<PAGE>
As filed with the Securities and Exchange Commission on February 10, 1999
Registration No. 333-62345
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 2
to
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
Interactive Objects, Inc.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<S> <C> <C>
State of Washington 7371 87-0434226
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Classification Code Number) Identification Number)
Organization)
</TABLE>
<TABLE>
<S> <C>
217 Pine Street, Suite 800 Steven G. Wollach, President
Seattle, Washington 98101 217 Pine Street, Suite 800
(206) 464-1008 Seattle, Washington 98101
(Address and Telephone Number of (206) 464-1008
Principal Executive Offices) (Name, Address and Telephone Number of
Agent for Service)
</TABLE>
Copies of all communications to the foregoing to be sent to:
Robert C. Seidel
Timothy M. Woodland
Cairncross & Hempelmann, P.S.
701 Fifth Avenue, Suite 7000
Seattle, Washington 98104-7014
(206) 587-0700
---------------
Approximate date of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box: [_]
---------------
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 hereafter 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.
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<PAGE>
INTERACTIVE OBJECTS, INC.
CROSS REFERENCE SHEET
Showing Location in Prospectus of Information Required by Items in Part I of
Form SB-2
<TABLE>
<CAPTION>
Item in Form SB-2 Location or Caption in Prospectus
----------------- ---------------------------------
<C> <S> <C>
1. Front of Registration Statement and
Outside Front Cover of Prospectus. Front of Registration Statement;
Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus............... Inside Front Cover and Outside Back
Cover Pages of Prospectus
3. Summary Information and Risk
Factors............................ Prospectus Summary; Risk Factors
4. Use of Proceeds.................... Use of Proceeds
5. Determination of Offering Price.... Not Applicable
6. Dilution........................... Not Applicable
7. Selling Security Holders........... Selling Shareholders
8. Plan of Distribution............... Plan of Distribution
9. Legal Proceedings.................. Business
10. Directors, Executive Officers,
Promoters and Control Persons..... Management; Principal Shareholders
11. Security Ownership of Certain
Beneficial Owners and Management.. Management; Principal Shareholders
12. Description of Securities.......... Description of Securities
13. Interest of Named Experts and
Counsel............................ Legal Matters; Experts
14. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities................... Description of Securities
15. Organization Within Last Five
Years.............................. Not Applicable
16. Description of Business............ Prospectus Summary; Risk Factors;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business
17. Management's Discussion and
Analysis of Plan of Operation..... Management's Discussion and Analysis
of Financial Condition and Results of
Operations
18. Description of Property............ Business
19. Certain Relationships and Related
Transactions....................... Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters....... Market for Common Equity and Related
Stockholder Matters
21. Executive Compensation............. Management
22. Financial Statements............... Financial Statements
23. Changes In and Disagreements With
Accountants and Financial
Disclosure........................ Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the Registration Statement +
+becomes effective. This Prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 10, 1999
PROSPECTUS
2,925,018 Shares
[LOGO OF INTERACTIVE OBJECTS]
Common Stock
This Prospectus relates to 2,925,018 shares (the "Shares") of common stock,
$.01 par value (the "Common Stock"), of Interactive Objects, Inc., a Washington
corporation ("Interactive Objects" or the "Company"). The Shares being offered
consist of 1,946,617 shares of Common Stock that are currently issued and
outstanding, and 978,401 shares of Common Stock that are subject to certain
outstanding stock purchase warrants (the "Warrants") and may be issued upon
exercise of such Warrants. The Shares are owned by the persons named in this
Prospectus under the caption "Selling Shareholders." The Shares were acquired
by the Selling Shareholders in various transactions, all of which were exempt
from the registration provisions of the Securities Act of 1933, as amended (the
"Securities Act"), including sales of Shares in private placements by the
Company, issuance of Shares as compensation and Shares issuable upon the
exercise of the Warrants by certain of the Selling Shareholders.
The Selling Shareholders may from time to time sell the Shares on the OTC
Bulletin Board or on any other national securities exchange or automated
quotation system on which the Common Stock may be listed or traded, in
negotiated transactions or otherwise, at prices then prevailing or related to
the then current market price or at negotiated prices. The Shares may be sold
directly by or through brokers or dealers. See "PLAN OF DISTRIBUTION."
The Company will receive no part of the proceeds of any sales of Shares made
hereunder. Assuming exercise in full of the Warrants, the Company would receive
approximately $2,941,604 upon such exercise, which would be used for general
corporate purposes and working capital. See "USE OF PROCEEDS." Approximately
half of the Warrants are currently out-of-the-money and until the trading price
for the Common Stock is greater than the exercise price for the Warrants, the
Company does not expect such Warrants to be exercised. All expenses of
registration incurred in connection with this offering are being borne by the
Company, but all selling and other expenses incurred by the Selling Shareholders
will be borne by the Selling Shareholders. See "SELLING SHAREHOLDERS."
The Selling Shareholders and any broker-dealers participating in the
distribution of the Shares may be deemed to be "underwriters" within the
meaning of the Securities Act, and any commissions or discounts given to any
such broker-dealer may be regarded as underwriting commissions or discounts
under the Securities Act.
The Shares have not been registered for sale by the Selling Shareholders
under the securities laws of any state as of the date of this Prospectus.
Brokers or dealers effecting transactions in the Shares should confirm the
registration thereof under the securities laws of the States in which
transactions occur or the existence of any exemption from registration.
The Common Stock is traded on the OTC Bulletin Board under the symbol "OBJX".
On February 8, 1999, the closing bid and asked prices of the Common Stock as
reported on the OTC Bulletin Board were $1 5/16 and $1 1/2, respectively.
-----------
SEE "RISK FACTORS" ON PAGE 5 FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------
The date of this Prospectus is , 1999
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act
with respect to the Shares of Common Stock offered hereby (together with the
exhibits and schedules thereto, the "Registration Statement"). This
Prospectus, filed as a part of the Registration Statement, does not contain
all the information set forth in the Registration Statement, certain portions
of which have been omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Shares
of Common Stock offered hereby, reference is made to the Registration
Statement. Statements made in this Prospectus as to the contents of any
contract or document are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement and each such statement is qualified in
its entirety by such reference. The Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the
principal office of the Commission at Room 1024, Judiciary Plaza Building, 450
Fifth Street, N.W., Washington D.C. 20549, and the regional offices of the
Commission at Seven World Trade Center, Suite 1300, New York, New York 10048,
and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material may be obtained at prescribed rates from
the Public Reference Section of the Commission at Room 1024, Judiciary Plaza
Building, 450 Fifth Street, N.W. Washington D.C. 20549. The Commission
maintains a Web site that contains registration statements, reports, proxy
statements and other information regarding registrants (including the
Company), that file electronically with the Commission. The address of the
Commission's Web site is www.sec.gov.
Following the effective date of the Registration Statement, the Company will
be subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). So long as the Company is subject to
the informational reporting requirements of the Exchange Act, the Company will
provide its shareholders with annual reports containing audited financial
statements and interim quarterly reports containing unaudited financial
information.
2
<PAGE>
PROSPECTUS SUMMARY
The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
risks and uncertainties posed by many factors and events that could cause the
Company's actual business, prospects and results of operations to differ
materially from those that may be anticipated by such forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed herein as well as those discussed under the
captions "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as those discussed elsewhere in
this report. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Prospectus.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports to be filed
with the Securities and Exchange Commission that attempt to advise interested
parties of the risks and factors that may affect the Company's business.
Except as noted otherwise, all references in this Prospectus to "Interactive
Objects" or the "Company" refer to both (i) Interactive Objects, Inc. and its
subsidiary after the consummation of the Neoteric Acquisition (as defined
below) and (ii) Neoteric Media, Inc. prior to the Neoteric Acquisition.
Interactive Objects designs, develops and markets modular software
components. Additionally, the Company, through its consulting services group,
provides sophisticated software business solutions designed to facilitate
integrating medium- to large-scale businesses with the Internet.
The Company's products are designed for use primarily on the Microsoft
Corporation ("Microsoft") suite of visual programming languages including
Visual Basic(R), Visual C++(R) and Visual FoxPro(R) and are marketed to
corporate and professional developers for use in a variety of environments,
including multi-tier client-server, intranet, extranet and Internet
environments. The Company's products are reusable, modular software components
designed to work across multiple operating platforms. As a result, corporate
and professional developers are able to focus on the core functionality of the
applications they are developing--designing and constructing their applications
more efficiently. The Company released two components in the first quarter of
1998 and released a suite of four components in October 1998.
The Company has historically derived substantially all of its revenue from
its consulting services group. The consulting services group specializes in
sophisticated software business solutions which involve intranet, extranet and
Internet environments. In addition to providing sophisticated business
solutions to enterprise companies, Interactive Objects' consultants provide
much of the Company's research and development input for creating new and
innovative products. In 1998, substantially all of the Company's revenues were
the result of contracts awarded to its consulting group. These contracts
provided the Company valuable insight into the technology hurdles confronting
medium and large companies.
The Company's business strategy is focused on broadening its product
development by productizing the business solutions the Company's consultants
have designed or identified while performing consulting services. These
products are "application frameworks," sets or suites of reusable software
components architected to facilitate scaleable application development designed
to solve a specific business problem. By assembling its base components
together with the business objects generated from its consulting projects in a
framework architecture, the Company can address the sophisticated business
solution requirements of medium to large size organizations. The Company
expects to release its first application framework product in 1999.
3
<PAGE>
While continuing to invest its engineering and development resources in
expanding its library of development tools and components, the Company believes
that by assembling objects within an application framework, the resulting
solutions will have greater market potential than that of individual component
sales. The move from developer solutions to business solutions represents a
natural evolution for the Company. The Company believes that its core
capabilities are application architecture through its consulting group and
reusable component development by its product development team.
The Company was incorporated in the State of Washington in October 1995 and
operated under the name Neoteric Media, Inc., d/b/a Interactive Objects, until
August 1997. In August 1997, pursuant to the terms of an acquisition agreement
with Asia Pacific Chemical Engineering Corp., a publicly-held Utah corporation
with nominal assets and liabilities, Neoteric Media entered into a business
combination with APEC (the "Neoteric Acquisition"). In the Neoteric
Acquisition, the shareholders of Neoteric Media exchanged their stock for
6,260,800 shares of common stock of APEC, representing approximately 57.3% of
the common stock outstanding following the Neoteric Acquisition, and Neoteric
Media became a wholly-owned subsidiary of APEC (which changed its name to
Interactive Objects). The Company entered into the Neoteric Acquisition, in
part, to provide long-term liquidity for the Company's shareholders and to
increase the Company's ability to raise additional capital through public or
private financings, acquisitions or otherwise. For accounting purposes, the
Neoteric Acquisition was accounted for as a reverse purchase, with Interactive
Objects as the continuing entity. The Company's audited financial statements
include, since August 1997, the results of APEC operations, which were
insignificant. In 1998, the Company was reincorporated from Utah to the State
of Washington.
The Company's executive offices are located at 217 Pine Street, Suite 800,
Olympic Tower Building, Seattle, Washington 98101 and its telephone number is
(206) 464-1008. Interactive Objects and the Interactive Objects logo are
trademarks of the Company; all other trademarks and tradenames appearing in
this Prospectus are the property of their respective owners. The Company's Web
site address is www.iobjects.com. Information accessed on or through the
Company's Web site does not constitute a part of this Prospectus.
4
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business. This Prospectus contains forward-looking statements that involve
risks and uncertainties. When used in this Prospectus, the words "intends,"
"believes," "effect," "estimate," "expect" and similar expressions as they
relate to the Company or its management are intended to identify such forward-
looking statements. The Company's actual results, performance or achievements
could differ materially from the results expressed in or implied by these
forward-looking statements. Factors that might cause such differences include,
but are not limited to, those discussed below and in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business"
as well as those discussed elsewhere in this Prospectus.
Limited Operating History; No Profitable Operations. The Company was founded
in 1995 and has had insignificant operating results until 1997. The Company
has experienced losses since incorporation and there can be no assurance that
the Company will become profitable in the near future or at all. The Company
experienced losses of $(3,377,000), $(1,682,266) and $(75,000) for the nine-
month period ended September 30, 1998, the year ended December 31, 1997 and
the year ended December 31, 1996, respectively. The loss for the nine-month
period and year-ended 1997 include a one-time non-cash compensation expense
for securities issued in exchange for services. The Company's ability to
achieve revenue growth and profitability are substantially dependent upon its
ability to successfully grow and expand its consulting division, the success
of the Company's software component and application framework strategies, and
upon its ability to successfully complete and introduce new products. There
can be no assurance that the Company will be able to successfully accomplish
the foregoing or to achieve or maintain profitability in future periods. The
Company believes that its existing capital resources will enable it to fund
its operations, without additional capital, through 1999. If the Company
determines to seek additional capital through the issuance of additional
shares of capital stock, such issuance could result in dilution to the holders
of the Company's Common Stock. There can be no assurance that the Company will
be able to obtain such capital on acceptable terms or at all.
Concentration of Customers; Limited Marketing Experience. The Company's
consulting group architects, designs and implements Web-based software systems
to address Internet, intranet and/or extranet communication and integration
needs of medium to large corporations in the Pacific Northwest. Since 1995,
the Company has performed consulting services primarily for SAFECO Insurance
Companies of America, Inc. ("SAFECO") and to a lesser degree for Eddie Bauer
Incorporated ("Eddie Bauer"), and Microsoft. For 1997 and the first nine
months of 1998, revenues resulting from the Company's relationship with SAFECO
accounted for substantially all of the Company's revenues. The Company's most
recent project with SAFECO involved developing an enterprise-wide, Internet-
based information automation system. The Company's relationship with SAFECO
ended on July 31, 1998. There can be no assurance that the Company will be
able to market its consulting services successfully to similarly positioned
organizations in the future. If the Company is unsuccessful in marketing its
consulting services this would have a material adverse effect on the Company's
financial condition and results of operations. In addition much of the
Company's research and development for creating new and innovative products,
as well as further development of the Company's application frameworks, may be
delayed, which would adversely affect the Company's financial condition and
results of operation.
Uncertainties Regarding Market Acceptance of the Company's Products; New
Product Introductions. The Company's future revenues will depend substantially
on its ability to successfully design and market new and innovative products
that appeal to developers using Microsoft's visual development programming
languages, including Microsoft's Visual Basic(R), Visual C++(R), Visual
FoxPro(R) ("Microsoft Visual Programming Languages"). The Company's current
product line adheres to Microsoft's COM (component object model) standard,
which competes with the Object Modeling Group's CORBA (common object request
broker architecture) standard. Components that the Company expects to release
prior to the end of 1998 retain this tight association and reliance on
Microsoft's COM standard. There can be no assurances that sales of the
Company's current or future products will meet the Company's expectations, due
to various factors. The Company may introduce products later to market than
expected or later to market than competitors' introductions, or
5
<PAGE>
competitors may introduce competitive products at lower prices. The acceptance
of the Company's products are dependent in part on the continued adoption of
the Internet as the new computing paradigm, and the continued growth of
Microsoft's visual development environment and languages. For example, if
Object Modeling Group's CORBA standard grows in popularity, reliance and
demand for COM-based products could decline dramatically. This in turn would
adversely affect the Company's financial condition and its results of
operation would be materially and adversely affected.
