the revenues derived from kiosk-related
sales.
Industry sources, including Speech Recognition Update(TM)and ASR News,
recognized industry publications, agree that the potential market for speech
recognition products is vast and worldwide. Through its assembled group of
highly qualified professionals, including a former IBM management team with
extensive international experience in the speech recognition industry, as well
as its technical expertise, the Company believes that it is well positioned to
compete in the emerging market for speech driven telephony and computer products
and services.
The Company expects to incur significant expenditures in connection with
the development and marketing of its speech recognition applications which will
likely result in losses until such time, if ever, as the Company is able to
secure sufficient contracts for its speech recognition products and services
which would generate adequate sources of revenue to support its operations.
There can be no assurance that the Company's current business strategy will
enable it to ever achieve profitable operations. In addition, as a result of the
aforementioned conditions, the Company's independent certified public
accountants included an explanatory paragraph in their report dated December 19,
1997 indicating that such conditions raise substantial doubt about the Company's
ability to continue as a going concern.
3
<PAGE> 5
The Company was incorporated as a Florida corporation on October 11, 1995
under the name Registry Database Incorporated, and on May 24, 1996 changed its
name to Registry Magic Incorporated. The address and telephone number of the
Company's executive offices are One South Ocean Boulevard, Suite 206, Boca
Raton, Florida 33432; (561) 367-0408. Its fiscal year end is July 31.
THE OFFERING
Common Stock offered by the
Company.................. 1,600,000 shares
Common Stock outstanding
after the Offering......... 5,593,000 shares(1)(2)
Use of Proceeds............ The Company intends to use the net proceeds from
the Offering for (i) product development and
refinement; (ii) sales and marketing; (iii)
repayment of debt; and (iv) general corporate
purposes, including working capital. See "Use of
Proceeds."
Proposed Nasdaq SmallCap
Market Symbol............ RMAG
Risk Factors............... The Offering involves a high degree of risk and
immediate substantial dilution. See "Risk Factors"
and "Dilution."
- ---------------
(1) Assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."
(2) Excludes: (i) 160,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants; (ii) 300,000 shares of Common Stock reserved for
issuance in accordance with the Company's 1997 Stock Option Plan, pursuant
to which options to purchase 227,350 shares of Common Stock are issued and
outstanding; and (iii) 440,676 shares of Common Stock underlying additional
outstanding options and warrants held by officers, employees, consultants
and others. See "Management -- Stock Options," "Description of Securities"
and "Underwriting."
4
<PAGE> 6
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE SIX
CUMULATIVE FROM MONTHS ENDED FOR THE PERIOD FROM
OCTOBER 11, 1995 JANUARY 31, FOR THE OCTOBER 11, 1995
(INCEPTION) THROUGH ----------------------- YEAR ENDED (INCEPTION) THROUGH
JANUARY 31, 1998 1998 1997 JULY 31, 1997 JULY 31, 1996
------------------- ---------- ---------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Incidental consulting fees
revenues................ $ 683,328 $ 338,384 $ 37,500 $ 344,944 $ --
Total costs and
expenses................ 2,776,611 1,013,623 708,265 1,719,147 43,841
Net loss.................. $(2,093,283) $ (675,239) $ (670,765) $(1,374,203) $ (43,841)
Weighted average shares
outstanding............. 3,882,130 3,460,136 3,625,200 3,325,000
Net loss per common share
outstanding............. $ (0.17) $ (0.19) $ (0.38) $ (0.01)
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1998
------------------------
JULY 31, 1997 ACTUAL ADJUSTED(1)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets............................................ $ 937,904 $ 983,358 $10,381,638
Working capital........................................... $ 196,029 $ 375,816 $10,193,712
Total assets.............................................. $1,108,095 $1,322,048 $10,606,800
Total liabilities......................................... $ 741,875 $ 607,542 $ 187,926
Shareholders' equity...................................... $ 366,220 $ 714,506 $10,418,874
</TABLE>
- ---------------
(1) As adjusted to give effect to the sale of 1,600,000 shares of Common Stock
offered hereby at an offering price of $7.125 per share, the receipt of net
proceeds therefrom and the application of a portion of the proceeds to repay
debt, including payment of accrued interest thereon through January 31,
1998. Gives effect to the recognition of unamortized debt issuance costs
associated with such debt. See "Use of Proceeds."
5
<PAGE> 7
RISK FACTORS
An investment in the securities offered hereby is speculative in nature and
involves a high degree of risk. In addition to the other information contained
in this Prospectus, the following factors should be considered carefully in
evaluating the Company and its business before purchasing the securities offered
hereby. This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the forward-
looking statements. Factors that might cause or contribute to such difference
include, but are not limited to, those discussed below, as well as those
discussed elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; OPERATING LOSSES; GOING CONCERN QUALIFICATION IN
INDEPENDENT ACCOUNTANT'S REPORT
The Company is a development stage enterprise and has received only limited
incidental revenues from its inception in October 1995 through January 31, 1998.
The Company has only recently begun shipping its Virtual Operator product for
on-site field testing and evaluation, and has entered into a limited number of
contracts for the provision of its speech recognition products and services.
Accordingly, the Company has only a limited history upon which an evaluation of
its prospects and future performance can be made. Such prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered in the operations and expansion of a new business in an evolving
industry which has not obtained widespread commercial acceptance and which is
characterized by rapid technological obsolescence and intense competition.
From inception through January 31, 1998, the Company has incurred
cumulative losses of $2,093,283 and anticipates that losses will continue during
the current fiscal year ending July 31, 1998. The Company expects to incur
significant expenditures in connection with the development and marketing of its
speech recognition applications which will likely result in losses until such
time, if ever, as the Company is able to secure sufficient contracts for its
speech recognition products and services which would generate adequate sources
of revenue to support its operations. There can be no assurance that the
Company's current business strategy will enable it to ever achieve profitable
operations. In addition, as a result of the aforementioned conditions, the
Company's independent certified public accountants included an explanatory
paragraph in their report dated December 19, 1997 indicating that such
conditions raise substantial doubt about the Company's ability to continue as a
going concern. See "Management's Discussion and Analysis and Plan of Operation"
and "Financial Statements."
SIGNIFICANT CAPITAL REQUIREMENTS; DEPENDENCE ON OFFERING PROCEEDS TO IMPLEMENT
BUSINESS PLAN; POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company's capital requirements have been and will continue to be
significant due to the substantial costs associated with product development and
refinement, recruitment of skilled personnel and the marketing of innovative
speech recognition products and related services primarily to large established
corporations and other organizations. The Company's cash requirements for the
purpose of developing its products have been substantial and, as a result, the
Company has been dependent upon capital resources provided by investors in order
to finance its operations. The Company is dependent upon the proceeds of the
Offering to implement its business plan and finance its working capital
requirements. Based on the Company's currently proposed plans and assumptions
relating to the implementation of its business plan, the Company anticipates
that the net proceeds of the Offering will be sufficient to satisfy its
contemplated cash requirements for at least 12 months following the consummation
of the Offering. In the event the Company's products are not developed and
refined on a timely basis, contracts for the provision of products and
technology are not consummated in sufficient number or in the event the proceeds
of the Offering otherwise prove to be insufficient to fund the implementation of
the Company's business plan and working capital requirements, the Company could
be required to seek additional financing. The Company has no current
arrangements with respect to, or potential sources of, additional financing and,
following the consummation of the Offering, it is not anticipated that existing
shareholders will satisfy any portion of the Company's future financing
requirements. There can be no assurance that any additional financing will be
available to the Company when needed, on commercially
6
<PAGE> 8
reasonable terms, or at all. Any inability to obtain additional financing when
needed would have a material adverse effect on the Company, including the
curtailment of its product development, marketing and expansion activities. See
"Use of Proceeds" and "Management's Discussion and Analysis and Plan of
Operation."
DEVELOPMENT OF MARKETS REQUIRED FOR SUCCESSFUL PERFORMANCE BY THE COMPANY
The Company has only recently commenced significant marketing activities,
and there can be no assurance that the Company's marketing program will be
successful or that the Company's applications software will achieve market
acceptance. Achieving market acceptance for the Company's products will require
substantial marketing efforts and the expenditure of significant funds. The
financial performance of the Company will depend, in part, on acceptance of
speech recognition technology and the future development, growth and ultimate
size of this market. The Company's applications software products will compete
with more conventional means of information processing (e.g., data entry or
access by keyboard or touch-tone phone). The development of these markets also
will be dependent upon the demand for new applications, the ability of the
Company's products and services to meet and adapt to these needs, and the
continuing price and performance improvements in speech recognition engine
technology and hardware technology that will reduce the cost and increase the
performance of products incorporating the Company's applications. See
"Business -- Sales and Marketing."
UNCERTAINTY OF PRODUCT AND TECHNOLOGY DEVELOPMENT BY THE COMPANY
The Company has recently introduced the Virtual Operator product, which is
a speech driven auto-attendant, and has developed prototypes for two additional
telephone-based speech recognition products including a voice driven speed
dialing product and a conversational personal assistant that performs voice-
mail, facsimile, and e-mail retrieval, as well as the functions of the Virtual
Operator and the speed dialing product. To date, however, the Company has not
developed foreign language versions, for its Virtual Operator Product (other
than Spanish) or its two prototypes. Additionally, the Company also intends to
continue to develop and refine additional products including conversational call
centers, kiosks, and point-of-sale applications, which are currently in the
relatively early stages of development. The Company will be required to commit
considerable time, effort and resources to finalize development of these
products. The Company's success will depend, in part, upon the ability of its
proposed products to meet targeted performance, cost objectives, and timely
introduction into the marketplace.
In addition, early versions of software products often contain errors or
defects. There can be no assurance that, despite extensive testing by the
Company and potential customers, errors or defects will not be found in the
Company's applications software products prior to or after commencement of
commercial deployment, resulting in redevelopment costs and loss of, or delay
in, market acceptance of the Company's products. Additionally, there can be no
assurance that the Company's products will satisfactorily perform the functions
for which they are designed or, that they will meet applicable price or
performance objectives. Moreover, the Company currently does not maintain errors
and omissions insurance, although it intends to do so in the foreseeable future.
In the event of any errors or defects in any of the Company's products that may
adversely affect end users, the Company may be liable for such errors or
defects, which could have a material adverse impact on the Company's financial
condition. See "Business -- Products."
RAPID TECHNOLOGICAL CHANGE
The market for speech recognition products is expected to be characterized
by rapid technological change resulting in dynamic customer demands, frequent
new product and service introductions and short product lifecycles. The markets
for the Company's products may change rapidly as a result of innovations in core
speech recognition engine technology, computer hardware, software and
communications technologies. The Company's success will depend, in part, upon
its ability to make timely and cost-effective enhancements and additions to its
existing applications software products and develop new products that meet
evolving customer demands. There can be no assurance that the Company will have
the resources necessary to achieve this objective and that the Company's
products will not be rendered obsolete.
7
<PAGE> 9
COMPETITION
The speech recognition applications market is growing and expected to
become intensely competitive. The Company's products will compete with those
developed or being developed by many well established companies, including
International Business Machines Corporation("IBM"), American Telephone and
Telegraph Company ("AT&T"), Microsoft Corporation ("Microsoft"), Digital
Equipment Corporation ("Digital Equipment"), Lucent Technologies, Inc.
("Lucent"), American Nortel Communications, Inc. ("Nortel") and Unisys
Corporation ("Unisys"). Most of these companies have substantially greater
financial, technical, personnel and other resources than the Company and have
established reputations for success in the development, licensing and sale of
their products and technology, especially the larger organizations. A number of
these competitors have the financial resources necessary to enable them to
withstand substantial price competition or downturns in their markets. In
addition, certain companies may be expected to develop technologies or products
which may be functionally similar to some or all of those being developed by the
Company. With respect to its Virtual Operator product, the Company's competitors
may include Voice Control Systems, Vocalis Group plc ("Vocalis"), and
PureSpeech, Inc. ("PureSpeech"). In the conversational speed dialing and
personal assistant applications, the Company expects that its initial
competitors will be Wildfire Communications, Inc. ("Wildfire"), General Magic,
and Webley Systems, Inc. ("Webley"). Additionally, voicemail companies and
telephone switch manufacturers could also attempt to develop their own
conversational speech recognition applications.
Industry standards with respect to the markets for the technology and
products being developed by the Company are continually evolving, which often
results in product obsolescence or short product life cycles. Accordingly, the
ability of the Company to compete will depend on its ability to complete
development and introduce into the marketplace its proposed products and
technology, to continually enhance and improve its products and technology in a
timely manner, to adapt its proposed products in order to be compatible with
specific products manufactured by others, and to successfully develop and market
new products and technology. There can be no assurance that the Company will be
able to compete successfully, that its competitors or future competitors will
not develop technologies or products that render the Company's products and
technology obsolete or less marketable, or that the Company will be able to
successfully enhance its proposed products or technology or adapt them
satisfactorily. See "Business -- Competition."
DIFFICULTIES IN MAINTAINING PROPRIETARY RIGHTS
The Company's success is dependent upon its proprietary applications
software technology which may be difficult to protect. The Company currently
relies on a combination of contractual rights, trade secrets, know-how,
trademarks, non-disclosure agreements and technical knowledge to establish and
protect its proprietary rights. There can be no assurance, however, that the
measures taken by the Company to protect its proprietary rights will be adequate
to prevent misappropriation of the technology or independent development by
others of products with features based upon, or otherwise similar to, those of
the Company's products. Additionally, although the Company believes that its
technology has been independently developed and does not infringe on the
proprietary rights or trade secrets of others, there can be no assurance that
the Company's technology does not and will not so infringe or that third parties
will not assert infringement claims, trade secret violations, competitive torts
or other proprietary rights violations against the Company in the future. In the
case of infringement, the Company could, under certain circumstances, be
required to modify its products or obtain licenses, which would likely require
cash or other consideration. There can be no assurance that the Company would be
able to do either in a timely manner or upon acceptable terms and conditions,
and such failure could have a material adverse effect on the Company. In
addition, there can be no assurance that the Company will have the resources to
defend or prosecute a patent infringement or other proprietary rights
infringement action. See "Business -- Proprietary Rights."
DEPENDENCE ON OTHER COMPANIES FOR ASSEMBLY AND COMPONENT PARTS
The Company does not manufacture component parts for its products and,
accordingly, will be dependent on others for the supply and assembly of various
of its products. The Company's products are designed to be used with personal
computers (PCs), specifically Intel Pentium MMX (multi-media extension)
processors.
8
<PAGE> 10
While the Company currently purchases its modems, which are required for its
software applications, for remote maintenance from Boca Research, Inc. and its
telephone interface cards, which are also required for its software
applications, from Dialogic Corporation, located in Parsippany, New Jersey,
there are a number of other manufacturers who can supply similar products to the
Company, and the Company is not dependent upon a single supplier for any
equipment or component parts. However, the loss of Dialogic as a source for
telephone interface cards could have an impact on the Company, since the Company
may not be able to offer all of the features of a particular application if a
card manufactured by another entity were to be used. Additionally, the Company
generally does not have long-term contracts with suppliers for the purchase and
delivery of component parts or contractors for the assembly of its products.
However, any interruption of supply in the assembly services utilized by the
Company or in the supply of key components, for any reason, could result in
significant delivery delays, thereby adversely affecting the Company's marketing
efforts, customer relations, revenues and profitability. See
"Business -- Suppliers and Licensors."
LACK OF SALES AND MARKETING CAPABILITIES; DEPENDENCE UPON INDEPENDENT
DISTRIBUTORS, CORPORATE PARTNERS AND STRATEGIC ALLIANCES
The Company's sales and marketing efforts have been limited to date, and
the Company does not intend to establish a large internal sales and marketing
organization. The Company has allocated a substantial portion of the proceeds of
the Offering for sales and marketing activities, including those aimed at
establishing a network of independent distributors. There can be no assurance
that such network can be successfully established or will result in substantial
sales of the Company's products. The Company also will seek to enter into
strategic alliances to develop and market certain products, however, none of
these arrangements may prove successful. There can be no assurance that the
Company's strategic partners will provide the Company with the support
anticipated by the Company, or that any of the strategic alliances will be
successful in marketing speech technology applications without further delays or
within budget. Failure of these joint ventures to be successful could have a
material adverse effect on the Company's business and prospects. See
"Business -- Sales and Marketing."
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH
The Company's business plan anticipates, among other things, significant
growth in the Company's customer base and continued development of its speech
recognition products and related services which represent potential attendant
risks. This growth and continued development, if it materializes, could place a
significant strain on the Company's management, employees and operations. In the
event of this expansion, the Company would have to continue to implement and
improve its operating systems, and to expand, train and manage its employee
base. If the Company is unable to implement and improve these operating systems
and manage its employee base effectively, the Company's operations could be
materially adversely affected. See "Business -- Employees."
DIFFICULTIES IN IMPLEMENTATION OF STRATEGY
The Company's strategy is to develop and refine proprietary applications
software products that address certain of the shortcomings associated with
speech recognition products currently in the market. While the Company intends
to market its initial products on a stand-alone basis through independent
reseller channels and on an OEM basis, the Company's ultimate strategy is to
establish alliances with corporate partners with whom it will develop specific
customer solutions incorporating the Company's proprietary applications software
and generate revenue on a recurring basis. The Company's ability to implement
its strategy and its ultimate success are subject to a broad range of
uncertainties and contingencies, many of which are beyond the Company's control.
There can be no assurance that the Company will be able to establish alliances
to develop customer solutions, that such solutions will be profitable, or that
these applications will generate revenue to the Company on a recurring basis.
See "Business -- Strategy."
9
<PAGE> 11
RISK OF INTERNATIONAL SALES
The Company's business in the near term is expected to be conducted in the
European Union ("EU"), as well as in the United States, and may be affected by
changes in demand resulting from fluctuations in currency exchange rates, as
well as by governmental controls and other risks associated with international
sales. The Company's international business may be subject to longer payment
cycles, difficulties in accounts receivable collection, delays in shipments,
increases in duties and taxes, price controls, adverse changes in foreign
regulations and the burdens of complying with a wide variety of foreign laws.
The Company will generally deal in local currencies in foreign markets. If the
U.S. dollar strengthens in relation to these international currencies, the
Company's revenues from international sales and the gains and losses on the
settlement of receivables of the Company from international operations may be
adversely affected. There can be no assurance that exchange rate fluctuations
and other risks associated with international operations will not have a
material adverse effect on the Company's business and prospects. See
"Business -- Sales and Marketing."
BROAD DISCRETIONARY USE OF PROCEEDS
The Company has broad discretion with respect to the specific application
of the net proceeds of the Offering. Such amounts are intended to be used for
working capital, including salaries, product development, implementation of a
sales and marketing program and the repayment of promissory notes issued to
investors in a private placement between November and December 1996. Thus,
purchasers of the Common Stock offered hereby will be entrusting their funds to
the Company's management, upon whose judgment such purchasers must depend, with
only limited information concerning management's specific intentions. See "Use
of Proceeds."
VARIABILITY OF QUARTERLY RESULTS
The Company's quarterly operating results may fluctuate as a result of a
variety of factors, including the length of the sales cycle, the timing of
orders from and shipments to customers, delays in product development and
customer acceptance of custom applications, product development expenses, the
success of new product introductions or announcements by the Company or its
competitors, levels of market acceptance for new and existing products and the
hiring and training of additional staff as well as general economic conditions.
Because a significant portion of the Company's overhead is fixed in the
short-term, the Company's results of operations may be materially adversely
affected if revenues fall below the Company's expectations. If management's
estimate of product sales and product mix prove to be substantially inaccurate,
the Company may not have the necessary inventory available to deliver systems in
a timely manner, which may have a material adverse effect on the Company's
results of operations during such period. See "Management's Discussion and
Analysis and Plan of Operation."
DEPENDENCE ON KEY PERSONNEL
The success of the Company will be largely dependent on the efforts of the
members of the management of the Company, especially Walt Nawrocki, its
President and Chief Executive Officer, Lawrence Cohen, its Chairman of the
Board, and Neal Bernstein, its Vice President of Business Development and
Marketing. Although the Company has entered into employment agreements with
various members of the management of the Company, there can be no assurance that
such persons will continue their employment with the Company. The loss of the
services of one or more of such key personnel could have a material adverse
effect on the Company's ability to maximize its use of its products and
technologies or to develop related products and technologies. The Company has
obtained $2,500,000 of key man insurance on the life of Mr. Nawrocki, which may
prove insufficient in the event Mr. Nawrocki were to become deceased. The
success of the Company is also dependent upon its ability to hire and retain
additional qualified executive, programming, engineering and marketing
personnel. Qualified employees are in great demand and are likely to remain a
limited resource for the foreseeable future. Competition for skilled, creative
and technical talent is intense. There can be no assurance that the Company will
be successful in attracting and retaining such personnel. Any failure by the
Company to retain existing employees or to hire new employees when necessary
could have
10
<PAGE> 12
a material adverse effect upon the Company's business, financial condition and
results of operations. See "Business -- Employees" and "Management."
DILUTION
Upon the closing of the Offering, investors in the Offering will incur
immediate substantial dilution of approximately $5.27 or approximately 74.0% in
the per share net tangible book value of their Common Stock based on an
anticipated public offering price of $7.125 per share. See "Dilution."
CONTROL OF THE COMPANY BY MANAGEMENT
Immediately following the Offering, the executive officers and directors of
the Company will beneficially own 49.4% of the outstanding shares of Common
Stock (47.4% if the Underwriters' over-allotment option is exercised in full,
but exclusive of options granted to management). Accordingly, the management of
the Company will have the ability to elect the Company's entire Board of
Directors and control the outcome of all matters submitted to a vote of the
shareholders of the Company. See "Management" and "Principal Shareholders."
NO DIVIDENDS
The Company has not paid any cash dividends on its Common Stock since its
inception and does not anticipate paying cash dividends on its Common Stock in
the foreseeable future. See "Dividend Policy."
ARBITRARY OFFERING PRICE; POSSIBLE STOCK PRICE VOLATILITY
The initial public offering price of the shares of Common Stock offered
hereby has been determined by negotiations between the Company and the
Representative. Among the factors considered in determining this price were the
Company's current financial condition and prospects, stage of development of the
speech recognition industry, market prices of similar securities of various
publicly traded software companies, and the general condition of the securities
market. However, the initial public offering price does not necessarily bear any
direct relationship to the Company's assets, book value, earnings or other
established indicia of value. See "Underwriting."
The stock market, especially Nasdaq, has from time to time experienced
significant price and volume fluctuations that may be unrelated to the operating
performance of particular companies. In addition, the market price of the Common
Stock, like the stock prices of many publicly-traded technology companies, may
prove to be highly volatile. Announcements of technological innovations or new
commercial products by the Company or its competitors, developments or disputes
concerning patent or proprietary rights, publicity regarding actual or potential
products by the Company or its competitors, commercial contracts consummated or
not obtained as a result of unsuccessful testing, various external factors as
well as period-to-period fluctuation in financial results, among other factors,
may have a significant impact on the market price of the Common Stock.
REPRESENTATIVE'S POTENTIAL CONTINUING INFLUENCE ON THE COMPANY
The Representative, for a period of two years after the date of the
Offering, may designate one director or a non-voting observer to the Board of
Directors of the Company. Accordingly, as a result of the foregoing, the
Representative may, under certain circumstances, be able to influence the
operations of the Company. Additionally, holders of the Representative's
Warrants will also have certain demand and piggyback registration rights with
respect to the Representative's Warrants and the 160,000 shares of Common Stock
underlying such Warrants. Any exercise of these registration rights may hinder
efforts by the Company to arrange future financings of the Company and/or have
an adverse effect on the market price of the Company's shares of Common Stock.
See "Underwriting."
11
<PAGE> 13
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
The sale, or availability for sale, of a substantial number of shares of
Common Stock in the public market subsequent to the Offering pursuant to Rule
144 under the Securities Act ("Rule 144") or otherwise could materially
adversely affect the market price of the Common Stock and could impair the
Company's ability to raise additional capital through the sale of its equity
securities or debt financing. The availability of Rule 144 to the holders of
restricted securities of the Company would be conditioned on, among other
factors, the availability of certain public information concerning the Company.
All of the 3,993,000 shares of Common Stock currently outstanding are
"restricted securities" as that term is defined in Rule 144, and 3,793,000 of
such shares may be sold, under certain circumstances, without registration under
the Securities Act. Ordinarily, any shares issuable to employees upon exercise
of options granted under the Company's 1997 Stock Option Plan or otherwise,
pursuant to Rule 701 under the Securities Act, could be sold publicly commencing
90 days after the Company becomes a reporting company under the Securities
Exchange Act of 1934 (the "Exchange Act"). Additionally, the holders of 668,000
shares of Common Stock have certain demand and piggyback registration rights
with respect to shares owned by them and the holder of warrants to purchase
100,000 shares of Common Stock has registration rights with respect to the
shares underlying such warrants. All of the Company's executive officers,
directors and substantially all of its shareholders have agreed not to sell
their shares of Common Stock for a period of 12 months from the date of this
Prospectus without the Representative's prior written consent. See "Shares
Eligible for Future Sale" and "Description of Securities -- Registration
Rights."
NO PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that any trading market therefor will
develop, or, if any such market develops, that it will be sustained.
Accordingly, purchasers of the shares of Common Stock offered hereby may
experience difficulty selling or otherwise disposing of their shares of Common
Stock. See "Underwriting."
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ
The Company's Common Stock is expected to be listed on The Nasdaq SmallCap
Market upon the completion of the Offering. In order to continue to be listed on
Nasdaq, however, the Company must maintain at least $2,000,000 in net tangible
assets (total assets less total liabilities and goodwill) or $500,000 in net
income in the latest fiscal year or in two of the last three years or
$35,000,000 in market capitalization, a public float of at least 500,000 shares,
a $1,000,000 market value of public float, a minimum bid price of $1.00 per
share, at least two market makers, at least 300 shareholders and at least two
outside directors. The failure to meet these maintenance criteria in the future
may result in the delisting of the Company's securities from Nasdaq, and the
Company's Common Stock would thereafter be traded in the non-Nasdaq
over-the-counter market. As a result of such delisting, an investor could find
it more difficult to dispose of or to obtain accurate quotations as to the
market value of, the Company's Common Stock.
AUTHORIZATION OF PREFERRED STOCK; POSSIBLE ANTI-TAKEOVER EFFECTS
The Board of Directors is authorized to issue shares of preferred stock and
to determine the dividend, liquidation, conversion, redemption, and other
rights, preferences, and limitations of such shares without any further vote or
action of the shareholders. Accordingly, the Board of Directors is empowered,
without shareholder approval, 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 Common Stock. In the
event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging and delaying or preventing a change
in control of the Company. The Company has no present plan to issue any shares
of its preferred stock, although there can be no assurance that the Company will
not do so in the future. See "Description of Securities -- Preferred Stock."
12
<PAGE> 14
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation include provisions to eliminate, to
the full extent permitted by the Florida Business Corporation Act (the "Florida
Act") as in effect from time to time, the personal liability of directors of the
Company for monetary damages arising from a breach of their fiduciary duties as
directors. The Articles of Incorporation also include provisions to the effect
that the Company shall, to the maximum extent permitted from time to time under
the laws of the State of Florida, indemnify, and upon request shall advance
expenses to any director or officer, to the extent that such indemnification and
advancement of expense is permitted under such law, as it may from time to time
be in effect. See "Management -- Indemnification of Directors and Officers."
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby based on a public offering price of $7.125 per share, after
deducting underwriting discounts and commissions and estimated expenses payable
by the Company, will be approximately $9,721,800 (or approximately $11,277,900
if the over-allotment option granted to the Underwriters is exercised in full).
The Company intends to use the net proceeds of the Offering approximately as
follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE AMOUNT PERCENTAGE OF
APPLICATION OF NET PROCEEDS NET PROCEEDS
- ----------- ------------------ -------------
<S> <C> <C>
Product Development(1)................................ $4,500,000 46.3%
Sales and Marketing(2)................................ 4,500,000 46.3%
Repayment of Debt(3).................................. 420,000 4.3%
Working Capital(4).................................... 301,800 3.1%
---------- ------
Total....................................... $9,721,800 100.0%
========== ======
</TABLE>
- ---------------
(1) Includes the costs of personnel, equipment and software necessary to further
develop and enhance the Company's Virtual Operator, conversational personal
assistant and voice dialing products. See "Business -- Products."
(2) Includes the costs of marketing and sales and technical support personnel
and related expenditures to be incurred in connection with developing and
implementing a sales and marketing program. See "Business -- Sales and
Marketing."
(3) Represents principal and accrued interest (through January 31, 1998) on
promissory notes in the aggregate principal amount of $410,000 held by
private placement investors which bear interest at the rate of 7% per annum
and are payable on the earlier of October 1, 1998 or completion of the
Offering. The proceeds of all of these loans were used for working capital
purposes. None of such investors are officers, directors or affiliates of
the Company. See "Management's Discussion and Analysis and Plan of
Operation" and "Certain Transactions."
(4) Includes general corporate purposes, such as funding day-to-day operations
of the Company, payment of salaries and general and administrative expenses
and the future development of the Company.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Offering during the next approximately 12 months based
on current plans and prevailing economic, industry and competitive conditions.
The Company reserves the right to reallocate the proceeds if unanticipated
events may cause the Company to redirect its priorities.