Periodically, the Company expects to make announcements regarding new
product releases and product updates. Such announcements are made for the
purpose of providing customers with a general idea of the expected
availability of products for planning purposes, and are based upon estimates
and are not a prediction of the exact availability date for such products.
Some new products are based on technology from third parties, and the Company
has limited control over whether and when these technologies may be enhanced.
The failure or delay in enhancements of technology from third parties could
have a material adverse effect on the Company's ability to develop and enhance
its products. Due to the inherent uncertainties of software development, it is
likely that such situations will occur from time to time in the future.
Moreover, the loss of key employees may increase the risk of delays in product
availability from timeframes originally anticipated. Consequently,
announcements regarding the Company's expectations of when products may ship
should not be considered a prediction by the Company that the products will
ship in any particular quarter or otherwise be relied upon by investors as a
basis for predicting the Company's results for any future period. Delays in
the shipment of such products and product enhancements will have a material
adverse impact on the Company. Without the introduction of such new products,
the Company's products may become technologically outdated, and as a result
the Company's business, operating results and financial condition could be
materially adversely affected. There can be no assurance that the future
development and marketing efforts by the Company will be successful.
Evolving Markets and Standards. The Company's current products are designed
for use by professional software developers who primarily rely on Microsoft
Visual Programming Languages to program in a variety of environments,
including multi-tier client-server, Internet, intranet, and extranet
environments. Although the component method of programming is in its infancy,
the Company believes the market for third-party components and application
frameworks (reusable software components and business objects assembled in a
framework architecture incorporating limited business logic and/or
functionality) is expanding. As such, the Company's growth depends upon
continued market acceptance of reusable, object-oriented components and
application framework technology. Additionally, because the Company's products
are based on the Microsoft's COM and DCOM (distributed component object model)
standards, continued market acceptance of, and adherence to, these standards
is critical to the Company's future growth. In the event that the Object
Modeling Group's CORBA standard or another standard increases in market
acceptance or emerges as the market standard, reliance on and demand for COM-
based products could diminish. This would have a material adverse affect on
the Company's business, operating results and financial condition.
There can be no assurance that the object-oriented programming market in
general, or the component market in particular, will gain further acceptance
in the near future or at all. Additionally, the Company's distributed object
solutions are designed specifically for use in Web-based applications
involving the Internet, intranets and/or extranets. Because critical issues in
the industry concerning implementing Web-based initiatives, including
security, reliability, cost, ease of use, access and quality of service remain
unresolved, the growth of applications targeting the Internet is uncertain and
difficult to predict.
The markets for the Company's products are relatively new and still
evolving, and accordingly it is difficult to assess or predict with any
assurance the size or growth rate, if any, of these markets. There can be no
assurance that markets for the Company's products will develop, or that the
Company's products will be accepted. If these markets fail to develop, develop
more slowly than expected, or attract new competitors, or if the Company's
products do not achieve market acceptance, the Company's business, operating
results and financial condition could be materially adversely affected. Even
if broader market acceptance is achieved, the reusable component market may
continue to be characterized by numerous competitors in the areas of tools,
methodology and services. In addition, in the event COM-based programming
loses market acceptance to CORBA or to another
6
<PAGE>
standard, or be replaced by another programming language, the Company's
business, financial condition and results of operations could be materially
and adversely affected. Because the Company's strategy is to develop
standards-based products, and these standards are relatively new, not widely
accepted and compete with other emerging standards, to the extent that these
standards are not commercially successful, this will have a material adverse
affect on the Company's business, operating results and financial condition.
Competing or alternative technologies are being, or are likely in the future
to be, promoted by current and potential competitors of the Company, some of
which have well-established relationships with current and potential customers
of the Company. Some of these current and potential competitors have extensive
knowledge of the markets served by the Company, better name recognition and
more extensive development, sales and marketing resources than the Company. To
the extent these organizations actually become competitors to the Company,
they may prove to materially and adversely affect the Company's business,
financial condition and results of operations.
Dependence on Microsoft. The Company's current products comply with
Microsoft's COM, DCOM and COM+ standards and have been designed specifically
for professional developers who utilize primarily Microsoft Visual Development
Languages and, to a lesser extent, Inprise's programming language, Delphi(R).
To the extent that Microsoft changes its visual programming languages, changes
its programming standards, withholds information regarding such changes or
other changes to its Windows(R) or Windows NT(R) operating systems, changes
the manner in which it markets its visual development languages or component
standards, or does not provide the Company with pre-release information about
such changes, the Company could be adversely impacted. Such impacts could
result in the delay of the release of the Company's products, the Company's
cost of developing products could be significantly increased, and the Company
may be required to expend significant resources to modify its marketing and
sales priorities and direction.
Limited Product Distribution. The Company's future revenues from product
sales are substantially dependent upon the Company's ability to successfully
market and sell its products. The Company currently sells its products solely
by utilizing electronic software distribution ("ESD") via its Web site.
Through September 30, 1998, Company sales of its products via its Web site
have been limited, generating insignificant revenues. Although the Company
believes that the use of the Internet for software sales and distribution will
continue to grow, the Company acknowledges the need to increase its internal
sales staff, and to market and distribute its products through resellers and
integrators and other channels in order to increase sales. There can be no
assurance that the Company will be successful in attracting and retaining such
sales professionals, or in establishing a channel of resellers and
integrators. Failure to accomplish any of these tasks could materially and
adversely affect the Company's financial condition and results of operation.
In addition, the Company has entered into distribution relationships with
Digital River Inc. and Earth Web Inc., and intends to explore additional
third-party partnerships with other independent software vendors ("ISVs") and
explore co-marketing arrangements. There can be no assurance that such
relationships will increase product sales through these channels or that the
Company will be successful in entering into further distribution relationships
or that such relationships will prove beneficial to the Company.
Uncertainties Regarding Component Product Positioning. The current standard
in the component industry is to sell bundled tools and components in a "class
library" consisting of numerous products, whereas the Company's marketing
strategy for its software components is, among other things, to sell
individual components at a lower unit cost than the bundled products. There
can be no assurances such product positioning will be accepted in the
marketplace. To the extent that the Company's non-bundled products do not
achieve market acceptance, the Company may be required to significantly reduce
the individual price per component to make the product more attractive, or may
be required to develop additional products to offer as a bundled library. In
either event, the Company's financial performance could be materially
adversely affected.
Uncertainty of Future Operating Results; Fluctuations in Quarterly Operating
Results. As a result of the Company's limited operating history and the
emerging nature of the markets in which it competes, the Company is unable to
forecast accurately its revenues. The Company's current and future expense
levels are based largely on its product development plans and are to a large
extent fixed. Revenues from consulting engagements tend to fluctuate as
consulting contracts, which may extend over several months, are undertaken,
renewed, completed or
7
<PAGE>
terminated. Product revenue is difficult to forecast due to the fact that the
Company to date has not generated significant material revenue from its
individual software component sales. The Company also has not determined what
the average sales cycle, from initial evaluation to purchase, will be for
future sales. Sales and operating results generally depend on the volume of,
timing of and ability to fulfill orders received, which are difficult to
forecast. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues in relation to the Company's planned expenditures would
have an immediate adverse effect on the Company's business, prospects,
financial condition and results of operations. Further, as a strategic
response to changes in the competitive environment, the Company may from time
to time make certain pricing, service or marketing decisions that could have a
material adverse effect on its business, prospects, financial condition and
results of operations.
The Company may experience significant fluctuations in its quarterly
operating results due to a variety of factors, many of which are outside the
Company's control. Future operating results will depend upon many factors,
including the timing of consulting engagements and payment terms, demand for
the Company's products and services, the level of product and price
competition in the industry, the length of the Company's sales cycle, the
budget cycles of the Company's customers, the timing of new product
introductions and product enhancements, the mix of products and services sold,
activities of and acquisitions by competitors, changes in pricing policy by
the Company and its competitors, analysts' reports about the Company, its
components and application framework technology, the hiring new employees, the
ability of the Company to develop and market new products and control costs,
and general economic conditions and economic conditions specific to the
Internet, on-line commerce and the software component industry in general.
Competition. The market for software consulting and contract
development/software system design services is extremely competitive. The
principal competitive factors in this market are thoroughness and ingenuity of
solution proposed and responsiveness to client proposal requests, and to a
lessor degree, reputation and price. Many of the Company's competitors in the
consulting arena have substantially greater financial, management, marketing
and technical resources than the Company. There can be no assurance that the
Company will be able to compete successfully against current and future
competition, and the failure to do so would have a material adverse effect
upon the Company's business, operating results and financial condition.
The market for the Company's reusable software components is intensely
competitive, subject to rapid change and significantly affected by new product
introductions and other market activities of industry participants. The
Company's current products are targeted at professional software developers
who program using primarily Microsoft Visual Programming Languages. The
Company's competitors offer a variety of products and services to address this
market. The Company believes that the principal competitive factors in this
market are product quality, flexibility, performance, functionality and
product features, use of standards-based technology, quality of support and
service, company reputation and price. While price is less significant than
other factors for corporate customers, price can be a significant factor for
individual developers. Direct and indirect competitors in the component market
include Microsoft, RogueWave Software, Inc., Progress Software Corporation, KL
Group, Inc. and others, and the Company expects to face significant
competition in the future from these and other companies. Most of these
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources, name recognition and larger
installed bases of customers than the Company. Additionally, many of these
current and potential competitors have well-established relationships with
potential customers of the Company, have extensive knowledge of the markets
serviced by the Company's customers, more extensive development, sales and
marketing resources and are capable of offering single vendor solutions. As a
result, the Company's competitors may be able to respond more quickly to new
or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products
than the Company. Certain competitors have been known to license software for
free to gain a competitive advantage. Such competition could materially
adversely affect the Company's ability to sell products on terms favorable to
the Company. There can be no assurance that the Company will be able to
compete successfully against current and future competition, and the failure
to do so would have a material adverse effect upon the Company's business,
operating results and financial condition.
8
<PAGE>
The Company also faces competition from other software vendors, systems
integrators and internal development efforts. Many of these competitors
possess industry-specific expertise that may enable them to offer a single
vendor solution more easily, and already have a reputation among potential
customers for offering enterprise-wide solutions for software programming
needs. There can be no assurance that these third-parties, most of whom have
significantly greater resources than the Company, will not market competitive
software business solutions in the future. It is also possible that new
competitors or alliances among competitors will emerge and rapidly acquire
significant market share. The Company also expects that competition will
increase as a result of software industry consolidation. Increased competition
may result in price reductions, reduced gross margins and loss of market
share, any of which could materially and adversely affect the Company's
business, operating results and financial condition. There can be no assurance
that the Company will be able to compete successfully against current and
future competitors or that competitive pressures faced by the Company will not
materially and adversely affect its business, financial condition and results
of operations.
The advent of the Internet as a computing, communication and collaboration
platform, as well as a low-cost and efficient distribution on-line service and
electronic commerce vehicle, increases competition and creates uncertainty as
to future directions this technology will ultimately take. The Company faces
intense competition in the development and marketing of Web-based COM, DCOM
and COM+ software components and business solutions from a wide variety of
companies. There can be no assurances that the Company will be able to compete
effectively for business opportunities as they arise on the Internet, on-line
services, electronic commerce and other emerging areas.
Dependence on Consulting Engagements for Product Research and Development
and Marketing Research. The Company's strategy depends in part on its
continued ability to use its consulting engagements as a research and
development opportunity for products the Company might market in the future.
The Company generally negotiates its consulting agreements to enable the
Company to retain intellectual property rights to portions of the software
being developed, while the client retains rights to the entire program
developed. If the Company is not successful in growing its consulting
business, is not able to negotiate consulting agreements which allow the
Company to retain rights to portions of the developed software, or the needs
of the Company's consulting customers do not create opportunities for creating
marketable products, the Company may be required to expend significant amounts
of resources, or contract with third-parties, to perform research and
development for new product offerings, which could materially and adversely
affect the Company's financial condition and results of operation. The Company
also utilizes its consulting services for its marketing research. However, the
needs of the Company's consulting customers may not be representative of the
needs of the professional software developer community in general, and there
can be no assurances that the Company will be successful in obtaining
sufficient information through its consulting services to be able to develop
software components and application frameworks that are desirable to
professional software developers and corporate application programmers. To the
extent that the Company's consulting services, or other internal research or
marketing methods, are insufficient for such purposes, the Company may be
required to expend significant amounts of resources, or contract with third-
parties, to obtain the necessary market research information necessary to
validate new products or the positioning the Company proposes, which could
materially and adversely affect the Company's financial condition and results
of operation.
Rapid Technological Change. To remain competitive, the Company must develop
new products, while enhancing and improving its existing products and
components. Web-centric software tools are characterized by rapid
technological change, changes in user and customer requirements and
preferences, frequent new product and service introductions embodying new
technologies, and the emergence of new industry standards and practices that
could render the Company's existing proprietary technology and systems
obsolete. The Company's success will depend, in part, on its ability to
develop or license state-of-the-art technologies, enhance its existing
services, develop or acquire new services and technologies that address the
increasingly sophisticated and varied needs of its prospective customers, and
respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis. There can be no assurance that
the Company will be successful in continuing to develop and market on a timely
and cost-effective basis fully functional product enhancements or new products
that respond to technological advances by others, or that its enhanced and new
products will
9
<PAGE>
achieve adequate market acceptance. If the Company is unable, for technical,
legal, financial or other reasons, to anticipate or respond adequately to
changes in technology and customer preferences, significant delays in product
development or introduction would have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Growth of Internet/Intranet/Extranet Software
Applications. The Company's product strategies focus on supporting
professional software developers programming Internet, intranet and/or
extranet-related applications using any of the visual development languages
available, including Microsoft's Visual Programming Languages and Inprise
Corporation's ("Inprise") Delphi(R). Accordingly, revenues derived from the
Company's products and consulting services will depend in large part upon the
rate of adoption by businesses and end-users of the Internet, intranets, and
extranets for commerce and communications. Many of the critical issues
concerning the Internet, including security, reliability, cost, ease of use,
access and quality of service, remain unresolved at this time, hindering
adoption by many enterprises and end-users. To the extent the Internet,
intranets, and in turn extranets, are not widely used by businesses and end-
users, there would be a corresponding material adverse effect on the Company's
business, operating results and financial condition. The Company's recent
entry into these markets is subject to a number of risks, including among
others, the Company's inexperience in these markets, the new and evolving
nature of these markets, the Company's need to make choices regarding the
visual development languages and standards on which to focus, the ongoing
transition of and investment of resources for this segment by the Company, the
Company's limited market credibility in this area, and the presence of several
very large and well-established businesses, as well as a number of smaller
very successful companies, already competing in this market. There can be no
assurance that sales in these markets will meet the Company's objectives, in
which case the Company's business, operating results or financial condition
could be materially adversely affected.
Reliance on Management and Key Personnel; Changes in Management. The
Company's future performance depends in significant part upon the continued
service of its key technical personnel and senior management. The loss of the
services of one or more of the Company's executive officers or key technical
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has entered into
employment agreements with certain of its executive officers and key
personnel. See "MANAGEMENT--Executive Compensation and Other Information--
Employment Contracts." Generally, these agreements are for a term of one year
and may be renewed for successive one-year terms. Additionally, the Company is
continually seeking to expand the capabilities of its management team by
adding new executives or replacing current executives. In early October 1998,
Ryan Smith and John Guarino, each a former director and the Company's former
chief executive officer and senior executive vice president, respectively,
resigned from their positions with the Company, and the Company hired Matthew
Schiltz as consultant to the Company and to serve as interim chief executive
officer. Effective on October 27, 1998, the Company appointed Steve Wollach,
the Company's Chief Financial Officer and Director, to serve as the Company's
President as part of an internal reorganization being effected by the Company
and to replace Mr. Schiltz. Mr. Schiltz has agreed to continue to serve as an
advisor to the Company through June 1999. In addition, the Company hired Dale
Western as the Company's Vice President of Engineering and Development. The
Company expects that there may be additional additions to or changes in
management in the future. The cost and management time expended in expanding
the capabilities of the management team and the resulting change in management
structure could have a material adverse affect on the Company, its product
launches and business strategy and its operating results.
Control by Existing Shareholders. Approximately 49.1 percent of the
outstanding shares of Common Stock as of February 8, 1999 are owned by current
and former directors and officers of the Company or their respective
affiliates. Assuming exercise in full of all the Warrants for which Shares are
being offered in this Prospectus, such persons would own approximately 45.9
percent of the then-outstanding shares of Common Stock. All such shareholders,
if they were to vote together, could significantly influence the outcome of
matters submitted to a vote of the Company's shareholders, including the
election of directors to the Company's Board of Directors. Shareholders do not
have the right to cummulate votes in the election of directors and do not have
preemptive rights. See "PRINCIPAL SHAREHOLDERS" and "DESCRIPTION OF
SECURITIES."
10
<PAGE>
Software Defects and Liability Claims. Software products frequently contain
errors or defects, especially when first introduced or when new versions or
enhancements are released. There can be no assurance that, despite testing by
the Company, third-parties and potential customers, defects and errors will
not be found in current versions, new versions or enhancements after
commercial shipments begin, resulting in the loss of revenues, delay in market
acceptance or unexpected re-programming costs, which could have a material
adverse effect upon the Company's business, operating results and financial
condition.
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective
as a result of existing or future federal, state or local laws or ordinances
or unfavorable judicial decisions. A successful product liability claim
brought against the Company could have a material adverse effect upon the
Company's business, operating results and financial condition.
Proprietary Rights, Risks of Infringement. The Company relies primarily on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect its proprietary rights. The
Company also believes that factors such as the technological and creative
skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are essential
to establishing and maintaining a technological leadership position. The
Company seeks to protect its software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. There can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. There can be no assurance
that the Company's means of protecting its proprietary rights in the United
States or abroad will be adequate or that competition will not independently
develop similar technology.
The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in the
Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
the Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company, if at all. In the event of a successful claim of product
infringement against the Company and failure or inability of the Company to
license the infringed or similar technology, the Company's business, financial
condition and results of operations would be materially and adversely
affected.
Risks Associated with Potential Acquisitions. As a part of the Company's
business strategy, the Company intends to review acquisition prospects that
would complement the Company's consulting services or existing product
offerings, augment the Company's market coverage or enhance its technological
capabilities, or that may otherwise offer growth opportunities. Although the
Company does not have current agreements or negotiations underway with respect
to any such acquisitions, the Company may make acquisitions of businesses,
products or technologies in the future. Future acquisitions by the Company
could result in potentially dilutive issuances of equity securities, the
incurrence of debt, contingent liabilities and/or amortization expenses
related to goodwill and other intangible assets, any of which could materially
adversely affect the Company's operating results and/or the market price of
the Common Stock. Acquisitions entail numerous risks, including difficulties
in the assimilation of acquired operations, technologies and products,
diversion of management's attention to other business concerns, risks of
entering markets in which the Company has no or limited prior experience and
potential loss of key employees of acquired organizations. Shareholders do not
generally have rights to approve any such acquisitions other than as required
by Washington Corporate law. No assurance can be given as to the
11
<PAGE>
ability of the Company to successfully integrate any businesses, products,
technologies or personnel that might be acquired in the future, and the
failure of the Company to do so could have a material adverse effect on the
Company's business, financial condition and operating results.
Year 2000 Issues. Many companies are currently expending significant
resources in order to address the "Year 2000" issue. Expenditures to address
the Year 2000 issue often involve the modification of legacy and other
existing software systems rather than the development of new systems. Because
of the size of such expenditures, companies may defer or cancel other new
software development projects for which such companies might otherwise have
purchased products from the Company or engaged the Company for consulting. Any
reductions in revenues to the Company resulting from other companies focus on
the Year 2000 issue could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company has commenced a review of its internal information systems. The
objective of the review is to address necessary code changes, testing and
implementation with the objective of taking corrective action based on the
results of such review. In addition, the Company could be materially and
adversely affected by costs or complications relating to code changes, testing
and implementation for its own systems or similar issues faced by its
distributors, suppliers, customers, vendors and the financial service
organizations with which the Company interacts. At this time, the Company has
not yet determined the cost related to achieving Year 2000 compliance.
The Year 2000 issue could affect the products that the Company sells. The
Company has reviewed its current products and believes that its products are
Year 2000 compliant. However, to the extent that the Company's products prove
to be non-compliant, or in the event of any dispute with any customer
regarding whether the Company's products are compliant, the Company's
business, results of operations and financial condition could be materially
and adversely affected.
Recruiting and Retaining Technical Personnel. The success of the Company
depends in large part upon the ability of the Company to recruit and retain
highly skilled software engineers and programmers, both as employees and as
independent contractors. The Company's consulting division relies primarily on
independent contractors and subcontractors to perform services in connection
with its consulting engagements. If the Company is unsuccessful in obtaining
skilled independent contractors and subcontractors for its consulting
engagements, the Company may be unable to perform the contracts on a timely
basis and may be unable to bid for contracts which it cannot perform with
employees. Additionally, the Company believes that the technological and
creative skills of its personnel are essential to establishing and maintaining
a leadership position, particularly in light of the fact that its intellectual
property, once sold to the public market, is easily replicated. The
competition for such personnel is intense, and there can be no assurance that
the Company will be successful in retaining or recruiting such personnel. In
seeking qualified personnel, the Company is required to compete with companies
having greater financial and other resources than the Company. In addition,
the Company has had to, and may continue to be required to, increase
substantially the compensation, bonuses, stock options or other fringe
benefits offered to employees in order to attract and retain such personnel.
Effective in November, 1998, the Company reorganized and reduced its employee
base. Such reorganization may also make recruiting new talented employees more
difficult and costly. The additional costs that may be incurred in retaining
or attracting new personnel may have a material adverse affect on the Company,
its product launches and its operating results.
No Dividends. The Company does not intend to declare any dividends on the
Common Stock in the foreseeable future.
Anti-takeover Effect of Certain Provisions of Articles of Incorporation. The
Company's Articles of Incorporation authorize the Board of Directors to issue
up to 10,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the shareholders. The rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in
12
<PAGE>
control of the Company without further action by the shareholders and may
adversely affect the voting and other rights of the holders of Common Stock.
The Company has no present plans to issue shares of preferred stock. Further,
certain provisions of the Company's Articles of Incorporation and Bylaws and
provisions of Washington law, including the presence of a staggered Board of
Directors, could delay or make more difficult a merger, tender offer or proxy
contest involving the Company. See "DESCRIPTION OF CAPITAL STOCK."
Possible Adverse Effect of Outstanding Warrants and Options. As described in
this Prospectus, there are currently approximately 978,401 shares of Common
Stock reserved for issuance upon the exercise of the Warrants (at a weighted
average exercise price of approximately $3.01 per share), and an aggregate of
2,000,000 shares of Common Stock reserved for issuance upon exercise of
options that may be granted under the Company's 1998 Stock Option Plan. As of
February 8, 1999 the Company had granted stock options to purchase up to an
aggregate of 1,648,750 shares of Common Stock at a weighted average exercise
price of approximately $1.40 per share. In connection with the Company's
recent restructuring, which included a reduction in the number of employees,
the Company repriced all outstanding stock options held by continuing
employees and directors to $1.406 per share, the last trade price of the
Common Stock on November 4, 1998. To the extent that any outstanding Warrants
or options are exercised, holders of Common Stock will be diluted. In
addition, any sales in the public market of the shares underlying such
Warrants or options may adversely affect prevailing market prices for the
Common Stock and may adversely affect the Company's ability to obtain
additional equity financing. See "DESCRIPTION OF SECURITIES."
Shares Eligible for Future Sale. As of the date of this Prospectus, there
are 14,708,927 shares of Common Stock outstanding, of which 1,946,617 Shares
are being offered hereby (exclusive of 978,401 shares issuable upon exercise
of the Warrants and which are also being registered hereby). There are
currently 5,165,526 previously issued shares that are freely tradable without
restriction or further registration under the Securities Act. Other than the
Shares being registered hereunder, the Company has not granted any
registration rights with regard to any additional shares of Common Stock. All
of the remaining 7,596,784 shares of Common Stock outstanding are "restricted
securities," as that term is defined under Rule 144 promulgated under the
Securities Act and will become eligible for sale, pursuant to Rule 144
commencing on various dates following the date of this Prospectus. No
prediction can be made as to the effect, if any, that sales of shares of
Common Stock or even the availability of such shares for sale will have on the
market prices prevailing from time to time. The possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
the prevailing market price for the Common Stock and could impair the
Company's ability to raise capital through the sale of its equity securities.
See "SHARES ELIGIBLE FOR FUTURE SALE."
Extreme Volatility of Stock Price. Like other software and high technology
companies, the market price of the Company's Common Stock has been and may
continue to be extremely volatile. Since the Common Stock began listing on the
OTC Bulletin Board in September 1997, the bid price of the Common Stock has
ranged from a high of $9.94 to a low of $0.9375. Factors such as quarterly
fluctuations in the Company's results of operations, the announcement of
technological innovations or the introduction of new products by the Company
or its competitors, and general conditions in the computer software and
hardware industries may have a significant impact on the market price of the
Common Stock. In addition, the stock market in general has experienced extreme
price and volume fluctuations that have affected the market price for many
companies in industries similar or related to that of the Company and that
have been unrelated to the operating performance of these companies. These
market fluctuations may materially and adversely affect the market price of
the Common Stock.
No Assurance of Public Market; Failure to Gain Listing on The Nasdaq
SmallCap Market; Risks Relating to Low-Priced Stocks. The Common Stock is
currently traded on the OTC Bulletin Board. There can be no assurance that a
regular trading market will develop or be sustained after the date of this
Prospectus. Following the date of this Prospectus, at such time that the
Company meet the initial listing requirements, the Company intends to apply
for listing on The Nasdaq SmallCap Market ("NASDAQ"). The minimum listing
requirements to qualify for listing on NASDAQ include generally either $4
million in net tangible assets (total assets,
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<PAGE>
excluding goodwill, less total liabilities), $750,000 in net income or $50
million in market capitalization, and a $5 million market value of the public
float. In addition, initial listing also requires three market makers and a
minimum bid price of $4.00 per share. In order to continue to be listed on
NASDAQ, the Company must maintain either $2 million in net tangible assets or
$500,000 in net income, and a $4 million market value of its public float. As
of the date of this Prospectus, the Company does not satisfy the initial
listing requirements for listing on NASDAQ. If the Company is not able to
apply for listing on NASDAQ or is not accepted for listing on NASDAQ, the
Common Stock will continue to be traded on the OTC Bulletin Board. In
addition, if the Company is subsequently listed on NASDAQ and fails to meet
the maintenance criteria, the Company's securities would be delisted from
NASDAQ, and trading, if any, in the Company's securities would thereafter be
conducted on the OTC Bulletin Board. For as long as the Common Stock is traded
on the OTC Bulletin Board, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the market value of, the Common
Stock than if it were listed on NASDAQ.
For as long as the Common Stock is traded on the OTC Bulletin Board and the
trading price of the Common Stock is below $5.00 per share, trading in such
securities will be subject to the requirements of certain "penny stock" rules
promulgated under the Exchange Act. These rules require additional disclosure
to investors by broker-dealers in connection with any trades involving a stock
defined as a penny stock (generally, any non-NASDAQ equity security that has a
market price of less than $5.00 per share, subject to certain exceptions).
Such rules require that, prior to any penny stock transaction, the broker-
dealer deliver to the investor a disclosure statement explaining the penny
stock market and the associated risks with the market. The rules also impose
sales practice requirements on broker-dealers who sell penny stocks to persons
other than to established customers or accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in the Company's securities, which
could severely limit the market price and liquidity of such securities and the
ability of purchasers to sell any of the Shares acquired in this offering in
the secondary market.
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<PAGE>
USE OF PROCEEDS
All of the Shares offered hereby are being offered by the Selling
Shareholders. The Company will not receive any of the proceeds from the sale
of the Shares. See "SELLING SHAREHOLDERS." Assuming exercise in full of the
Warrants, the Company would receive approximately $2,941,604 upon such
exercise, which would be used for general corporate purposes and working
capital. The Warrants are currently out of the money and until the trading
price for the Common Stock is greater than the exercise price for the
Warrants, the Company does not expect the Warrants to be exercised.
SELLING SHAREHOLDERS
The following table sets forth certain information about the Selling
Shareholders, including the number of shares of Common Stock being registered
hereunder and that may be offered for sale from time to time by the Selling
Shareholders. The Shares listed below consist of 1,946,617 shares of Common
Stock that are currently issued and outstanding, and 978,401 shares of Common
Stock that are subject to certain outstanding Warrants and that may be issued
upon exercise of such Warrants. Except as noted below, the Shares offered for
sale constitute all of the shares of Common Stock known to the Company to be
beneficially owned by the respective Selling Shareholders, and following the
offering and sale of the Shares, to the best of the Company's knowledge, none
of the Selling Shareholders will beneficially own more than one percent of the
issued and outstanding shares of Common Stock. In addition, other than as
described below, none of the Selling Shareholders has held any position or
office with the Company or had or have any material relationship with the
Company.