Any additional proceeds received upon exercise of the Underwriters'
over-allotment option will be added to working capital. Pending utilization, the
net proceeds of the Offering will be invested in short-term, investment grade,
interest-bearing investments, certificates of deposit or direct or guaranteed
United States government obligations.
13
<PAGE> 15
DIVIDEND POLICY
The Company has not paid, and does not anticipate paying, any dividends on
its Common Stock in the foreseeable future. The Company currently intends to
retain its future earnings for use in operations and expansions of its business.
Declaration and payment of future dividends, if any, will be at the sole
discretion of the Board of Directors.
CAPITALIZATION
The following table sets forth the capitalization of the Company: (i) as of
January 31, 1998 and (ii) as adjusted to give effect to the sale of the Common
Stock offered hereby at a public offering price of $7.125 per share and the
receipt of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
JANUARY 31, 1998
----------------------------
ACTUAL AS ADJUSTED
----------- --------------
<S> <C> <C>
Notes payable -- shareholders............................... $ 410,000 $ --(1)
Note payable -- related party............................... 50,000 50,000
----------- -----------
Total debt................................................ 460,000 50,000
----------- -----------
Shareholders' equity:
Preferred Stock, $.01 par value; 5,000,000 shares
authorized; no shares outstanding...................... -- --
Common Stock, $.001 par value; 30,000,000 shares
authorized; 3,993,000 shares issued (actual); 5,593,000
shares (as adjusted)(2)................................ 3,993 5,593
Additional paid-in capital................................ 2,803,796 12,523,996
Accumulated deficit....................................... (2,093,283) (2,110,715)(3)
----------- -----------
Total shareholders' equity........................ 714,506 10,418,874
----------- -----------
Total capitalization.............................. $ 1,174,506 $10,468,874
=========== ===========
</TABLE>
- ---------------
(1) Reflects repayment of $410,000 principal amount of promissory notes issued
to shareholders in a private placement completed in December 1996.
(2) Does not include shares of Common Stock issuable upon exercise of (i) the
over-allotment option; (ii) the Representative's Warrants; or (iii)
outstanding options and warrants or options which may be granted under the
Company's 1997 Stock Option Plan.
(3) Gives effect to the recognition of unamortized debt issuance costs
associated with notes payable to shareholders referred to in footnote (1)
above.
14
<PAGE> 16
DILUTION
As of January 31, 1998, the net tangible book value of the Company was
$577,894 or approximately $.14 per share of Common Stock based on 3,993,000
shares of Common Stock outstanding. Net tangible book value per share represents
the amount of the Company's shareholders' equity, less intangible assets,
divided by the number of shares of Common Stock outstanding. Dilution to new
investors represents the difference between the amount per share paid by
purchasers of shares of Common Stock in the Offering made hereby and the net
tangible book value per share of Common Stock immediately after completion of
the Offering. After giving effect to the sale of 1,600,000 shares of Common
Stock by the Company at a public offering price of $7.125 per share and receipt
of the estimated net proceeds therefrom, the adjusted net tangible book value of
the Company as of January 31, 1998 would have been $10,395,790 or $1.86 per
share. This represents an immediate increase in net tangible book value of $1.72
per share to existing shareholders and an immediate dilution in net tangible
book value of $5.265 or approximately 74.0% per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $7.125
Net tangible book value before the Offering............... .14
Increase attributable to new investors.................... 1.72
-----
Adjusted net tangible book value after the Offering......... 1.86
------
Dilution to new investors................................... $5.265
======
</TABLE>
In the event that the Underwriters' over-allotment option is exercised in
full, the net tangible book value of the Company at January 31, 1998 would be
approximately $2.05 per share, which would result in dilution per share to the
new investors in the Offering of approximately $5.075 per share.
The following table summarizes at January 31, 1998, the difference between
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing shareholders
since inception and by new investors in the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders................ 3,993,000 71.4% $ 2,641,325 18.8% $ 0.66
New Investors........................ 1,600,000 28.6% $11,400,000 81.2% $7.125
--------- ------ ----------- ------
Totals............................... 5,593,000 100.0% $14,041,325 100.0%
========= ====== =========== ======
</TABLE>
The foregoing tables do not give effect to the exercise of any outstanding
options. See "Management -- Stock Options."
15
<PAGE> 17
SELECTED FINANCIAL INFORMATION
The table below contains certain summary historical financial information
of the Company. The information has been derived from the Financial Statements
included elsewhere in this Prospectus. The six months data at January 31, 1998,
the cumulative data from October 11, 1995 (inception) through January 31, 1998,
and for the six months ended January 31, 1998 and 1997 are derived from the
Company's unaudited financial statements and include all adjustments, consisting
only of normal recurring adjustments, that management considers necessary to
fairly present such data. The results of the six months ending January 31, 1998
are not necessarily indicative of the results to be expected for the full year
ended July 31, 1998. This information should be read in conjunction with the
Financial Statements and "Management's Discussion and Analysis and Plan of
Operation."
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
CUMULATIVE FROM MONTHS ENDED PERIOD FROM
OCTOBER 11, 1995 JANUARY 31, FOR THE OCTOBER 11, 1995
(INCEPTION) THROUGH ---------------------- YEAR ENDED (INCEPTION) THROUGH
JANUARY 31, 1998 1998 1997 JULY 31, 1997 JULY 31, 1996
------------------- ---------- --------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Incidental consulting fees
revenues................. $ 683,328 $ 338,384 $ 37,500 $ 344,944 $ --
Total costs and expenses... 2,776,611 1,013,623 708,265 1,719,147 43,841
Net loss................... $(2,093,283) $ (675,239) $(670,765) $(1,374,203) $ (43,841)
Weighted average shares
outstanding.............. 3,882,130 3,460,136 3,625,200 3,325,000
Net loss per common share
outstanding.............. $ (0.17) $ (0.19) $ (0.38) $ (0.01)
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1998
------------------------
JULY 31, 1997 ACTUAL ADJUSTED(1)
------------- ---------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets............................................ $ 937,904 $ 983,358 $10,381,638
Working capital........................................... $ 196,029 $ 375,816 $10,193,712
Total assets.............................................. $1,108,095 $1,322,048 $10,606,800
Total liabilities......................................... $ 741,875 $ 607,542 $ 187,926
Shareholders' equity...................................... $ 366,220 $ 714,506 $10,418,874
</TABLE>
- ---------------
(1) As adjusted to give effect to the sale of 1,600,000 shares of Common Stock
offered hereby at an offering price of $7.125 per share, the receipt of net
proceeds therefrom and the application of a portion of the proceeds to repay
debt, including payment of accrued interest thereon through January 31,
1998. Gives effect to the recognition of unamortized debt issuance costs
associated with such debt. See "Use of Proceeds."
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the financial statements of the Company and the notes thereto appearing
elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The Company is in the development stage. Since its inception in October
1995, the Company's efforts have been principally devoted to research,
development and design of products, marketing activities and raising capital.
The Company has generated only nominal incidental consulting fee revenues and
has incurred substantial operating losses to date, which losses are continuing.
Since inception, the Company has sustained cumulative losses of
($2,093,283). These losses have resulted primarily from expenditures for general
and administrative activities, including salaries and professional fees, which
have aggregated $1,328,910 since inception. Losses are expected to continue
through fiscal year 1998.
Since inception, the Company has recognized incidental consulting fee
revenues of $683,328 which were derived from three consulting contracts, one of
which was completed as of July 31, 1997 and the two remaining consulting
contracts were both completed as of December 31, 1997. The Company performed
these consulting services for Lernout & Hauspie Speech Products, N.V. ("L&H")
and Nortel. The Company does not consider revenues from consulting fees to be a
significant source of revenues in the future, as revenues are expected to be
derived from the sale or licensing of products and technologies.
Subsequent to January 31, 1998, the Company received $200,000 from L&H as a
prepayment against future royalties on sales of the Company's Magic Calendar
product. See "Business -- Products."
Research and development expenses for the fiscal year ended July 31, 1997
were $418,164 compared to $16,129 for the period ended July 31, 1996, an
increase of $402,035. Research and development expenses for the six months ended
January 31, 1998 were $441,530, compared to $174,494 for the six months ended
January 31, 1998, an increase of $267,036. These increases were due to the
development of the Company's Virtual Operator product, the development of other
product and service prototypes, and expenses related to the Company's
performance of the consulting contracts. Research and development expenses
incurred in the course of establishing technological feasibility of the
Company's software applications have been charged to operations pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 86 -- "Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." As of
January 31, 1998, the Company had not reached technological feasibility of its
products.
Royalty expense for the fiscal year ended July 31, 1997 was $500,000,
compared to nil for the fiscal year ended July 31, 1996. This amount represents
a non-refundable prepayment to L&H on royalties to use certain speech
recognition engine technologies and text to speech technologies. The Company
expensed such prepaid royalties in the absence of any contracts for the sale of
its products at the time of the prepayment. See Note 8 of Notes to the Financial
Statements and "Business -- Suppliers and Licensors." As of January 31, 1998,
the Company has not sold any products utilizing these licenses and accordingly,
has not used any of the prepaid royalties. On March 30, 1998, the Company paid
L&H an additional $200,000 non-refundable prepayment against future royalties.
General and administrative expenses increased from $26,879 for the fiscal
year ended July 31, 1996 to $770,283 for the fiscal year ended July 31, 1997.
General and administrative expenses increased by $133,109 from $398,639 for the
six months ended January 31, 1997, to $531,748 for the six months ended January
31, 1998. The Company incurred a $300,000 charge for the six months ended
January 31, 1997 for stock options issued to employees. The increases for fiscal
year 1997 were due to additional employees hired to begin marketing and sales of
the Virtual Operator, additional office support staff, and increased legal and
accounting fees incurred in connection with the Company's expanding activities
and patent applications.
The Securities and Exchange Commission has issued Staff Legal Bulletin No.
5 (CF/IM) stating that public operating companies should consider whether there
will be any anticipated costs, problems and
17
<PAGE> 19
uncertainties associated with the Year 2000 issue, which affects many existing
computer programs that use only two digits to identify a year in the date field.
According to the Company's best knowledge, all software used by the Company is
Year 2000 compliant, whether developed by the Company or by third parties, and
the Company will continue to ensure that all software systems used by the
Company are Year 2000 compliant.
LIQUIDITY AND CAPITAL RESOURCES
From inception through January 31, 1998, the Company's capital was provided
by loans made by the Company's Chairman and his wife in the amount of $100,000
(of which $50,000 was repaid at December 31, 1996). The remaining $50,000 plus
accrued interest still outstanding and due to the Chairman shall be repaid not
earlier than six months from the date of this Prospectus and only to the extent
of cash flow from operations, if any. Such related party loans included interest
ranging from 6 1/2% to 7% per annum.
Between November and December 1996, the Company completed a private
placement in which it sold 82 units of its securities consisting in the
aggregate of $410,000 principal amount of its subordinated promissory notes (the
"Notes") and 410,000 shares of Common Stock for an aggregate payment net of
expenses of $1,606,216 to 40 investors, none of whom were affiliated with the
Company and substantially all of whom were accredited investors. The Notes bear
interest at the rate of 7% per annum payable semi-annually on April 1 and
October 1 of each year and mature on October 1, 1998. In accordance with the
terms of the Notes, the principal amount of such Notes together with accrued
interest is to be repaid from the proceeds of the Offering. See "Use of
Proceeds." The placement agent for the offering received warrants to purchase
100,000 shares of Common Stock exercisable at $6.00 per share on or prior to
November 27, 2001.
In January 1997, the Company issued 58,000 shares of its Common Stock to
three unaffiliated investors at $3.50 per share for a total payment of $203,000.
In November 1997, the Company received net proceeds of $997,159 through the
issuance of 200,000 shares of its Common Stock at $5.00 per share to 1-800-REACH
ME LLC, a dealer for certain of the Company's products and services. See
"Business -- Sales and Marketing" and "Certain Transactions."
The proceeds generated from private placements described above were used
for (i) research and development (approximately $324,000), (ii) payment of the
non-refundable prepayment due to L&H ($500,000), (iii) general and
administrative expenses including salaries (approximately $529,000), (iv)
purchase of equipment (approximately $185,000), (v) repayment of related party
loans ($50,000), and (vi) patent fees and related legal expenses (approximately
$18,000).
In December 1997, the Company entered into three-year employment agreements
with three of its executive officers which provide for aggregate base salaries
of $415,500. See "Management -- Employment Agreements" and Note 8 of Notes to
the Financial Statements.
PLAN OF OPERATION
The report of the independent auditors on the Company's financial
statements as of July 31, 1997 contains an explanatory paragraph regarding an
uncertainty with respect to the ability of the Company to continue as a going
concern. The Company has generated only nominal, incidental consulting fee
revenues of $683,328 and incurred an accumulated deficit through January 31,
1998 of $2,093,283. However, the Company believes that upon the completion of
the Offering and the receipt of the proceeds therefrom, it will have the
necessary liquidity and capital resources to sustain planned operations for the
12 month period following the Offering. See "Use of Proceeds."
During such 12-month period, the Company intends to focus its efforts on
enhancing its Virtual Operator product and refining two of its telephone-based
speech recognition prototypes which it intends to introduce during calendar
1998. It will also use a portion of the proceeds for the implementation of its
sales and marketing program which includes developing a marketing and sales
network initially in North America and thereafter, in the EU.
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In the event that the Company's internal estimates relating to its planned
expenditures prove materially inaccurate or the Company's development and
marketing efforts do not result in significant product sales, the Company may be
required to reallocate funds among its planned activities and curtail certain
planned expenditures. In any event, the Company is unable to predict whether
revenues from operations will be sufficient to fund the Company's working
capital requirements beyond 12 months. Therefore, the Company may be required to
obtain substantial additional financing through equity or debt financings,
collaborative arrangements or otherwise. There can be no assurance as to the
availability or terms of any required additional financing, when and if needed.
In the event that the Company fails to raise any funds it requires, it may be
necessary for the Company to significantly curtail its activities or cease
operations. See "Use of Proceeds."
FUTURE ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, Financial Reporting for Segments of
a Business Enterprise, establishes standards for the way that public enterprises
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate the resources and in assessing performance.
Both SFAS No. 130 and 131, issued in June 1997, are effective for financial
statements for periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evaluate the impact, if
any, they may have on future financial statement disclosures.
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BUSINESS
INTRODUCTION
The Company was organized to design, develop and market proprietary
applications software to exploit advances in speech recognition technologies.
The Company is creating products that enable a user to perform tasks or retrieve
information by speaking into a telephone or to a computer in a natural
conversational manner. The Company recently introduced the Virtual Operator -- a
speech driven auto-attendant that has received a number of industry awards
including "Product of the Year 1997" by both CTI Magazine and Teleconnect
Magazine, "Best of Show" at the 1998 CT Expo and a nomination as a finalist for
a Computerworld Smithsonian Award in the category of Business & Related
Services. The Company has developed prototypes for two additional
telephone-based speech recognition products which it intends to introduce during
calendar 1998 -- a voice driven speed dialing product and a conversational
personal assistant that performs voice mail, facsimile, and e-mail retrieval, as
well as auto-attendant and speed dialing functions. See "Business -- Products."
The Company anticipates that it will initially market these products primarily
through a distribution network of independent resellers, although it will also
seek to license its proprietary applications software to telephone switch and
voice-mail manufacturers, among others, on an OEM basis. See "Business -- Sales
and Marketing."
The Company's goal is to continue to develop and refine speech driven
applications software products which will enable users to easily access computer
automated transactions via telephone or PC without the need for extensive
touch-tone menus or computer proficiency while providing customers with
cost-saving benefits. The Company's strategy is to establish alliances with
corporate partners to develop specific customer solutions incorporating the
Company's proprietary applications software and generate revenue on a recurring
basis. See "-- Strategy."
INDUSTRY BACKGROUND
The following description of industry background is based on management's
understanding of trends and developments in the speech recognition industry
predicated on the experience and background of various members of management in
such industry.
While various types of speech recognition technology have existed for
several years and the number of commercially available speech-enabled products
continues to grow, until recently, speech recognition technology applications
have been deficient and costly, thereby limiting widespread acceptance.
Historically, emphasis in the speech recognition industry has been placed on the
development of core speech recognition engine technology, rather than on the
development of speech recognition applications technology. The speech
recognition engine is the core technology upon which various applications are
based. Major companies, including IBM, Dragon Dictate Systems, Inc., L&H, Voice
Control Systems, Nortel and Lucent, have spent vast sums of money over the last
quarter century in developing core engine technology, but have, for the most
part, relegated developing applications to others.
Speech recognition engine technologies require distinct skills including
speech algorithms, statistics, digital signal processing algorithms, digital
signal processing programming, phonetics, linguistics, information theory and
coding theory. On the other hand, creating speech recognition applications
requires an entirely different set of skills including speech and word
recognition, linguistics, usability engineering, phonetics, multimedia and
telephone application development.
Early speech recognition applications typically required programming of
equipment to recognize a limited number of discrete words spoken by a specific
user, referred to as "speaker enrollment." These speaker-dependent systems also
tended to be sensitive to background noise and to changes in speech patterns
that resulted from an enrolled speaker being tired or excited. Additionally,
these initial speech recognition applications had limited vocabularies and
required the user to speak discretely, pausing between each word, rather than
allowing natural continuous speech. Moreover, in addition to these performance
challenges, the development of foreign language versions of automatic speech
recognition and text-to-speech synthesis (technologies for converting textual
information into synthetic speech output) has been costly and time
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consuming. As a result, most developers have limited development to one
(typically English) or a few language versions of their technology.
As the number of electronic devices used by businesses and consumers
proliferate and the features and functionality of these products and services
increase and become more complex, manufacturers continually seek to increase the
ease of use and the interface between their products and the end user. The
manner and simplicity of operation of a product can have a direct effect on its
popularity, frequency of use and market acceptance. The introduction of the
"mouse" and the graphical user interface (GUI), each of which simplified the use
of the personal computer, are examples of how improving a product's
user-friendliness can enhance its marketability.
Speech is typically the most natural, efficient and easiest means of human
communication. With the increase in the power and capability of core speech
recognition engine technology, as well as the increase in speed and reduction of
costs in computer processors, integration of human speech as an interface to
telephone and computer applications is now feasible. Recent advances in the
accuracy of speech recognition technologies have led to improvements in the
performance and reliability of speech recognition products, allowing for
multiple languages to be developed for a specific application. Management
believes that these improvements and continuing advances in speech recognition
technologies, including the development of intuitive and easy-to-use natural
language user interfaces, are accelerating the growth of speech-enabled products
in daily business and personal use. Furthermore, management believes that
electronic devices and products incorporating speech recognition technology will
be available in an increasing variety of applications, provided that these
applications are easy to use, natural, accurate and cost effective.
STRATEGY
The Company's goal is to exploit existing speech engine technology to
create advanced speech recognition applications. The Company's strategy is to
develop and refine proprietary applications software products that address
certain of the shortcomings associated with speech recognition products
currently on the market. In pursuit of that goal, management has retained a
development team which includes (i) speech recognition developers to enhance the
capabilities of the speech recognition engines that form the foundation of the
Company's products; (ii) natural dialogue designers with linguistic and phonetic
skills to design applications that anticipate user responses; (iii) multimedia
application developers to exploit and integrate audio and video functionality;
(iv) usability engineers to design intuitive, easy-to-use applications; and (v)
telephone application developers to integrate telephone systems with computer
applications.
The Company intends to offer products and services that, among other
attributes, will substantially eliminate touch-tone menus, reduce labor costs by
reducing the number of live operators, increase efficiency by reducing the
potential for lost messages and information, and provide information in a
natural conversational manner to a targeted audience.
While the Company intends to market its initial products on a stand-alone
basis through independent reseller channels and on an OEM basis, the Company's
ultimate strategy is to establish alliances with corporate partners pursuant to
which it will develop specific customer solutions incorporating the Company's
proprietary applications software and generate revenue on a recurring basis. See
"-- Sales and Marketing."
PRODUCTS
General
The Company is developing proprietary applications software products that
simulate the manner in which human beings communicate by incorporating the
following key attributes:
- Speaker Independence -- enables any person to speak and be understood. As
a result, within a geographic region or country, the Company's technology
"listens" to and can understand different dialects, ages and genders.
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- Natural Speech -- allows users to speak at a continuous and natural pace
rather than one word at a time.
- Key Word Spotting -- identifies the key words for action within any
naturally spoken command. For example, a caller may say, "I'd like to
speak with John Doe, please." Dialogue Detection locates the name "John
Doe" and ignores all other words which have been spoken.
- Barge-in -- allows callers to override prompts with their voice. The
computer stops speaking, "hears" the new input and responds by going into
its database to retrieve the requested information.
- Advanced Statistical Methods -- used to analyze what users will say based
on quantitative statistical analyses that evaluates the combination of
responses in order to understand the spoken language. For example,
although it is currently not possible for a computer system to understand
each individual city, town or village in the United States (e.g., Boise,
Dallas or Buffalo), it can understand a specific city or town when
coupled with a specific state (e.g., Idaho, Texas or New York).
Telephony Products
The Company believes that because of its universality, the telephone offers
a particularly powerful means for information retrieval, transactions and
messaging. While in the United States interactive voice response telephone
systems using touch-tone input have enjoyed considerable success in automating a
variety of transactions, users often find that using touch-tone telephone menus,
which require a user to push different buttons based upon a series of commands,
tend to be inefficient and frustrating. The limitations for touch-tone input for
more complex and varied transactions are significant and provide a strong
opportunity for speech driven products. Furthermore, outside North America, many
telephone systems are still rotary-driven, which precludes touch-tone telephone
application capability. The recent deregulation of the telecommunication market
in the EU, however, is expected to result in telecommunication products and
services becoming more competitive. The Company believes it is well positioned
to compete in the overseas market based on its prior experience in developing
multi-lingual voice recognition products. The Company has developed a Spanish
language version of its Virtual Operator which recently was awarded "Best of
Show" at the 1998 CT Expo. In light of the foregoing and as a result of better
applications and advances in speech recognition technologies, management
believes that the exploitation of speech driven applications in the telephony
market will increase. Accordingly, the Company has determined to focus its
initial development efforts primarily on telephone products and services.
- The Virtual Operator. The Company's first stand-alone product is a
speech driven auto-attendant that enables a caller to request connection
to a person or department by speaking into the telephone in a natural
manner. A caller does not need to remember the extension of the person or
department to whom the caller wishes to speak, and the caller is not
required to enter touch-tones to transfer to a desired department.
Additionally, a caller can interrupt a prompt at any time and state the
caller's request without waiting for the prompt to finish. A product
prototype of the Virtual Operator won a Best-of-Show Award at the
Computer Technology Expo 1997, a major trade show for products and
services using computer telephone solutions that was held in Los Angeles
in March 1997. The Virtual Operator was also named "Product of the Year"
for 1997 by both Teleconnect Magazine and CTI Magazine, leading trade
publications for telephone equipment dealers, and "Best of Show" at the
1998 CT Expo. In December 1997, the Company was nominated as a finalist
for a Computerworld Smithsonian Award for its Virtual Operator
application in the category of Business & Related Services, with the
winner to be announced later this year.
In December 1997, the Company began shipping the Virtual Operator for
on-site field testing and evaluation by several international businesses,
national and regional distribution companies and prospective OEM resellers. The
Company is engaged in ongoing discussions with respect to additional field
pilots as well as sales of product for those entities which are nearing
completion of their evaluation process. See "-- Sales and Marketing."
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- MagicDialing(TM). The Company's second product is an application
software package that enables a user to dial his or her contact list by
stating the requested name rather than requiring a user to enter a number
or numerical extension. This product is targeted at companies providing
cellular telephone services, as well as to long distance and calling card
companies.
- Conversational Personal Assistant. The Company is also developing a
conversational personal assistant that can be sold as either a
stand-alone product or as a service on a subscription basis. This product
will perform remote voice mail, facsimile, and e-mail retrieval, as well
as the functions of the Virtual Operator and the speed dialing product.
The Company has allocated a substantial portion of the proceeds of the
Offering for product development efforts aimed at enhancing the Virtual
Operator, including the creation of foreign language versions of this product,
completion of development of the conversational voice dialing and personal
assistant applications, and creation of foreign language versions of the latter.
See "Use of Proceeds."
Other Products
The Company has developed several additional products and services. One of
these -- Magic Calendar -- is a PC microphone-based interface which enables
users to input scheduling data into their computers utilizing spoken commands.
In December 1997, the Company entered into a licensing agreement with L&H for
distribution of Magic Calendar pursuant to which L&H is to pay $450,000 of
prepaid royalties to the Company. L&H paid $200,000 in prepaid royalties at
March 20, 1998 and will pay $250,000 of additional prepaid royalties between
June 30 and September 30, 1998.
Retail products and services under development include:
- Conversational Call Centers. Integrating the attributes of key word
spotting and barge-in, this product could be employed in applications
such as order-taking by a virtual call-center attendant.
- Conversational Kiosks(TM). Employing most of the Company's applications
technologies and integrating full motion video, this product can be
employed by customers to create a virtual employee capable of promoting
product sales to or eliciting information from the end user.
- Conversational Point-Of-Sale Applications. Employing many of the
Company's application technologies, this product can potentially be used
in a diverse number of applications including fast-food items ordering
via telephone or as part of an in-store informational kiosk.
The Company does not intend to utilize a significant portion of the
proceeds of the Offering to further develop these applications. Instead, it is
the Company's intention to seek strategic alliances pursuant to which third
parties will contribute technology or services, provide financing or marketing,
sales or support in connection with the development and commercialization of
these specific customer solutions. See "-- Strategy."
The Company has entered into a strategic alliance agreement with Phone
Interactive Corporation ("PIC"), a telephone service bureau business. As part of
this agreement, the Company has agreed to contribute its speech recognition call
center software under development, while PIC will provide its telecommunications
platforms, marketing, customer base and other contributions, and each will
receive a percentage of the overall revenue from the proposed services based
upon each party's contribution in developing and marketing a specific
application. The Company and PIC have begun the integration of the Company's
call center software with PIC's telecommunications platforms, and the Company
believes that the service will be available for customers prior to the end of
calendar 1998.
The Company and M.S. Management Associates, Inc. ("MSM"), an affiliate of
the Simon DeBartollo Group, L.P. ("SDG"), a national shopping mall developer,
have entered into a letter of intent in anticipation of consummation of a
Strategic Technology and Marketing Agreement for purposes of identifying
opportunities for installation of Conversational Kiosks at a limited number of
SDG properties. Under the terms of the proposed joint venture, MSM would provide
national advertisers and mall facilities for the Conversational Kiosks, while
the Company would contribute its speech application software and related
technology under
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development. Revenues derived from advertising, rent and transaction fees from
the Conversational Kiosks would also be divided evenly between MSM and the
Company. The letter of intent contemplates that the first phase of the venture
will consist of a pilot program for installation of Conversational Kiosks in a
limited number of malls, with additional Conversational Kiosks to be installed
at additional SDG properties based on the results of the initial phase of the
program. There can be no assurance that a definitive agreement with MSM will be
consummated or that full scale deployment of Conversational Kiosks will occur
following evaluation of the initial phase of the program.
Research and Development Expenses
For the period ended July 31, 1996, the fiscal year ended July 31, 1997 and
the six months ended January 31, 1998, the Company incurred research and
development expenses of $16,129, $418,164 and $441,530, respectively. As
previously described above and under "Use of Proceeds", the Company will use a
substantial portion of the proceeds of the Offering for further product
development.
SALES AND MARKETING
To date, marketing efforts have been conducted by Company personnel and
have focused on international businesses, national and regional distribution
companies and OEM telephone switch and voicemail manufacturers which would
conduct field pilots of the Virtual Operator for evaluation purposes. The
Company anticipates that initially sales of its telephony products will be made
primarily through independent resellers that supply telephone and voicemail
systems to businesses, as well as OEM manufacturers. The Company is first
seeking to establish a distribution network for North America. Thereafter, the
Company intends to establish a similar network in the EU, focusing initially on
the United Kingdom, based on the natural progression from U.S. English-based
applications to U.K. English-based applications. Thereafter, the Company intends
to expand into other EU countries based on the expected size of the market
opportunities and the availability of distribution partners. The Company will
also be required to provide ongoing technical support and training to
distributors of its applications software.
The Company has allocated a substantial portion of the proceeds of the
Offering for sales and marketing activities, including the costs of attendance
at trade shows, trade journal publications and advertising and promotional
materials aimed at increasing awareness of the Company's products and
establishing a network of committed distributors and resellers. See "Use of
Proceeds." There can be no assurance, however, that any sales and marketing
efforts undertaken by or on behalf of the Company will be successful or will
result in substantial sales of the Company's applications software products.
The Company's ultimate strategy is to establish alliances with corporate
partners pursuant to which it will develop specific customer solutions
incorporating the Company's proprietary applications software and generate
revenue on a recurring basis. There can be no assurances, however, that the
Company will be able to enter into any additional agreements or arrangements
with any entities to develop, market, distribute or sell applications software
products or that any arrangements entered into will generate significant
revenues for the Company.
SUPPLIERS AND LICENSORS
The Company's proprietary applications software incorporates core speech
engine technology developed by others for which the Company must obtain
licenses. The Company has entered into a four-year, non-exclusive, worldwide
license agreement, effective as of December 31, 1996 and subsequently amended
(the "L&H Agreement"), to use and exploit L&H's proprietary core speech
recognition engine technologies and text-to-speech technologies. L&H is an
international developer, licensor and provider of multilingual advanced speech
and language technologies and services for telephone and desktop applications.
Included in the license to the Company are all advances or improvements made by
L&H to such technologies and all foreign language uses requested by the Company
which initially include American English, Castillian Spanish, French, German,
Italian, Dutch, and in certain instances, British English and Korean. L&H has
agreed to provide technical support, marketing support and training to the
Company. To date, the Company has paid L&H an aggregate of $700,000 in
non-refundable prepayments against future royalties due to L&H on sales of
certain of the Company's products incorporating L&H technology. The Company has
also entered into a
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licensing arrangement with IBM for use of its core speech engine technology to
incorporate into certain products under development.
The Company's applications software is designed to be used with PCs,
specifically Intel Pentium MMX (multi-media extension) processors. The Company's
software applications also require a modem for remote maintenance which the
Company currently purchases from Boca Research, although these modems are
available from numerous sources on similar terms and conditions. Standard
telephone interface cards are also required for certain of the applications if
these operations communicate via the telephone. The Company's telephony products
currently require telephone interface cards manufactured by Dialogic of
Parsippany, New Jersey, however there are a number of other manufacturers,
including Natural Microsystems, Rhetoric, and NewVoice from which the Company
may purchase cards on similar terms and conditions. Certain of the Company's
products also rely on special external processing boards which are manufactured
by Dialogic as well. The loss of Dialogic as a source for these cards could have
a material adverse impact on the Company, since the Company might not be able to
offer all the features of a particular application if it were required to rely
on other suppliers.
The Company's conversational kiosk applications under development require
high quality sound cards shipped with most PCs today, as well as high quality
noise-canceling microphones available from a number of suppliers including
Andrea Electronics. The Company's telephony applications software is designed to
be used with Microsoft(R) Windows NT and its kiosk applications software is
designed to be used with Microsoft(R) Windows 95. The Company undertakes its
software development using Microsoft programming tools. To the extent that
Microsoft programming tools become unavailable, the Company should be able to
utilize Borland programming tools; however, the loss of the Microsoft
programming tools could have a material adverse affect on the development of the
Company's applications. Additionally, toolkits (i.e. collections of programs
that facilitate the creation of applications software) from engine providers
enable the Company to exploit speech recognition engine technologies developed
by different vendors. Typically, the Company selects engine toolkits and speech
recognition engine technology manufactured by the same entity. Alternatively,
the Company selects a programming toolkit to complement a specific application
based on the toolkit that produces the fastest results in a high quality manner
and yields efficiencies in hardware requirements.
PROPRIETARY RIGHTS
The Company considers its software and applications as propriety and
currently relies on a combination of copyright, trade secret and trademark laws
and license agreements to protect its intellectual property rights. The Company
also will enter into license agreements with end-users of the products and
applications, and has required all employees to enter into confidentiality and
non-disclosure agreements. Despite these precautions, it may be possible for
unauthorized third parties to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. The Company
currently has filed for federal trademark protection with the United States
Patent and Trademark Office (the "PTO") for the marks REGISTRY MAGIC(TM) and
VIRTUAL OPERATOR(TM).
There are three patent applications currently pending with the PTO on
various aspects of its applications software including for the Company's
barge-in and key word spotting attributes. The Company has six additional
provisional patent disclosures filed with the PTO which relate to its
conversational personal assistant and speed dialing products. There can be no
assurance that any of these patents will be granted, or if granted, will provide
the Company with significant protection against competitors. Certain of the
Company's competitors have obtained patent protection, and the Company believes
that certain of its competitors are seeking patent protection on various aspects
of their speech recognition technology. There can be no assurances that the
Company's technology will not be subject to challenges that such technology
infringes on the proprietary rights or trade secrets of others.
COMPETITION
The speech recognition applications market is growing and is expected to be
characterized by intense competition. The Company's products will compete with,
or affect the sales of, many well established companies including IBM, AT&T,
Digital Equipment, Lucent, Nortel and Unisys. Most of these companies
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have substantially greater financial, technical, personnel and other resources
than the Company and have established reputations for success in the
development, licensing and sale of their products and technology, especially the
larger organizations. Various of these competitors have the financial resources
necessary to enable them to withstand substantial price competition or downturns
in their markets. In addition, certain companies may be expected to develop
technologies or products which may be functionally similar to some or all of
those being developed by the Company. With respect to the Virtual Operator
product, the Company's competitors will likely include Voice Control Systems,
Vocalis and PureSpeech. In the speed dialing and conversational personal
assistant applications, the Company expects that its initial competitors will be
Wildfire, General Magic, and Webley. Additionally, voice-mail companies and
telephone switch manufacturers may also attempt to develop their own
conversational speech recognition applications. There can be no assurance that
the Company will be able to compete successfully, that its competitors or future
competitors will not develop technologies or products that render the Company's
products and technology obsolete or less marketable, or that the Company will be
able to successfully enhance its proposed products or technology or adapt them
satisfactorily.
EMPLOYEES
The Company currently has 15 full-time employees. Four persons are in
management and provide services in the areas of marketing and business
development, administration and research and development; eight are employed in
research and development; two persons are engaged in sales and marketing and one
person is in administration. No employee of the Company is covered by a
collective bargaining agreement or is represented by a labor union. The Company
considers its employee relations to be good. The Company also has entered into
independent contractor arrangements with 11 individuals on an as-needed basis to
develop programming or provide sales and marketing assistance for the Company.
LITIGATION
On April 3, 1998, the Company initiated an action in the Circuit Court for
Palm Beach County, Florida against a former employee of the Company whose
employment was terminated at such date. The Company is alleging breach of an
oral employment agreement and misrepresentations in the inducement of such
agreement. The Company is seeking damages and the rescission of the 20,000
shares of Common Stock and options to purchase 90,000 shares of Common Stock
previously granted to such former employee. The defendant has filed an answer
denying various of the Company's allegations and raising certain affirmative
defenses. The defendant has also asserted a counterclaim against the Company and
Walt Nawrocki and Lawrence Cohen, who are members of management and principal
shareholders of the Company, seeking salary and benefits under the terms of his
oral employment agreement as well as additional unspecified equity participation
in the Company (the defendant had previously made a demand for 200,000 shares of
Common Stock). The defendant is also seeking a declaratory judgment with regard
to the Company's claim for rescission. While the Company believes that the
defendant's claims are without merit based on the breaches by the defendant of
his oral agreement with the Company, Walt Nawrocki and Lawrence Cohen have
agreed to settle such equity claims, should the need arise, from their personal
shareholdings. Any expense associated with the action will be incurred as an
expense by the Company. The Company does not believe that the outcome of this
matter will have a material adverse effect on the financial condition or
business prospects of the Company.
Other than as described above, the Company is not a party to any litigation
nor is it aware of any material threatened litigation.
FACILITIES
The Company currently leases adjacent facilities consisting of
approximately 1,594 and 1,009 square feet of office space in Boca Raton, Florida
at an initial monthly base rental amount of $1,726 and $1,093, respectively,
plus the Company's proportionate share (an aggregate of 5.43%) of taxes and
operating expenses for the common area of the building. The Company's leases
terminate on December 31, 1999.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Walt Nawrocki(1)........................... 53 President, Chief Executive Officer and
Director
Lawrence Cohen............................. 53 Chairman of the Board
Neal A. Bernstein.......................... 36 Vice President-Business Development and
Marketing
Martin Scott............................... 30 Treasurer and Secretary
Ted Gordon(1).............................. 68 Director
Paul Spindler(1)........................... 66 Director
Sheldon E. Misher(2)....................... 57 Director (nominee)
</TABLE>
- ---------------
(1) Member of the Audit and Compensation Committee.
(2) Mr. Misher will join the Board of Directors immediately following the
completion of the Offering.
WALT NAWROCKI has served as President, Chief Executive Officer and a
director of the Company since June 1996. Prior to joining the Company, Mr.
Nawrocki spent over 30 years at IBM where he was employed in positions of
increasing responsibility becoming Manager for Worldwide Product Development and
Business Management in August 1992. In such capacity, he oversaw a number of
business areas, including speech products, and was responsible for acquisitions,
joint development and OEM licensing programs. While at IBM, Mr. Nawrocki was
responsible for the shift from 5 1/4 inch diskettes to 3 1/2 inch diskettes and
the standardization of keyboards currently used on most PCs today. His working
teams have been honored with five Byte Magazine awards for speech recognition
products and an IBM Market Driven Quality award for customer requirements and
customer satisfaction.
LAWRENCE COHEN has served as Chairman of the Board since he founded the
Company in October 1995. Mr. Cohen has been engaged in providing financial
consulting and merchant banking services to early-stage companies for more than
the past 25 years. He has served as Vice Chairman of the Board and Executive
Vice President of Bristol Retail Solutions, Inc. (Nasdaq:BRTL), a point-of-sale
equipment distributor ("Bristol"), since he co-founded such company in April
1996. He is also the co-founder and a director of Apollo BioPharmaceuticals,
Inc., a privately-held company in Massachusetts engaged in the development of
neuroprotective pharmaceuticals ("Apollo"), and currently serves on the board of
directors of ASHA Corp. (Nasdaq:ASHA), an automotive drive train developer.
Between November 1990 and September 1996, Mr. Cohen served as Chairman of the
Board of BioTime, Inc. (Nasdaq:BTIM), a biotechnology firm he founded to develop
an artificial blood plasma substitute. He was a co-founder of Cryomedical
Sciences (Nasdaq:CMSI), a low temperature surgery company, and served as its
President from November 1990 to November 1991. It is anticipated that Mr. Cohen
will devote approximately 25% of his working time to the Company's affairs.
NEAL A. BERNSTEIN has served as Vice President-Business Development and
Marketing of the Company since January 1997. Prior to joining the Company, Mr.
Bernstein spent approximately 13 years at IBM where he was employed in a variety
of sales, marketing and business development capacities, serving last as a
Business Development Manager within the IBM Internet Division from May 1996
until December 1996. From January 1992 until May 1996, he held a number of
management positions within the Speech Products Business Unit, including Manager
of OEM and Licensing, Manager of Business Development and Strategic Alliances
and Manager of North American Sales and Marketing.
MARTIN SCOTT, a certified public accountant, has served as Secretary and
Treasurer of the Company since October 1997. From June 1996 until October 1997,
he was employed as an Audit Supervisor by Millward & Co., CPAs. From October
1995 until June 1996, Mr. Scott served as Controller of ERD Waste Corp.
(Nasdaq:ERDI), a waste disposal company. Prior thereto, from January 1995, he
was employed as a Senior
27
<PAGE> 29
Accountant with the firm of Richard A. Eisner & Co., LLP. From January 1991 to
January 1995, he was employed as a Senior Accountant with the firm of Feldman
Radin & Co., P.C.
TED GORDON served as a director of the Company from June 1996 until his
resignation in December 1996 and was reelected to the Board of Directors in
December 1997. From April 1971 to June 1990, Mr. Gordon served as President and
Chairman of the Board of The Futures Group, a Connecticut-based management
consulting firm he founded which provides strategic planning in the areas of
technology deployment and Company re-engineering. He remains a director and
consultant of such firm. Mr. Gordon also serves as Director of the Millennium
Project in Washington, D.C., an outlook study for the American Council of the
United Nations with which he has been associated since January 1992. Since March
1994, he has served as a consultant to the United States Environmental
Protection Agency in the area of forecasting future environment issues. He
currently serves on the boards of directors of Apollo BioPharmaceuticals and the
Institute for Global Ethics in Camden, Maine.
PAUL SPINDLER has served as a director of the Company since June 1996. He
has served as Chairman of the Board and Executive Vice President of Bristol
since he co-founded such company in April 1996. From May 1987 to December 1996,
Mr. Spindler served as President of GCI-Spindler, a Los Angeles-based marketing
communications firm (a subsidiary of Grey Advertising, Inc.), whose clients
include Toshiba Information Systems, Microsoft Corp. and IBM.
SHELDON E. MISHER has been nominated to become a director of the Company
upon the closing of the Offering. Mr. Misher has been a partner in the law firm
of Bachner, Tally, Polevoy & Misher LLP, New York, New York since 1971, and has
over 30 years experience in the areas of corporate and securities law.
Directors are elected at the Company's annual meeting of shareholders and
serve a term of one year or until their successors are elected and qualified.
Officers are appointed by the Board of Directors and serve at the discretion of
the Board of Directors, subject to the By-Laws of the Company.
BOARD COMMITTEES AND RELATED INFORMATION
Upon the closing of the Offering, the Company will establish a Compensation
and Audit Committee to be comprised of Ted Gordon and Paul Spindler, who are
non-employee directors, and Walt Nawrocki.
The Compensation and Audit Committee will administer the Company's stock
option plan and make recommendations to the full Board of Directors concerning
compensation, including bonuses and incentive arrangements, of the Company's
officers and key employees. The Compensation and Audit Committee will be
comprised of a majority of independent directors. The Compensation and Audit
Committee will also review the engagement of the independent accountants and
review the independence of the accounting firm, as well as review the audit and
non-audit fees of the independent accountants and the adequacy of the Company's
internal accounting controls.
The Company has agreed that, if it is requested to do so by the
Representative, it will use its best efforts, for a period of two years from the
date of this Prospectus, to elect one designee of the Representative as a
director of the Company or, at the Representative's option, as a non-voting
observer to the Company's Board of Directors. Such observer will have no voting
rights. He or she will be reimbursed for any out-of-pocket expense incurred in
attending such meetings, and will be indemnified against any claims arising out
of participation at Board meetings, including claims based on liabilities
arising under the securities laws. The Representative has not selected a
designee for director or a non-voting observer.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Act permits the indemnification of directors, employees,
officers and agents of Florida corporations. The Company's Articles of
Incorporation indemnify its directors and officers to the fullest extent
permitted by law.
At present, there is no pending litigation or proceeding involving a
director, officer, employee, or other agent of the Company as to which
indemnification is being sought. However, the Company is a plaintiff in a
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<PAGE> 30
recently filed complaint against a former employee who has filed a counterclaim
against the Company as well as executives of the Company. See
"Business -- Litigation."
Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
DIRECTOR COMPENSATION
Following the completion of the Offering, the Company will compensate
non-employee directors in the amount of $500 per meeting for attending meetings
of the Board of Directors. In addition, directors will be reimbursed for
expenses incurred in attending such meetings and will be indemnified against any
claims arising out of his or her status as a director of the Company, including
claims arising under federal and state securities laws. In addition, directors
are eligible to receive options under the Company's 1997 Stock Option Plan.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information relating to the compensation
paid by the Company during the past two fiscal years to: (i) the Company's
President and Chief Executive Officer; and (ii) each of the Company's executive
officers who earned more than $100,000 during the fiscal year ended July 31,
1997 (collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- --------------------------- ---- -------- ----- ------- ------------
<S> <C> <C> <C> <C> <C>
Walt Nawrocki............................. 1997 $175,000 $ 0 200,000 $ 0
President and Chief Executive 1996 $ 14,583 $ 0 0 $ 0
Officer
Lawrence Cohen............................ 1997 $ 67,375 $ 0 100,000 $ 0
Chairman 1996 $ 0 $ 0 0 $ 0
</TABLE>
The Company maintains key man life insurance on the life of Walt Nawrocki
in the amount of $2,500,000 payable to the Company.
Employment Agreements
Effective December 21, 1997, the Company entered into three-year employment
agreements with each of Walt Nawrocki, Lawrence Cohen and Neal Bernstein
providing for base annual salaries of $175,000, $115,500 and $125,000,
respectively. The employees may receive annual bonuses at the discretion of the
Company, with bonuses to be determined by the Compensation and Audit Committee.
No formula or criteria have been specifically determined. The agreements provide
for severance equal to one year's salary in the event of (i) non-renewal of the
agreement upon expiration other than for cause or (ii) a change of control of
the Company as a result of which the employee is not retained by new management
on a comparable basis. In addition, the agreements contain confidentiality
provisions and 12-month post termination non-competition restriction which may
be imposed by the Company provided the employee receives a lump sum payment
equal to one year's salary within 30 days of termination of employment. Under
Florida law, a court of competent jurisdiction may determine not to enforce such
non-competition restrictions or partially enforce or modify such provisions.
29
<PAGE> 31
STOCK OPTIONS
OPTION/SAR GRANTS IN LAST FISCAL YEAR (INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES PERCENTAGE OF TOTAL EXERCISE OR EXPIRATION
UNDERLYING OPTIONS/ OPTIONS/SARS GRANTED BASE PRICE DATE
NAME SARS GRANTED(#) EMPLOYEES IN FISCAL YEAR ($/SH) THROUGH
- ---- -------------------- ------------------------ ----------- ----------------
<S> <C> <C> <C> <C>
Walt Nawrocki................ 200,000 37% $3.50 October 20, 2001
Lawrence Cohen............... 100,000 18% $3.85 March 11, 2001
</TABLE>
1997 Stock Option Plan
The 1997 Stock Option Plan (the "Plan") provides for the grant of options
to purchase up to 300,000 shares of Common Stock to employees, officers,
directors, and consultants of the Company. Options may either be "incentive
stock options" within the meaning of Section 422 of the United States Internal
Revenue Code of 1986, as amended (the "Code"), or non-qualified options.
Incentive stock options may be granted only to employees of the Company, while
non-qualified options may be issued to non-employee directors, consultants, and
others, as well as to employees of the Company.
The Plan will be administered by the Board of Directors or a committee
thereof, who determine, among other things, those individuals who shall receive
options, the time period during which the options may be partially or fully
exercised, the number of shares of Common Stock issuable upon the exercise of
each option, and the option exercise price.
The exercise price of an incentive stock option may not be less than the
fair market value per share of Common Stock on the date the option is granted.
The exercise price of a non-qualified option may be established by the Board of
Directors. The aggregate fair market value (determined as of the date the option
is granted) of Common Stock for which any person may be granted incentive stock
options which first become exercisable in any calendar year may not exceed
$100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to such person, 10% or more of the total
combined voting power of all classes of stock of the Company (a "10%
Shareholder") shall be eligible to receive any incentive stock options under the
Plan unless the exercise price is at least 110% of the fair market value of the
shares of Common Stock subject to the option, determined on the date of grant.
Non-qualified options are not subject to such limitation.
Incentive stock options may not be transferred by an optionee other than by
will or the laws of descent and distribution, and, during the lifetime of an
optionee, the option will be exercisable only by the optionee. In the event of
termination of employment other than by death or disability, the optionee will
have no more than three months after such termination during which the optionee
will be entitled to exercise the option, unless otherwise determined by the
Board of Directors. Upon termination of employment of an optionee by reason of
death or permanent and total disability, an optionee's options remain
exercisable for one year thereafter to the extent such options were exercisable
on the date of such termination. No similar limitation applies to non-qualified
options.
Options under the Plan must be issued within ten years from the effective
date of the Plan, which is March 12, 1997. Incentive stock options granted under
the Plan cannot be exercised more than ten years from the date of grant.
Incentive stock options issued to a 10% Shareholder are limited to five year
terms. Options granted under the Plan generally provide for the payment of the
exercise price in cash and may provide for the payment of the exercise price by
delivery to the Company of shares of Common Stock already owned by the optionee
having a fair market value equal to the exercise price of the options being
exercised, or by a combination of such methods. Therefore, if so provided in an
optionee's options, an optionee may be able to tender shares of Common Stock to
purchase additional shares of Common Stock and may theoretically exercise all of
his stock options with no additional investment other than the purchase of his
original shares.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the Company become available again for issuance under
the Plan.
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<PAGE> 32
The Plan may be terminated or amended at any time by the Board of
Directors, except that the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the Plan may not be
increased without the consent of the shareholders of the Company.
Options to purchase 227,350 shares of Common Stock have been granted
pursuant to the Plan leaving a balance of 72,650 shares of Common Stock
available for issuance. The Company issued options to purchase an aggregate of
207,350 shares of Common Stock on March 12, 1997 exercisable at $3.50 to $3.85
per share over a four-year term to two executive officers and other employees of
the Company. Lawrence Cohen, the Company's Chairman of the Board, received
options to purchase 100,000 shares of Common Stock exercisable at $3.85 per
share during their four-year term. Neal Bernstein, the Company's Vice
President -- Business Development and Marketing, received options to purchase
50,000 shares of Common Stock and Tony Nawrocki, an employee and the adult son
of Walt Nawrocki, the Company's President and Chief Executive Officer, received
options to purchase 30,000 shares of Common Stock. Other employees also received
options to purchase 27,350 shares of Common Stock exercisable at $3.50 per share
during their four-year term. In addition, Martin Scott, the Company's Secretary
and Treasurer, received options to purchase 5,000 shares of Common Stock of the
Company on October 15, 1997 at an exercise price of $3.50 per share over their
four-year term and an employee received options to purchase 15,000 shares of
Common Stock of the Company on December 15, 1997 at an exercise price of $5.00
per share over their four-year term. Such options are exercisable as to 50% of
the options granted commencing one year following the date of grant and as to
the remaining 50% of such options, commencing two years from the date of grant,
except for Lawrence Cohen whose options are currently exercisable in their
entirety.
OTHER OPTION GRANTS
In addition to options granted pursuant to the Company's 1997 Stock Option
Plan described above Registry Magic granted options in October 1996 to Walt
Nawrocki, the President and Chief Executive Officer of the Company, to purchase
200,000 shares of Common Stock of the Company exercisable at $3.50 per share on
or prior to October 20, 2001. At that time, the Company also issued options to
purchase an aggregate of 100,000 shares of Common Stock to two employees of the
Company, exercisable at $.50 per share on or prior to October 20, 2001. See
"Management's Discussion and Analysis and Plan of Operation." In addition,
between March and July 1997, the Company granted options to purchase an
aggregate of 19,500 shares of Common Stock to two consultants of the Company,
exercisable at $3.50 per share during the five year term of such options. During
the six months ended January 31, 1998, options to purchase 6,676 shares of
Common Stock were granted to two consultants of the Company, including one of
the consultants referred to above. Such options are exercisable at $3.50 to
$5.00 per share, expiring in four to five years and vesting immediately.
Subsequent to January 31, 1998, options to purchase 14,500 shares of Common
Stock were granted to three consultants. Such options are exercisable at $7.00
per share, expiring in five years and vesting immediately.
In connection with the issuance of the aforementioned options, $300,000 was
charged to operations representing the difference between the market price of
the stock and the exercise price of the options on the date the options were
granted. In addition, $4,500 was charged to operations for services received in
exchange for the grant of options.
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<PAGE> 33
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the exercise of
options to purchase shares of Common Stock during the fiscal year ended July 31,
1997 to each person named in the Summary Compensation Table and the unexercised
options held as of the end of the 1997 fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS OPTIONS(1)/SARS
ACQUIRED ON VALUE AT FY-END(#) AT FY-END($)
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ------------- ---------------
<S> <C> <C> <C> <C>
Walt Nawrocki, President and
Chief Executive Officer...................... -- -- 200,000/0 $725,000/0
Lawrence Cohen, Chairman....................... -- -- 100,000/0 $327,500/0
</TABLE>
- ---------------
(1) Based on a public offering price of $7.125 per share.
CERTAIN TRANSACTIONS
Between June and September 1996, the Company issued an aggregate of
3,325,000 shares of Common Stock for $.001 per share in connection with its
initial capitalization. Following reallocation and transfers, executive officers
and directors, their immediate family members or affiliated entities received
shares of Common Stock as follows: (i) 300,000 shares were issued to Elizabeth
Nawrocki, the wife of Walt Nawrocki, the President, Chief Executive Officer and
a director of the Company; (ii) 1,724,000 shares were issued to Alliant Holding
and Transfer Company ("Alliant"), an affiliate of Lawrence Cohen, the Company's
Chairman of the Board; (iii) 120,000 shares were issued to The Spindler Trust
which is controlled by Paul Spindler, a director of the Company; (iv) 320,000
shares were issued to Ted Gordon, a director of the Company; and (v) 300,000
shares were issued to Leslie Bernstein, the wife of Neal Bernstein, a Vice
President of the Company. Alliant transferred 15,000 of its shares in October
1997 to Martin Scott, the Company's Secretary and Treasurer.
During 1996 and 1997, Lawrence Cohen contributed $25,959 and $3,500,
respectively, to the capital of the Company. At that time he also advanced the
Company $50,000 which bears interest at the rate of 6.5% per annum. This loan
and related interest may be repaid not earlier than six months from the date of
this Prospectus and only to the extent of cash flow from operations, if any. In
October and November 1996, Donna Cohen, Mr. Cohen's wife, advanced the Company a
total of $50,000, which was repaid in December 1996 together with interest at
the rate of 7% per annum.
In November 1997, the Company issued 200,000 shares of its Common Stock to
1-800-REACH ME, LLC ("REACH ME") in consideration for a cash payment of
$1,000,000 (net proceeds of $997,159). REACH ME, subsequently entered into a
dealer agreement with the Company. REACH ME has certain demand and piggyback
registration rights with regard to these shares of Common Stock that it
acquired, and the Company will register the resale of such shares 12 months from
the date hereof.
Between October 20, 1996 and October 15, 1997, the Company granted options
to purchase an aggregate of 355,000 shares of Common Stock at exercise prices
ranging from $0.50 to $3.85 per share to executive officers of the Company. See
"Management -- Stock Options."
All transactions between the Company and its officers, shareholders and
each of their affiliated companies have been made on terms no less favorable to
the Company than those available from unaffiliated parties. In the future, the
Company intends to handle transactions of a similar nature on terms no less
favorable to the Company than those available from unaffiliated parties. In
addition, any forgiveness of loans must be approved by a majority of the
Company's independent directors who do not have an interest in the transaction
and who have access, at the Company's expense, to the Company's counsel or
independent counsel.
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<PAGE> 34
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus and as
adjusted to reflect the sale of the shares of Common Stock offered hereby,
certain information with respect to the beneficial ownership of the Company's
Common Stock by (i) each person known by the Company to own beneficially 5% or
more of the outstanding Common Stock, (ii) each director of the Company, (iii)
the executive officers of the Company, (iv) the nominee for director whose term
will begin upon the completion of the Offering; and (v) all current directors
and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
SHARES OF COMMON STOCK --------------------
NAME AND ADDRESS BENEFICIALLY OWNED BEFORE AFTER
OF BENEFICAL OWNERS(1)(2) PRIOR TO OFFERING OFFERING OFFERING
- ------------------------- ---------------------- -------- --------
<S> <C> <C> <C>
Lawrence Cohen(3)...................................... 1,809,000 44.2% 31.8%
Walt Nawrocki(4)....................................... 500,000 11.9 8.6
Neal Bernstein(5)...................................... 325,000 8.1 5.8
Harbor View Fund, Inc.(6).............................. 340,000 8.3 6.0
488 Madison Avenue New York, New York 10019
Ted Gordon............................................. 320,000 8.0 5.7
1-800-REACH ME, LLC(7)................................. 200,000 5.0 3.6
One Penn Plaza, Suite 1526
New York, New York 10019.
Paul Spindler(8)....................................... 120,000 3.0 2.1
Martin Scott........................................... 15,000 .4 .3
Sheldon Misher(9)...................................... -- -- --
All officers and directors as a group (6 persons)...... 3,089,000 71.5 52.2
</TABLE>
- ---------------
(1) Unless otherwise indicated below, the persons in the table above have sole
voting and investment power with respect to all shares shown as beneficially
owned by them, subject to community property laws where applicable. A person
is deemed to be the beneficial owner of securities that can be acquired by
such person within 60 days from the date of this Prospectus upon the
exercise of options. Each person's percentage of ownership is determined by
assuming that any options held by such person have been exercised.
(2) Unless otherwise indicated below, the address of each person is c/o the
Company at One South Ocean Boulevard, Boca Raton, Suite 206, Florida 33432.
(3) Includes (i) 100,000 shares of Common Stock underlying immediately
exercisable options and (ii) 1,709,000 shares owned by Alliant. Alliant is
wholly owned by East Ocean Limited Partnership, as to which Mr. Cohen is the
general partner and members of Mr. Cohen's family are limited partners. Mr.
Cohen disclaims beneficial ownership with respect to the limited partnership
interests owned by members of his family.
(4) Includes (i) 200,000 shares of Common Stock underlying immediately
exercisable options and (ii) 300,000 shares owned by Mr. Nawrocki's wife.
Mr. Nawrocki disclaims beneficial ownership of his wife's shares.
(5) Includes (i) 25,000 shares of Common Stock underlying immediately
exercisable options and (ii) 300,000 shares owned by Mr. Bernstein's, wife.
Mr. Bernstein disclaims beneficial ownership of his wife's shares.