Of the 2,925,018 Shares being offered hereunder on behalf of the Selling
Shareholders, 1,534,010 shares were originally issued and sold to certain
foreign investors in a private offering in May 1998 at a price of $4.00 per
share, 112,607 shares were issued upon conversion of certain Company debt in
September 1997 at a conversion rate of $.65 per share, 200,000 shares were
issued in May 1998 as consideration for consulting services to the Company at
a deemed price per share of $4.00 and the Company issued 100,000 shares at a
price of $1.50 per share upon exercise of warrants granted in September 1997
as part of a Company financing. In addition, this Prospectus includes 978,401
shares of Common Stock issuable upon exercise of certain outstanding Warrants
granted by the Company to various third-parties in 1998 in consideration for
services provided to the Company. The Warrants consist of the following: (i)
warrants for 200,000 shares granted to Berliner Freiverkehr AG in April 1998
at an exercise price of $4.00 per share (the "Berliner Warrant") in
consideration for financial consulting services valued at approximately
$77,000 rendered to the Company in Germany; (ii) warrants for 500,000 shares
granted to National Day Corporation in May 1998 at an exercise price of $4.00
per share (the "National Day Warrant") in consideration for its efforts and
assistance in raising capital for the Company, in providing certain short-term
bridge loans to the Company, and making introductions to foreign brokers and
investors, which services were valued at approxmiately $50,000; (iii) warrants
for 153,401 shares granted to certain foreign brokers and their affiliates in
May 1998 at an exercise price of $4.00 per share (the "Brokers' Warrants") in
consideration for their assistance in connection with the Company's private
offering of Common Stock to foreign investors in May 1998, which services were
valued at approximately $15,340; and (iv) warrants for 175,000 shares granted
to GlobeMedia AG in June 1998 at an exercise price of $4.00 per share (the
"GlobeMedia Warrants") in consideration for certain media, marketing and
publication relation services for the Company in Europe, which services were
valued at approximately $22,500. See "DESCRIPTION OF SECURITIES."
Subsequently, in January 1999, the Company repriced the National Day Warrant
to an exercise price of $1.406 per share, in consideration for on-going
consulting services performed by the consultant. The Warrants, other than the
National Day Warrant, are currently out of the money. If the market price of
the Common Stock does not exceed the applicable exercise prices for the
Warrants, the Company does not believe that any such Warrants will be
exercised.
The Company has agreed with each of the Selling Shareholders, pursuant to
the terms of the Warrants, the purchase agreements by which certain of the
Selling Shareholders acquired their Shares and otherwise, to use its best
efforts to register the Shares. Pursuant to these arrangements, the Company
will pay all expenses in connection with the registration and sale of the
Shares, except any selling commissions or discounts allocable to sales of the
Shares, fees and disbursements of counsel and other representatives of the
Selling Shareholders, and any stock transfer taxes payable by reason of any
such sale.
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The following tables set forth certain information about the Selling
Shareholders:
Shares Issuable Upon Exercise of Outstanding Warrants
<TABLE>
<CAPTION>
Number of Shares
Underlying Warrants
Beneficially Owned Number of Shares
Name of Selling Shareholder Before Offering Offered for Sale
- --------------------------- ------------------- ----------------
<S> <C> <C>
National Day Corporation.................. 629,057 500,000
Berliner Freiverkehr AG................... 200,000 200,000
GlobeMedia AG............................. 125,000 125,000
Alexander Nill............................ 26,700 26,700
Jan Nicolaus Voswinckel................... 1,000 1,000
Stefan Kallabis........................... 11,625 11,625
Martin Lechner............................ 13,545 13,545
Thorsten Wagner........................... 5,000 5,000
ACP Venture AG............................ 5,500 5,500
International Investment Management
Limited.................................. 25,000 25,000
Nick Nugent............................... 25,000 25,000
Value Management & Research GmbH.......... 25,000 25,000
Walter Edgar Seiz......................... 3,977 3,877
Simon Ford................................ 3,877 3,877
Edward C. Henschel........................ 3,877 3,877
ECM Securities Services GmbH.............. 3,400 3,400
--------- -------
TOTAL:.................................. 1,107,558 978,401
========= =======
Shares Issued in Debt Conversion
<CAPTION>
Number of Shares
Beneficially Owned Number of Shares
Name of Selling Shareholder Before Offering Offered for Sale
- --------------------------- ------------------- ----------------
<S> <C> <C>
Thad E. Wardall........................... 1,152,607 112,607
--------- -------
TOTAL:.................................. 1,152,607 112,607
========= =======
</TABLE>
Thad E. Wardall is a director of the Company. In September 1996, the Company
borrowed $125,000 from Mr. Wardall evidenced by a secured promissory note.
Subsequently, in August 1997, the Company cancelled the promissory note and
reissued to Mr. Wardall a new convertible promissory note for the outstanding
principal on the prior note. In October 1997, Mr. Wardall converted the
principal plus accrued interest on the new note into 112,607 shares of Common
Stock, which shares are being registered for resale hereunder. Following the
offering of all of the Shares hereunder (including the shares issuable upon
exercise of the Warrants), Mr. Wardall will beneficially own approximately
6.9% of then issued and outstanding shares of Common Stock. See "MANAGEMENT"
and "PRINCIPAL SHAREHOLDERS."
Shares Issued for Consulting/Financing Services
<TABLE>
<CAPTION>
Number of Shares
Beneficially Owned Number of Shares
Name of Selling Shareholder Before Offering Offered for Sale
- --------------------------- ------------------ ----------------
<S> <C> <C>
Starward Securities, Ltd. .................. 208,386 200,000
Matrix Securities Pty., Ltd. ............... 121,700 100,000
--------- ---------
TOTAL:.................................... 330,086 300,000
========= =========
</TABLE>
Shares Issued in May 1998 Private Placement
<TABLE>
<CAPTION>
Number of Shares
Beneficially Owned Number of Shares
Name of Selling Shareholder Before Offering Offered for Sale
- --------------------------- ------------------ ----------------
<S> <C> <C>
Bankers Trust International PLC............. 500,000 500,000
Prime Asset Management Ltd.................. 100,000 100,000
Bank Vontobel & Co. AG...................... 145,000 145,000
Oyster SICAV-Europe Value................... 80,000 80,000
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Beneficially Owned Number of Shares
Name of Selling Shareholder Before Offering Offered for Sale
- --------------------------- ------------------ ----------------
<S> <C> <C>
ACP Ventures AG............................. 55,000 55,000
Alexander Nill.............................. 55,000 55,000
Dieter Nill................................. 50,000 50,000
Sigi Piel................................... 50,000 50,000
VMR Fund-Strategie Quadrat.................. 50,000 50,000
Thorsten Wagner............................. 50,000 50,000
Martin Lechner.............................. 30,000 30,000
Karsten Schiebler........................... 27,500 27,500
Abakus Fonds UI............................. 25,000 25,000
Patrik Cohn................................. 25,000 25,000
VMR Fund-Shareholder Value.................. 20,000 20,000
Fred Kompauer............................... 15,000 15,000
Peter Gorg.................................. 10,000 10,000
Joachin Paech............................... 10,000 10,000
Mathias von Marcard......................... 8,000 8,000
Rudolf Fichtner............................. 7,900 7,900
Siegfried Piel.............................. 7,500 7,500
Dr. Olaf Hein............................... 7,000 7,000
Claes Smith-Solbakken....................... 5,000 5,000
Eckbrecht Belka............................. 5,000 5,000
Dr. Hans-Christian Donnerstag............... 5,000 5,000
Markus Gies................................. 5,000 5,000
Maria Gies.................................. 5,000 5,000
Aloys Korioth............................... 5,000 5,000
Gunter Kramer............................... 5,000 5,000
Norbert Tingelhoff.......................... 5,000 5,000
Leonhard Teutrine........................... 5,000 5,000
Ernst Wild.................................. 5,000 5,000
Christian Zehendner......................... 5,000 5,000
Bernarda Bole-Vekar......................... 4,500 4,500
Horst Bernges............................... 4,000 4,000
Kurt Koenig................................. 4,000 4,000
Ulf Lesemann................................ 4,000 4,000
Harald & Marianne Britz..................... 3,500 3,500
Dr. Ernst Fischer........................... 3,500 3,500
Gerhard and Hannelore Goldschmitt........... 3,500 3,500
Cherno Jobatey.............................. 3,500 3,500
Thorsten Wobig.............................. 3,500 3,500
Fritz Gutschmitt............................ 3,000 3,000
Wolfgang Heichel............................ 3,000 3,000
Klaus Heidenreich........................... 3,000 3,000
Gunter and Anita Hornung.................... 3,000 3,000
Dr. Rainer and Andrea Marquart.............. 3,000 3,000
Fritz Oehler................................ 3,000 3,000
Dr. Marcus Optiz............................ 3,000 3,000
Dr. Walter Reinhard......................... 3,000 3,000
Irmtraut Becker............................. 2,500 2,500
Christoph Brunning.......................... 2,500 2,500
Walter Cullmann............................. 2,500 2,500
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Beneficially Owned Number of Shares
Name of Selling Shareholder Before Offering Offered for Sale
- --------------------------- ------------------ ----------------
<S> <C> <C>
Siegfried Drautz............................ 2,500 2,500
Jurgen Gebhardt............................. 2,500 2,500
Walter Karitzki............................. 2,500 2,500
Helga Marienfeld............................ 2,500 2,500
Wolfgang Pfeiffer........................... 2,500 2,500
Schabin Sattari............................. 2,500 2,500
Thomas Schinogel............................ 2,500 2,500
Helmut Senft................................ 2,500 2,500
Hermann Huber............................... 2,110 2,110
Christoph Baer.............................. 2,000 2,000
Andreas Bernd............................... 2,000 2,000
Juergen Braun............................... 2,000 2,000
Hans Jurgen Eschmann........................ 2,000 2,000
Karin Figge................................. 2,000 2,000
Andreas Gunther............................. 2,000 2,000
Charlotta Heuer............................. 2,000 2,000
Roland und Maike Konig...................... 2,000 2,000
Kurt Kosse.................................. 2,000 2,000
Michael Roussinos........................... 2,000 2,000
Roland und Waltraut Schuster................ 2,000 2,000
Wienfried Siebert........................... 2,000 2,000
Josef Stiefvater............................ 2,000 2,000
Edwin Thoma................................. 2,000 2,000
Jurgen Wagner............................... 2,000 2,000
Ada Wilcke.................................. 2,000 2,000
Peter Nosek................................. 1,800 1,800
John Mantle................................. 1,500 1,500
Michael Karow............................... 1,100 1,100
Reiner Balzer............................... 1,000 1,000
Elisabeth Baumgartner....................... 1,000 1,000
Dieter Bidlingmaier......................... 1,000 1,000
Manfred Breu................................ 1,000 1,000
Gabriele Cuno............................... 1,000 1,000
Matthias Eckert............................. 1,000 1,000
Bernd Heimburger............................ 1,000 1,000
Guido Jesemann.............................. 1,000 1,000
Nicolaus Loibl.............................. 1,000 1,000
Ermias Mekasha.............................. 1,000 1,000
Miachel Obraczka............................ 1,000 1,000
Klaus Schumann.............................. 1,000 1,000
Frank Sommer................................ 1,000 1,000
Stefan Taubitz.............................. 1,000 1,000
Goetz Wende................................. 1,000 1,000
Thomas Haarmeyer............................ 900 900
Erhard Karle................................ 800 800
Centa Hahn.................................. 750 750
Klaus Hahn.................................. 750 750
Barbara Belka............................... 700 700
Britta Juenger.............................. 700 700
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Beneficially Owned Number of Shares
Name of Selling Shareholder Before Offering Offered for Sale
- --------------------------- ------------------ ----------------
<S> <C> <C>
Peter Scannewin............................. 600 600
Joerg George................................ 550 550
Thorsten Belka.............................. 500 500
Thomas Blum................................. 500 500
Thomas Diener............................... 500 500
Jurgen Doring............................... 500 500
Guenter Spens GmbH.......................... 500 500
Albert Hellwage............................. 500 500
Andreas Hesse............................... 500 500
Uwe Kranz................................... 500 500
Ariane Mummert.............................. 500 500
Lydia Paulussen............................. 500 500
Vermeulen-Schiffers......................... 500 500
Willi Waden................................. 500 500
Anton Jell.................................. 250 250
Walter Edgar Seiz........................... 100 100
--------- ---------
TOTAL:.................................... 1,534,010 1,534,010
========= =========
</TABLE>
19
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock. The Company currently anticipates that it will retain future earnings
for use in the operation and expansion of its business and does not anticipate
paying cash dividends on the Common Stock in the foreseeable future. Any
future determination with regard to the payment of dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
future earnings, financial condition, applicable dividend restrictions and
capital requirements and other factors deemed relevant by the Board of
Directors.
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of September 30, 1998:
<TABLE>
<CAPTION>
September 30,
1998
-------------
<S> <C>
Short-term debt............................................... $ 517,382
Long-term liabilities......................................... --
Shareholders' equity:
Common Stock, $.01 par value, 50,000,000 authorized shares
and 14,708,927 shares issued and outstanding at September
30, 1998................................................... 147,089
Preferred Stock, $.01 par value, issuable in series:
10,000,000 shares
authorized; no shares issued and outstanding............... --
Additional paid-in capital.................................. 8,450,161
Retained deficit............................................ (4,366,602)
----------
Total shareholders' equity................................ 4,230,648
----------
Total capitalization.................................... $4,748,030
==========
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
risks and uncertainties posed by many factors and events that could cause the
Company's actual business, prospects and results of operations to differ
materially from those that may be anticipated by such forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed herein as well as those discussed under the
captions "Risk Factors" and "Business" as well as those discussed elsewhere in
this Prospectus. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this
Prospectus. Readers are urged to carefully review and consider the various
disclosures made by the Company in this Prospectus that attempt to advise
interested parties of the risks and factors that may affect the Company's
business.
Overview
The Company was incorporated in the State of Washington in October 1995 and
operated under the name Neoteric Media, Inc., d/b/a Interactive Objects, until
August 1997. In August 1997, pursuant to the terms of an acquisition agreement
with Asia Pacific Chemical Engineering Corp., a publicly-held Utah corporation
with nominal assets and liabilities, Neoteric Media entered into a business
combination with APEC. In the Neoteric Acquisition, the shareholders of
Neoteric Media exchanged their stock for a majority of the then-outstanding
common stock of APEC and Neoteric Media became a wholly-owned subsidiary of
APEC (which changed its name to Interactive Objects). For accounting purposes,
the Neoteric Acquisition was accounted for as a reverse purchase, with
Interactive Objects as the continuing entity. The Company's audited financial
statements include, since August 1997, the results of APEC operations, which
were insignificant. See Note 1 of Notes to Financial Statements. The Company's
unaudited pro forma results of operations as if the APEC transaction had
occurred on January 1, 1996 are included in Note 1 of Notes to Financial
Statements. The Company had insignificant operations in 1996 and most of 1997.
Through September 30, 1998, substantially all of the Company's revenues have
been derived from its software consulting services. To date, the Company has
provided consulting services primarily for SAFECO, and has performed
consulting services on smaller projects for other corporations, including
Microsoft and Eddie Bauer. While the Company expects that revenue from its
consulting services will grow in the future, it also believes that over the
long term, revenues from its recently released and future products will become
a larger percentage of total sales. As of July 31, 1998, the Company's
consulting relationship with SAFECO concluded and the Company does not
currently expect any future revenues from SAFECO. On July 31, 1998, the
Company's latest contract with SAFECO, the fourth in a series of contracts
granted by SAFECO for various phases in the development of an Internet-based
automation program for SAFECO's insurance agents, expired by its terms and
SAFECO took over management of the project. The Company performed consulting
services for SAFECO covering approximately one year and during such period
revenues from SAFECO consulting represented substantially all of the Company's
total revenue. With the conclusion of its relationship with SAFECO, the
Company expects that consulting revenue will decrease for the second half of
1998. See "RISK FACTORS-- Concentration of Customers; Limited Marketing
Experience" and "--Uncertainty of Future Operating Results; Fluctuations in
Quarterly Operating Results."
In the first quarter of 1998, the Company released two software component
products and acquired a Novell-based software component product. Subsequent to
such acquisition, the Company decided to focus exclusively on Microsoft-based
software component products. The Company also released a suite of four
components in October 1998. The Company has until recently marketed its
products solely through the Internet. Revenue from product sales has been
insignificant to date, and there can be no assurance that the Company will be
successful in marketing its products. The Company expects product revenue to
grow; however, for the near term such revenue will continue to be a small
percentage of sales as compared to sales from software consulting services.
21
<PAGE>
Effective in early November 1998, the Company announced a Company-wide
restructuring plan. As part of this plan, the Company reduced its employee
base from 23 to 13 employees, most of whom were first-level supervisors and
administrative staff. In addition, the Company promoted Steve Wollach, the
Company's Chief Financial Officer and Director, to serve as the Company's
President to replace Matthew Schiltz, a consultant hired by the Company in
October 1998 to serve as the Company's interim chief executive officer in
connection with the resignation of Ryan Smith, the former Chief Executive
Officer of the Company. Mr. Schiltz has agreed to continue to serve as an
advisor to the Company and its Board of Directors through June 1999. In
addition, the Company also hired Dale Western as the Company's Vice President
of Engineering and Development. The Company plans to take a one-time
restructuring charge in the fourth quarter of 1998. In connection with the
Company's restructuring plan, the Company intends to take certain non-
recurring restructuring charges in the fourth quarter of 1998 in the amount of
approximately $385,000. These charges include severance payments of $60,000
paid in the fourth quarter of 1998, moving expenses of $15,000 for
consolidation of the Company's offices and a provision of up to $310,000 for
severance and settlement payments in connection with the resignations of Ryan
Smith and John Guarino from their positions as officers and directors of the
Company. See "Certain Transactions." In connection with the restructuring
plan, the Company repriced all outstanding stock options held by current
Company employees and directors to $1.406 per share, the closing trading price
of the Common Stock on the OTC Bulletin Board on November 4, 1998.
Results of Operations
Nine Months Ended September 30, 1998 and 1997
Gross Revenue. Gross revenue for the nine-month periods ended September 30,
1998 and 1997 was approximately $2,090,000 and $122,000, respectively. During
the nine-month period ended September 30, 1998, substantially all of the
Company's revenue was generated by its software consulting services. The
Company released its first product in the first quarter of 1998 and did not
make any product sales prior to January 1, 1998. The 1,713% increase in gross
revenue is attributable primarily to the Company's software consulting
agreement with SAFECO, which accounted for substantially all of the Company's
revenue in the nine-month period ended September 30, 1998. During the nine-
month period ended September 30, 1998, the Company had insignificant revenue
from product sales. In prior periods, the Company had no revenues from product
sales. See "RISK FACTORS-- Concentration of Customers; Limited Marketing
Experience" and "--Uncertainties Regarding Market Acceptance of the Company's
Products; New Product Introductions."
Labor and Benefits Expenses. Labor and benefits includes all internal labor
costs and other direct costs related to project performance, such as project
specific independent contractor fees, labor costs, supplies and specific
project related expenditures. The Company's labor and benefits expenses
increased by 1,670% from approximately $178,000 for the nine-month period
ended September 30, 1997 to approximately $2,972,000 for the nine months ended
September 30, 1998. Labor and benefits consisted exclusively of salaries,
taxes and benefits. The increase in labor and benefits expenses from the first
three quarters of 1997 to the same period in 1998 was directly attributable to
increased costs and independent contractor fees arising out of the Company's
consulting contract with SAFECO, as well as the Company's hiring of new
employees and increasing salaries to senior management. In addition, the
Company hired additional employees during the second half of 1997 and nine-
month period ended September 30, 1998 to meet increased demand and had 23
full-time employees at September 30, 1998, and increase of 16 from seven at
September 30, 1997.
At September 30, 1998, the Company had nine employees in software consulting
services and product development, eight employees in sales and marketing and
six employees in general and administrative. Subsequently, in November 1998
the Company implemented a restructuring plan, including a reduction in the
number of employees from 23 to 13 total employees. In addition, the Company
hires independent contractors to service project demand for the Company's
consulting services on a project by project basis, and expects to continue to
staff projects with independent contractors. The Company believes that
staffing client projects with independent contractors results in the Company
incurring costs that are less than those the Company would experience if
projects were internally staffed. The Company expects that it will hire
additional staff if and as
22
<PAGE>
needed to meet demand from current clients and prospective clients whose
projects are anticipated to commence within ninety days after hiring. The
Company expects that its independent contractor costs will remain relatively
constant as it takes on additional consulting contracts that offset decreases
resulting from the termination of its consulting agreement with SAFECO.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were approximately $2,563,000 and $138,000 for the
nine-month periods ended September 30, 1998 and 1997, respectively. The
amounts for the nine months ended September 30, 1998 includes approximately
$1,084,000 as a non-cash compensation expense for Company securities issued
during such period for consulting and other services. In each period, the
other expenses consisted primarily of employee recruiting, travel,
professional fees, occupancy costs, telephone and related Internet
connectivity fees, computer network costs, office expenses and supplies,
marketing, advertising and new business development costs. Overall, selling,
general and administrative expenses as a percentage of gross revenue were 123%
for the nine-month period ended September 30, 1998 as compared to 113% for the
same period in 1997. The increase in selling, general, and administrative
expenses was primarily a result of the one-time non-cash compensation expense
recorded for securities issued for consulting services and other services in
connection with the Company's financing and investor relations efforts and,
secondarily, of an increase in the Company's sales, marketing and advertising
efforts in anticipation of growth and its 1998 product releases and,
secondarily, of increased professional fees in connection with its financing
efforts in 1998 and the Company entering into a lease for additional office
space. The decrease as a percentage of gross revenue was due to the Company's
increased revenues growing at a greater rate than expenses.
Management believes that selling, general, and administrative expenses will
decrease as a percentage of gross revenue in future periods. General and
administrative expenses have increased due to increased staffing, investment
in infrastructure and associated expenses necessary to manage and support the
Company's growing operations. The Company believes that its general and
administrative expenses will increase in dollar amount for fiscal 1998 as a
result of an anticipated expansion of the Company's administrative staff
required to support its growing operations and as a result of an increase in
expenses associated with being a Exchange Act reporting company. The Company
anticipates that it will begin to devote further resources to product
development in fiscal 1998. All costs incurred in the research and development
of software products and enhancements to existing products have been expensed
as incurred and the cost of acquired software products have been capitalized.
The Company's capitalized software will be amortized as required by GAAP
principles beginning in the first quarter of 1998 when the product was
released for sale to the public.
Net Loss. The Company recognized a net loss of approximately $3,377,000
(representing 162% of gross revenue) for the nine-month period ended September
30, 1998 as compared to $204,000 (representing 167% of gross revenue) for the
comparable period in 1997. The increase in net loss on an absolute basis is
due primarily to the increased expenses described above which have been only
partially offset by increased revenues from the Company's consulting services.
Interest Expense. Interest expense represents interest expense on Company
debt. Interest expense increased to approximately $12,000 in the nine-month
period ended September 30, 1998 from $11,000 for the nine months ended
September 30, 1997, due to increased borrowings during 1998.
Years Ended December 31, 1997 and 1996
Gross Revenue. Gross revenue for fiscal 1997 and fiscal 1996 was
approximately $366,000 and $58,000, respectively. During these fiscal years,
all of the Company's revenue was generated by its software consulting
services. The 632% increase in fiscal 1997 gross revenue over fiscal 1996
gross revenue is attributable primarily to the Company's software consulting
agreement with SAFECO, which accounted for approximately $296,000 in revenue
in 1997. During fiscal 1996 and 1997 the Company had no revenue from product
sales.
23
<PAGE>
Labor and Benefits Expenses. Labor and benefits includes all internal labor
costs and other direct costs related to project performance, such as project
specific independent contractor fees, labor costs, supplies and specific
project related expenditures. The Company's labor and benefits for fiscal 1997
were approximately $787,000. The Company hired additional employees during
fiscal 1997 in connection with increasing consulting and product development
and had 23 full-time employees at December 31, 1997. The Company's labor and
benefits expenses increased by 1,174% from approximately $67,000 for fiscal
1996 to $787,000 in fiscal 1997. The increase resulted primarily from the
hiring of additional personnel, primarily in the product development and
consulting and in the sales and marketing areas. The Company grew from five
full-time employees at December 31, 1996 to 23 full-time employees at December
31, 1997.
At December 31, 1997, the Company had ten employees in software consulting
and product development, four employees in sales and marketing and nine
employees in general and administrative. In addition, the Company hires
independent contractors to service project demand for the Company's consulting
services on a project by project basis, and expects to continue to staff
projects with independent contractors. The Company believes that staffing
client projects with independent contractors results in the incurrence by the
Company of costs that are less than those the Company would experience if
projects were internally staffed. The Company expects that it will hire
additional staff if and as needed to meet demand from current clients and
prospective clients whose projects are anticipated to commence within ninety
days after hiring.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were approximately $1,256,432 and $61,000 for fiscal
1997 and fiscal 1996, respectively. In each period, these expenses consisted
primarily of employee recruiting, travel, professional fees, occupancy costs,
telephone and related Internet connectivity fees, computer network costs,
office expenses and supplies, marketing, advertising and new business
development costs. The amounts for 1997 include a one-time non-cash
compensation expense of $780,000 for the value of securities issued in
exchange for services. Overall, selling, general and administrative expenses
as a percentage of gross revenue were 344% for fiscal 1997 as compared to 106%
for fiscal 1996. This increase in selling, general, and administrative
expenses on an absolute basis and as a percentage of gross revenue was a
result of the one-time non-cash compensation expense and the Company's
increased sales, marketing and advertising in anticipation of growth and its
first quarter 1998 product releases.
Management believes that selling, general, and administrative expenses will
decrease as a percentage of gross revenue in future periods. General and
administrative expenses have increased due to increased staffing, investment
in infrastructure and associated expenses necessary to manage and support the
Company's growing operations. The Company believes that its general and
administrative expenses will increase in dollar amount for fiscal 1998 as a
result of an anticipated expansion of the Company's administrative staff
required to support its growing operations and as a result of an increase in
expenses associated with being a Exchange Act reporting company. The Company
expects that it will begin to devote further resources to product development
in fiscal 1998. All costs incurred in the research and development of software
products and enhancements to existing products have been expensed as incurred
and the cost of acquired software products have been capitalized.
Net Loss. The Company recognized a net loss of approximately $1,682,266
(representing 460% of gross revenue) for fiscal 1997 as compared to $75,000
(representing 129% of gross revenue) for fiscal 1996. The increase in net
loss, both on an absolute basis and as a percentage of gross revenue is due
primarily to the increased expenses described above which have been only
partially offset by increased revenues from the Company's consulting services.
Interest Expense. Interest expense represents interest expense on Company
debt. Interest expense increased from approximately $4,000 in fiscal 1996 to
$7,000 in fiscal 1997, due to increased outstanding borrowings during fiscal
1997.
Income Tax. From inception until August 1997, the Company operated as an S-
corporation. As a result, the Company's earnings have been taxed directly to
the Company's shareholders at their individual federal income tax rates,
rather than the Company. The Company became a taxable C-corporation in August
1997. To date, the Company has not paid income taxes.
24
<PAGE>
As of December 31, 1997, the Company had net operating loss carry-forwards
for federal income tax purposes of approximately $768,000. The federal net
operating loss carry-forwards expire in 2012.
Capital Resources And Liquidity
As a result of hiring additional employees, increasing marketing and
increasing its product development efforts in anticipation of product releases
in 1998, the Company's capital requirements have been and will continue to be
significant and its cash requirements have been and will continue to exceed
cash flows from operations. As a result, the Company has been substantially
dependent on sales of its equity securities, cash flow from operations, and
borrowings from affiliates. At September 30, 1998, the Company had cash in the
aggregate amount of approximately $4,007,000, primarily attributable to the
sale of Company Common Stock to foreign investors in May 1998. The Company's
working capital increased an aggregate of $3,983,000, from ($158,000) at
December 31, 1996 to $62,000 at December 31, 1997 and to $3,825,000 at
September 30, 1998, primarily due to the sale of equity securities described
in more detail below. Subsequently, in November 1998 the Company implemented a
reorganization which included a reduction in the employee base from 23 to 13
employees, thereby reducing the Company's cash requirement for the short term.
Net cash used in operating activities was $2,162,000 for the nine months
ended September 30, 1998, as compared to $195,000 for the nine months ended
September 30, 1997. The increase in net cash used in operating activities was
primarily attributable to the Company's operating loss of $2,292,000. Net cash
used in operating activities was $728,000 for the year ended December 31,
1997, resulting primarily from the Company's operating loss of $1,682,266.
Net cash used in investing activities was $123,000 for the nine months ended
September 30, 1998, as compared to $21,000 for the comparable nine months in
1997. The increase in net cash used in investing activities was primarily
attributable to an increase in purchases of equipment, software and leasehold
improvements. Net cash used in investing activities for the year ended
December 31, 1997 was $279,000, consisting primarily of purchases of equipment
and leasehold improvements.
Net cash provided by financing activities for the nine months ended
September 30, 1998 was $6,077,000, as compared to $520,000 for the nine months
ended September 30, 1997. The increase in net cash provided by financing
activities was primarily attributable to the Company's sales of equity
securities in May 1998. Net cash provided by financing activities for the year
ended December 31, 1997 was $1,206,000, consisting primarily of sales of
equity securities.
During May 1998, the Company sold 1,534,010 shares of Common Stock to
approximately 117 foreign investors in a private offering. The Company
received gross proceeds of approximately $6,136,040 from such offering, before
costs associated with the offering. See "SELLING SHAREHOLDERS."
Additionally, in the first half of 1998, the Company borrowed and repaid
$600,000. National Day Corporation loaned such funds to the Company pursuant
to three demand promissory notes which bore interest at 12% per annum. The
Company used part of the proceeds from the Common Stock offering in May 1998
to repay such loan.
From September 1997 to November 1997, the Company issued warrants to certain
foreign brokers to purchase an aggregate of up to 2,800,000 shares of Common
Stock. Warrants for 600,000 shares were exercised during fiscal 1997,
resulting in net proceeds to the Company of $900,000. Warrants for 2,200,000
shares have expired without being exercised.
Based on the Company's current proposed plans and assumptions relating to
product releases and sales, the Company anticipates that it will not require
additional capital financing through the third quarter of 1999. If the
Company's plans change or its assumptions prove to be inaccurate, the Company
may be required to seek additional equity and/or debt financing sooner than
currently anticipated. The Company has no current
25
<PAGE>
arrangements related to additional financing. In as much, there can be no
assurance that any additional financing will be available to the Company when
needed, on commercially reasonable terms, or at all. See "RISK FACTORS--
Limited Operating History; No Profitable Operations."
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), EARNINGS PER
SHARE, which specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS 128 supersedes Accounting Principles
Board Opinion No. 15 and is effective for financial statements issued for
periods ending after December 15, 1997. SFAS 128 requires restatement of all
prior-period earnings per share data presented after the effective date. The
adoption of SFAS 128 did not result in a restatement of earnings per share in
prior periods.