(6) Harbor View Fund, Inc. ("Harbor View") is an entity controlled by Cori Orr,
the wife of Kenneth Orr, the former principal of the placement agent for the
Company's private offering completed in December 1996. Harbor View's
holdings include (i) 100,000 shares underlying warrants originally issued to
the placement agent in the aforementioned private offering and (ii) 145,000
shares acquired by Sheldon Schwartz, Mrs. Orr's father, as to which she
disclaims beneficial ownership. The Company has been advised that a dispute
exists as to the ownership of an aggregate of 240,000 of the shares
beneficially owned by Harbor View and Mr. Schwartz. Based on supporting
documentation reviewed by the Company
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<PAGE> 35
and statements of Mr. and Mrs. Orr, the Company believes that the shares in
question were assigned to Mr. Orr by Gregg Marcus in May 1997 in connection
with a loan transaction. Mr. Marcus had acquired the shares from the Company
in August 1996. In August 1997, Mr. Marcus submitted an affidavit of lost
stock certificate to the Company pursuant to which the Company reissued the
240,000 shares to Mr. Marcus. The representations contained in the affidavit
are inconsistent with transfer and assignment documentation subsequently
supplied to the Company by Mr. and Mrs. Orr, and a lawsuit has been filed by
Mrs. Orr against Mr. Marcus seeking, inter alia, delivery of a formal stock
power for the transfer. It is the Company's present position, based on the
foregoing, that the 240,000 shares were validly transferred to Mr. Orr and
that Mr. Marcus is not currently a beneficial shareholder of the Company.
However, Harbor View, Mrs. Orr and Mr. Schwartz have agreed to escrow
240,000 of the shares in the event it is ultimately determined that Mr.
Marcus is entitled to all or a portion of the disputed shares. While the
Company is not a party to such litigation, there can be no assurance that
during the course of the litigation either party will not seek to include
the Company as an additional party based on the Company's position as to the
beneficial ownership of the 240,000 shares.
(7) The managing member of REACH ME is Mortimer D.A. Sackler.
(8) Such shares are held of record by The Spindler Trust, of which Mr. Spindler
is the beneficial owner and trustee.
(9) Address is 380 Madison Avenue, New York, New York 10017. Mr. Misher is a
nominee for director of the Company.
34
<PAGE> 36
DESCRIPTION OF SECURITIES
GENERAL
The following description of the material terms of the Common Stock is
subject to the Florida Act and to the provisions contained in the Company's
Articles of Incorporation, as amended (the "Articles of Incorporation"), and
By-Laws, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. See "Available Information."
The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, $.001 par value, and 5,000,000 shares of preferred stock, $.01 par
value (the "Preferred Stock"). Immediately prior to the Offering, there were
outstanding 3,993,000 shares of Common Stock and no shares of Preferred Stock.
COMMON STOCK
The Company is authorized to issue 30,000,000 shares of Common Stock, $.001
par value per share, of which as of the date of this Prospectus, 3,993,000
shares of Common Stock are outstanding and held by 77 holders of record. All
outstanding shares of Common Stock are, and all shares of Common Stock to be
outstanding upon completion of the Offering will be, validly authorized and
issued, fully paid and non-assessable.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution, or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities. Holders of Common Stock have no preemptive rights and have no
rights to convert their Common Stock into any other securities.
PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of Preferred
Stock, $.01 par value per share, of which no shares are outstanding as of the
date hereof. The Preferred Stock may be issued in one or more series, the terms
of which may be determined at the time of issuance by the Board of Directors,
without further action by shareholders, and may include voting rights (including
the right to vote as a series on particular matters), preferences as to
dividends and liquidation, conversion rights, redemption rights, and sinking
fund provisions. The issuance of any such Preferred Stock could adversely affect
the rights of the holders of Common Stock and, therefore, reduce the value of
the Common Stock. The ability of the Board of Directors to issue Preferred Stock
could discourage, delay, or prevent a takeover of the Company.
THE NASDAQ SMALLCAP MARKET(R)
The Company has applied for listing of the Common Stock on The Nasdaq
SmallCap Market under the symbol "RMAG."
ANTI-TAKEOVER PROVISIONS OF FLORIDA LAW
The Company may be subject to the control-share acquisition provisions of
Section 607.0902 of the Florida Act.
The control share acquisition provisions generally provide that control
shares of an issuing public corporation acquired in a control share acquisition
have no voting rights until voting rights are granted by a resolution approved
by a majority of shares entitled to vote excluding control shares. Control share
acquisition provisions apply to "Issuing Public Corporations" which are defined
to include corporations with: (i) 100 or more shareholders, excluding all
nominees or brokers; (ii) principal offices in Florida; and (iii) more than 10%
of its shares owned by Florida residents.
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<PAGE> 37
"Control Shares" are defined as shares that, when acquired and added to
other shares owned by a person, enable that person to exercise voting power with
respect to shares of an Issuing Public Corporation within the ranges of
one-fifth to one-third, one-third to one-half, and one-half or more of the
outstanding voting power. This term does not include all shares owned by the
person but only those shares acquired to put the shareholder "over the top" with
respect to that particular range. The Florida Act provides that shares acquired
within any 90-day period either before or after purchase are considered to be
one acquisition. Approval of voting rights requires: (i) approval by each class
entitled to vote separately by majority vote and (ii) approval by each class or
series entitled to vote separately by a majority of all votes entitles to be
cast by that group excluding all Control Shares.
If an acquiring person proposes to make or has made a control share
acquisition, he may deliver to the Issuing Public Corporation an acquiring
person's statement ("APS"). The acquiring person may then request that the
Issuing Public Corporation call a special meeting of the shareholders at the
acquiring person's expense to consider granting rights to the Control Shares. If
no APS has been filed, any Control Shares acquired in a Control Share
acquisition by such person may, after 60 days has passed since the last
acquisition of Control Shares, be redeemed at their fair market value. If an APS
is filed, the shares are not subject to redemption unless the shares are not
accorded full voting rights by shareholders. The effect and intent of the
control share acquisition provision is to deter corporate takeovers. Therefore,
it is more likely than not that control of the Company will remain in the hands
of the existing principal shareholders. See "Principal Shareholders."
REGISTRATION RIGHTS
The Company has granted demand and piggyback registration rights to (i)
investors in the December 1996 private placement who hold 410,000 shares of
Common Stock; (ii) the holders of 58,000 shares of Common Stock acquired in
January 1997; (iii) REACH ME, which holds 200,000 shares of Common Stock; and
(iv) the assignee of the former placement agent for the Company's private
offering of securities, which holds warrants to purchase 100,000 shares of
Common Stock (the "Agent's Warrants"). The Company has obtained lock-up
agreements from the January 1997 investors, REACH ME and most of the investors
in the December 1996 offering pursuant to which they have agreed not to exercise
such registration rights or sell or otherwise transfer their shares for a period
of 12 months after the consummation of the Offering. The Company believes,
notwithstanding the foregoing, that all of the investors in the December 1996
placement are bound by the 12 month lock-up by virtue of documentation executed
by such individuals at the time of their purchase. The holder of the Agent's
Warrants has agreed not to exercise its demand registration rights for a period
of 12 months and not to sell or otherwise transfer the shares underlying the
Agent's Warrants for a period of six months after the consummation of the
Offering, and for the six months thereafter not to sell more than one-sixth of
such shares during any one month. The holders of the Representative's Warrants
will also have certain demand and piggyback registration rights with respect to
such Warrants and the 160,000 shares of Common Stock underlying such Warrants.
Any exercise of the above registration rights may hinder efforts by the Company
to arrange future financings of the Company and/or have an adverse effect on the
market price of the Company's shares of Common Stock.
TRANSFER AGENT
The transfer agent for the Common Stock is American Stock Transfer & Trust
Company, 40 Wall Street, New York, New York 10005.
36
<PAGE> 38
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 5,593,000 shares of
Common Stock outstanding (5,833,000 shares of Common Stock outstanding if the
Underwriters' over-allotment option is exercised in full). Of these shares, the
1,600,000 shares of Common Stock offered hereby (1,840,000 shares if the
Underwriter's over-allotment option is exercised in full) will be freely
tradable without further registration under the Securities Act. All of the
presently outstanding 3,993,000 shares of Common Stock are "restricted
securities" within the meaning of Rule 144 of the Securities Act and, will be
eligible for sale in the public market in reliance upon, and in accordance with,
the provisions of Rule 144 commencing on the date of this Prospectus, subject to
the restrictions on transferability described below. In general, under Rule 144,
as currently in effect, a person or persons whose shares are aggregated,
including a person who may be deemed to be an "affiliate" of the Company as that
term is defined under the Securities Act, would be entitled to sell within any
three month period a number of shares beneficially owned for at least one year
that does not exceed the greater of (i) 1% of the then outstanding shares of
Common Stock, or (ii) the average weekly trading volume in the Common Stock on a
designated exchange or automated quotation system during the four calendar weeks
preceding 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. However, a person who is not deemed to
have been an affiliate of the Company during the 90 days preceding a sale by
such person and who has beneficially owned shares of Common Stock for at least
two years may sell such shares without regard to the volume, manner of sale, or
notice requirements of Rule 144.
Under Rule 701 of the Securities Act, a person having exercisable options
which were granted prior to the date of this Prospectus would be entitled to
sell such shares commencing 90 days following the date of this Prospectus in
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. Affiliates are subject to all Rule 144 restrictions after the 90-day
period, but without a holding period. Currently, 411,176 outstanding options are
exercisable; however, if all the requirements of Rule 701 are met, an aggregate
of 474,851 shares subject to outstanding stock options may be sold by December
31, 1998, subject to the restrictions on transferability described below.
All officers and directors of the Company and substantially all of its
shareholders have agreed not to sell, assign, transfer or otherwise dispose of
their shares for a period of 12 months following the date of this Prospectus
without the prior written consent of the Representative. See "Description of
Securities -- Registration Rights."
The Company has granted certain demand and piggyback registration rights
with respect to an aggregate of 768,000 shares of Common Stock and shares of
Common Stock underlying warrants. The Representative also has demand and
piggyback registration rights with respect to the Common Stock underlying the
Representative's Warrants. See "Description of Securities -- Registration
Rights" and "Underwriting."
Prior to the Offering, there has been no public market for the Company's
securities. Following the Offering, the Company cannot predict the effect, if
any, that sales of shares of Common Stock pursuant to Rule 144 or otherwise, or
the availability of such shares for sale, will have on the market price
prevailing from time to time. Nevertheless, sales by the current shareholders of
a substantial number of shares of Common Stock in the public market could
materially adversely affect prevailing market prices for the Common Stock. In
addition, the availability for sale of a substantial number of shares of Common
Stock acquired through the exercise of the Representative's Warrants or the
currently outstanding options could materially adversely affect prevailing
market prices for the Common Stock.
37
<PAGE> 39
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, the Underwriters named below, for whom
Commonwealth Associates is acting as Representative, have severally agreed to
purchase, and the Company has agreed to sell to them, severally, the respective
number of shares of Common Stock set forth opposite the names of such
Underwriters below:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ---- ----------------
<S> <C>
Commonwealth Associates.....................................
---------
Total............................................. 1,600,000
=========
</TABLE>
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock to the public at the initial offering price set forth on
the cover page of this Prospectus and to certain dealers who are members of the
NASD, at such prices less concessions of not in excess of $ per share,
of which a sum not in excess of $ per share may in turn be reallowed to
other dealers who are members of the NASD, which initial public offering price,
concessions and reallowances will not be changed by the Representative until
after the Offering has been completed. The Underwriters are committed to
purchase all of the shares of Common Stock offered hereby if any are purchased.
The shares are being offered by the Underwriters subject to prior sale, when, as
and if delivered to and accepted by the Underwriters and subject to approval of
certain legal matters by counsel and to certain other conditions.
The Company has granted to the Underwriters an option, exercisable during
the 45-day period commencing on the date of this Prospectus, to purchase from
the Company at the initial public offering price, less underwriting discounts,
up to 240,000 additional shares for the purpose of covering over-allotments, if
any.
The Company has agreed to sell to the Representative and its designees, for
nominal consideration, the Representative's Warrants to purchase up to 160,000
shares of Common Stock. The Representative's Warrants will be exercisable during
the four-year period commencing one year after the date of this Prospectus at an
exercise price of $ per share, subject to adjustment in certain events
to protect against dilution, and are not transferable for a period of one year
after the date of this Prospectus except to officers of the Representative or to
members of the selling group or their respective officers. The Company has
agreed to register during the four-year period commencing one year after the
date of this Prospectus, on two separate occasions, the securities issuable upon
exercise thereof under the Securities Act, the initial such registration to be
at the Company's expense and the second at the expense of the holders. The
Company has also granted certain demand and piggyback registration rights to
holders of the Representative's Warrants. The Representative's Warrant includes
a provision permitting the holders to elect a "cashless exercise" whereby the
holders, in lieu of paying the exercise price in cash, may elect to forego the
right to exercise the Representative's Warrant with respect to certain of the
shares issuable thereunder (the "Warrant Shares") as consideration for part or
all of the remaining shares issuable under the Representative's Warrant.
Specifically, the Representative's Warrant provides that the dollar amount of
such cashless consideration shall be deemed to be the market value per share of
Common Stock on the date of exercise less the exercise price per share provided
in the Representative's Warrant multiplied by the number of Warrant Shares
surrendered.
The Company has agreed to pay to the Representative a non-accountable
expense allowance equal to 1.5% of the gross proceeds derived from the sale of
shares offered hereby, including any shares purchased pursuant to the
Underwriters' over-allotment option, $50,000 of which has been paid to date. The
Company has also agreed to enter into a financial consulting agreement with the
Representative providing for an advisory fee of 2.0% of the gross proceeds
derived from the sale of shares offered hereby, assuming exercise of the
Underwriters' overallotment option.
38
<PAGE> 40
The Company and the Underwriters have agreed in the Underwriting Agreement
to indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Company has agreed that, if it is requested to do so by the
Representative, it will use its best efforts, for a period of two years from the
date of this prospectus, to elect one designee of the Representative as a
director of the Company or, at the Representative's option, as a non-voting
observer to the Company's Board of Directors. The Representative has not
selected a designee for director or a non-voting observer.
All officers and directors of the Company and substantially all of its
shareholders have agreed not to sell, assign, transfer or otherwise dispose of
their shares for a period of 12 months following the date of this Prospectus
without the prior written consent of the Representative. See "Description of
Securities -- Registration Rights."
Prior to the Offering, there has been no public market for any of the
securities offered hereby. Accordingly, the initial public offering price of the
shares offered hereby has been determined by negotiation between the Company and
the Representative and are not necessarily related to the Company's asset value,
net worth or other established criteria of value. Among the factors considered
in determining such prices and terms, in addition to the prevailing market
conditions, include the history of and the prospects for the industry in which
the Company competes, the present state of the Company's development and its
future prospects, an assessment of the Company's management, the Company's
capital structure and demand for similar securities of comparable companies.
The Representative has informed the Company that it does not expect sales
to discretionary accounts to exceed 5% of the total number of the shares offered
hereby.
The foregoing is a summary of the principal terms of the Underwriting
Agreement and related agreements described above and does not purport to be
complete. Reference is made to copies of each such agreements which are filed as
exhibits to the Registration Statement. See "Additional Information."
LEGAL MATTERS
The validity of the issuance of the securities offered hereby will be
passed upon for the Company by Atlas, Pearlman, Trop & Borkson, P.A., Fort
Lauderdale, Florida. Certain members of the firm of Atlas, Pearlman, Trop &
Borkson, P.A. own 21,000 shares of Common Stock. Certain matters will be passed
upon for the Underwriters by Bachner, Tally, Polevoy & Misher LLP., New York,
New York.
EXPERTS
The financial statements of the Company appearing in this Prospectus have
been audited by BDO Seidman, LLP, independent certified public accountants, to
the extent and for the periods set forth in their report appearing elsewhere
herein, which contains an explanatory paragraph raising substantial doubt as to
the Company's ability to continue as a going concern, and are included in
reliance upon such report given upon the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company intends to furnish to its shareholders annual reports, which
will include financial statements audited by independent accountants, and such
other periodic reports as it may determine to furnish or as may be required by
law, including Sections 13(a) and 15(d) of the Securities Exchange Act of 1934,
as amended.
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W., Washington, D.C. 20549, a Registration
Statement on Form SB-2 (the "Registration Statement") under the Securities Act
with respect to the securities offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits
thereto, as permitted by the rules and regulations of the Commission. For
further information, reference is made to the Registration
39
<PAGE> 41
Statement and to the exhibits filed therewith. Statements contained in this
Prospectus as to the contents of any contract or other document which has been
filed as an exhibit to the Registration Statement are qualified in their
entirety by reference to such exhibits for a complete statement of their terms
and conditions. The Registration Statement and the exhibits thereto may be
inspected without charge at the offices of the Commission and copies of all or
any part thereof may be obtained from the Commission's principal office at 450
Fifth Street, N.W., Washington, D.C. 20549 or at certain of the regional offices
of the Commission located at 7 World Trade Center, 13th Floor, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
upon payment of the fees prescribed by the Commission. Electronic reports and
other information filed through the Electronic Data Gathering, Analysis, and
Retrieval System are publicly available through the Commission's website
(http://www.sec.gov.). In addition, following approval of the Common Stock for
quotation on The Nasdaq SmallCap Market, reports and other information
concerning the Company may be inspected at the office of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
40
<PAGE> 42
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Shareholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 43
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Registry Magic Incorporated
(A Development Stage Company)
We have audited the accompanying balance sheet of Registry Magic
Incorporated, (a development stage company) as of July 31, 1997 and the related
statements of operations, shareholders' equity (deficit) and cash flows for the
year ended July 31, 1997 and for the period from October 11, 1995 (inception)
through July 31, 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 Registry Magic Incorporated
(a development stage company), as of July 31, 1997 and the results of its
operations and its cash flows for the year then ended and for the period from
October 11, 1995 (inception) to July 31, 1996 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's dependence on outside financing, lack of
existing commitments from lenders to provide necessary financing, lack of
sufficient working capital, and losses since inception raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Miami, Florida BDO Seidman, LLP
December 19, 1997
F-2
<PAGE> 44
REGISTRY MAGIC INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1998 1997
----------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 829,345 $ 928,680
Accounts receivable....................................... -- 5,140
Inventories............................................... 136,078 --
Other current assets...................................... 17,935 4,084
---------- ----------
Total current assets.............................. 983,358 937,904
Property and equipment, net (Note 3)........................ 195,153 114,929
Deferred patent costs....................................... 23,084 17,847
Deferred loan costs, net.................................... 17,432 30,490
Deferred offering costs..................................... 96,096 --
Other assets................................................ 6,925 6,925
---------- ----------
$1,322,048 $1,108,095
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities.................. $ 147,542 $ 44,375
Notes payable -- shareholders (Note 4).................... 410,000 410,000
Notes payable -- related party (Note 5)................... 50,000 50,000
Deferred revenue.......................................... -- 237,500
---------- ----------
Total current liabilities......................... 607,542 741,875
---------- ----------
Shareholders' equity:
Preferred stock $.01 par value; 5,000,000 shares
authorized; no shares outstanding...................... -- --
Common stock, $.001 par value; 30,000,000 shares
authorized; 3,993,000 and 3,793,000 shares issued and
outstanding at January 31, 1998 and July 31, 1997,
respectively........................................... 3,993 3,793
Additional paid-in capital................................ 2,803,796 1,780,471
Deficit accumulated during the development stage.......... (2,093,283) (1,418,044)
---------- ----------
Total shareholders' equity........................ 714,506 366,220
---------- ----------
$1,322,048 $1,108,095
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 45
REGISTRY MAGIC INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
CUMULATIVE FROM PERIOD FROM
OCTOBER 11, OCTOBER 11,
1995 1995
(INCEPTION) FOR THE SIX MONTHS ENDED FOR THE (INCEPTION)
THROUGH JANUARY 31, YEAR ENDED THROUGH
JANUARY 31, ------------------------- JULY 31, JULY 31,
1998 1998 1997 1997 1996
--------------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Incidental consulting fees
revenue........................ $ 683,328 $ 338,384 $ 37,500 $ 344,944 $ --
----------- ---------- ---------- ----------- ----------
Costs and Expenses:
General and administrative..... 1,328,910 531,748 398,639 770,283 26,879
Research and development....... 875,823 441,530 174,494 418,164 16,129
Royalty expense (Note 8)....... 500,000 -- 125,000 500,000 --
Depreciation and
amortization................ 80,703 43,789 8,673 36,357 557
Interest expense (income),
net......................... (8,825) (3,444) 1,459 (5,657) 276
----------- ---------- ---------- ----------- ----------
Total costs and
expenses............. 2,776,611 1,013,623 708,265 1,719,147 43,841
----------- ---------- ---------- ----------- ----------
Net Loss............... $(2,093,283) $ (675,239) $ (670,765) $(1,374,203) $ (43,841)
=========== ========== ========== =========== ==========
Weighted average shares
outstanding (Note 1)........... 3,882,130 3,460,136 3,625,200 3,325,000
Net loss per common share (basic
and diluted) (Note 1).......... $ (0.17) $ (0.19) $ (0.38) $ (0.01)
========== ========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 46
REGISTRY MAGIC INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
------------------ PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
--------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock for cash at
$.001 per share (Note 7)............. 3,325,000 $3,325 $ -- $ -- $ 3,325
Capital contributions (Note 7)......... -- -- 25,959 -- 25,959
Net loss..................... -- -- -- (43,841) (43,841)
--------- ------ ---------- ----------- -----------
Balance at July 31, 1996............... 3,325,000 3,325 25,959 (43,841) (14,557)
Issuance of stock options to employees
(Note 9)............................. -- -- 300,000 -- 300,000
Capital contributions (Note 7)......... -- -- 3,500 -- 3,500
Issuance of common stock for cash at
$3.50 per share net of offering costs
of $191,020 (Note 7)................. 410,000 410 1,243,570 -- 1,243,980
Issuance of stock options for services
(Note 9)............................. -- -- 4,500 -- 4,500
Issuance of common stock for cash at
$3.50 per share (Note 7)............. 58,000 58 202,942 -- 203,000
Net loss..................... -- -- -- (1,374,203) (1,374,203)
--------- ------ ---------- ----------- -----------
Balance at July 31, 1997............... 3,793,000 3,793 1,780,471 (1,418,044) 366,220
Issuance of common stock for cash at
$5.00 per share, net of offering
costs of $2,841 (Note 10)
(unaudited).......................... 200,000 200 996,959 -- 997,159
Issuance of stock options for services
(unaudited).......................... -- -- 26,366 -- 26,366
Net loss (unaudited)......... -- -- -- (675,239) (675,239)
--------- ------ ---------- ----------- -----------
Balance at January 31, 1998
(unaudited).......................... 3,993,000 $3,993 $2,803,796 $(2,093,283) $ 714,506
========= ====== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 47
REGISTRY MAGIC INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
CUMULATIVE FROM PERIOD FROM
OCTOBER 11, OCTOBER 11,
1995 (INCEPTION) FOR THE SIX MONTHS FOR THE 1995
THROUGH ENDED JANUARY 31, YEAR ENDED (INCEPTION) TO
JANUARY 31, ---------------------- JULY 31, JULY 31,
1998 1998 1997 1997 1996
---------------- --------- ---------- ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net loss.......................... $(2,093,283) $(675,239) $ (670,765) $(1,374,203) (43,841)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization... 80,703 43,789 8,673 36,357 557
Stock option compensation
expense...................... 330,866 26,366 300,000 304,500 --
(Increase) decrease in accounts
receivable................... -- 5,140 (37,500) (5,140) --
Increase in inventories......... (136,078) (136,078)
Increase in other current
assets....................... (4,084) -- -- (4,084) --
Increase in other assets........ (20,776) (13,851) (6,925) (6,925) --
Increase (decrease) in accounts
payable and accrued
expenses..................... 147,542 103,167 27,226 22,137 22,238
Increase (decrease) in deferred
revenue...................... -- (237,500) -- 237,500 --
----------- --------- ---------- ----------- --------
Net cash used in operating
activities............... (1,695,110) (884,206) (379,291) (789,858) (21,046)
----------- --------- ---------- ----------- --------
Investing Activities:
Purchase of equipment............. (251,959) (117,390) (47,941) (116,525) (18,044)
Proceeds from sale of equipment... 6,435 6,435 -- -- --
Deferred patent costs............. (23,084) (5,237) (4,090) (13,824) (4,023)
----------- --------- ---------- ----------- --------
Net cash used in investing
activities............... (268,608) (116,192) (52,031) (130,349) (22,067)
----------- --------- ---------- ----------- --------
Financing Activities:
Borrowings from related party..... 100,000 -- 50,000 50,000 50,000
Repayment to related party........ (50,000) -- (50,000) (50,000) --
Stock subscription receivable..... -- -- 1,479 1,479 (1,479)
Payment of deferred offering
costs........................... (96,096) (96,096) -- -- --
Payment of deferred loan costs.... (47,764) -- (47,764) (47,764)
Net proceeds from sale of common
stock........................... 2,450,964 997,159 1,450,480 1,450,480 3,325
Capital contribution.............. 25,959 -- -- -- 25,959
Notes payable..................... 410,000 -- 410,000 410,000 --
----------- --------- ---------- ----------- --------
Net cash from (used in)
financing activities..... 2,793,063 901,063 1,814,195 1,814,195 77,805
----------- --------- ---------- ----------- --------
Net increase (decrease) in
cash..................... 829,345 (99,335) 1,382,873 893,988 34,692
Cash beginning of period............ -- 928,680 34,692 34,692 --
----------- --------- ---------- ----------- --------
Cash end of period.................. $ 829,345 $ 829,345 $1,417,565 $ 928,680 $ 34,692
=========== ========= ========== =========== ========
Supplemental disclosures:
Cash paid for interest............ $ 28,009 $ 17,945 $ 952 $ 10,064 $ --
=========== ========= ========== =========== ========
Common stock issued for services
rendered in connection with
private placement................. $ 3,500 $ -- $ 3,500 3,500 $ --
=========== ========= ========== =========== ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 48
REGISTRY MAGIC INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
UNAUDITED WITH RESPECT TO THE CUMULATIVE PERIOD FROM OCTOBER 11, 1995
(INCEPTION) THROUGH JANUARY 31, 1998 AND THE SIX MONTHS ENDED
JANUARY 31, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Registry Magic Incorporated (the "Company"), was incorporated on October
11, 1995 (Inception). The Company is engaged in the development and marketing of
proprietary applications software incorporating core speech recognition
technology. The Company's products are designed to enable a user to perform
tasks or retrieve information by speaking into a telephone or a computer in a
natural conversational manner. The Company has developed voice recognition
prototype products that span the spectrum of applications areas from telephony
to point-of-sale human interface solutions. The Company's offices are located in
Boca Raton, Florida. The Company is in the development stage and its operations
to date have largely consisted of the research and development of its products.
Certain incidental consulting fees revenue have been earned unrelated to the
Company's intended purpose.
Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all liquid debt instruments with original maturities
of six months or less to be cash equivalents. Cash equivalents include
investments in money market accounts.
Research and Development Costs
Research and development costs incurred to establish the technological
feasibility of computer software products are charged to operations as incurred.
Equipment and Depreciation
Equipment is recorded at cost. Depreciation is calculated on a straight
line basis over the estimated useful lives of the assets, which range from three
to five years.
Deferred Patent Costs
Costs incurred in relation to patent applications are capitalized as
deferred patent costs. If and when a patent is issued, the related patent
application costs will be transferred to a patent account and amortized over the
legal life of the patent. If it is determined that a patent will not be issued,
the related patent application costs will be charged to expense at the time such
determination is made.
Deferred Loan Costs
The costs incurred in connection with the issuance of debt are deferred and
amortized over the term of the notes. See Note 4.
F-7
<PAGE> 49
REGISTRY MAGIC INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED WITH RESPECT TO THE CUMULATIVE PERIOD FROM OCTOBER 11, 1995
(INCEPTION) THROUGH JANUARY 31, 1998 AND THE SIX MONTHS ENDED
JANUARY 31, 1998 AND 1997
Deferred Offering Costs
Costs incurred in connection with the Company's effort to obtain additional
financing through a public offering have been deferred and will be offset
against the proceeds of the offering or charged to operations if the offering is
unsuccessful.
Fair Value of Financial Instruments
The Company's financial instruments consist principally of cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities and
notes payable. The carrying amounts of such financial instruments as reflected
in the balance sheet approximate their estimated fair value as of July 31, 1997.
The estimated fair value is not necessarily indicative of the amounts the
Company could realize in a current market exchange or of future earnings or cash
flows.
Capitalized Software Costs
Costs for developing computer software are capitalized when technological
feasibility has been established for the computer software product.
Capitalization of computer software costs is discontinued when the product is
available for general release to customers and such costs are amortized on a
product-by-product basis over the estimated lives of the products. There are no
capitalized costs in the accompanying financial statements.
Revenue Recognition
Revenue from consulting services is recognized as services are provided.
Deferred revenues represent prepayments for such services.
Income Taxes
The Company accounts for income taxes pursuant to the provisions of FASB
No. 109, "Accounting for Income Taxes," which requires, among other things, a
liability approach to calculating deferred income taxes. The asset and liability
approach requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. The Company has no income
since inception and accordingly has not provided for income taxes.
Net Loss Per Common Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which simplifies the standards for computing earnings
per share ("EPS") previously found in APB No. 15, "Earnings Per Share." It
replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the diluted EPS computation.
The Company adopted SFAS No. 128 in January 1998 and its implementation did not
have a material effect on the financial statements. EPS has been restated for
all prior periods presented.
Net loss per common share (basic and diluted) is based on the net loss
divided by the weighted average number of common shares outstanding during each
year.
F-8
<PAGE> 50
REGISTRY MAGIC INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED WITH RESPECT TO THE CUMULATIVE PERIOD FROM OCTOBER 11, 1995
(INCEPTION) THROUGH JANUARY 31, 1998 AND THE SIX MONTHS ENDED
JANUARY 31, 1998 AND 1997
The Company's potentially issuable shares of common stock pursuant to
outstanding stock purchase options and warrants (totaling $668,026 with prices,
ranging from $0.50 to $7.00) are excluded from the Company's diluted computation
as their effect would be antidilutive to the Company's net loss.
Long-Lived Assets
In accordance with Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"), the
Company includes as a component of income from continuing operations before
taxes on income, the impairment loss of assets to be held and gains and losses
that are expected to be disposed of.
Stock Based Compensation
In January 1995, FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." SFAS No. 123 establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. The
Company did not adopt the fair value based method but instead will disclose the
pro forma effects of the calculation required by the statement.
Future Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, Financial Reporting for Segments of
a Business Enterprise, establishes standards for the way that public enterprises
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate the resources and in assessing performance.
Both SFAS No. 130 and 131, issued in June 1997, are effective for financial
statements for periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evaluate the impact, if
any, they may have on future financial statement disclosures.
Unaudited Financial Statements
The interim financial statements as of January 31, 1998 and for the six
months ended January 31, 1998 and 1997 and the cumulative period October 11,
1995 (inception) through January 31, 1998 are unaudited. In the opinion of
management, such statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position, results of operations and changes in
F-9
<PAGE> 51
REGISTRY MAGIC INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED WITH RESPECT TO THE CUMULATIVE PERIOD FROM OCTOBER 11, 1995
(INCEPTION) THROUGH JANUARY 31, 1998 AND THE SIX MONTHS ENDED
JANUARY 31, 1998 AND 1997
cash flows. The results of operations for the six months ended January 31, 1998
and 1997 are not necessarily indicative of the results for the entire year.
2. LIQUIDITY
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of operations. Since inception, the Company has been involved
in the research and design of its products, the development of an organizational
infrastructure, and the performance of preliminary marketing and promotional
activities. The Company's ultimate ability to attain profitable operations is
dependent upon obtaining additional financing adequate to complete its
development activities, and to achieve a level of sales adequate to support its
cost structure. Through January 1, 1998, the Company has incurred losses
totaling $2,093,283 which raises substantial doubt about the Company's ability
to continue as a going concern.
The Company has entered into a letter of intent with an underwriter for an
initial public offering of the Company's common stock. If the Company is not
successful in consummating an initial public offering, the Company intends to
fund future development activities by obtaining additional funds from new or
existing investors. However, there can be no assurance that the Company will be
successful in consummating its plans, or that such plans, if consummated, will
enable the Company to attain profitable operations or continue as a going
concern.
3. PROPERTY AND EQUIPMENT
The Company's property and equipment is summarized as follows:
<TABLE>
<CAPTION>
JULY 31, 1997
-------------
<S> <C>
Office equipment............................................ $ 3,883
Computers................................................... 125,012
Leasehold improvements...................................... 5,674
--------
134,569
Accumulated depreciation.................................... (19,640)
--------
$114,929
========
</TABLE>
4. NOTES PAYABLE SHAREHOLDERS
The Company issued $410,000 of subordinate notes in connection with a
private placement of securities. The notes are due and payable on October 1,
1998 or prior thereto upon receipt by the Company of proceeds from the sale of
equity securities equal to or exceeding $5 million. There is no scheduled
prepayment or amortization of principal on the notes. Costs associated with this
transaction were $47,764. Interest of 7% per annum is payable semi-annually on
April 1 and October 1 of each year. (Note 7)
5. NOTES PAYABLE RELATED PARTY
Notes payable related party consists of a $50,000 loan from an officer and
director of the Company. The note bears interest at a rate of 6.5% per annum and
is payable no earlier than six months from the date of the Company's initial
public offering of securities and only to the extent that there is cash flow
from operations.
F-10
<PAGE> 52
REGISTRY MAGIC INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED WITH RESPECT TO THE CUMULATIVE PERIOD FROM OCTOBER 11, 1995
(INCEPTION) THROUGH JANUARY 31, 1998 AND THE SIX MONTHS ENDED
JANUARY 31, 1998 AND 1997
The wife of this officer of the Company loaned the Company an additional $50,000
in January and November of 1996 at a rate of 7% per annum. The full amount of
this $50,000 loan and interest was paid in December 1996.
6. INCOME TAXES
At July 31, 1997, the Company had a net operating loss carryforward (NOL)
of approximately $2,000,000 which expires through 2011. In the event of a change
in ownership of the Company, the utilization of the NOL carryforward will be
subject to limitation under certain provisions of the Internal Revenue Code.
Deferred income taxes are comprised of the following at July 31, 1997:
<TABLE>
<S> <C>
Prepaid royalty expense..................................... $ 161,000
Start up costs.............................................. 156,000
Compensation................................................ 113,000
Deferred revenue............................................ 89,000
Net operating loss carryforward............................. 1,000
---------
Gross deferred tax asset.................................... 520,000
Deferred tax asset valuation allowance...................... (520,000)
---------
Net deferred tax asset............................ $ --
=========
</TABLE>
Realization of any portion of the Company's deferred tax asset at July 31,
1997 is not considered to be more likely than not and accordingly a $520,000
valuation allowance has been provided.
7. SHAREHOLDERS' EQUITY (DEFICIT)
During 1996, the Company issued 3,325,000 shares of common stock for
$3,325.
During 1997 and 1996, the Company received $3,500 and $25,959 in additional
capital contributions from its Chairman.
In December 1996, the Company completed a private offering of securities.
The Company received gross proceeds of $1,845,000 from this private offering.
Costs associated with this transaction were $238,784. In connection with this
offering, 410,000 shares of common stock were sold for $1,435,000 and $410,000
in subordinated notes were also sold (Note 4). In addition, five year warrants
to purchase 100,000 shares of common stock exercisable at $6.00 per share were
granted to the investment banker.
In January 1997, in connection with a private placement, the Company issued
58,000 shares of common stock, at $3.50 per share for cash of $203,000.
8. COMMITMENTS
a) In December 1997, the Company entered into three year employment
agreements with three of its executive officers, which provide for aggregate
base salaries of $415,500. In the event of a change of control of the Company,
and the officers are not retained on a comparable basis by new management, the
officers will receive lump sum payments equivalent to one year's salary. In
addition, in the event of the non-renewal of the employment agreements, the
officers will be entitled to the same lump sum payments.
b) The Company has entered into a licensing agreement with Lernout &
Hausple Speech Products N.V. ("L&H") which grants the Company the right to use a
certain software object code in the development of its
F-11
<PAGE> 53
REGISTRY MAGIC INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED WITH RESPECT TO THE CUMULATIVE PERIOD FROM OCTOBER 11, 1995
(INCEPTION) THROUGH JANUARY 31, 1998 AND THE SIX MONTHS ENDED
JANUARY 31, 1998 AND 1997
products in exchange for payment of certain amounts for royalties. The agreement
commenced on December 31, 1996 for a term of four years and provides for the
payment of percentage royalties and unit royalties as specified in the
agreement. During 1996, the Company prepaid a $500,000 non-refundable royalty
which has been expensed. As of January 31, 1998 the Company has not sold any
products and accordingly has not used any of the prepaid royalties. The Company
has also agreed to pay L&H a $200,000 non-refundable royalty prepayment on
future royalties in March 1998.
The success of the Company will be largely dependent on the members of the
management of the Company, especially its President and Chief Executive Officer,
Chairman, and Vice President -- Business Development. Although the Company has
entered into employment agreements with certain members of the management of the
Company, as described above, there can be no assurance that such persons will
continue their employment with the Company.
The Company occupies premises under two operating leases. The facilities
are leased for three year terms with annual rental payments of approximately
$34,000. Rent expense for 1997 and 1996 aggregated approximately $10,000 and $0,
respectively. Minimum guaranteed lease payments under these leases are as
follows:
<TABLE>
<S> <C>
1998........................................................ $31,600
1999........................................................ 33,800
2000........................................................ 14,100
-------
$79,500
=======
</TABLE>
9. STOCK BASED COMPENSATION
At July 31, 1997, the Company has a fixed stock option plan and non-plan
options which are described below. The Company applies Accounting Principles
Board ("APB") Opinion 25, Accounting For Stock Issued to Employees, and related
interpretations in accounting for the plan. Under APB Opinion 25, in situations
where the exercise price of the Company's employee stock options equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation cost is recognized.
In March 1997, the Company adopted a Stock Option Plan (the "Plan") under
which 300,000 shares of common stock will be reserved for issuance upon exercise
of stock based awards including, non-qualified stock options. The Plan is also
authorized to issue short-term cash incentive awards. The Plan will be
administered by a plan administrator which may consist of either the Board or
such committees, officers and/or employees of the Company as the Board may so
designate. The purchase price of each share of common stock purchased upon
exercise of any option granted is as follows: (i) Incentive stock options shall
be equal to or greater than the fair market value of the common stock on the
date of grant as required under Section 422 of the Internal Revenue Code, (ii)
Options granted to 10% holders and designated by the plan administrator as
incentive stock options shall be at least 110% of the fair market value of the
common stock on the date of grant as required under Section 422 of the Internal
Revenue Code, (iii) Non-employee director options shall be equal to or greater
than the fair market value of the common stock on the date of the grant. To
date, options to purchase 207,350 shares of common stock at $3.50 to $3.85 have
been granted pursuant to the plan. These options vest over terms up to two years
from the grant date and expire in 2001.
In addition, during 1997, five-year non-plan options to purchase 4,500
shares at $3.50 were granted to a consultant for general business services and
five-year non-plan options to purchase 300,000 shares ranging
F-12
<PAGE> 54
REGISTRY MAGIC INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED WITH RESPECT TO THE CUMULATIVE PERIOD FROM OCTOBER 11, 1995
(INCEPTION) THROUGH JANUARY 31, 1998 AND THE SIX MONTHS ENDED
JANUARY 31, 1998 AND 1997
between $0.50 and $3.50 were granted to certain employees. These options were
fully vested at date of grant. In connection with these grants, $300,000 was
charged to operations representing the difference between the market price of
the stock and the exercise price of the options on the date the options were
granted and $4,500 was charged to operations representing the value of the
services provided.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the Company
to provide pro forma information regarding net income and net income per share
as if compensation cost for the Company's stock option plan had been determined
in accordance with the fair value based method prescribed in SFAS No. 123. The
Company estimates the fair value of each stock option at the grant date by using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997: no dividend yield percent; expected
volatility of 0.001; risk-free interest rates of 6.1%, and expected lives
ranging between 4 and 5 years for the Plan and non-plan options.
Under the accounting provisions of SFAS No. 123, the Company's net loss and
loss per share would have been increased to the pro forma amount indicated
below.
<TABLE>
<CAPTION>
YEAR ENDED
JULY 31, 1997
-------------
<S> <C>
Net loss
As reported............................................... $1,374,203
Pro forma................................................. $1,641,203
Net loss per common share
As reported............................................... $ (.38)
Pro forma................................................. $ (.45)
</TABLE>
A summary of the status of the Company's fixed stock option plan and
non-plan options as of July 31, 1997, and changes during the year ended on that
date is presented below:
<TABLE>
<CAPTION>
JULY 31, 1997
-----------------------
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
------- -------------
<S> <C> <C>
Outstanding at beginning of year............................ -- $ --
Granted..................................................... 526,850 3.00
Exercised................................................... -- --
Forfeited................................................... -- --
------- -----
Outstanding at end of year.................................. 526,850 3.00
------- -----
Options exercisable at year-end............................. 404,500 2.84
Weighted-average fair value of options granted during the
year:
Below market.............................................. $3.13
At market................................................. $0.74
Above market.............................................. $0.70
</TABLE>
F-13
<PAGE> 55
REGISTRY MAGIC INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED WITH RESPECT TO THE CUMULATIVE PERIOD FROM OCTOBER 11, 1995
(INCEPTION) THROUGH JANUARY 31, 1998 AND THE SIX MONTHS ENDED
JANUARY 31, 1998 AND 1997
The following table summarizes information about fixed stock options and
non-plan options outstanding at July 31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
NUMBER WEIGHTED AVERAGE -------------------------------------
OUTSTANDING REMAINING WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES AT 7/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 7/31/97 EXERCISE PRICE
------------------------ ----------- ---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
$3.85 100,000 3.6 years $3.85 100,000 $3.85
3.50 326,850 3.9 years 3.50 204,500 3.50
0.50 100,000 4.2 years .50 100,000 .50
</TABLE>
10. SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to July 31, 1997, the Company's board of directors authorized
the Company to undertake an initial public offering of the Company's common
stock pursuant to a letter of intent dated October 22, 1997.
During the six months ended January 31, 1998, options to purchase 26,676
shares of common stock were granted to two consultants and an employee of the
Company. Such options are exercisable at $3.50 to $5.00 per share, expire in
four to five years and vest over terms up to two years.
In November 1997, in connection with a private placement, the Company
issued 200,000 shares of common stock at $5.00 for cash consideration of
$1,000,000. Costs associated with this transaction were $2,841.
Subsequent to January 31, 1998, options to purchase 14,500 shares of common
stock were granted to three consultants. Such options are exercisable at $7.00
per share, expire in five years and vest immediately.
In December 1997, the Company entered into a distribution agreement for one
of its products which calls for the Company to receive $450,000 in
non-refundable prepaid royalties during 1998, of which $200,000 was received
subsequent to July 31, 1997.
On April 3, 1998, the Company initiated an action in the Circuit Court for
Palm Beach County, Florida, against a former employee of the Company whose
employment was terminated at such date. The Company is alleging breach of an
oral employment agreement and misrepresentations in the inducement of such
agreement. The Company is seeking damages and the rescission of the 20,000
shares of common stock and options to purchase 90,000 shares of common stock
previously granted to such former employee. The defendant has filed an answer
denying various of the Company's allegations and raising certain affirmative
defenses. The defendant has also asserted a counterclaim against the Company and
Walt Nawrocki and Lawrence Cohen, who are members of management and principal
shareholders of the Company, seeking salary and benefits under the terms of his
oral employment agreement as well as additional unspecified equity participation
in the Company (the defendant had previously made a demand for 200,000 shares of
Common Stock). The defendant is also seeking a declaratory judgment with regard
to the Company's claim for rescission. While the Company believes that the
Defendant's claims are without merit based on the breaches by the Defendant of
his oral agreement with the Company, two members of management have agreed to
settle such equity claims, should the need arise, from their personal
shareholdings. Any expense associated with the action will be incurred as an
expense by the Company. The Company does not believe that the outcome of this
matter will have a material adverse effect on the financial position of the
Company.
F-14
<PAGE> 56
[Logo for MagicDialing consisting of a swirl]
MagicDialing(TM)
Speech recognition personal phonebook
Allows users to make calls by just saying the name of the
person they want to reach. Available anytime, anywhere ...
all that's needed is a phone.
MAGICDIALING(TM)
this is a machine?(TM)
[Picture of computer with product logo and four individuals using telephones]
- --------------------------------------------------------------------------------
Conversational Kiosk(TM)
Speech recognition for information access
Allows people to have conversations with computers to
overcome the lack of computer skills and the limitations of
telephone keypads. Can be used to promote products,
generate sales leads and provide information.
[Picture of a man using a telephone and of another man standing and using a
telephone to talk to a free standing kiosk with built-in display]
[Oval with the word "Information" within]
[Oval with the logo for Conversational K I O S K(TM) followed by "this is a
machine?"(TM)]
<PAGE> 57
======================================================
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 13
Dividend Policy....................... 14
Capitalization........................ 14
Dilution.............................. 15
Selected Financial Information........ 16
Management's Discussion and Analysis
and Plan of Operation............... 17
Business.............................. 20
Management............................ 27
Certain Transactions.................. 32
Principal Shareholders................ 33
Description of Securities............. 35
Shares Eligible for Future Sale....... 37
Underwriting.......................... 38
Legal Matters......................... 39
Experts............................... 39
Additional Information................ 39
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL
DEALERS AFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
(REGISTRY MAGIC INCORPORATED LOGO)
1,600,000 Shares of
Common Stock
--------------------
PROSPECTUS
--------------------
COMMONWEALTH
ASSOCIATES
, 1998
======================================================
<PAGE> 58
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Corporation Act (the "Florida Act") contains
provisions entitling the Company's directors and officers to indemnification
from judgments, settlements, penalties, fines, and reasonable expenses
(including attorney's fees) as the result of an action or proceeding in which
they may be involved by reason of having been a director or officer of the
Company. In its Articles of Incorporation, the Company has included a provision
that limits, to the fullest extent now or hereafter permitted by the Florida
Act, the personal liability of its directors to the Company or its shareholders
for monetary damages arising from a breach of their fiduciary duties as
directors. Under the Florida Act as currently in effect, this provision limits a
director's liability except where such director breaches a duty. The Company's
Articles of Incorporation and By-Laws provide that the Company shall indemnify
its directors and officers to the fullest extent permitted by the Florida Act.
The Florida Act provides that no director or officer of the Company shall be
personally liable to the Company or its shareholders for damages for breach of
any duty owed to the Company or its shareholders, except for liability for (i)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (ii) any unlawful payment of a dividend or unlawful
stock repurchase or redemption in violation of the Florida Act, (iii) any
transaction from which the director received an improper personal benefit or
(iv) a violation of a criminal law. This provision does not prevent the Company
or its shareholders from seeking equitable remedies, such as injunctive relief
or rescission. If equitable remedies are found not to be available to
shareholders in any particular case, shareholders may not have any effective
remedy against actions taken by directors or officers that constitute negligence
or gross negligence.
The Articles of Incorporation also include provisions to the effect that
(subject to certain exceptions) the Company shall, to the maximum extent
permitted from time to time under the law of the State of Florida, indemnify and
upon request shall advance expenses to, any director or officer to the extent
that such indemnification and advancement of expenses is permitted under such
law, as may from time to time be in effect.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to any charter provision, by-law, contract, arrangement, statute or
otherwise, the Company has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Company in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions and the Representative's non-accountable
expense allowance and advisory fee) are as follows:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 4,364.00
NASD filing fee............................................. 1,923.00
Nasdaq listing fee.......................................... 10,000.00
Legal fees and expenses..................................... 125,000.00
Accounting fees and expenses................................ 100,000.00
Blue sky fees and expenses.................................. 50,000.00
Printing and engraving expenses............................. 90,000.00
Transfer agent fees and expenses............................ 3,500.00
Miscellaneous............................................... 5,213.00
-----------
Total............................................. $390,000.00
===========
</TABLE>
II-1
<PAGE> 59
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Company was incorporated on October 11, 1995, and in connection with
the commencement of operations and its initial capitalization between June and
September 1996, issued an aggregate of 3,325,000 shares of Common Stock for
$.001 per share to 16 persons, including issuances to members of the Company's
management and its legal counsel. Each of such investors were either accredited
and/or sophisticated investors, had pre-existing relationships with members of
management of the Company, were employees or members of management of the
Company and/or had access to relevant information pertaining to the contemplated
operations of the Company. Accordingly, such issuances were exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act.
Between November and December 1996, the Company sold 82 units of its
securities consisting in the aggregate of $410,000 principal amount of its
subordinated promissory notes and 410,000 shares of Common Stock to 40 investors
for an aggregate cash investment of $1,845,000. All of such investors were
accredited or otherwise qualified investors based on their financial resources
and knowledge of investments, had access to or were provided with relevant
financial and other information relating to the Company. Accordingly, such
issuance was exempt from the registration provisions of the Securities Act in
accordance with the exemption provided by Section 4(2) of the Securities Act and
Rule 506 of Regulation D thereunder. First Cambridge Securities, a registered
broker-dealer which ceased operations in May 1997, served as placement agent for
the private offering and received commissions of 10%, and warrants to purchase
100,000 shares of Common Stock of the Company exercisable at $6.00 per share.
Such issuance was undertaken pursuant to the exemption provided by Section 4(2)
of the Securities Act.
In January 1997, the Company issued 58,000 shares of its Common Stock at
$3.50 per share to three investors for an aggregate consideration of $203,000.
All of such investors were accredited investors based on their financial
resources, had knowledge of investments, had access to relevant information
pertaining to the financial and other operations of the Company and had a
pre-existing relationship with members of management of the Company.
Accordingly, such issuance was exempt from the registration provisions of the
Securities Act in accordance with the exemption provided by Section 4(2) of the
Securities Act.
On November 10, 1997, the Company issued 200,000 shares of its Common Stock
at $5.00 per share for an aggregate consideration of $1,000,000 to 1-800-REACH
ME, LLC. The latter, a dealer of the Company, had access to relevant financial
and other information relating to the Company, represented that it was a
sophisticated investor based on its knowledge of investments, had a pre-existing
relationship with the Company and represented that it had the capacity to bear
the economic risks of this investment. Accordingly, the issuance of the shares
was exempt from the registration requirements of the Act pursuant to Section
4(2) of the Securities Act.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement**
3.1 -- Articles of Incorporation, as amended*
3.2 -- By-Laws*
4.1 -- Form of Common Stock Certificate*
4.2 -- Form of Subordinated Promissory Note issued to private
investors*
4.3 -- Promissory Note issued to Lawrence Cohen and addendum
thereto**
4.4 -- Form of Representative's Warrants**
5.1 -- Opinion of Atlas, Pearlman, Trop & Borkson, P.A.*
10.1 -- 1997 Stock Option Plan*
10.2 -- Employment Agreement with Walt Nawrocki*
</TABLE>
II-2
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.3 -- Employment Agreement with Lawrence Cohen*
10.4 -- Employment Agreement with Neal Bernstein*
10.5 -- Lease Agreements with Intervest -- One Ocean Plaza L.P.*
10.6 -- Prepaid Royalty Agreement with Lernout & Hauspie Speech
Products, Inc.*+
10.7 -- Agreement with 1-800 REACH ME, LLC*
10.8 -- Phone Interactive Agreement*
10.9 -- Agreement with M.S. Management Associates, Inc.*
10.10 -- Licensing Agreement with International Business Machines
Corporation and extension thereto**
10.11 -- Financial Advisory and Consulting Agreement*
10.12 -- Form of Lock-Up Agreement*
10.13 -- Indemnification Agreement*
23.1 -- Consent of BDO Seidman, LLP, Independent Certified Public
Accountants**
23.2 -- Consent of Atlas, Pearlman, Trop & Borkson, P.A. (contained
in such firm's opinion filed as Exhibit 5.1)*
24.1 -- Power of Attorney (incorporated in the signature pages of
this Registration Statement)*
27.1 -- Financial Data Schedule*
27.2 -- Financial Data Schedule*
99.1 -- Consent of Sheldon E. Misher*
</TABLE>
- ---------------
* Previously filed
** Filed herewith
+ Portions of this Agreement have been omitted and filed separately with the
Commission pursuant to a request for confidential treatment.
ITEM 28. UNDERTAKINGS
The undersigned Company hereby undertakes to:
(1) File, during any period in which it offers or sell securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act.
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the Registration Statement.
(iii) Include any additional or changed material information on the
plan of distribution;
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration of the securities offered,
and the offering of such securities at that time to be the initial bona
fide offering; and
(3) File a post effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) The Company will provide to the Underwriters at the closing
specified in the Underwriter's Agreement certificates in such denominations
and registered in such names as required by the Underwriters to permit
prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the
II-3
<PAGE> 61
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the mater has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
For the purpose of determining any liability under the Securities Act, the
Company will treat the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Company pursuant to Rule 424(b)(1), or (4), or
497(h) under the Securities Act as part of this Registration Statement as of the
time the Securities and Exchange Commission declares it effective.
For the purpose of determining any liability under the Securities Act, the
Company will treat such posteffective amendment that contains a form of
Prospectus as a new Registration Statement for the securities offered in the
Registration Statement therein, and treat the Offering of the securities at that
time as the initial bona fide offering of those securities.
II-4
<PAGE> 62
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, in the
city of Boca Raton, State of Florida on May 22, 1998.
REGISTRY MAGIC INCORPORATED
By: /s/ WALT NAWROCKI
------------------------------------
Walt Nawrocki
President
In accordance with the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement was signed by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WALT NAWROCKI President, Chief Executive May 22, 1998
- ----------------------------------------------------- Officer, Director and
Walt Nawrocki Principal Executive Officer
/s/ LAWRENCE COHEN Chairman of the Board May 22, 1998
- -----------------------------------------------------
Lawrence Cohen
/s/ TED GORDON Director May 22, 1998
- -----------------------------------------------------
Ted Gordon
/s/ PAUL SPINDLER Director May 22, 1998
- -----------------------------------------------------
Paul Spindler
/s/ MARTIN SCOTT Secretary, Treasurer and May 22, 1998
- ----------------------------------------------------- Principal Financial and
Martin Scott Accounting Officer
</TABLE>
II-5
<PAGE> 63
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
1.1 Form of Underwriting Agreement
4.3 Promissory Note issued to Lawrence Cohen and addendum
thereto
4.4 Form of Representative's Warrants
10.10 Licensing Agreement with International Business Machines
Corporation and extension thereto
23.1 Consent of BDO Seidman, LLP, Independent Certified Public
Accountants
</TABLE>
<PAGE> 1
EXHIBIT 1.1
1,600,000 Shares
REGISTRY MAGIC INCORPORATED
Common Stock
UNDERWRITING AGREEMENT
May _____, 1998
Commonwealth Associates
As Representative of the Several Underwriters
830 Third Avenue
New York, New York 10022
Registry Magic Incorporated, a Florida corporation (the
"Company"), proposes to issue and sell to the underwriters named in Schedule A
(the "Underwriters") of this Underwriting Agreement (the "Agreement"), for whom
you are acting as representative (the "Representative"), an aggregate of
1,600,000 shares (the "Stock") of Common Stock, $.001 par value (such class of
stock being herein called the "Common Stock"), of the Company. In addition, the
Company grants to the Underwriters (or, at its option, the Representative,
individually) the option referred to in Section 3(b) hereof to purchase all or
any part of an aggregate of 240,000 additional shares of Common Stock, if and to
the extent that you, as Representative, shall have determined to exercise, on
behalf of the Underwriters, the right to purchase such shares of Common Stock.
Unless the context otherwise indicates, the term "Stock" shall include the
240,000 additional shares referred to above.
You have advised the Company that you and the other
Underwriters desire to purchase, severally, the Stock, and that you have been
authorized by the Underwriters to execute this agreement on their behalf. The
Company confirms the agreements made by it with respect to the purchase of the
Stock by the several Underwriters on whose behalf you are signing this
Agreement, as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, the Underwriters that:
(a) A registration statement (File No. 333-47715) on
Form SB-2 relating to the public offering of the Stock, including a form of
prospectus subject to completion, copies of which have heretofore been delivered
to you, has been prepared by the Company in conformity with the requirements of
the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission
<PAGE> 2
(the "Commission") thereunder, and has been filed with the Commission under the
Act and one or more amendments to such registration statement may have been so
filed. After the execution of this Agreement, the Company will file with the
Commission either (i) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the Act, a
prospectus in the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have been filed, in such
registration statement), with such changes or insertions as are required by Rule
430A under the Act or permitted by Rule 424(b) under the Act and as have been
provided to and approved by the Representative prior to the execution of this
Agreement, or (ii) if such registration statement, as it may have been amended,
has not been declared by the Commission to be effective under the Act, an
amendment to such registration statement, including a form of prospectus, a copy
of which amendment has been furnished to and approved by the Representative
prior to the execution of this Agreement. As used in this Agreement, the term
"Registration Statement" means such registration statement, as amended at the
time when it was or is declared effective, including all financial schedules and
exhibits thereto and including any information omitted therefrom pursuant to
Rule 430A under the Act and included in the Prospectus (as hereinafter defined);
the term "Preliminary Prospectus" means each prospectus subject to completion
filed with such registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration Statement
or any amendment thereto at the time it was or is declared effective); and the
term "Prospectus" means the prospectus first filed with the Commission pursuant
to Rule 424(b) under the Act, or, if no prospectus is required to be filed
pursuant to said Rule 424(b), such term means the prospectus included in the
Registration Statement; except that if such registration statement or prospectus
is amended or such prospectus is supplemented, after the effective date of such
registration statement and prior to the Option Closing Date (as hereinafter
defined), the terms "Registration Statement" and "Prospectus" shall include such
registration statement and prospectus as so amended, and the term "Prospectus"
shall include the prospectus as so supplemented, or both, as the case may be.
(b) The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus. When the
Registration Statement becomes effective and at all times subsequent thereto up
to and on the Closing Date (as hereinafter defined) or the Option Closing Date,
as the case may be, (i) the Registration Statement and Prospectus will in all
respects conform to the requirements of the Act and the Rules and Regulations;
and (ii) neither the Registration Statement nor the Prospectus will include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make statements therein not misleading;
provided, however, that the Company makes no representations, warranties or
agreements as to information contained in or omitted from the Registration
Statement or Prospectus in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of the Underwriters
specifically for use in the preparation thereof. It is understood that the
statements set forth in the Prospectus on page 2 with respect to stabilization,
under the heading "Underwriting" and the identity of counsel to the Underwriters
under the heading "Legal Matters" constitute the only information furnished in
writing by or on behalf of the several Underwriters for inclusion in the
Registration Statement and Prospectus, as the case may be.
- 2 -
<PAGE> 3
(c) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with full power and authority (corporate and
other) to own its properties and conduct its business as described in the
Prospectus and is duly qualified to do business as a foreign corporation and is
in good standing in all other jurisdictions in which the nature of its business
or the character or location of its properties requires such qualification,
except where failure to so qualify will not materially affect the Company's
business, properties or financial condition.