In June 1997, the FASB issued SFAS 130, REPORTING COMPREHENSIVE INCOME,
which establishes standards for reporting and display of comprehensive income
and its components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. The Company will adopt SFAS 130 in
fiscal 1998. Management believes that SFAS 130 will not have a material impact
on the Company's financial position, results of operations or cash flows.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value.
Although there was no stock-based compensation in 1997, Interactive Objects
has chosen to account for stock-based compensation using Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issues to Employees."
Accordingly, compensation cost for stock options granted to employees is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee is required to pay
for the stock.
Statement of Financial Accounting Standards No. 131, "Disclosure About
Segments of an Enterprise and Related Information," is effective for years
beginning after December 15, 1997. This statement requires use of the
"management approach" model for segment reporting. The management approach
model is based on the way a company's management organizes segments within the
company for making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal structure,
management structure, or any other manner in which management disaggregates a
company. Interactive Objects does not anticipate that the adoption of the
statement will have a significant impact on its financial statements other
than potentially providing more financial statement disclosures.
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BUSINESS
The Company
Interactive Objects designs, develops and markets modular software
components. Additionally, the Company, through its consulting services group,
provides sophisticated software business solutions designed to facilitate
integrating medium- to large-scale businesses with the Internet.
The Company's products are designed for use primarily on the Microsoft suite
of visual programming languages including Visual Basic(R), Visual C++(R) and
Visual FoxPro(R) and are marketed to corporate and professional developers for
use in a variety of environments, including multi-tier client-server,
intranet, extranet and Internet environments. The Company's products are
reusable, modular software components designed to work across multiple
operating platforms. As a result, corporate and professional developers are
able to focus on the core functionality of the applications they are
developing--designing and constructing their applications more efficiently.
The Company released two components in the first quarter of 1998 and released
a suite of four additional components in October 1998.
The Company has historically derived a substantially all of its revenue from
its consulting services group. The consulting services group specializes in
sophisticated software business solutions which involve intranet, extranet and
Internet environments. In addition to providing sophisticated business
solutions to enterprise companies, Interactive Objects' consultants provide
much of the Company's research and development input for creating new and
innovative products. In 1998, substantially all of the Company's revenues were
the result of contracts awarded to its consulting group. These contracts
provided the Company valuable insight into the technology hurdles confronting
medium and large companies.
The Company's business strategy is focused on broadening its product
development by productizing the business solutions the Company's consultants
have designed or identified while performing consulting services. These
products are "application frameworks," sets or suites of reusable software
components architected to facilitate scaleable application development
designed to solve a specific business problem. By assembling its base
components together with the business objects generated from its consulting
projects in a framework architecture, the Company can address the
sophisticated business solution requirements of medium to large size
organizations.
While continuing to invest its engineering and development resources in
expanding its library of development tools and components, the Company
believes that by assembling objects within an application framework, the
resulting solutions will have greater market potential than that of individual
component sales. The move from developer solutions to business solutions
represents a natural evolution for the Company. The Company believes that its
core capabilities are application architecture through its consulting group
and reusable component development by its product development team. See "RISK
FACTORS--Uncertainties Regarding Market Acceptance of the Company's Products;
New Product Introductions."
Industry Background
Increasing Dependence on Software. Businesses are increasingly relying on
information systems as a strategic resource and as a way of differentiating
themselves from their competitors. A sophisticated enterprise-wide information
system can allow a company to take advantage of new markets before a
competitor, reduce operating expenses, and increase ties with suppliers and
customers. Business solutions incorporating Internet and intranet technologies
can be particularly effective in extending the information system outside the
bounds of a company, creating even more opportunities. Of all the pieces that
make up an information system, software plays a critical role. Therefore, as
businesses become more dependent on their information systems, their
dependence on software increases. In addition, original equipment
manufacturers ("OEMs") and independent software vendors ("ISVs") are
increasingly dependent on the development of software to provide critical
functionality and product differentiation.
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Need for Improved Software Development Technologies and Methods. Software
development technologies and methods have not kept pace with the increasing
reliance on software systems. In fact, the intricacies of modern software
systems have tended to make the software development process longer, more
complicated and increasingly error prone. For example, many businesses are
implementing client-server applications that must be scalable (capable of
growing to support additional users) enough to handle hundreds or thousands of
users, yet flexible enough to meet continually changing business requirements.
Businesses implementing enterprise-wide information systems face a
particularly difficult challenge in developing software for the distributed,
heterogeneous environments that these systems typically demand. In addition,
businesses recognize that not only are these software systems expensive to
develop, they can also be expensive to maintain.
Organizations have taken an initial step in addressing the complexity and
cost of today's software systems by breaking software applications into
functional segments to be developed by separate teams of programmers. However,
traditional software development methodologies often produce unnecessary and
complex interdependencies among functional software segments. The resulting
software is typically difficult to develop and test, as well as expensive to
modify and maintain.
Adoption of Object-Oriented Technologies. To address the difficulties of
developing and maintaining complex software systems, organizations are
increasingly adopting object-oriented technologies and development
methodologies. Object-oriented programming allows software to be written in
terms of objects that are used as building blocks to model real-world objects
and systems. Objects, sometimes referred to as components, are self-contained
units that encapsulate a collection of data and related procedures. Although
objects may be internally complex, they are designed to have simple interfaces
that allow programmers to develop and change objects independently without
affecting other segments of the software system. The generalized, self-
contained nature of well-designed objects allows them to be reused within a
single software system and in subsequent applications. To a large extent,
developing software applications then becomes a matter of assembling new and
existing objects, rather than writing entire programs from scratch, resulting
in significantly reduced development times and improved software quality. In
addition, because the internal details of each object are relatively insulated
from the rest of the system, objects can be tested, modified and maintained
independently.
As object-oriented technologies have been adopted over the last several
years, Microsoft's Visual Programming Languages (primarily Visual C++(R) and
Visual Basic(R)) have emerged as the de facto standard computer languages for
object-oriented software development. Java(R) by Sun Microsystem, Inc.,
another object-oriented programming language that is similar to C++(R), is
gaining popularity with the growth of the Internet and intranet environments.
Need for Reusable Third-Party Software Components. While objects or
components are easy to use once built, developing reusable, well-designed
components can be extremely difficult and time consuming. Many technical
details must be addressed, including support for various platforms, graphical
user interfaces, databases and networking protocols. As a result, object-
oriented software development can be improved significantly through the use of
pre-built, industry-standard objects ("components"). Software components are
typically sold as a "class library," a group of up to 100 related object types
("classes"). Organizations seek to improve quality and time-to-market by
purchasing pre-written components from independent vendors to handle
fundamental operations ranging from simple functions such as date handling to
more complex functions such as network communications. Using off-the-shelf
components for such tasks allows developers to focus on the core functionality
of the systems they are developing. For example, using a standard component
for database connectivity allows a developers to develop an application
without regard to the low-level details of programming to any particular
database while allowing the freedom to switch between different database
vendors. In addition, commercially available software components typically are
more thoroughly tested and provide more complete functionality than parts
developed in-house. The Company believes that the use of third-party software
components will enable organizations to develop robust software applications
more rapidly, at lower cost and with more functionality than applications
using only internally developed components.
Benefits of Implementing Application Framework Technology. As the complexity
of applications developed to solve specific business problems increase,
developers have looked to expand upon the concept of
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reusable component architecture to capture the benefits this process
facilitates. As a result, the concept of application frameworks has evolved.
Application frameworks are a set or suite of reusable components architected
and assembled in such a way as to facilitate scaleable application development
designed to solve a specific business problem. As such, application frameworks
represent a reusable, easily modifiable environment where application
development of a robust business solution becomes an assembly process, built
on the substantial reuse of common, well-tested components or business
objects.
In theory, application frameworks represent a development methodology where
up to 80 percent of an application or business solution under development can
be based on reusable software. As a result, application frameworks pledge to
shorten development cycles, reduce skill requirements, and cut the costs
associated with custom development of software-based business solutions.
Unlike traditional "middleware" solutions that only address low-level
application programming interface (API) integration and data transformation,
application frameworks extend upward to the business process layer allowing
developers to develop robust business solutions in less time than traditional
programming practices provide.
Interactive Objects' Solutions
In addition to providing high-level consulting services to major
corporations, Interactive Objects designs, develops and markets reusable,
modular software components.
Reusable Software Components
Improved Software Quality. Interactive Objects' products improve software
quality by providing professional developers with reliable, reusable software
components and application frameworks. The use of the Company's products
result in reduced development times for applications that are easier to
maintain and contain less untested code, resulting in fewer bugs and higher
quality. See "RISK FACTORS--Uncertainties Regarding Market Acceptance of the
Company's Products; New Product Introductions."
Accelerated Development Time. By incorporating the Company's pre-programmed,
pre-tested, reusable software components within their applications, developers
can produce more reliable software solutions in less time.
Responsive to Developers. The method of bundling multiple components has
become an industry standard. However, the Company believes that in many
instances, components with little to no commonality are bundled together as a
class library. Interactive Objects offers its components on an individual
basis versus pre-bundled allowing the developer to pick and choose according
to his or her needs. The Company believes this method is a competitive
advantage as it empowers customers to determine their needs rather than the
vendor.
Increased Focus on Critical Functionality. The Company's products
encapsulate fundamental operations within reusable software components,
allowing developers to focus on defining and creating the critical business
logic within applications rather than the mundane routines that an application
needs to request and carry out lower-level services.
Reduced Maintenance Cost. The Company's products are designed to reduce
overall maintenance and support costs over the life of an application. Use of
the Company's products help developers program flexible, modular applications
that are easier to update, modify and refine. See "RISK FACTORS--Rapid
Technological Change."
Software Consulting Services
Specializing in Internet-based technologies and protocols, the Company's
consultants target primarily large enterprise-caliber companies. Through its
object-oriented, standards-based architectures, the Company provides
sophisticated solutions and interfaces connecting enterprise corporations to
relevant communities of interest their
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distributors, their salesforce, their employees, clients and business
partners. With their thorough understanding of re-useable, modular application
architecture, the Company's consultants deliver enterprise business solutions
that bridge the gap between legacy information and today's cutting-edge Web
technology. In addition to providing sophisticated IS solutions to enterprise
companies, Interactive Objects' consultants serve as part of the Company's
research and development arm identifying and defining new and innovative
products that may ultimately be sold by the Company. Emphasizing
collaboration, coordination and communication, the Company is a premium
service provider of complex business solutions for large corporations such as
SAFECO, Eddie Bauer and Microsoft. See "RISK FACTORS--Concentration of
Customers; Limited Marketing Experience."
Because Internet development expertise is in demand, many companies find
they simply don't have the resources in house to tackle particularly
challenging applications. In these cases, the Company's consultants provide
the technical guidance on a project basis and solve the complex problems
presented to them. By working directly with companies, the Company's
consultants see first-hand the problems confronting corporate IS departments.
That, in turn, gives Interactive Objects a competitive advantage in creating
the tools to solve that problem. The customized tools created by the Company's
consultants to solve a particular problem today may become Company products in
the future. See "RISK FACTORS--Dependence on Consulting Engagements for
Product Research and Development and Market Research."
The Company's consultants focus on providing solutions leveraging
Interactive Objects core area of expertise integrating the enterprise with the
Internet. The Company's most recent consulting agreement related to the design
of an enterprise-wide information automation system that will enable SAFECO's
nationwide network of over 8,000 independent agents to create and process
insurance applications over the Internet. The suite of software components and
business objects resulting from this partnership are expected to increase the
efficiencies of SAFECO's claim and policy processing while reducing the cost
of SAFECO's remote agent support activities. See "RISK FACTORS--Concentration
of Customers; Limited Marketing Experience."
Cognizant of the competitive nature in the professional IS services arena,
the Company, in an effort to provide the highest level of flexibility and
responsiveness for its clients and to limit the growth of its employee base,
assembles teams of independent programmers for each project based on the
individual requirements of that project. Utilizing this business model, the
Company can limit the risks inherent in assembling large teams of low-level
programmers while maintaining management of the project and the ability to
provide the highest level of service. See "RISK FACTORS--Recruiting and
Retaining Technical Personnel."
Interactive Objects believes that its consulting services provide many
opportunities and benefits to the Company, including:
. Market Research--By working directly with large corporations,
Interactive Objects gains timely insight into the needs of the
information services market. The Company analyzes and utilizes this
market research information to identify opportunities for the
development of new components. The Company believes that consulting
projects will not only enable the Company to further develop its core
expertise while keeping apprised of the needs of the market, but will
also foster a competitive advantage for the Company since this market
research is not an added expense to the Company. See "RISK FACTORS--
Dependence on Consulting Engagements for Product Research and
Development and Market Research."
. Development--The customized tools created to solve business problems on
the consulting engagement can be further developed to become products
marketed by Interactive Objects. See "RISK FACTORS--Uncertainties
Regarding Market Acceptance of the Company's Products; New Product
Introductions."
. Product Exposure--The solutions implemented to business problems
encountered on a particular consulting engagement may require the use of
existing Interactive Objects' products, resulting in increased awareness
and exposure to the Company, its products, and personnel. See "RISK
FACTORS--Concentration of Customers; Limited Marketing Experience."
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The Interactive Objects Strategy
Interactive Objects' objective is to be a leading provider of modular
software components, application frameworks and Internet, intranet and
extranet business software solutions. The Company intends to achieve this
objective by:
. Continuing to Develop Modular Software Components that are both Reusable
and Robust. The Company intends to continue to develop reliable modular
software components designed to facilitate accelerated application
development of robust business solutions for the professional and
corporate developer. See "RISK FACTORS--Dependence on Growth of
Internet/Intranet/Extranet Software Applications."
. Expanding upon its Consulting Services to Enterprise-level
Corporations. Leveraging its key technological expertise in Internet,
intranet and extranet business solutions, the Company intends to invest
in expanding its infrastructure and personnel base to facilitate a more
aggressive sales initiative targeting medium to large companies. See
"RISK FACTORS--Evolving Markets and Standards" and "--Rapid
Technological Change."
. Leveraging Consulting Relationships to Develop Application
Frameworks. By leveraging the intellectual properties resulting from
certain of its consulting relationships and its software components, the
Company intends to develop application frameworks for the corporate IS
and enterprise business community. See "RISK FACTORS--Dependence on
Consulting Engagements for Product Research and Development and Market
Research."
. Expanding its Sales and Distribution Network. While it has historically
relied on Web-based electronic software distribution, the Company has
recently expanded its sales and distribution capabilities through
distribution relationships with Digital River, Inc. and Earth Web, Inc.
The Company intends to expand its sales activity further through a
variety of activities including establishing and building a network of
resellers and integrators to support the Company's enterprise
initiatives, growing its internal sales organization to facilitate
dealing directly with Fortune 2000 companies, and encouraging the
establishment of co-marketing relationships with leading OEMs, ISVs and
VARs. See "RISK FACTORS--Limited Product Distribution."