(d) The authorized, issued and outstanding capital
stock of the Company as of January 31, 1998 is as set forth in the Prospectus
under "Capitalization"; the shares of issued and outstanding capital stock of
the Company set forth thereunder have been duly authorized, validly issued and
are fully paid and non-assessable and have been issued in compliance with all
federal and state securities laws; except as set forth in the Prospectus, no
options, warrants or other rights to purchase, agreements or other obligations
to issue, or agreements or other rights to convert any obligation into, any
shares of capital stock of the Company have been granted or entered into by the
Company; and the capital stock conforms to all statements relating thereto
contained in the Registration Statement and Prospectus.
(e) The Stock and the Common Stock to be issued upon
exercise of the common stock purchase warrants to be issued to the
Representative (the "Warrants") are duly authorized, and when issued, and
delivered pursuant to this Agreement, will be duly authorized, validly issued,
fully paid and non-assessable and free of preemptive rights of any security
holder of the Company. Neither the filing of the Registration Statement nor the
offering or sale of the Stock as contemplated in this Agreement gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock, except as described
in the Registration Statement.
(f) This Agreement, the Warrants and the Advisory
Agreement (to be delivered to you in accordance with Section 3(p) and 3(s),
respectively, hereof) have been duly and validly authorized, executed and
delivered by the Company. The Company has full power and lawful authority to
authorize, issue and sell the Stock to be sold by it hereunder on the terms and
conditions set forth herein, and no consent, approval, authorization or other
order of any governmental authority is required in connection with such
authorization, execution and delivery or with the authorization, issue and sale
of the Stock or the Warrants, except such as may be required under the Act or
state securities laws.
(g) Except as described in the Prospectus, the
Company is not in violation, breach or default of or under, and consummation of
the transactions herein contemplated and the fulfillment of the terms of this
Agreement will not conflict with, or result in a breach or violation of, any of
the terms or provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any of the
property or assets of the Company pursuant to the terms of any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Company is a party or by which the Company may be bound or to which
any of the respective properties or assets of the Company is subject, nor will
such action result in any violation of the provisions of the respective articles
of
- 3 -
<PAGE> 4
incorporation or the by-laws of the Company, as amended, or any statute or any
order, rule or regulation applicable to the Company of any court or of any
regulatory authority or other governmental body having jurisdiction over the
Company.
(h) Subject to the qualifications stated in the
Prospectus, the Company has good and marketable title to all respective
properties and assets described in the Prospectus as owned by the Company, free
and clear of all liens, charges, encumbrances or restrictions, except such as
are not materially significant or important in relation to its respective
business; all of the material leases and subleases under which the Company is
the lessor or sublessor of properties or assets or under which the Company holds
properties or assets as lessee or sublessee as described in the Prospectus are
in full force and effect, and, except as described in the Prospectus, the
Company is not in default in any material respect with respect to any of the
terms or provisions of any of such leases or subleases, and no claim has been
asserted by anyone adverse to rights of the Company as lessor, sublessor, lessee
or sublessee under any of the leases or subleases mentioned above, or affecting
or questioning the right of the Company to continued possession of the leased or
subleased premises or assets under any such lease or sublease except as
described or referred to in the Prospectus; and the Company owns or leases all
such properties described in the Prospectus as are necessary to its respective
operations as now conducted and, except as otherwise stated in the Prospectus,
as proposed to be conducted as set forth in the Prospectus.
(i) BDO Seidman, LLP, who have given their reports on
certain financial statements filed and to be filed with the Commission as a part
of the Registration Statement, which are incorporated in the Prospectus, are
with respect to the Company, independent public accountants as required by the
Act and the Rules and Regulations.
(j) The financial statements, together with related
notes, set forth in the Prospectus or the Registration Statement present fairly
the financial position and results of operations and changes in cash flow of the
Company on the basis stated in the Registration Statement, at the respective
dates and for the respective periods to which they apply. Said statements and
related notes have been prepared in accordance with generally accepted
accounting principles applied on a basis which is consistent during the periods
involved and the Rules and Regulations. The information set forth under the
captions "Dilution," "Capitalization" and "Selected Financial Information" in
the Prospectus fairly present, on the basis stated in the Prospectus, the
information included therein.
(k) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, the Company
has not incurred any liabilities or obligations, direct or contingent, not in
the ordinary course of business, or entered into any transaction not in the
ordinary course of business, which is material to the business of the Company,
and there has not been any change in the capital stock of, or any incurrence of
short-term or long-term debt by, the Company or any issuance of options,
warrants or other rights to purchase the capital stock of the Company or any
adverse change or any development involving, so far as the Company can now
reasonably foresee a prospective adverse change in the condition (financial or
other), net worth, results of operations, business, key personnel or
- 4 -
<PAGE> 5
properties of the Company which would be material to the business or financial
condition of the Company and the Company has not become a party to, and neither
the business nor the property of the Company has become the subject of, any
material litigation whether or not in the ordinary course of business.
(l) Except as set forth in the Prospectus, there is
not now pending or, to the knowledge of the Company, threatened, any action,
suit or proceeding to which the Company is a party before or by any court or
governmental agency or body, which might result in any material adverse change
in the condition (financial or other), business prospects, net worth, or
properties of the Company, nor are there any actions, suits or proceedings
related to environmental matters or related to discrimination on the basis of
age, sex, religion or race; and no labor disputes involving the employees of the
Company exist or are imminent which might adversely affect the conduct of the
business, property or operations or the financial condition or results of
operations of the Company.
(m) Except as disclosed in the Prospectus, the
Company has filed all necessary federal, state and foreign income and franchise
tax returns and has paid all taxes shown as due thereon; and there is no tax
deficiency which has been or to the knowledge of the Company might be asserted
against the Company.
(n) The Company has sufficient licenses, permits and
other governmental authorizations as are required for the conduct of its
business or the ownership of its properties as described in the Prospectus and
is in all material respects complying therewith and owns or possesses adequate
rights to use all material patents, patent applications, trademarks, service
marks, trade-names, trademark registrations, service mark registrations,
copyrights and licenses necessary for the conduct of such business and none of
the foregoing are in dispute or are in conflict with the right of any other
person or entity. To the best knowledge of the Company, none of the activities
or business of the Company are in violation of, or cause the Company to violate,
any law, rule, regulation or order of the United States, any state, county or
locality, or of any agency or body of the United States or of any state, county
or locality, the violation of which would have a material adverse impact upon
the condition (financial or otherwise), businesses, properties, prospective
results of operations, or net worth of the Company.
(o) The Company has not directly or indirectly, at
any time (i) made any contributions to any candidate for political office, or
failed to disclose fully any such contribution in violation of law or (ii) made
any payment to any state, federal or foreign governmental officer or official,
or other person charged with similar public or quasi-public duties, other than
payments or contributions required or allowed by applicable law. The Company's
internal accounting controls and procedures are sufficient to cause the Company
to comply in all material respects with the Foreign Corrupt Practices Act of
1977, as amended.
(p) On the Closing Dates (hereinafter defined) all
transfer or other taxes, (including franchise, capital stock or other tax, other
than income taxes, imposed by any jurisdiction) if any, which are required to be
paid in connection with the sale and transfer of the
- 5 -
<PAGE> 6
Stock to the several Underwriters hereunder will have been fully paid or
provided for by the Company and all laws imposing such taxes will have been
fully complied with.
(q) All contracts and other documents of the Company
which are, under the Rules and Regulations, required to be filed as exhibits to
the Registration Statement have been so filed.
(r) The Company has not taken and will not take,
directly or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock.
(s) The Company has no subsidiaries and does not own
any equity interest in any other corporation, joint venture, partnership or
other business entity.
(t) Except as previously disclosed in writing by the
Company to the Representative, no officer, director or shareholder of the
Company has any National Association of Securities Dealers Inc. (the "NASD")
affiliation.
(u) The Company is not and upon receipt of the
proceeds from the sale of the Stock will not be, an "investment company" within
the meaning of the Investment Company Act of 1940, as amended, and the rules and
regulations thereunder.
(v) The Company has not distributed nor will it
distribute prior to the First Closing Date, any offering material in connection
with the offering and sale of the Stock other than the Prospectus, the
Registration Statement and the other materials permitted by the Act.
(w) The conditions for use of Form SB-2, as set forth
in the General nstructions thereto, have been satisfied.
(x) The Company has complied with all provisions of
Section 517.075 Florida Statutes relating to doing business with the government
of Cuba or with any person or affiliate located in Cuba.
(y) The Company has not entered into any agreement
pursuant to which any person is entitled, either directly or indirectly, to
compensation from the Company for services as a finder in connection with the
public offering referred to herein.
2. PURCHASE, DELIVERY AND SALE OF THE STOCK.
(a) Subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties, and agreements
herein contained, the Company agrees to issue and sell to the Underwriters, and
each such Underwriter agrees, severally and not jointly, to buy from the Company
at $ per share of Stock, at the place and time hereinafter
- 6 -
<PAGE> 7
specified, the number of shares of Stock set forth opposite the names of the
Underwriters in Schedule A attached hereto (the "First Stock") plus any
additional shares of Stock which such Underwriters may become obligated to
purchase pursuant to the provisions of Section 9 hereof. The First Stock shall
consist of 1,600,000 shares of Stock to be purchased from the Company.
Delivery of the First Stock against payment therefor
shall take place at the offices of Commonwealth Associates, 830 Third Avenue,
New York, New York 10022 (or at such other place as may be designated by
agreement between you and the Company) at 10:00 a.m., New York time, on ,
1998, or at such later time and date as you may designate, such time and date of
payment and delivery for the First Stock being herein called the "First Closing
Date."
(b) In addition, subject to the terms and conditions
of this Agreement, and upon the basis of the representations, warranties and
agreements herein contained, the Company hereby grants, severally and not
jointly, an option to the several Underwriters (which may be exercised, at its
option, by the Representative, individually) to purchase all or any part of an
aggregate of an additional 240,000 shares of Stock, at the same price per share
of Stock, as the Underwriters shall pay for the First Stock being sold pursuant
to the provisions of subsection (a) of this Section 2 (such additional Stock
being referred to herein as the "Option Stock"). This option may be exercised
within 45 days after the effective date of the Registration Statement upon
notice by the Representative to the Company advising as to the amount of Option
Stock as to which the option is being exercised, the names and denominations in
which the certificates for such Option Stock are to be registered and the time
and date when such certificates are to be delivered. Such time and date shall be
determined by the Representative but shall not be earlier than four nor later
than ten full business days after the exercise of said option, nor in any event
prior to the First Closing Date, and such time and date is referred to herein as
the "Option Closing Date." Delivery of the Option Stock against payment therefor
shall take place at the offices of Commonwealth Associates, 830 Third Avenue,
New York, New York 10022. The number of shares of Option Stock to be purchased
by each Underwriter, if any, shall bear the same percentage to the total number
of shares of Option Stock being purchased by the several Underwriters pursuant
to this subsection (b) as the number of shares of Stock such Underwriter is
purchasing bears to the total number of the First Stock being purchased pursuant
to subsection (a) of this Section 2, as adjusted, in each case by the
Representative in such manner as the Representative may deem appropriate. The
option granted hereunder may be exercised only to cover overallotments in the
sale by the Underwriters of First Stock referred to in subsection (a) above. In
the event the Company declares or pays a dividend or distribution on its Common
Stock, whether in the form of cash, shares of Common Stock or any other
consideration, prior to the Option Closing Date, such dividend or distribution
shall also be paid on the Option Stock at the Option Closing Date.
(c) The Company will make the certificates for the
Stock to be purchased by the Underwriters hereunder available to you for
checking at least two full business days prior to the First Closing Date or the
Option Closing Date (which are collectively referred to herein as the "Closing
Dates"). The certificates shall be in such names and denominations as you may
request, at least two full business days prior to the Closing Dates. Time shall
be of the
- 7 -
<PAGE> 8
essence and delivery at the time and place specified in this Agreement is a
further condition to the obligations of each Underwriter.
Definitive certificates in negotiable form for the
Stock to be purchased by the Underwriters hereunder will be delivered by the
Company to you for the accounts of the several Underwriters against payment of
the respective purchase prices therefor by the several Underwriters, by
certified or bank cashier's checks in New York Clearing House funds, payable to
the order of the Company.
In addition, in the event the Underwriters (or the
Representative, individually) exercise the option to purchase from the Company
all or any portion of the Option Stock pursuant to the provisions of subsection
(b) above, payment for such stock shall be made to or upon the order of the
Company by certified or bank cashier's checks payable in New York Clearing House
funds at the offices of Commonwealth Associates, at the time and date of
delivery of such Stock as required by the provisions of subsection (b) above,
against receipt of the certificates for such Stock by the Representative for the
respective accounts of the several Underwriters registered in such names and in
such denominations as the Representative may request.
It is understood that you, individually and not as
Representative of the several Underwriters, may (but shall not be obligated to)
make any and all payments required pursuant to this Section 2 on behalf of any
Underwriters whose check or checks shall not have been received by the
Representative at the time of delivery of the Stock to be purchased by such
Underwriter or Underwriters. Any such payment by you shall not relieve any such
Underwriter or underwriters of any of its or their obligations hereunder. It is
also understood that you individually rather than all of the Underwriters may
(but shall not be obligated to) purchase the Option Stock referred to in
subsection (b) of this Section 2, but only to cover overallotments.
It is understood that the several Underwriters
propose to offer the Stock to be purchased hereunder to the public upon the
terms and conditions set forth in the Registration Statement, after the
Registration Statement becomes effective.
3. COVENANTS OF THE COMPANY. The Company covenants and agrees
with the several Underwriters that:
(a) The Company will use its best efforts to cause
the Registration Statement to become effective. If required, the Company will
file the Prospectus and any amendment or supplement thereto with the Commission
in the manner and within the time period required by Rule 424(b) under the Act.
Upon notification from the Commission that the Registration Statement has become
effective, the Company will so advise you and will not at any time, whether
before or after the effective date, file any amendment to the Registration
Statement or supplement to the Prospectus of which you shall not previously have
been advised and furnished with a copy or to which you or your counsel shall
have objected in writing or which is not in compliance with the Act and the
Rules and Regulations. At any time prior to the later of (A) the completion by
all of the Underwriters of the distribution of the Stock contemplated
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<PAGE> 9
hereby (but in no event more than nine months after the date on which the
Registration Statement shall have become or been declared effective) and (B) 25
days after the date on which the Registration Statement shall have become or
been declared effective (the "Minimum Period"), the Company will prepare and
file with the Commission, promptly upon your request, any amendments or
supplements to the Registration Statement or Prospectus which, in your opinion,
may be necessary or advisable in connection with the distribution of the Stock.
As soon as the Company is advised thereof, the
Company will advise you, and confirm the advice in writing, of the receipt of
any comments of the Commission, of the effectiveness of any post-effective
amendment to the Registration Statement, of the filing of any supplement to the
Prospectus or any amended Prospectus, of any request made by the Commission for
amendment of the Registration Statement or for supplementing of the Prospectus
or for additional information with respect thereto, of the issuance by the
Commission or any state or regulatory body of any stop order or other order or
threat thereof suspending the effectiveness of the Registration Statement or any
order preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Stock for offering in any jurisdiction,
or of the institution of any proceedings for any of such purposes, and will use
its best efforts to prevent the issuance of any such order, and, if issued, to
obtain as soon as possible the lifting thereof.
The Company has caused to be delivered to you copies
of each Preliminary Prospectus, and the Company has consented and hereby
consents to the use of such copies for the purposes permitted by the Act. The
Company authorizes the Underwriters and dealers to use the Prospectus in
connection with the sale of the Stock for such period as in the opinion of
counsel to the several Underwriters the use thereof is required to comply with
the applicable provisions of the Act and the Rules and Regulations. In case of
the happening, at any time within such period as a Prospectus is required under
this Act to be delivered in connection with sales by an underwriter of any event
of which the Company has knowledge and which materially affects the Company or
the securities of the Company, or which in the opinion of counsel for the
Company or counsel for the Underwriters should be set forth in an amendment of
the Registration Statement or a supplement to the Prospectus in order to make
the statements therein not then misleading, in light of the circumstances
existing at the time the Prospectus is required to be delivered to a purchaser
of the Stock or in case it shall be necessary to amend or supplement the
Prospectus to comply with law or with the Rules and Regulations, the Company
will notify you promptly and forthwith prepare and furnish to you copies of such
amended Prospectus or of such supplement to be attached to the Prospectus, in
such quantities as you may reasonably request, in order that the Prospectus, as
so amended or supplemented, will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements in the Prospectus, in the light of the circumstances under which they
are made, not misleading. The preparation and furnishing of any such amendment
or supplement to the Registration Statement or amended Prospectus or supplement
to be attached to the Prospectus shall be without expense to the Underwriters,
except that in case any Underwriter is required, in connection with the sale of
the Stock, to deliver a Prospectus nine months or more after the effective date
of the Registration Statement, the Company will upon request of and at the
expense of the Underwriter, amend or supplement the Registration Statement and
Prospectus
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<PAGE> 10
and furnish the Underwriter with reasonable quantities of prospectuses complying
with Section 10(a)(3) of the Act.
The Company will comply with the Act, the Rules and
Regulations and the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the rules and regulations thereunder in connection with the offering
and issuance of the Stock.
(b) The Company will use its best efforts to qualify
to register the Stock for sale under the securities or "blue sky" laws of such
jurisdictions as the Representative may designate and will make such
applications and furnish such information as may be required for that purpose
and to comply with such laws, provided the Company shall not be required to
qualify as a foreign corporation or a dealer in securities or to execute a
general consent to service of process in any jurisdiction in any action other
than one arising out of the offering or sale of the Stock. The Company will,
from time to time, prepare and file such statements and reports as are or may be
required to continue such qualification in effect for so long a period as the
Underwriters may reasonably request.
(c) If the sale of the Stock provided for herein is
not consummated for any reason caused by the Company, the Company shall pay all
costs and expenses incident to the performance of the Company's obligations
hereunder, including but not limited to, all of the expenses itemized in Section
8, including the accountable out-of-pocket expenses of the Underwriters,
including legal fees.
(d) The Company will use its best efforts to (i)
cause a registration statement under the Exchange Act to be declared effective
concurrently with the completion of this offering (and will notify the
Representative in writing immediately upon the effectiveness of such
registration statement), and (ii) if requested by the Representative, to obtain
a listing on the Pacific Stock Exchange, and to obtain and keep current a
listing in the Standard & Poors or Moody's Industrial OTC Manual.
(e) For so long as the Company is a reporting company
under either Section 12(g) or 15(d) of the Exchange Act, the Company, at its
expense, will furnish to its shareholders an annual report (including financial
statements audited by independent public accountants), in reasonable detail, and
at its expense, will furnish to you during the period ending five (5) years from
the date hereof, (i) as soon as practicable after the end of each fiscal year, a
balance sheet of the Company and any of its subsidiaries as at the end of such
fiscal year, together with statements of income, surplus and cash flow of the
Company and any subsidiaries for such fiscal year, all in reasonable detail and
accompanied by a copy of the certificate or report thereon of independent
accountants; (ii) as soon as practicable after the end of each of the first
three fiscal quarters of each fiscal year, consolidated summary financial
information of the Company for such quarter in reasonable detail; (iii) as soon
as they are available, a copy of all reports (financial or other) mailed to
security holders; (iv) as soon as they are available, a copy of all
non-confidential reports and financial statements furnished to or filed with the
Commission of any securities exchange or automated quotation system on which any
class of securities of the
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<PAGE> 11
Company is listed; and (v) such other information as you may from time to time
reasonably request.
(f) In the event the Company has an active subsidiary
or subsidiaries, such financial statements referred to in subsection (e) above
will be on a consolidated basis to the extent the accounts of the Company and
its subsidiary or subsidiaries are consolidated in reports furnished to its
shareholders generally.
(g) The Company will deliver to you at or before the
First Closing Date two signed copies of the Registration Statement including all
financial statements and exhibits filed therewith, and of all amendments
thereto, and will deliver to the several Underwriters such number of conformed
copies of the Registration Statement, including such financial statements but
without exhibits, and of all amendments thereto, as the several Underwriters may
reasonably request. The Company will deliver to or upon the order of the several
Underwriters, from time to time until the effective date of the Registration
Statement, as many copies of any Preliminary Prospectus filed with the
Commission prior to the effective date of the Registration Statement as the
Underwriters may reasonably request. The Company will deliver to the
Underwriters on the effective date of the Registration Statement and thereafter
for so long as a Prospectus is required to be delivered under the Act, from time
to time, as many copies of the Prospectus, in final form, or as thereafter
amended or supplemented, as the Underwriters may from time to time reasonably
request.
(h) The Company will make generally available to its
security holders and deliver to you as soon as it is practicable to do so but in
no event later than 90 days after the end of twelve months after its current
fiscal quarter, an earnings statement (which need not be audited) covering a
period of at least twelve consecutive months beginning after the effective date
of the Registration Statement, which shall satisfy the requirements of Section
11(a) of the Act.
(i) The Company will apply the net proceeds from the
sale of the Stock for the purposes set forth under "Use of Proceeds" in the
Prospectus, and will file such reports with the Commission with respect to the
sale of the Stock and the application of the proceeds therefrom as may be
required pursuant to the Exchange Act.
(j) The Company will, promptly upon your request,
prepare and file with the Commission any amendments or supplements to the
Registration Statement, Preliminary Prospectus or Prospectus and take any other
action, which in the reasonable opinion of Bachner, Tally, Polevoy & Misher LLP,
counsel to the several Underwriters, may be reasonably necessary or advisable in
connection with the distribution of the Stock, and will use its best efforts to
cause the same to become effective as promptly as possible.
(k) The Company will reserve and keep available that
maximum number of its authorized but unissued shares of Common Stock which are
issuable upon exercise of the Warrants outstanding from time to time.
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<PAGE> 12
(l) For a period of 12 months from the date of the
Prospectus, no officer, director or shareholder of the Company (including
beneficial holders of 5% or more of the Company's outstanding capital stock (the
"Principal Shareholders")) will offer, sell or dispose of, directly or
indirectly, any shares of Common Stock without the prior written consent of the
Representative. In addition, holders of registration rights will agree not to
exercise such registration rights for a period of 12 months from the date of the
Prospectus. In order to enforce this covenant, the Company shall impose
stop-transfer instructions with respect to the shares of Common Stock owned by
the Principal Shareholders until the end of each such period.
(m) During the two year period commencing on the
effective date of the Registration Statement, the Company shall, at the
Representative's option, nominate a designee of the Representative for election
to the Company's Board of Directors. If no such designee is selected by
Representative, the Representative shall have the option to appoint an observer
selected by the Representative to attend all meetings of the Company's Board of
Directors during such period.
(n) Upon completion of this offering, the Company
will make all filings required, including registration under the Exchange Act,
to obtain the listing of its Common Stock on the Nasdaq SmallCap Market, and
will effect and maintain such listing for at least five years from the date of
this Agreement.
(o) The Company and each of the Principal
Shareholders represents that it or he has not taken and agree that it or he will
not take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Stock or to facilitate the
sale or resale of the Stock.
(p) On the Closing Date, and simultaneously with the
delivery of the Stock, the Company shall execute and deliver to you,
individually and not as representative of the Underwriters, the Warrants. The
Warrants will be substantially in the form of the Stock Purchase Warrant filed
as an Exhibit to the Registration Statement.
(q) During the 18 month period commencing on the date
of this Agreement the Company will not, without the prior written consent of the
Representative, grant options to purchase shares of Common Stock at a price less
than the lesser of (i) initial public offering price of the Stock or (ii) the
fair market value of the Common Stock on the date of grant. During the six month
period commencing on the date of this Agreement, the Company will not, without
the prior written consent of the Representative, grant options to any current
officer of the Company. During the three year period from the First Closing
Date, the Company will not, without the prior written consent of the
Representative offer or sell any of its Securities pursuant to Regulation S.
(r) Walt Nawrocki will be Chief Executive Officer of
the Company on the Closing Dates. The Company has obtained key person life
insurance on the life of Walt Nawrocki in an amount of not less than $1 million
and will use its best efforts to maintain such
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<PAGE> 13
insurance for a minimum period of three years from the effective date of the
Registration Statement or, if such individual's employment is terminated prior
to such date, to maintain such insurance on his successor until the expiration
of such period. For a period of 13 months from the First Closing Date, the
compensation of the executive officers of the Company shall not be increased
from the compensation levels disclosed in the Prospectus without the approval of
the compensation committee and the majority of the members of the Company's
Board of Directors.
(s) On the Closing Date and simultaneously with the
delivery of the Stock the Company shall deliver to you, individually and not as
representative of the Underwriters, payment of the fee due under the financial
advisory and consulting agreement with you (the "Advisory Agreement"), by
certified or bank cashier's checks, in New York Clearing House Funds, payable to
the order of the Representative.
(t) For a period of five years from the effective
date of the Registration Statement the Company (i) at its expense, shall cause
its regularly engaged independent certified public accountants to review (but
not audit) the Company's financial statements for each of the first three fiscal
quarters prior to the announcement of quarterly financial information, the
filing of the Company's 10-QSB quarterly report and the mailing of quarterly
financial information to shareholders and (ii) shall maintain BDO Seidman, LLP
as the regularly engaged independent certified public accountants to the
Company, and shall not effect a change therefrom without the prior written
consent of the Representative; provided that no such consent shall be necessary
if the new independent certified public accountant to the Company is a firm
which is a member of the so called "Big Six".
(u) As promptly as practicable after the Closing
Date, the Company will prepare, at its own expense, hard cover "bound volumes"
relating to the offering, and will distribute at least four of such volumes to
the individuals designated by the Representative or counsel to the several
Underwriters.
(v) The Company shall, for a period of six years
after the date of this Agreement, submit such reports to the Secretary of the
Treasury and to shareholders, as the Secretary may require, pursuant to Section
1202 of the Internal Revenue Code, as amended, or regulations promulgated
thereunder, in order for the Company to qualify as a "small business" so that
shareholders may realize special tax treatment with respect to their investment
in the Company.
(w) The Company shall not grant any additional
registration rights to any person which are exercisable prior to 13 months after
the First Closing Date.
(x) For a period of one year after the Closing Date,
the Company shall cause the transfer agent for the Company's Common Stock, at
its own expense, to provide the Representative, if so requested, with copies of
the Company's daily transfer sheets.
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<PAGE> 14
(y) Prior to the Closing Date, the Company shall
engage a public relations firm, acceptable to you, and shall maintain such
public relations firm for a period of not less than one year following the
effective date of the Registration Statement.
4. CONDITIONS OF UNDERWRITERS' OBLIGATION. The obligations of
the several Underwriters to purchase and pay for the Stock which they have
respectively agreed to purchase hereunder, are subject to the accuracy (as of
the date hereof, and as of the Closing Dates) of and compliance with the
representations and warranties of the Company herein, to the performance by the
Company of its obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become
effective and you shall have received notice thereof not later
than 10:00 A.M., New York time, on the day following the date
of this Agreement, or at such later time or on such later date
as to which you may agree in writing; on or prior to the
Closing Dates no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no
proceedings for that or a similar purpose shall have been
instituted or shall be pending or, to your knowledge or to the
knowledge of the Company, shall be contemplated by the
Commission; any request on the part of the Commission for
additional information shall have been complied with to the
reasonable satisfaction of Bachner, Tally, Polevoy & Misher
LLP, counsel to the several Underwriters; and no stop order
shall be in effect denying or suspending effectiveness of such
qualification nor shall any stop order proceedings with
respect thereto be instituted or pending or threatened. If
required, the Prospectus shall have been filed with the
Commission in the manner and within the time period required
by Rule 424(b) under the Act.
(b) At the First Closing Date, you shall have
received the opinion, addressed to the Underwriters, dated as
of the First Closing Date, of Atlas, Pearlman, Trop & Borkson,
P.A., counsel for the Company, in form and substance
satisfactory to counsel for the several Underwriters, to the
effect that:
(i) the Company has been duly incorporated and
is validly existing as a corporation in good standing
under the laws of the State of Florida, with full
corporate power and authority to own its properties
and conduct its business as described in the
Registration Statement and Prospectus and is duly
qualified or licensed to do business as a foreign
corporation and is in good standing in each other
jurisdiction in which the ownership or leasing of its
properties or conduct of its business requires such
qualification, except where the failure to so qualify
would not have a material adverse effect on the
Company;
(ii) to the best knowledge of such counsel, (a)
the Company has obtained, or is in the process of
obtaining, all licenses, permits and other
governmental authorizations necessary to the conduct
of its respective business as described in the
Prospectus, (b) such licenses,
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<PAGE> 15
permits and other governmental authorizations
obtained are in full force and effect, and (c) the
Company is in all material respects complying
therewith;
(iii) the authorized capitalization of the
Company as of January 31, 1998 is as set forth under
"Capitalization" in the Prospectus; all shares of the
Company's outstanding stock requiring authorization
for issuance by the Company's board of directors have
been duly authorized, validly issued, are fully paid
and non-assessable and conform to the description
thereof contained in the Prospectus; the outstanding
shares of Common Stock of the Company have not been
issued in violation of the preemptive rights of any
shareholder and the shareholders of the Company do
not have any preemptive rights or other rights to
subscribe for or to purchase, nor are there any
restrictions upon the voting or transfer of any of
the Stock; the Stock conforms to the description
thereof contained in the Prospectus; the Stock has
been duly authorized and, when issued and delivered
pursuant to this Agreement, will be duly and validly
issued, fully paid, non-assessable, free of
preemptive rights and no personal liability will
attach to the ownership thereof; all prior sales by
the Company of the Company's securities have been
made in compliance with or under an exemption from
registration under the Act and applicable state
securities laws and the shareholders of the Company
have no rescission rights with respect to any
outstanding securities of the Company (provided that
with respect to the Company's private placement of
notes and shares in 1996, such opinion may be to the
best of such counsel's knowledge); and to the best
of such counsel's knowledge, neither the filing of
the Registration Statement nor the offering or sale
of the Stock as contemplated by this Agreement gives
rise to any registration rights or other rights,
other than those which have been waived or satisfied
for or relating to the registration of any shares of
Common Stock;
(iv) each of this Agreement, the Warrants and
the Advisory Agreement have been duly and validly
authorized, executed and delivered by the Company and
assuming due execution by each other party hereto,
constitutes a legal, valid and binding obligation of
the Company enforceable against the Company in
accordance with its respective terms (except as such
enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or
affecting enforcement of creditors' rights and the
application of equitable principles in any action,
legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law);
(v) the certificates evidencing the Stock
are in due and proper form; the Warrants will be
exercisable for shares of Common Stock of the
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<PAGE> 16
Company in accordance with the terms of the Warrants
and at the prices therein provided for; at all times
during the term of the Warrants the shares of Common
Stock of the Company issuable upon exercise of the
Warrants will have been duly authorized and reserved
for issuance upon such exercise and such shares, when
issued upon such exercise in accordance with the
terms of the Warrants and at the price provided for,
will be duly and validly issued, fully paid and
non-assessable;
(vi) except as disclosed in the Prospectus,
such counsel knows of no pending or threatened legal
or governmental proceedings to which the Company is a
party which could materially adversely affect the
business, property, financial conditions or
operations of the Company; or which question the
validity of the Common Stock of the Company, the
Stock, this Agreement, the Warrants or the Advisory
Agreement, or of any action taken or to be taken by
the Company pursuant to this Agreement, the Warrants
or the Advisory Agreement, and no such proceedings
are known to such counsel to be contemplated against
the Company; there are no governmental proceedings or
regulations required to be described or referred to
in the Registration Statement which are not so
described or referred to;
(vii) the Company is not in violation of or
default under, nor will the execution and delivery of
this Agreement, the Warrants or the Advisory
Agreement, and the incurrence of the obligations
herein or therein set forth and the consummation of
the transactions herein or therein contemplated,
result in a breach or violation of, or constitute a
default under the articles of incorporation or
by-laws, in the performance or observance of any
material obligations, agreement, covenant or
condition contained in any bond, debenture, note or
other evidence of indebtedness or in any contract,
indenture, mortgage, loan agreement, lease, joint
venture or other agreement or instrument known to
such counsel to which the Company is a party or by
which the Company or its property may be bound or in
violation of any material order, rule, regulation,
writ, injunction, or decree of any government,
governmental instrumentality or court, domestic or
foreign;
(viii) the Registration Statement has become
effective under the Act, and to the best of such
counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement is in
effect, and no proceedings for that purpose have been
instituted or are pending before, or threatened by,
the Commission; the Registration Statement and the
Prospectus (except for the financial statements and
other financial data contained therein, or omitted
therefrom, as to which such counsel need express no
opinion) comply as to form in all material respects
with the applicable requirements of the Act and the
Rules and Regulations;
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<PAGE> 17
(ix) such counsel has participated in the
preparation of the Registration Statement and the
Prospectus and nothing has come to the attention of
such counsel to cause such counsel to have reason to
believe that the Registration Statement or any
amendment thereto at the time it became effective or
as of the Closing Dates contained any untrue
statement of a material fact required to be stated
therein or omitted to state any material fact
required to be stated therein or necessary to make
the statements therein not misleading or that the
Prospectus or any supplement thereto contains any
untrue statement of a material fact or omits to state
a material fact necessary in order to make statements
therein, in light of the circumstances under which
they were made, not misleading (except, in the case
of both the Registration Statement and any amendment
thereto and the Prospectus and any supplement
thereto, for the financial statements, notes thereto
and other financial information and schedules
contained therein, as to which such counsel need
express no opinion);
(x) all descriptions in the Registration
Statement and the Prospectus, and any amendment or
supplement thereto, of contracts and other documents
are accurate in all material respects and fairly
present the information required to be shown, and
such counsel is familiar with all contracts and other
documents referred to in the Registration Statement
and the Prospectus and any such amendment or
supplement or filed as exhibits to the Registration
Statement, and such counsel does not know of any
contracts or documents of a character required to be
summarized or described therein or to be filed as
exhibits thereto which are not so summarized,
described or filed;
(xi) no authorization, approval, consent, or
license of any governmental or regulatory authority
or agency is necessary in connection with the
authorization, issuance, transfer, sale or delivery
of the Stock by the Company, in connection with the
execution, delivery and performance of this Agreement
by the Company or in connection with the taking of
any action contemplated herein, or the issuance of
the Warrants or the Common Stock underlying the
Warrants, other than registrations or qualifications
of the Stock under applicable state or foreign
securities or Blue Sky laws and registration under
the Act;
(xii) the statements in the Registration
Statement under the captions "Business", "Use of
Proceeds", "Management", and "Description of Common
Stock" have been reviewed by such counsel and insofar
as they refer to descriptions of agreements,
statements of law, descriptions of statutes,
licenses, rules or regulations or legal conclusions,
are correct in all material respects; and
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<PAGE> 18
(xiii) At the First Closing Date, you shall have
received the opinion, addressed to the Underwriters,
dated as of the First Closing Date, of John Smith,
Esq., patent counsel to the Company, in form and
substance satisfactory to counsel for the
Underwriters, to the effect that:
(a) patent counsel has read the
material set forth in the prospectus under "Risk
Factors - Difficulties in Maintaining Proprietary
Rights" and "Business - Proprietary Rights" and, in
patent counsel's opinion, such material accurately
and adequately discloses the Company's patent
position and does not contain an untrue statement of
a material fact or omit to state a material fact
required to be stated therein or necessary to make
the statements therein not misleading;
(b) the patent applications referred
to in the Prospectus were properly filed in the
Patent and Trademark Office ("PTO"). There has been
no action taken to date by the PTO in regard to the
applications. There has been no public use prior to
filing applications which would affect their
validity. In patent counsel's opinion, the claims in
the applications are valid and patent counsel has no
reason to believe the patents will not issue with
respect thereto, or that the claims will conflict
with the rights of others;
(c) patent counsel is aware of no
facts which would preclude the Company from having
clear title to the patent applications or any patents
issuing therefrom;
(d) patent counsel is not aware of any
notice challenging the validity or enforceability of
any patent owned by, or licensed to, the Company;
(e) to patent counsel's knowledge, the
Company does not lack, nor will it be unable to
obtain any rights or licenses to use United States
patents necessary to the business as currently
conducted;
(f) to patent counsel's knowledge,
there are no material legal or governmental
proceedings pending or threatened with respect to any
patents of the Company; and
(g) to patent counsel's knowledge,
there have been no claims asserted against the
Company relating to the potential infringement of or
conflict with any patents, trademarks, copyrights or
trade secrets of others. Such counsel has conducted a
search for existing United States and European Union
patents with claims that might cover the Company's
technology as it relates to the Virtual Operator,
Conversational Voice Dialing, Conversational Personal
Assistant and Magic Calendar and, in
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<PAGE> 19
such counsel's opinion, the Company's technology does
not infringe any United States patents.
(iv) the Stock has been duly authorized for
quotation on the Nasdaq SmallCap Market.
Such opinion shall also cover such matters incident
to the transactions contemplated hereby as the Representative
or counsel for the several Underwriters shall reasonably
request. In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials
as to matters of fact; and may rely as to all matters of law
other than the law of the United States or of Florida upon
opinions of counsel satisfactory to you, in which case the
opinion shall state that they have no reason to believe that
you and they are not entitled to so rely.
(c) All corporate proceedings and other legal matters
relating to this Agreement, the Registration Statement, the
Prospectus and other related matters shall be satisfactory to
or approved by Bachner, Tally, Polevoy & Misher LLP, counsel
to the several Underwriters, and you shall have received from
such counsel a signed opinion, dated as of the First Closing
Date, together with copies thereof for each of the other
Underwriters, with respect to the validity of the issuance of
the Stock, the form of the Registration Statement and
Prospectus (other than the financial statements and other
financial data contained therein), the execution of this
Agreement and other related matters as you may reasonably
require. The Company shall have furnished to counsel for the
several Underwriters such documents as they may reasonably
request for the purpose of enabling them to render such
opinion.
(d) You shall have received a letter prior to the
effective date of the Registration Statement and again on and
as of the First Closing Date from BDO Seidman, LLP,
independent public accountants for the Company, substantially
in the form approved by you, and including estimates of the
Company's revenues and results of operations for the period
ending at the end of the month immediately preceding the
effective date and results of the comparable period during the
prior fiscal year.
(e) At the Closing Dates, (i) the representations and
warranties of the Company contained in this Agreement shall be
true and correct with the same effect as if made on and as of
the Closing Dates and the Company shall have performed all of
its obligations hereunder and satisfied all the conditions on
its part to be satisfied at or prior to such Closing Date,
(ii) the Registration Statement and the Prospectus and any
amendments or supplements thereto shall contain all statements
which are required to be stated therein in accordance with the
Act and the Rules and Regulations, and in all material
respects conform to the requirements thereof, and neither the
Registration Statement nor the Prospectus
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<PAGE> 20
nor any amendment or supplement thereto shall contain any
untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading, (iii) there shall
have been, since the respective dates as of which information
is given, no material adverse change, or any development
involving a prospective material adverse change in the
business, properties or conditions (financial or otherwise),
results of operations, capital stock, long-term or short-term
debt or general affairs of the Company from that set forth in
the Registration Statement and the Prospectus, except changes
which the Registration Statement and Prospectus indicate might
occur after the effective date of the Registration Statement,
and the Company shall not have incurred any material
liabilities or agreement not in the ordinary course of
business other than as referred to in the Registration
Statement and Prospectus; and (iv) except as set forth in the
Prospectus, no action, suit or proceeding at law or in equity
shall be pending or threatened against the Company which would
be required to be set forth in the Registration Statement, and
no proceedings shall be pending or threatened against the
Company before or by any commission, board or administrative
agency in the United States or elsewhere, wherein an
unfavorable decision, ruling or finding would materially and
adversely affect the business, property, conditions (financial
or otherwise), results of operations or general affairs of the
Company, and (v) you shall have received, at the First Closing
Date, a certificate signed by each of the Chairman of the
Board or the President and the principal financial or
accounting officer of the Company, dated as of the First
Closing Date, evidencing compliance with the provisions of
this subsection (e).
(f) Upon exercise of the option provided for in
Section 2(b) hereof, the obligations of the several
Underwriters (or, at its option, the Representative,
individually) to purchase and pay for the Option Stock
referred to therein will be subject (as of the date hereof and
as of the Option Closing Date) to the following additional
conditions:
(i) The Registration Statement shall remain
effective at the Option Closing Date, and no stop
order suspending the effectiveness thereof shall have
been issued and no proceedings for that purpose shall
have been instituted or shall be pending, or, to your
knowledge or the knowledge of the Company, shall be
contemplated by the Commission, and any reasonable
request on the part of the Commission for additional
information shall have been complied with to the
satisfaction of Bachner, Tally, Polevoy & Misher LLP,
counsel to the several Underwriters.
(ii) At the Option Closing Date there shall
have been delivered to you as Representative the
signed opinions of Atlas, Pearlman, Trop & Borkson,
P.A., counsel for the Company, and ________________,
patent counsel to the Company, both dated as of the
Option Closing Date, in form and substance
satisfactory to Bachner, Tally, Polevoy &
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<PAGE> 21
Misher LLP, counsel to the several Underwriters,
together with copies of such opinions for each of the
other several Underwriters, which opinions shall be
substantially the same in scope and substance as the
opinions furnished to you at the First Closing Date
pursuant to Section 4(b), except that such opinions,
where appropriate, shall cover the Option Stock.
(iii) At the Option Closing Date there shall
have been delivered to you a certificate of the
Chairman of the Board or the President and the
principal financial or accounting officer of the
Company, dated the Option Closing Date, in form and
substance satisfactory to Bachner, Tally, Polevoy &
Misher LLP, counsel to the several Underwriters,
substantially the same in scope and substance as the
certificate furnished to you at the First Closing
Date pursuant to Section 4(e).
(iv) At the Option Closing Date there shall
have been delivered to you a letter in form and
substance satisfactory to you from BDO Seidman, LLP,
dated the Option Closing Date and addressed to the
Underwriters confirming the information in their
letter referred to in Section 4(d) hereof and stating
that nothing has come to their attention during the
period from the ending date of their review referred
to in said letter to a date not more than five
business days prior to the Option Closing Date, which
would require any change in said letter if it were
required to be dated the Option Closing Date.
(v) All proceedings taken at or prior to the
Option Closing Date in connection with the sale and
issuance of the Option Stock shall be satisfactory in
form and substance to you, and you and Bachner,
Tally, Polevoy & Misher LLP, counsel to the several
Underwriters, shall have been furnished with all such
documents, certificates, affidavits and opinions as
you may request in connection with this transaction
in order to evidence the accuracy and completeness of
any of the representations, warranties or statements
of the Company or its compliance with any of the
covenants or conditions contained herein.
(g) No action shall have been taken by the Commission
or the NASD the effect of which would make it improper, at any
time prior to the Closing Date, for members of the NASD to
execute transactions (as principal or agent) in the Common
Stock and no proceedings for the taking of such action shall
have been instituted or shall be pending, or, to the knowledge
of the several Underwriters or the Company, shall be
contemplated by the Commission or the NASD. The Company
represents that at the date hereof it has no knowledge that
any such action is in fact contemplated by the Commission or
the NASD. The Company shall advise the several Underwriters of
any NASD affiliation of any of its officers, directors,
shareholders or their affiliates.
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<PAGE> 22
If any of the conditions herein provided for in this Section
shall not have been fulfilled as of the date indicated, this Agreement and all
obligations of the several Underwriters under this Agreement may be cancelled
at, or at any time prior to, each Closing Date by the Representative. Any such
cancellation shall be without liability of the Underwriters to the Company.
5. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The
obligation of the Company to sell and deliver the Stock is subject to the
following conditions:
(a) The Registration Statement shall have become
effective not later than 10:00 A.M. New York time, on the day
following the date of this Agreement, or on such later date as
the Company and the Representative may agree to in writing.
(b) At the Closing Dates, no stop orders suspending
the effectiveness of the Registration Statement shall have
been issued under the Act or any proceedings therefor
initiated or threatened by the Commission.
If the conditions to the obligations of the Company provided
for in this Section have been fulfilled on the First Closing Date but are not
fulfilled after the First Closing Date and prior to the Option Closing Date,
then only the obligation of the Company to sell and deliver the Stock on
exercise of the option provided for in Section 2(b) hereof shall be affected.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of the Act against any losses, claims, damages or liabilities, joint
or several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which such Underwriter or such controlling person may become subject,
under the Act or otherwise, and will reimburse, as incurred, such Underwriter
and such controlling persons for any legal or other expenses reasonably incurred
in connection with investigating, defending against or appearing as a third
party witness in connection with any losses, claims, damages or liabilities,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in (A) the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto,
(B) any blue sky application or other document executed by the Company
specifically for that purpose or based upon written information furnished by the
Company filed in any state or other jurisdiction in order to qualify any or all
of the Stock under the securities laws thereof (any such application, document
or information being hereinafter called a "Blue Sky Application"), or arise out
of or are based upon the omission or alleged omission to state in the
Registration Statement, any Preliminary Prospectus, Prospectus, or any amendment
or supplement thereto, or in any Blue Sky Application, a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case
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<PAGE> 23
to the extent, but only to the extent, that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
the Underwriters specifically for use in the preparation of the Registration
Statement or any such amendment or supplement thereof or any such Blue Sky
Application or any such preliminary Prospectus or the Prospectus or any such
amendment or supplement thereto. This indemnity will be in addition to any
liability which the Company may otherwise have.
(b) Each Underwriter severally, but not jointly, will
indemnify and hold harmless the Company, each of the Company's directors, each
nominee (if any) for director of the Company named in the Prospectus, each of
the Company's officers who have signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of the Act, against
any losses, claims, damages or liabilities (which shall, for all purposes of
this Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees) to which the Company or any such
director, nominee, officer or controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, (i) in reliance upon and in conformity with written
information furnished to the Company by you or by any Underwriter through you
specifically for use in the preparation thereof and (ii) relates to the
transactions effected by the Underwriters in connection with the offer and sale
of the Stock contemplated hereby. This indemnity agreement will be in addition
to any liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party
under this Section 6 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section, notify in writing the indemnifying party
of the commencement thereof; but the omission so to notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than under this Section. In case any such action is
brought against any indemnified party, and it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
in, and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, subject to the
provisions herein stated, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. The indemnified party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
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<PAGE> 24
but the fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party; provided
that if the indemnified party is an Underwriter or a person who controls such
Underwriter within the meaning of the Act, the fees and expenses of such counsel
shall be at the expense of the indemnifying party if (i) the employment of such
counsel has been specifically authorized in writing by the indemnifying party or
(ii) the named parties to any such action (including any impleaded parties)
include both such Underwriter or such controlling person and the indemnifying
party and in the judgment of the Representative, it is advisable for the
Representative or such Underwriters or controlling persons to be represented by
separate counsel (in which case the indemnifying party shall not have the right
to assume the defense of such action on behalf of such Underwriter or such
controlling person, it being understood, however, that the indemnifying party
shall not, in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys for all such Underwriters
and controlling persons, which firm shall be designated in writing by you). No
settlement of any action against an indemnified party shall be made without the
consent of the indemnifying party, which shall not be unreasonably withheld in
light of all factors of importance to such indemnifying party.
7. CONTRIBUTION. In order to provide for just and equitable
contribution under the Act in any case in which (i) any Underwriter makes claim
for indemnification pursuant to Section 7 hereof but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case, notwithstanding the
fact that the express provisions of Section 6 provide for indemnification in
such case, or (ii) contribution under the Act may be required on the part of any
Underwriter, then the Company and each person who controls the Company, in the
aggregate, and any such Underwriter shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys' fees) in either
such case (after contribution from others) in such proportions that all such
Underwriters are responsible in the aggregate for that portion of such losses,
claims, damages or liabilities represented by the percentage that the
underwriting discount per share appearing on the cover page of the Prospectus
bears to the public offering price appearing thereon, and the Company shall be
responsible for the remaining portion, provided, however, that (a) if such
allocation is not permitted by applicable law then the relative fault of the
Company and the Underwriters and controlling persons, in the aggregate, in
connection with the statements or omissions which resulted in such damages and
other relevant equitable considerations shall also be considered. The relative
fault shall be determined by reference to, among other things, whether in the
case of an untrue statement of a material fact or the omission to state a
material fact, such statement or omission relates to information supplied by the
Company, or the Underwriters and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such untrue statement or
omission. The Company and the Underwriters agree that (a) it would not be just
and equitable if the respective obligations of the Company and the Underwriters
to contribute pursuant to this Section 7 were to be determined by pro rata or
per capita allocation of
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<PAGE> 25
the aggregate damages (even if the Underwriters and their respective controlling
persons in the aggregate were treated as one entity for such purpose) or by any
other method of allocation that does not take account of the equitable
considerations referred to in the first sentence of this Section 7, (b) that the
contribution of each contributing Underwriter shall not be in excess of its
proportionate share (based on the ratio of the number of shares of Stock
purchased by such Underwriter to the number of shares of Stock purchased by all
contributing Underwriters) of the portion of such losses, claims, damages or
liabilities for which the Underwriters are responsible. No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. As used in this paragraph, the term "Underwriter"
includes any officer, director, or other person who controls an Underwriter
within the meaning of Section 15 of the Act and the word "Company" includes any
officer, director, or person who controls the Company within the meaning of
Section 15 of the Act. If the full amount of the contribution specified in this
paragraph is not permitted by law, then any Underwriter and each person who
controls any Underwriter shall be entitled to contribution from the Company, its
officers, directors and controlling persons to the full extent permitted by law.
The foregoing contribution agreement shall in no way affect the contribution
liabilities of any persons having liability under Section 11 of the Act other
than the Company and the Underwriters. No contribution shall be requested with
regard to the settlement of any matter from any party who did not consent to the
settlement; provided, however, that such consent shall not be unreasonably
withheld in light of all factors of importance to such party.
8. COSTS AND EXPENSES.
(a) Whether or not this Agreement becomes effective
or the sale of the Stock to the Underwriters is consummated, the Company will
pay all costs and expenses incident to the performance of this Agreement by the
Company including, but not limited to, the fees and expenses of counsel to the
Company and the Company's accountants; the costs of investigative reports
regarding the Company, its principal shareholders and/or its officers and
directors; the costs and expenses incident to the preparation, printing, filing
and distribution under the Act of the Registration Statement (including the
financial statements therein and all amendments and exhibits thereto),
Preliminary Prospectus and the Prospectus, as amended or supplemented, the fee
of the NASD in connection with the filing required by the NASD relating to the
offering of the Stock contemplated hereby; all expenses, including reasonable
fees and disbursements of counsel to the Underwriters, in connection with the
qualification of the Stock under the state securities or blue sky laws which the
Representative shall designate; the cost of printing and furnishing to the
several Underwriters copies of the Registration Statement, each Preliminary
Prospectus, the Prospectus, this Agreement, the Agreement Among Underwriters,
Selling Agreement, Underwriters' Questionnaire, Underwriters' Power of Attorney
and the Blue Sky Memorandum, any fees relating to the listing of the Common
Stock on the Nasdaq SmallCap Market or other securities exchange, the cost of
printing the certificates representing the Stock, the fees of the transfer
agent, the cost of publication of at least three "tombstones" of the offering
(at least one of which shall be in a national business newspaper and one of
which shall be in a major New York newspaper and the cost of preparing at least
four hard cover "bound volumes" relating to the offering for individuals
designated by the Representative. The Company shall pay
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<PAGE> 26
any and all taxes (including any transfer, franchise, capital stock or other tax
imposed by any jurisdiction) on sales to the Underwriters hereunder. The Company
will also pay all cost and expenses incident to the furnishing of any amended
Prospectus or of any supplement to be attached to the Prospectus as called for
in Section 3(a) of this Agreement except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses the Company
shall at the First Closing Date pay to Commonwealth Associates in its individual
rather than representative capacity (i) a non-accountable expense allowance of
$_______ (1.5% of the gross proceeds of the offering) of which $50,000 has been
paid and (ii) a financial advisory fee of $________ (2% of the gross proceeds of
the offering, assuming sale of the over-allotment option). In the event the
overallotment option is exercised, the Company shall pay to Commonwealth
Associates at the Option Closing Date an additional amount equal to 1.5% of the
gross proceeds from the sale of Stock by the Company on exercise of the
overallotment option. In the event the transactions contemplated hereby are not
consummated by reason of any action by the Representative (except if such
prevention is based upon a breach by the Company of any covenant, representation
or warranty contained herein or because any other condition to the Underwriters'
obligations hereunder required to be fulfilled by the Company is not fulfilled)
the Company shall be liable for the accountable expenses of the Underwriters
including legal fees. In the event the transactions contemplated hereby are not
consummated by reason of any action of the Company or because of a breach by the
Company of any covenant, representation or warranty herein, the Company shall be
liable for the accountable expenses of the Underwriters, including legal fees.
(c) No person is entitled either directly or
indirectly to compensation from the Company, from the Representative or from any
other person for services as a finder in connection with the proposed offering,
and the Company agrees to indemnify and hold harmless the Representative and the
other Underwriters, against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all costs of defense and investigation and all attorneys' fees), to
which the Company, the Representative or such other Underwriter or person may
become subject insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon the claim of any
person (other than an employee of the party claiming indemnity) or entity that
he or it is entitled to a finder's fee in connection with the proposed offering
by reason of such person's or entity's influence or prior contact with the
indemnifying party.
9. SUBSTITUTION OF UNDERWRITERS. If any Underwriters shall for
any reason not permitted hereunder cancel their obligations to purchase the
First Stock hereunder, or shall fail to take up and pay for the number of First
Stock set forth opposite their respective names in Schedule A hereto upon tender
of such First Stock in accordance with the terms hereof, then:
(a) If the aggregate number of shares of First Stock
which such Underwriter or Underwriters agreed but failed to purchase does not
exceed 10% of the total number of First Stock, the other Underwriters shall be
obligated severally, in proportion to their respective commitments hereunder, to
purchase the First Stock which such defaulting Underwriter or Underwriters
agreed but failed to purchase.
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<PAGE> 27
(b) If any Underwriter or Underwriters so default and
the agreed number of First Stock with respect to which such default or defaults
occurs is more than 10% of the total number of First Stock, the remaining
Underwriters shall have the right to take up and pay for (in such proportion as
may be agreed upon among them) the First Stock which the defaulting Underwriter
or Underwriters agreed but failed to purchase. If such remaining Underwriters do
not, at the First Closing Date, take up and pay for the First Stock which the
defaulting Underwriter or Underwriters agreed but failed to purchase, the time
for delivery of the First Stock shall be extended to the next business day to
allow the several Underwriters the privilege of substituting within twenty-four
hours (including nonbusiness hours) another underwriter or underwriters
satisfactory to the Company. If no such underwriter or underwriters shall have
been substituted as aforesaid, within such twenty-four hour period, the time of
delivery of the First Stock may, at the option of the Company, be again extended
to the next following business day, if necessary, to allow the Company the
privilege of finding within twenty-four hours (including nonbusiness hours)
another underwriter or underwriters to purchase the First Stock which the
defaulting Underwriter or Underwriters agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted Underwriters to
take up the First Stock of the defaulting Underwriter or Underwriters as
provided in this Section, (i) the Company or the Representative shall have the
right to postpone the time of delivery for a period of not more than seven
business days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees promptly to file any amendments to the
Registration Statement or supplements to the Prospectus which may thereby be
made necessary, and (ii) the respective numbers of First Stock to be purchased
by the remaining Underwriters or substituted Underwriters shall be taken at the
basis of the underwriting obligation for all purposes of this Agreement.
If in the event of a default by one or more Underwriters and
the remaining Underwriters shall not take up and pay for all the First Stock
agreed to be purchased by the defaulting Underwriters or substitute another
underwriter or underwriters as aforesaid, the Company shall not find or shall
not elect to seek another underwriter or underwriters for such First Stock as
aforesaid, then this Agreement shall terminate.
If, following exercise of the option provided in Section 2(b)
hereof, any Underwriter or Underwriters shall for any reason not permitted
hereunder cancel their obligations to purchase Option Stock at the Option
Closing Date, or shall fail to take up and pay for the number of Option Stock,
which they become obligated to purchase at the Option Closing Date upon tender
of such Option Stock in accordance with the terms hereof, then the remaining
Underwriters or substituted Underwriters may take up and pay for the Option
Stock of the defaulting Underwriters in the manner provided in Section 9(b)
hereof. If the remaining Underwriters or substituted Underwriters shall not take
up and pay for all such Option Stock, the Underwriters shall be entitled to
purchase the number of Option Stock for which there is no default or, at their
election, the option shall terminate, the exercise thereof shall be of no
effect.
As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section. In the event of
termination, there shall be no
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<PAGE> 28
liability on the part of any nondefaulting Underwriter to the Company, provided
that the provisions of this Section 9 shall not in any event affect the
liability of any defaulting Underwriter to the Company arising out of such
default.
10. EFFECTIVE DATE. The Agreement shall become effective upon
its execution except that you may, at your option, delay its effectiveness until
11:00 A.M., New York time on the first full business day following the effective
date of the Registration Statement, or at such earlier time after the effective
date of the Registration Statement as you in your discretion shall first
commence the initial public offering by the Underwriters of any of the Stock.
The time of the initial public offering shall mean the time of release by you of
the first newspaper advertisement with respect to the Stock, or the time when
the Stock is first generally offered by you to dealers by letter or telegram,
whichever shall first occur. This Agreement may be terminated by you at any time
before it becomes effective as provided above, except that Sections 3(c), 6, 7,
8, 13, 14, 15 and 16 shall remain in effect notwithstanding such termination.