. Performing Strategic Acquisitions. The Company continually evaluates
potential acquisitions of complementary businesses, products and
technologies, that among other things, could expand the breadth and
depth of its products and organization. See "RISK FACTORS--Competition"
and "--Risks Associated with Potential Acquisitions."
Interactive Objects' Products and Services
Interactive Objects designs, develops and markets modular software
components. Additionally, the Company, through its consulting services group,
provides sophisticated software business solutions designed to facilitate
integrating medium- to large-scale businesses with the Internet.
Products
Visual Gateway Interface ("VGI"), the Company's first product released in
the first quarter of 1998, is a fully integrated, object-oriented Microsoft-
based development tool allowing users develop true server-independent Web-
based applications able to run on any NT Web server without relying on, or
learning, a new scripting language. VGI was created to solve a problem Web
programmers consistently encounter--the fact that different gateways and Web
servers support different scripting languages and/or protocol specifications.
As a result, visual programmers were required to learn and use multiple tool
sets to create separate versions of the same application for deployment across
the different servers. VGI provides a familiar, standards-based interface that
visual programmers can use to create a single version of a Web application
that runs on all popular Web servers without needing to learn and use the Web
server specific scripting language (e.g., VBScript, JavaScript,
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Perl, etc.). This tool enables visual programmers to concentrate on the
development and enhancement of the Web application itself rather than on the
protocols necessary to run them. By simplifying the method for integrating
standard Web protocols into the developer's native visual application
environment, VGI provides an easy-to-use framework for creating and migrating
visual applications to the Web. VGI retails for $149.00. Sales of VGI, to
date, have been insignificant.
Visual Mail Interface ("VMI"). The VMI product suite is a series of four
reusable, object-oriented components that let developers create and implement
a variety of electronic mail applications without having to learn specific e-
mail protocols. The Company released VMI in October 1998. Both componentized
and reusable, VMI allows for the easy assimilation of e-mail capabilities into
existing or new applications from either the client or server side. From
requisition and form routing, to automatic response mechanisms, VMI lets
developers quickly and easily add innovative e-mail functionality to their
applications. All the VMI components come pre-tested, ensuring the highest
level of reliability and stability available. Designed for COM-compliant
development environments including Visual Basic(R), Visual C++(R), Visual
J++(R) and Delphi(R), VMI supports the leading Internet and communication
protocols: POP3, SMTP, MIME and UUencode. The Company plans to release the VMI
product line the fourth quarter of 1998. The Company intends to market VMI
both as a suite and as individual components. VMI individual components retail
for $149.00 to $199.00 and the product suite retails for $499.00.
Products Under Development
Application Frameworks. Leveraging its core competencies and its consulting
relationships, the Company plans to release its first application framework in
1999. These application frameworks will represent a set of reusable objects
architected and assembled in such a way as to facilitate scaleable application
development that solves a specific business problem. As the Company's
products, specifically its application framework solutions, become more
complex, customers increasingly require greater professional assistance in the
design, development and deployment of these business solutions within their
individual organizations. As a result of the complexity and robustness of its
application framework technology, the Company expects that application
framework pricing will be significantly in excess of prices charged for its
components. See "RISK FACTORS--Uncertainties Regarding Market Acceptance of
the Company's Products; New Product Introductions" and "--Dependence on Growth
of Internet/Intranet/Extranet Software Applications."
Consulting Services
Specializing in Internet-based technologies and protocols, the Company's
consultants target primarily large enterprise-caliber companies. Through its
object-oriented, standards-based architectures, the Company provides
sophisticated solutions and interfaces connecting enterprise corporations to
relevant communities of interest--their distributors, their sales force, their
employees, clients and business partners. With their thorough understanding of
re-useable, modular application architecture, the Company's consultants
deliver enterprise business solutions that bridge the gap between legacy
information and today's cutting-edge Web technology. Emphasizing
collaboration, coordination and communication, the Company is a premium
service provider of complex business solutions for large corporations such as
SAFECO, Eddie Bauer and Microsoft.
Product Development
Interactive Objects approaches product development as an organized
development effort utilizing individual product teams. These teams are
designed to be small, focused, and efficient. Each team consists of a project
manager, and a number of software designers, documentation writers and test
engineers. The teams work on a six to nine month development cycle, with each
team focusing on a particular component or set of related components during a
development period. The Company's product development plan includes the
release of a suite of 4 components in October 1998. The Company currently has
two product development teams and will add additional teams if product sales
warrrant. Additionally, the Company maintains information on freelancers,
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independent developers/programmers, and 3rd party development organizations
the Company could contract with, and outsource projects to, in an effort to
help facilitate the Company's development plans, in the event internal
resources are insufficient to accomplish the specific project. See "RISK
FACTORS--Recruiting and Retaining Technical Personnel."
The Company believes that quality is a competitive factor in the software
component market. In as much, the Company emphasizes quality assurance as a
fundamental element within its development process. Each product development
team is staffed with a test engineer whose purpose is to develop test scripts
for the respective components and to conduct unit testing. In addition,
Interactive Objects has contracted with a third-party laboratory, ST Labs
Inc., one of the nation's leading providers of software testing and quality
assurance support services, for functionality, stress, and scalability
testing. The Company believes that with its commitment to thoroughly testing
its products, the Company will engender developer confidence in the
reliability of all products Interactive Objects brings to market. See "RISK
FACTORS--Software Defects and Liability Claims."
Sales, Distribution and Support
The Company distributes its products through Digital River, Inc. and its
network of over 500 reseller sites. The Company also has a distribution
relationship with Developer.com and Developer Direct, on-line distribution
channels that target professional software developers. The Company seeks to
increase awareness of its products, to provide customer and technical support
and to encourage dialogue regarding its products by maintaining a World Wide
Web site. Interactive Objects' current sales and support strategy for its
software components relies almost exclusively on the Internet and electronic
software distribution. A visitor to the Company's Web site can download
products for a free time-limited trial period (15 to 30-days in length)
letting potential users become aware of the features and benefits of the
respective product. At the end of the trial period, the user must purchase the
product or it will automatically expire. To purchase the product, the user
must enter credit card information to facilitate the sale.
The Company believes that the electronic channel is an important source of
information and support for IT professionals. By utilizing the Web and ESD as
its principal means of distribution for its components, the Company believes
it has taken the most direct and effective route to its target market, the
professional software developers a group that tends to spend significant time
on the Web. This marketing strategy enables the Company to eliminate most of
the manufacturing, distribution and inventory costs traditionally associated
with selling software. See "RISK FACTORS--Limited Product Distribution."
Another advantage to the Company's Web-based ESD is increased responsiveness
to market changes. This strategy allows the Company to provide instantaneous
changes to its product line without recalling outdated or unsold product. The
Company can also quickly respond to market pressures and can adjust the price
of a product depending on market demand. In addition, the Company has the
flexibility to dynamically package its products in a variety of configurations
versus being tied to the rigid packaging requirements standard distribution
channels require. The Company provides both volume discounts and corporate
licenses encouraging mass distribution of its products. See "RISK FACTORS--
Uncertainties Regarding Component Product Positioning" and "--Rapid
Technological Change."
As the Company expands its activities into the application frameworks arena,
the Company will move beyond the Web-centric sales and distribution model it
has employed for its components. Historically, the Company has not had a large
enterprise or national accounts sales force. Establishing and building a
channel of resellers and integrators to support the Company's overall
strategic sales and marketing activities as it expands into its enterprise
initiative will be a priority for the Company. Accordingly, the Company is
currently recruiting seasoned sales professionals in an effort to expand its
direct sales department. These individuals will serve as the primary sales
mechanism necessary to communicate the strengths of the Company to the
targeted audience-- enterprise organizations.
The Company also provides support through its Web site. By providing support
electronically, the Company believes that it is often able to identify and
solve customer problems more rapidly.
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Marketing
Interactive Objects' promotion activities focus on two objectives: generate
and raise awareness to the Company and its products, and increase the number
of visits and resulting sales from its Web site. Advertising and promotional
efforts are focused on these goals. Using controlled circulation publications
such as Visual Basic Programmer's Journal and Microsoft Interactive Developer,
Interactive Objects has implemented a plan targeting professional software
developers through print advertising for its component product lines.
Interactive Objects has also pursued Web advertising. Banner ads have been
placed on www.microsoft.com, one of the highest trafficked sites on the Web.
The Company believes this to be an effective form of advertising since it
leverages the visibility a high traffic site like Microsoft's provides, while
enabling customers to hyperlink directly to the Company's Web site. See "RISK
FACTORS--Competition."
As the Company expands its activities to the application framework market,
its marketing activities will also expand. Direct mail supported by
telemarketing, reseller channel development and training, third-party
partnerships with other independent software vendors will all be explored as
the Company's strategy evolves. The Company's commitment to establishing these
relationships is demonstrated through its participation in Microsoft's
Software Developers Network Independent Software Vendor Program, as well as
being named a charter member of Wall Data's Cyberprise(R) Consulting Partner
Program. See "RISK FACTORS--Concentration of Customers; Limited Marketing
Experience."
Media and analyst relations will remain a core component to the Company's
promotional campaign. The Company believes that press coverage of the Company
is a cost-efficient way to increase visibility and establish credibility.
Interactive Objects has already received positive coverage in Web Techniques,
The Seattle Times, The Seattle Post-Intelligencer, Washington CEO magazine,
Puget Sound Business Journal, Business Week, and CNET's electronic magazine,
AnchorDesk. Interactive Objects intends to continue to invest in this channel
through press/analyst tours with the objective of generating further interest
and visibility in industry, general business and regional publications.
Interactive Objects' promotional activities include maintaining a presence
in the industry by promoting itself at selective trade shows. Trade shows give
Interactive Objects the opportunity to enhance its image as the corporate
developer's advocate, establish business relationships with OEMs and VARs,
meet with industry analysts and press as well as research the market and the
competitors. The Company's commitment to tradeshows was immediately recognized
at VBITS'98 San Francisco (March 1998)--the Company's first show appearance--
where Interactive Objects was awarded "Best of Show" for its marketing
activities and booth design.
Acquisitions
The software industry has experienced and is expected to continue to
experience a significant amount of consolidation. While the Company expects
that it will grow internally, the Company continually evaluates potential
acquisitions of complementary businesses, products and technologies, that
among other things, could expand the breadth and depths of its products and
organization. See "RISK FACTORS--Risks Associated with Potential
Acquisitions."
Competition
The market for software consulting and contract development/software system
design services is extremely competitive. The principal competitive factors in
this market are thoroughness and ingenuity of solution proposed and
responsiveness to client proposal requests, and to a lessor degree, reputation
and price. Many of the Company's competitors in the consulting arena have
substantially greater financial, management, marketing and technical resources
than the Company. There can be no assurance that the Company will be able to
compete successfully against current and future competition, and the failure
to do so would have a material adverse effect upon the Company's business,
operating results and financial condition. See "RISK FACTORS--Concentration of
Customers; Limited Marketing Experience" and "--Competition."
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The market for the Company's products is intensely competitive, subject to
rapid change, and significantly affected by new product introductions and
related marketing activities of industry participants. The Company's products
are targeted at the emerging market for re-usable business objects and
software components specific to Internet-related applications. Sales in the
component industry is not currently dominated by any one company.
International Data Corporation in its 1998 Worldwide Markets and Trends Report
on Internet Tools, reports that, with the exception of Oracle Corporation at
16%, no programmer development tool vendor has over 5.1 percent of the
worldwide market share. See "RISK FACTORS--Rapid Technological Change."
Direct competitors of the Company's reusable software components include
Progress Software Corporation (Crescent division) and Sheridan Software
Systems, Inc. Both produce components that are targeted directly at visual
developers and both were early leaders in the visual component market.
The Company believes that the principal competitive factors in this market
to be: product quality, flexibility, performance, functionality and features,
use of standards-based technology, quality of support and service, company
reputation and price. While price is less significant than other factors for
corporate customers, price can be a significant factor for individual
developers.
According to International Data Corporation in its 1998 Worldwide Markets
and Trends Report on Internet Tools, the Windows component market share
(developer tools produced to support Microsoft's Windows 95(R), Windows 98(R)
and Windows NT(R)) is expected to double in the next five years, from 22.3% in
1997 to 42.5% in 2002. The Company believes that by containing its development
efforts to Windows-based solutions, that it will be well positioned to take
advantage of this anticipated growth.
In the application framework product area, the competition the Company faces
is not easily identified. As an emerging market, it is difficult to project
which companies may be the most effective competitors and, as the market
matures, the Company believes it is inevitable that strong competitors will
surface. Until that time, the Company is confronted by a myriad of competitors
including Mortice Kern Systems Inc., Neuron Data, Inc. and Usoft Corporation.
Indirect competitors include many of the independent information system
consulting organizations which may have distributed component technology
expertise.
Many of these direct and indirect competitors have longer operating
histories, more resources (financial, technical, and marketing), greater name
recognition and larger installed base of customers than the Company. As a
result, these competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, or devote greater
resources to the development, promotion and sale of their products than the
Company. The Company believes that its product positioning, including its
planned offering of individual, non-bundled components, as well as complete
application frameworks, and its dedication to high quality, reliable products
will enable it to gain competitive advantage in the market. In addition, the
Company's business objects are designed to interact smoothly with established
software systems. With components specifically developed for use with
Microsoft, the Company intends to partner with these companies to bundle the
components with theirs, or sell them in conjunction. The Company's products
are also developed using standards-based object technologies enabling them to
run on multiple platforms and with multiple programming languages
The Company also faces competition from systems integrators and internal
development efforts. Some systems integrators possess industry-specific
expertise that may enable them to offer a single vendor solution where they
already have a reputation among potential customers. There can be no assurance
that these third parties, some of which have significantly greater resources
than the Company, will not market competitive software products in the future.
It is also possible that new competitors or alliances among competitors will
emerge and rapidly acquire significant market share. The Company also expects
that competition will increase as a result of software industry consolidation.
Increased competition may result in price reductions, reduced gross margins
and loss of market share, any of which could materially and adversely affect
the Company's business, operating results and financial condition. There can
be no assurance that the Company will be able to compete successfully against
current and future competitors or that competitive pressures faced by the
Company will not
35
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materially and adversely affect its business, financial condition and results
of operations. See "RISK FACTORS--Uncertainties Regarding Market Acceptance of
the Company's Products; New Product Introductions" and "--Competition."
Year 2000 Compliance
The Company's products are designed to be Year 2000 compliant and do not
contain any date- or time-dependent code strings, fields, variables or other
mechanisms that inhibit their use or reliability following the turn of the
century. As Interactive Objects develops, tests, and releases new products,
and upgrades existing products it actively verifies that any date-related
items are Year 2000 compliant. See "RISK FACTORS--Year 2000 Issues."
Intellectual Property and Other Proprietary Rights
The Company relies primarily on a combination of copyright, trademark and
trade secret laws, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company also believes that factors such as
the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are essential to establishing and maintaining a
technological leadership position. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection. The Company believes its current
intellectual property rights are sufficient to carry on its business as
currently conducted. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the United States.
There can be no assurance that the Company's means of protecting its
proprietary rights in the United States or abroad will be adequate or that
competition will not independently develop similar technology. See "RISK
FACTORS--Proprietary Rights; Risks of Infringement."