11. TERMINATION.
(a) This Agreement, except for Sections 3(c), 6, 7,
8, 13, 14, 15 and 16 hereof, may be terminated at any time prior to the First
Closing Date, and the option referred to in Section 2(b) hereof, if exercised,
may be cancelled at any time prior to the Option Closing Date, by you if in your
judgment it is impracticable to offer for sale or to enforce contracts made by
the Underwriters for the resale of the Stock agreed to be purchased hereunder by
reason of (i) the Company having sustained a material loss, whether or not
insured, by reason of fire, earthquake, flood, accident or other calamity, or
from any labor dispute or court or government action, order or decree; (ii)
trading in securities on the New York Stock Exchange, the American Stock
Exchange, the Nasdaq National Market or the Nasdaq SmallCap Market having been
suspended or limited; (iii) material governmental restrictions having been
imposed on trading in securities generally (not in force and effect on the date
hereof); (iv) a banking moratorium having been declared by federal or New York
state authorities; (v) an outbreak of international hostilities or other
national or international calamity or crisis or change in economic or political
conditions having occurred; (vi) a pending or threatened legal or governmental
proceeding or action relating generally to the Company's business, or a
notification having been received by the Company of the threat of any such
proceeding or action, which could materially adversely affect the Company; (vii)
except as contemplated by the Prospectus, the Company are merged or consolidated
into or all or substantially all of the capital stock or assets of the Company
are acquired by another company or group or there exists a binding legal
commitment for the foregoing or any other material change of ownership or
control occurs; (viii) the passage by the Congress of the United States or by
any state legislative body, or federal or state agency or other authority of any
act, measure, rule or regulation, or the adoption of any orders, rules or
regulations by any governmental body or any authoritative accounting institute
or board, or any governmental executive, which is reasonably believed likely by
the Representative to have a material impact on the business, financial
conditions or financial statements of the Company or the market for the
securities offered pursuant to the Prospectus; (ix) any adverse change in the
financial or securities markets beyond normal market fluctuations, having
occurred since the date of this Agreement, or (x) any material adverse change
having occurred, since the respective
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<PAGE> 29
dates of which information is given in the Registration Statement and
Prospectus, in the earnings, business, prospects or general conditions of the
Company, financial or otherwise, whether or not arising in the ordinary course
of business.
(b) If you elect to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this Section 11
or in Section 10, the Company shall be promptly notified by you, by telephone or
telegram, confirmed by letter.
12. WARRANTS. At or before the First Closing Date, the Company
will sell to Commonwealth Associates (for its own account and not as
Representative of the several Underwriters), or its designees for a
consideration of $160, and upon the terms and conditions set forth in the form
of Warrant annexed as an exhibit to the Registration Statement, Warrants to
purchase an aggregate of 160,000 shares of Common Stock of the Company. In the
event of conflict in the terms of this Agreement and the Warrants, the language
of the Warrants shall control.
13. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. The respective indemnities, agreements, representations, warranties
and other statements of the Company or its Principal Shareholders where
appropriate, and the Underwriters set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any investigation
made by or on behalf of the Underwriters, the Company or any of its officers or
directors or any controlling person and will survive delivery of and payment of
the Stock and the termination of this Agreement.
14. NOTICE. Any communications specifically required hereunder
to be in writing, if sent to the Underwriters, will be mailed, delivered or
telegraphed and confirmed to them at Commonwealth Associates, 830 Third Avenue,
New York, New York 10022 with a copy sent to Bachner, Tally, Polevoy & Misher
LLP, 380 Madison Avenue, New York, New York 10022, or if sent to the Company,
will be mailed, delivered or telegraphed and confirmed to it at One South Ocean
Boulevard, Suite 206, Boca Raton, Florida 33432, with a copy sent to Atlas,
Pearlman, Trop & Borkson, P.A., 200 East Las Olas Boulevard, Suite 1900, Fort
Lauderdale, FL 33301.
15. PARTIES IN INTEREST. The Agreement herein set forth is
made solely for the benefit of the several Underwriters, the Company and, to the
extent expressed, the Principal Shareholders, any person controlling the Company
or any of the several Underwriters, and directors of the Company, nominees for
directors (if any) named in the Prospectus, its officers who have signed the
Registration Statement, and their respective executors, administrators,
successors, and assigns and no other person shall acquire or have any right
under or by virtue of this Agreement. The term "successors and assigns" shall
not include any purchaser, as such purchaser, from any of the several
Underwriters of the Stock. All of the obligations of the Underwriters hereunder
are several and not joint.
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<PAGE> 30
16. APPLICABLE LAW. This Agreement will be governed by, and
construed in accordance with, the laws of the State of New York applicable to
agreements made and to be entirely performed within New York.
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return this agreement, whereupon it will become a
binding agreement between the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
REGISTRY MAGIC INCORPORATED
By:
----------------------------------
Walt Nawrocki, President and Chief
Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and
accepted as of the date first above written.
COMMONWEALTH ASSOCIATES, a New York
limited partnership
For itself and as Representative of the several
Underwriters
By: COMMONWEALTH MANAGEMENT CO., INC.
a New York corporation, its general partner
By:
------------------------------------
Robert Beuret, Vice Chairman
- 30 -
<PAGE> 31
SCHEDULE A
NAME OF UNDERWRITER NUMBER OF SHARES OF STOCK TO BE PURCHASED
- ------------------- -----------------------------------------
Commonwealth Associates
-------------
Total:
=============
<PAGE> 1
Exhibit 4.3
ADDENDUM TO PROMISSORY NOTE
Dated as of: March 19, 1998 Boca Raton, Florida
This is an addendum (the "Addendum") to that certain Promissory Note
dated July 1, 1996 (the "Note") whereby Registry Magic Incorporated ("Maker")
promised to pay to the order of DLJSC as Custodian IRA F/B/O Larry Cohen
(3IR911703) (the "Lender") the principal sum of Fifty Thousand Dollars
($50,000), together with interest on the unpaid principal amount outstanding
from time to time at a rate of six and one-half percent (6-1/2%) per annum.
1. By this Addendum, all outstanding principal and interest accrued and
unpaid on the Note shall not be payable by the Maker, on demand of the Lender or
otherwise, until six months from the date of the Maker's Prospectus and only to
the extent of cash flow from operations.
IN WITNESS WHEREOF, Maker and Lender have duly executed this Addendum
below, on the date first above written.
Registry Magic Incorporated
/s/ Walt Nawrocki
----------------------------------------
Name: Walt Nawrocki
Its: President and CEO
DLJSC as Custodian IRA F/B/O Larry Cohen
/s/ Lawrence Cohen
----------------------------------------
Lawrence Cohen
<PAGE> 1
EXHIBIT 4.4
Void after 5:00 p.m. New York Time, on __________, 2003.
Warrant to Purchase ______ Shares of Common Stock.
WARRANT TO PURCHASE COMMON STOCK
OF
REGISTRY MAGIC INCORPORATED
This is to Certify That, FOR VALUE RECEIVED, Commonwealth
Associates, or assigns ("Holder"), is entitled to purchase, subject to the
provisions of this Warrant, from Registry Magic Incorporated, a Florida
corporation ("Company"), _______ fully paid, validly issued and nonassessable
shares of Common Stock, par value $.001 per share, of the Company ("Common
Stock") at a price of $_____ per share [125% of the public offering price] at
any time or from time to time during the period from ____________, 1999 to
________________, 2003, but not later than 5:00 p.m. New York City Time, on
______________, 2003. The number of shares of Common Stock to be received upon
the exercise of this Warrant and the price to be paid for each share of Common
Stock may be adjusted from time to time as hereinafter set forth. The shares of
Common Stock deliverable upon such exercise, and as adjusted from time to time,
are hereinafter sometimes referred to as "Warrant Shares" and the exercise price
of a share of Common Stock in effect at any time and as adjusted from time to
time is hereinafter sometimes referred to as the "Exercise Price". This Warrant,
together with warrants of like tenor, constituting in the aggregate warrants
(the "Warrants") to purchase 160,000 shares of Common Stock, was originally
issued pursuant to an underwriting agreement between the Company and
Commonwealth Associates ("Commonwealth"), in connection with a public offering
through Commonwealth of 1,600,000 shares of Common Stock, in consideration of
$160 received for the Warrants.
(a) EXERCISE OF WARRANT.
(1) This Warrant may be exercised in whole or in part at any
time or from time to time on or after ______________, 1999 and until
___________, 2003 (the "Exercise Period"), subject to the provisions of Section
(j)(2) hereof; provided, however, that (i) if either such day is a day on which
banking institutions in the State of New York are authorized by law to close,
then on the next succeeding day which shall not be such a day, and (ii) in the
event of any merger, consolidation or sale of substantially all the assets of
the Company as an entirety, resulting in any distribution to the Company's
stockholders, prior to _____________ 2003, the Holder shall have the right to
exercise this Warrant commencing at
<PAGE> 2
such time through ________, 2003 into the kind and amount of shares of stock and
other securities and property (including cash) receivable by a holder of the
number of shares of Common Stock into which this Warrant might have been
exercisable immediately prior thereto. This Warrant may be exercised by
presentation and surrender hereof to the Company at its principal office, or at
the office of its stock transfer agent, if any, with the Purchase Form annexed
hereto duly executed and accompanied by payment of the Exercise Price for the
number of Warrant Shares specified in such form. As soon as practicable after
each such exercise of the warrants, but not later than seven (7) days from the
date of such exercise, the Company shall issue and deliver to the Holder a
certificate or certificate for the Warrant Shares issuable upon such exercise,
registered in the name of the Holder or its designee. If this Warrant should be
exercised in part only, the Company shall, upon surrender of this Warrant for
cancellation, execute and deliver a new Warrant evidencing the rights of the
Holder thereof to purchase the balance of the Warrant Shares purchasable
thereunder. Upon receipt by the Company of this Warrant at its office, or by the
stock transfer agent of the Company at its office, in proper form for exercise,
the Holder shall be deemed to be the holder of record of the shares of Common
Stock issuable upon such exercise, notwithstanding that the stock transfer books
of the Company shall then be closed or that certificates representing such
shares of Common Stock shall not then be physically delivered to the Holder.
(2) At any time during the Exercise Period, the
Holder may, at its option, exchange this Warrant, in whole or in part (a
"Warrant Exchange"), into the number of Warrant Shares determined in accordance
with this Section (a)(2), by surrendering this Warrant at the principal office
of the Company or at the office of its stock transfer agent, accompanied by a
notice stating such Holder's intent to effect such exchange, the number of
Warrant Shares to be exchanged and the date on which the Holder requests that
such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange
shall take place on the date specified in the Notice of Exchange or, if later,
the date the Notice of Exchange is received by the Company (the "Exchange
Date"). Certificates for the shares issuable upon such Warrant Exchange and, if
applicable, a new warrant of like tenor evidencing the balance of the shares
remaining subject to this Warrant, shall be issued as of the Exchange Date and
delivered to the Holder within seven (7) days following the Exchange Date. In
connection with any Warrant Exchange, this Warrant shall represent the right to
subscribe for and acquire the number of Warrant Shares (rounded to the next
highest integer) equal to (i) the number of Warrant Shares specified by the
Holder in its Notice of Exchange (the "Total Number") less (ii) the number of
Warrant Shares equal to the quotient obtained by dividing (A) the product of the
Total Number and the existing Exercise Price by (B) the current market value of
a share of Common Stock. Current market value shall have the meaning set forth
Section (c) below, except that for purposes hereof, the date of exercise, as
used in such Section (c), shall mean the Exchange Date.
(b) RESERVATION OF SHARES. The Company shall at all times
reserve for issuance and/or delivery upon exercise of this Warrant such number
of shares of its Common Stock as shall be required for issuance and delivery
upon exercise of the Warrants.
(c) FRACTIONAL SHARES. No fractional shares or script
representing fractional shares shall be issued upon the exercise of this
Warrant. With respect to any fraction
2
<PAGE> 3
of a share called for upon any exercise hereof, the Company shall pay to the
Holder an amount in cash equal to such fraction multiplied by the current market
value of a share, determined as follows:
(1) If the Common Stock is listed on a national
securities exchange or admitted to unlisted trading privileges
on such exchange or listed for trading on the Nasdaq National
Market, the current market value shall be the last reported
sale price of the Common Stock on such exchange or market on
the last business day prior to the date of exercise of this
Warrant or if no such sale is made on such day, the average
closing bid and asked prices for such day on such exchange or
market; or
(2) If the Common Stock is not so listed or admitted
to unlisted trading privileges, but is traded on the Nasdaq
SmallCap Market, the current Market Value shall be the average
of the closing bid and asked prices for such day on such
market and if the Common Stock is not so traded, the current
market value shall be the mean of the last reported bid and
asked prices reported by the National Quotation Bureau, Inc.
on the last business day prior to the date of the exercise of
this Warrant; or
(3) If the Common Stock is not so listed or admitted
to unlisted trading privileges and bid and asked prices are
not so reported, the current market value shall be an amount,
not less than book value thereof as at the end of the most
recent fiscal year of the Company ending prior to the date of
the exercise of the Warrant, determined in such reasonable
manner as may be prescribed by the Board of Directors of the
Company.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This
Warrant is exchangeable, without expense, at the option of the Holder, upon
presentation and surrender hereof to the Company or at the office of its stock
transfer agent, if any, for other warrants of different denominations entitling
the holder thereof to purchase in the aggregate the same number of shares of
Common Stock purchasable hereunder. This Warrant is not transferable (other than
by will or pursuant to the laws of descent and distribution and except as
provided under Subsection (a)(1)(ii) hereof) and may not be assigned or
hypothecated for a period of one year from , 1998, except to and
among the officers of Commonwealth, any member of the selling group, or to and
among the officers of any member of the selling group. Upon surrender of this
Warrant to the Company at its principal office or at the office of its stock
transfer agent, if any, with the Assignment Form annexed hereto duly executed
and funds sufficient to pay any transfer tax, the Company shall, without charge,
execute and deliver a new Warrant in the name of the assignee named in such
instrument of assignment and this Warrant shall promptly be cancelled. This
Warrant may be divided or combined with other warrants which carry the same
rights upon presentation hereof at the principal office of the Company or at the
office of its stock transfer agent, if any, together with a written notice
specifying the names and denominations in which new Warrants are to be issued
and signed by the Holder hereof.
3
<PAGE> 4
The term "Warrant" as used herein includes any Warrants into which this Warrant
may be divided or exchanged. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Warrant, if mutilated, the Company will execute and deliver a new Warrant of
like tenor and date. Any such new Warrant executed and delivered shall
constitute an additional contractual obligation on the part of the Company,
whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at
any time enforceable by anyone.
(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue
hereof, be entitled to any rights of a shareholder in the Company, either at law
or equity, and the rights of the Holder are limited to those expressed in the
Warrant and are not enforceable against the Company except to the extent set
forth herein.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at
any time and the number and kind of securities purchasable upon the exercise of
the Warrants shall be subject to adjustment from time to time upon the happening
of certain events as follows:
(1) In case the Company shall (i) declare a dividend
or make a distribution on its outstanding shares of Common
Stock in shares of Common Stock, (ii) subdivide or reclassify
its outstanding shares of Common Stock into a greater number
of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the
Exercise Price in effect at the time of the record date for
such dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be adjusted
so that it shall equal the price determined by multiplying the
Exercise Price by a fraction, the denominator of which shall
be the number of shares of Common Stock outstanding after
giving effect to such action, and the numerator of which shall
be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be
made successively whenever any event listed above shall occur.
(2) Whenever the Exercise Price payable upon exercise
of each Warrant is adjusted pursuant to Subsection (1) above,
the number of Shares purchasable upon exercise of this Warrant
shall simultaneously be adjusted by multiplying the number of
Shares initially issuable upon exercise of this Warrant by the
Exercise Price in effect on the date hereof and dividing the
product so obtained by the Exercise Price, as adjusted.
(3) No adjustment in the Exercise Price shall be
required unless such adjustment would require an increase or
decrease of at least five cents ($0.05) in such price;
provided, however, that any adjustments which by reason of
this Subsection (3) are not required to be made shall be
carried forward and taken into account in any subsequent
adjustment required to be made hereunder. All
4
<PAGE> 5
calculations under this Section (f) shall be made to the
nearest cent or to the nearest one-hundredth of a share, as
the case may be. Anything in this Section (f) to the contrary
notwithstanding, the Company shall be entitled, but shall not
be required, to make such changes in the Exercise Price, in
addition to those required by this Section (f), as it shall
determine, in its sole discretion, to be advisable in order
that any dividend or distribution in shares of Common Stock,
or any subdivision, reclassification or combination of Common
Stock, hereafter made by the Company shall not result in any
Federal Income tax liability to the holders of Common Stock or
securities convertible into Common Stock (including Warrants).
(4) Whenever the Exercise Price is adjusted, as
herein provided, the Company shall promptly (but no later than
10 days after any request for such an adjustment by the
Holder), cause a notice setting forth the adjusted Exercise
Price and adjusted number of Shares issuable upon exercise of
each Warrant, and, if requested, information describing the
transactions giving rise to such adjustments, to be mailed to
the Holders at their last addresses appearing in the Warrant
Register, and shall cause a certified copy thereof to be
mailed to its transfer agent, if any. In the event the Company
does not provide the Holder with such notice and information
within 10 days of a request by the Holder, then
notwithstanding the provisions of this Section (f), the
Exercise Price shall be immediately adjusted to equal the
lowest Offering Price, Subscription Price or Conversion Price,
as applicable, since the date of this Warrant, and the number
of shares issuable upon exercise of this Warrant shall be
adjusted accordingly. The Company may retain a firm of
independent certified public accountants selected by the Board
of Directors (who may be the regular accountants employed by
the Company) to make any computation required by this Section
(f), and a certificate signed by such firm shall be conclusive
evidence of the correctness of such adjustment.
(5) In the event that at any time, as a result of an
adjustment made pursuant to Subsection (1) above, the Holder
of this Warrant thereafter shall become entitled to receive
any shares of the Company, other than Common Stock, thereafter
the number of such other shares so receivable upon exercise of
this Warrant shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the Common Stock contained
in Subsections (1) to (3), inclusive above.
(6) Irrespective of any adjustments in the Exercise
Price or the number or kind of shares purchasable upon
exercise of this Warrant, Warrants theretofore or thereafter
issued may continue to express the same price and number and
kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Agreement.
5
<PAGE> 6
(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall
be adjusted as required by the provisions of the foregoing Section, the Company
shall forthwith file in the custody of its Secretary or an Assistant Secretary
at its principal office and with its stock transfer agent, if any, an officer's
certificate showing the adjusted Exercise Price determined as herein provided,
setting forth in reasonable detail the facts requiring such adjustment,
including a statement of the number of additional shares of Common Stock, if
any, and such other facts as shall be necessary to show the reason for and the
manner of computing such adjustment. Each such officer's certificate shall be
made available at all reasonable times for inspection by the holder or any
holder of a Warrant executed and delivered pursuant to Section (a) and the
Company shall, forthwith after each such adjustment, mail a copy by certified
mail of such certificate to the Holder or any such holder.
(h) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall
be outstanding, (i) if the Company shall pay any dividend or make any
distribution upon the Common Stock or (ii) if the Company shall offer to the
holders of Common Stock for subscription or purchase by them any share of any
class or any other rights or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then in any such case, the Company shall cause
to be mailed by certified mail to the Holder, at least fifteen days prior the
date specified in (x) or (y) below, as the case may be, a notice containing a
brief description of the proposed action and stating the date on which (x) a
record is to be taken for the purpose of such dividend, distribution or rights,
or (y) such reclassification, reorganization, consolidation, merger, conveyance,
lease, dissolution, liquidation or winding up is to take place and the date, if
any is to be fixed, as of which the holders of Common Stock or other securities
shall receive cash or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up.
(i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale, lease or conveyance to another corporation of
the property of the Company as an entirety, the Company shall, cause effective
provisions to be made so that the Holder shall have the right thereafter by
exercising this Warrant at any time prior to the expiration of the Warrant, to
purchase the kind and amount of shares of stock and other securities and
property receivable upon such reclassification, capital reorganization and other
change, consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock which might have been purchased upon exercise of this
Warrant immediately prior to such reclassification, change, consolidation,
merger, sale or conveyance. Any such provision shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to
6
<PAGE> 7
the adjustments provided for in this Warrant. The foregoing provisions of this
Section (i) shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization or reclassification, consolidation, merger,
sale or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for a
security of the Company other than Common Stock, any such issue shall be treated
as an issue of Common Stock covered by the provisions of Subsection (1) of
Section (f) hereof.
(j) REGISTRATION UNDER THE SECURITIES ACT OF 1933.
(1) The Company shall advise the Holder of this
Warrant or of the Warrant Shares or any then holder of
Warrants or Warrant Shares (such persons being collectively
referred to herein as "holders") by written notice at least
four weeks prior to the filing of any post-effective amendment
to the Company's Registration Statement No. 333-47715 on Form
SB-2 ("Registration Statement"), declared effective by the
Securities and Exchange Commission on , 1998 or of
any new registration statement or post-effective amendment
thereto under the Securities Act of 1933 (the "Act") covering
securities of the Company and will for a period of five years,
commencing two years from the effective date of the
Registration Statement, upon the request of any such holder,
include in any such post-effective amendment or registration
statement such information as may be required to permit a
public offering of the Warrants or the Warrant Shares. The
Company shall supply prospectuses and other documents as the
Holder may request in order to facilitate the public sale or
other disposition of the Warrants or Warrant Shares, qualify
the Warrants and the Warrant Shares for sale in such states as
any such holder designates and do any and all other acts and
things which may be necessary or desirable to enable such
Holders to consummate the public sale or other disposition of
the Warrants or Warrant Shares, and furnish indemnification in
the manner as set forth in Subsection (3)(C) of this Section
(j). Such holders shall furnish information and
indemnification as set forth in Subsection (3)(C) of this
Section (j), except that the maximum amount which may be
recovered from the Holder shall be limited to the amount of
proceeds received by the Holder from the sale of the Warrants
or Warrant Shares.
(2) If any majority holder (as defined in Subsection
(4) of this Section (j) below) shall give notice to the
Company at any time during the four year period commencing one
year from the effective date of the Registration Statement to
the effect that such holder contemplates (i) the transfer of
all or any part of his or its Warrants and/or Warrant Shares,
or (ii) the exercise and/or conversion of all or any part of
his or its Warrants and the transfer of all or any part of the
Warrants and/or Warrant Shares under such circumstances that a
public offering (within the meaning of the Act) of Warrants
and/or Warrant
7
<PAGE> 8
Shares will be involved, and desires to register under the
Act, the Warrants and/or the Warrant Shares, then the Company
shall, within two weeks after receipt of such notice, file a
post-effective amendment to the Registration Statement or a
new registration statement on Form S-1 or such other form as
the holder requests, pursuant to the Act, to the end that the
Warrants and/or Warrant Shares may be sold under the Act as
promptly as practicable thereafter and the Company will use
its best efforts to cause such registration to become
effective and continue to be effective (current) (including
the taking of such steps as are necessary to obtain the
removal of any stop order) until the holder has advised that
all of the Warrants and/or Warrant Shares have been sold;
provided that such holder shall furnish the Company with
appropriate information (relating to the intentions of such
holders) in connection therewith as the Company shall
reasonably request in writing. In the event the registration
statement is not declared effective under the Act prior to
2003, then at the holder's request, the Company shall purchase
the Warrants from the holders for a per share price equal to
the fair market value of the Common Stock less the per share
Exercise Price. The holder may, at its option, request the
registration of the Warrants and/or Warrant Shares in a
registration statement made by the Company as contemplated by
Subsection (1) of this Section (j) or in connection with a
request made pursuant to Subsection (2) of this Section (j)
prior to the acquisition of the Warrant Shares upon exercise
of the Warrants and even though the holder has not given
notice of exercise of the Warrants. The holder may thereafter
at its option, exercise the Warrants at any time or from time
to time subsequent to the effectiveness under the Act of the
registration statement in which the Warrant Shares were
included.
(3) The following provision of this Section (j) shall
also be applicable:
(A) Within ten days after receiving any such
notice pursuant to Subsection (2) of this Section
(j), the Company shall give notice to the other
holders of Warrants and Warrant Shares, advising that
the Company is proceeding with such post-effective
amendment or registration statement and offering to
include therein Warrants and/or Warrant Shares of
such other holders, provided that they shall furnish
the Company with such appropriate information
(relating to the intentions of such holders) in
connection therewith as the Company shall reasonably
request in writing. Following the effective date of
such post-effective amendment or registration, the
Company shall upon the request of any owner of
Warrants and/or Warrant Shares forthwith supply such
a number of prospectuses meeting the requirements of
the Act, as shall be requested by such owner to
permit such holder to make a public offering of all
Warrants and/or Warrant Shares from time to time
offered or sold to such holder, provided that such
holder shall from time to time furnish the Company
with such appropriate information (relating to the
intentions of such holder) in connection therewith as
the Company shall request in writing. The
8
<PAGE> 9
Company shall also use its best efforts to qualify
the Warrant Shares for sale in such states as such
majority holder shall designate.
(B) The Company shall bear the entire cost
and expense of any registration of securities
initiated by it under Subsection (1) of this Section
(j) notwithstanding that Warrants and/or Warrant
Shares subject to this Warrant may be included in any
such registration. The Company shall also comply with
one request for registration made by the majority
holder pursuant to Subsection (2) of this Section (j)
at its own expense and without charge to any holder
of any Warrants and/or Warrant Shares; and the
Company shall comply with one additional request made
by the majority holder pursuant to Subsection (2) of
this Section (j) (and not deemed to be pursuant to
Subsection (1) of this Section (j)) at the sole
expense of such majority holder. Any holder whose
Warrants and/ or Warrant Shares are included in any
such registration statement pursuant to this Section
(j) shall, however, bear the fees of his own counsel
and any registration fees, transfer taxes or
underwriting discounts or commissions applicable to
the Warrant Shares sold by him pursuant thereto.
(C) The Company shall indemnify and hold
harmless each such holder and each underwriter,
within the meaning of the Act, who may purchase from
or sell for any such holder any Warrants and/or
Warrant Shares from and against any and all losses,
claims, damages and liabilities caused by any untrue
statement or alleged untrue statement of a material
fact contained in the Registration Statement or any
post-effective amendment thereto or any registration
statement under the Act or any prospectus included
therein required to be filed or furnished by reason
of this Section (j) or caused by any omission or
alleged omission to state therein a material fact
required to be stated therein or necessary to make
the statements therein not misleading, except insofar
as such losses, claims, damages or liabilities are
caused by any such untrue statement or alleged untrue
statement or omission or alleged omission based upon
information furnished or required to be furnished in
writing to the Company by such holder or underwriter
expressly for use therein, which indemnification
shall include each person, if any, who controls any
such underwriter within the meaning of such Act
provided, however, that the Company will not be
liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in
said registration statement, said preliminary
prospectus, said final prospectus or said amendment
or supplement in reliance upon and in conformity with
written information furnished by such Holder or any
other Holder, specifically for use in the preparation
thereof.
9
<PAGE> 10
(D) Neither the giving of any notice by any
such majority holder nor the making of any request
for prospectuses shall impose any upon such majority
holder or owner making such request any obligation to
sell any Warrants and/or Warrant Shares, or exercise
any Warrants.
(4) The term "majority holder" as used in this
Section (j) shall include Commonwealth or any owner or
combination of owners of Warrants or Warrant Shares in any
combination if the holdings of the aggregate amount of:
(i) the Warrants held by him or among
them, plus
(ii) the Warrants which he or they would
be holding if the Warrants for the Warrant Shares
owned by him or among them had not been exercised,
would constitute a majority of the Warrants originally issued.
The Company's agreements with respect to Warrants or Warrant
Shares in this Section (j) shall continue in effect regardless of the exercise
and surrender of this Warrant.
REGISTRY MAGIC INCORPORATED
By:
------------------------------------
Walt Nawrocki, President
[SEAL]
Dated: , 1998
--------------
Attest:
- -----------------------------
Martin Scott, Secretary
10
<PAGE> 11
PURCHASE FORM
Dated , 19
------------ --
The undersigned hereby irrevocably elects to exercise the
within Warrant to the extent of purchasing _______ shares of Common Stock and
hereby makes payment of _______ in payment of the actual exercise price thereof.
----------------
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name
--------------------------------
(Please typewrite or print in block letters)
Address
------------------------------
Signature
------------------------------
<PAGE> 12
ASSIGNMENT FORM
FOR VALUE RECEIVED, ______________ hereby sells, assigns and
transfers unto
Name
-----------------------------
(Please typewrite or print in block letters)
Address
----------------------------
the right to purchase Common Stock represented by this Warrant to the extent of
______ shares as to which such right is exercisable and does hereby irrevocably
constitute and appoint ___________ as attorney, to transfer the same on the
books of the Company with full power of substitution in the premises.
Date
-------------
Signature
-------------------
<PAGE> 1
Exhibit 10.10
IBM
SPEECH RECOGNITION FAMILY
May 5, 1998
Mr. Walt Nawrocki
Registry Magic, Inc.
One South Ocean Boulevard
Boca Raton, FL 33432
Dear Mr. Nawrocki:
Per your earlier discussion with Mr. Ron Sternberg of IBM, this letter is to
confirm that the 2,000 VTAF speech recognition run-time licenses prepaid
($2,000) by Registry Magic on December 27, 1996 are valid and extended through
December 31, 1998.
Sincerely
/s/ Thomas Lyons
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Thomas Lyons
Manager, World Wide Sales & Marketing
Speech Systems Business Unit
IBM Corporation
590 Madison Avenue
New York, NY 10022
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EXHIBIT 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Registry Magic Incorporated
Boca Raton, Florida
We hereby consent to the use in the Prospectus constituting a part of
this Registration Statement of our report dated December 19, 1997, relating to
the financial statements of Registry Magic Incorporated which is contained in
that Prospectus. Our report contains an explanatory paragraph indicating that
there exists substantial doubt about the Company's ability to continue as a
going concern.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
/s/ BDO Seidman, LLP
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BDO Seidman, LLP
Miami, Florida
May 21, 1998