The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in the
Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays, or
require the Company to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company, if at all. In the event of a successful claim of
product infringement against the Company and failure or inability of the
Company to license the infringed or similar technology, the Company's
business, operating results and financial condition would be materially and
adversely affected.
Employees
As of February 8, 1999, the Company had a total of ten employees, all of
whom were based in the Seattle, Washington area. Of the total, seven were in
consulting services and product development, one was engaged in sales and
marketing and two were in administration and finance. The Company's future
success depends in significant part upon the continued service of its key
technical and senior management personnel and its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for highly qualified personnel is intense and there can be no
assurance that the Company will be able to retain its key managerial and
technical employees or that it will be able to attract and retain additional
highly qualified technical and managerial personnel in the future. None of the
Company's employees is represented by a labor
36
<PAGE>
union. The Company has not experienced any work stoppages and considers its
relations with its employees to be good. See "RISK FACTORS--Recruiting and
Retaining Technical Personnel" and "--Reliance on Management and Key
Personnel; Changes in Management."
Facilities
In November 1998 the Company consolidated its corporate headquarters in
Seattle, Washington, where it leases approximately 8,141 square feet of office
space in the Olympic Tower Building in Seattle, Washington. The Company has
also sublet certain of its Seattle office space to unaffiliated third parties.
The Company believes that its existing facilities will be adequate through
fiscal 1999 and that sufficient additional space will be available as needed
thereafter on commercially reasonable terms.
Legal Proceedings
The Company is currently in negotiations and expects to enter into mediation
and/or arbitration with Ryan Smith, John Guarino and Jay Paulson, former
officers and/or directors and significant shareholders of the Company, in
connection with certain severance and other matters related to their
employment with the Company. In addition, the Company has been served with a
complaint filed by Jay Paulson in King County Superior Court in the State of
Washington on November 18, 1998 (case no. 98-2-27751-1SEA) for declaratory and
injunctive relief and unspecified damages in connection with a requested
transfer of restricted securities held by Mr. Paulson. The Company believes it
has taken appropriate action and intends to vigorously defend this lawsuit.
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MANAGEMENT
Directors, Executive Officers, and Key Employees
The following table sets forth the names and ages of the current directors
and executive officers of the Company and the principal offices and positions
with the Company held by each person. The Company's Board of Directors is
divided into three classes and currently consists of five directors of which
there are currently two vacancies from the resignations of Ryan Smith and John
Guarino in October 1998. The Company is searching for qualified candidates to
fill the Board vacancies that currently exist; however, as of the date of this
Prospectus, no persons have been identified. The members of each class serve
three-year terms, with one class elected annually. The terms of office for
Class I directors (Brent Nelson and Thad E. Wardall) expire at the Annual
Meeting of Shareholders to be held in 1999; the term of office for the Class
II director (Steven G. Wollach) expires at the Annual Meeting of Shareholders
to be held in 2000; and the terms of office for Class III directors (currently
vacant) expire at the Annual Meeting of Shareholders to be held in 2001.
The executive officers of the Company are elected annually by the Board of
Directors and serve terms of one year or until their death, resignation or
removal by the Board of Directors. There are no family relationships between
any of the directors and executive officers. Pursuant to the terms of a
consulting agreement between the Company and Northwest Capital Partners,
L.L.C., Northwest Capital has the right to nominate one director for election
to the Company's Board of Directors. Northwest Capital's nominee is Brent
Nelson. See "CERTAIN TRANSACTIONS." Other than the foregoing right of
Northwest Capital, there are no arrangements or understandings between any
director or executive officer and any other person pursuant to which any
person was selected as a director or executive officer.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Steven G. Wollach....... 44 President, Chief Financial Officer, Treasurer, and Director
Steve Jackson........... 31 Executive Vice President
Dale Western............ 37 Vice President of Engineering and Development
Mark Phillips........... 25 Chief Technology Officer
Robin L. Byrd........... 36 Corporate Secretary
Thad E. Wardall......... 52 Director
Brent Nelson............ 37 Director
</TABLE>
Set forth below is biographical information for the directors and executive
officers:
Directors
Steven G. Wollach, age 44, was recently appointed President of the Company
on October 27, 1998 in connection with the Company's restructuring. He has
served as a Director of the Company since September 16, 1997, as Chief
Financial Officer of the Company since October 1997 and as Treasurer of the
Company's Board of Directors since October 1997. From 1995 through 1997, Mr.
Wollach served as an independent contractor for various venture capital firms.
Prior to 1995, for several years Mr. Wollach worked in the
accounting/audit/tax departments at Laventhol and Horwath and Seidman and
Seidman. Mr. Wollach holds a B.S. in Business, with a major in Accounting from
Wayne State University.
Thad E. Wardall, age 52, has served as a Director of the Company since
September 16, 1997. From March 1996 to September 1997, Mr. Wardall served as a
Director of Neoteric Media, Inc. From June 1991 to February 1996, Mr. Wardall
served as the International Facilities Project Manager for Microsoft
Corporation. During his time at Microsoft, Mr. Wardall traveled to 27
countries and had oversight responsibilities for 36 high-tech subsidiary
office projects. Mr. Wardall holds a Bachelor of Architecture degree from
Washington State University.
Brent Nelson, age 37, has served as a Director of the Company since
September 16, 1997. Mr. Nelson presently serves as the managing partner of
Northwest Capital Partners, L.L.C., a venture capital firm located in
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Bellevue, Washington. See "CERTAIN TRANSACTIONS." Mr. Nelson presently serves
on the boards of directors of Eclipse Entertainment Group Inc., a film
development, production and distribution company, and Titan Resources Inc., a
natural resource company with interests in oil and gas exploration and
development. Mr. Nelson holds a diploma in marketing and general business from
Douglas College, Vancouver, B.C., Canada.
Executive Officers
In addition to Mr. Wollach, the following are the executive officers of the
Company:
Steve Jackson, age 31, has served as Executive Vice President since January
1999. Prior to that, he served as Chief Technology Officer of the Company from
December 1997. From 1990 to 1996, Mr. Jackson served as Systems Engineer and
Program Manager of Microsoft Corporation. During his time at Microsoft, Mr.
Jackson managed several product development teams and was a lead member of the
Company's Desktop Management Task Force and Licensing Services Application
Programming Interface industry standards groups. From 1988 to 1990, Mr.
Jackson served as Systems Engineer, Network Architect, and Software Design
Engineer of O/E Systems, Inc. From 1987 to 1988, Mr. Jackson served as
Director of Training and Sales Representative of Entree Computer Systems.
Dale Western, age 37, was appointed as the Company's Vice President of
Product Development in October 1998. From April 1993 through October 1998, Mr.
Western served as practice director for PLATINUM technology, Inc. From June
1984 through April 1993, Mr. Western served in various capacities with The
Boeing Company, including as Application Architect for the Computer Services
Division, CAE Software Engineer for the Electronics Division and as System
Architect for the Commercial Airplane Division. Mr. Western holds a B.S. in
Computer Science and a B.S. in Electrical Engineering from Michigan
Technological University.
Mark Phillips, age 25, was recently appointed as Chief Technology Officer of
the Company in January 1999. Mr. Phillips has been employed with the Company
since January 1998, serving as a senior software engineer and developer. Prior
to the Company, Mr. Phillips served as a senior software engineer and
developer for Saltmine Creative, Inc. from July 1997 to January 1998, for Oo-
moja Software from December 1996 to July 1997, for MetaBridge, Inc. from June
1996 to July 1997. In addition, Mr. Phillips worked as a developer with the
University of Washington Human Interface Technologies Lab from September 1996
to July 1998. Mr. Phillips earned his B.S. in Comparative History of Ideas,
with a minor in Computer Science Engineering and Architecture Design from the
University of Washington.
Robyn L. Byrd, age 36, was recently appointed as Corporate Secretary of the
Company in December 1999. Ms. Byrd has served a variety of administrative
positions with the Company since her date of employment in November 1997.
Prior to the Company, Ms. Byrd has served as office manager for Millstone
Coffee, Inc. since 1996 and as a customer service manager with Fukuda Denshi
America from 1992 to 1996. Ms. Byrd received her Bachelor of Arts from the
University of Washington.
Information Regarding the Board of Directors and its Committees
In October 1997, the Board of Directors established an Audit Committee. The
Audit Committee's functions include reviewing the Company's internal controls
and recommending to the Board of Directors the engagement of the Company's
independent accountants, reviewing with such accountants a plan for and the
results of their examination of the Company's financial statements and
determining the independence of such accountants. The members of the Audit
Committee during 1997 and the first half of 1998 were Messrs. Nelson and
Wollach. The Audit Committee met twice in 1997. Effective on August 19, 1998,
the Audit Committee was reconstituted to be comprised of Messrs. Nelson,
Wardall and Wollach.
In October 1997, the Board of Directors established a Compensation
Committee. The Compensation Committee's functions include making
recommendations regarding the Company's employee stock option plan and
decisions concerning salaries and incentive compensation for employees and
consultants of Company. The
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<PAGE>
members of the Compensation Committee during 1997 and the first half of 1998
were Messrs. Wollach and John Guarino. The Compensation Committee met three
times in 1997. Effective on August 19, 1998, the Compensation Committee was
reconstituted to be comprised of Messrs. Nelson, Wardall and Wollach.
During 1997, the Company's Board of Directors met eight times. Each director
attended at least 75% of the total number of meetings of the Board of
Directors and committees on which he was eligible to attend.
Compensation of Directors
During 1998, Company directors were compensated for their service on the
Company's Board of Directors and any committees on which they served. The
Company's non-employee directors, Brent Nelson and Thad E. Wardall, each
received a one-time grant of stock options to purchase 25,000 shares of Common
Stock and were eligible to receive additional options to purchase 5,000 shares
of Common Stock for each Board meeting attended, up to a total of 50,000
shares each. Steve Wollach received a one-time grant of stock options to
purchase 50,000 shares of Common Stock and was eligible to receive additional
options to purchase 10,000 shares of Common Stock for each Board meeting
attended, up to a total of 100,000 shares. Ryan Smith and John Guarino, as
employee directors, each received a one-time grant of stock options to
purchase 12,500 shares of Common Stock and were eligible to receive additional
options to purchase 2,500 shares of Common Stock for each Board meeting
attended, up to a total of 25,000 shares each. Each of the Company's directors
received the maximum number of stock options that such director was eligible
to receive. All of such options vest one year from the date of grant.
In addition, during 1998, each member of the Compensation Committee received
options to purchase up to 5,000 shares (for non-employee directors) and 1,000
shares (for employee directors) for each committee meeting attended. Each
member of the Audit Committee received options to purchase up to 15,000 shares
(for non-employee directors) and 5,000 shares (for employee directors) for
each committee meeting attended.
Effective on August 19, 1998, the Board of Directors adopted a new
compensation policy for the directors. Under the new policy, each director of
the Company in office on such date and immediately following each annual
shareholders' meeting thereafter will receive an annual grant of stock options
to purchase 25,000 shares of Common Stock, at an exercise price equal to the
closing trade price on the date of grant. The stock options will vest 100% on
the one-year anniversary of the date of grant, provided that such director has
attended at least 75% of all meetings of the Board of Directors during such
period. In addition, each member of the Audit Committee and the Compensation
Committee will receive an annual grant of stock options to purchase 5,000
shares of Common Stock, at an exercise price equal to the closing trade price
on the date of grant, which options will vest 100% on the one-year anniversary
of the date of grant.
Executive Compensation and Other Information
Summary Compensation Table. The following table sets forth all compensation
paid to or earned by the Company's former Chief Executive Officer for the
fiscal year ended December 31, 1997. No executive officer of the Company
received compensation in salary and bonus in excess of $100,000 during 1997.
<TABLE>
<CAPTION>
Annual
Compensation
------------
Name and Principal Position Year Salary
--------------------------- ---- ------------
<S> <C> <C>
Ryan Smith................................................. 1997 $25,961
Chief Executive Officer, President, Director(1)
</TABLE>
- --------
(1) Mr. Smith resigned from his positions as an officer and director of the
Company effective October 8, 1998.
Employment Contracts. Effective November 1, 1998, the Company entered into a
new employment agreement with Mr. Wollach to serve as President and Chief
Financial Officer of the Company. The employment
40
<PAGE>
agreement runs through December 31, 1999 and provides for an annual base
salary to Mr. Wollach of $135,000, subject to annual adjustment by the Board
of Directors, together with an annual discretionary bonus as determined by the
Board. The agreement also provides for performance-based bonus compensation
Mr. Wollach of up to a total of $135,000 during calendar year 1999, based on
the following performance criteria: listing of the Common Stock on The Nasdaq
SmallCap Market ($25,000 bonus); effectiveness of the registration statement
on Form SB-2 ($15,000); satisfaction of Company quarterly financial goals as
set in advance by the Board of Directors ($5,000 bonus per quarter, up to
aggregate of $20,000); satisfaction of Company yearly financial goals as set
in advance by the Board of Directors ($5,000 bonus); closing of any
acquisition by the Company, by purchase, merger or otherwise, of on-going
businesses, intellectual property, software or other assets, which acquisition
is accounted for using the purchase or pooling method of accounting ($40,000
bonus per acquisition); and closing trade price of the Common Stock as
reported on the OTC Bulletin Board greater than or equal to $4.00 (one-time
$25,000 bonus). Upon termination of the employment agreement by the Company
without cause (as defined in the agreement), Mr. Wollach shall be entitled to
severance payments equal to the product of his then-current base salary
multiplied by a fraction, the numerator of which is the number of partial and
complete calendar quarters between his original date of hire (September 1997)
and the date of termination (up to a maximum of 12), and the denominator of
which shall be 12. However, in the event of a change of control, Mr. Wollach's
amount of severance will be as determined by the Board, and at least equal to
his total salary and bonuses during the prior 12 months.
Mr. Wollach's employment agreement also provides for a grant of additional
stock options to purchase up to 400,000 shares of Common Stock, of which
options for 200,000 shares are immediately vested and options for 200,000
shares vest monthly over a period of two years from the date of the employment
agreement. The employment agreement also amended Mr. Wollach's prior stock
option grant of 200,000 shares to provide that options for 60,000 shares would
be immediately vested and options for 140,000 shares vest monthly over a
period of two years from the date of the employment agreement. All of Mr.
Wollach's options accelerate and become fully vested in the event of a merger,
sale of substantially all of the Company's assets, reorganization, liquidation
or change of control of the Company. All such stock options are exercisable at
an exercise price of $1.406, the price at which outstanding Company options
were repriced as of November 4, 1998.
In addition, the Company has entered into employment agreements with Messrs.
Jackson and Western, effective January 1, 1998 and October 12, 1998,
respectively. Each of the employment agreements is for a term of one year and
provides for an annual base salary to each of Messrs. Jackson and Western of
$100,000 and $100,000, respectively, subject to annual adjustment by the Board
of Directors, together with an annual discretionary bonus to be determined by
the Board of Directors. In addition, Mr. Western received a signing bonus in
the form of stock options to purchase up to 10,000 shares of Common Stock
pursuant to the Company's 1998 Stock Option Plan, which options vest 90 days
from his date of hire. Mr. Western also received stock options to purchase up
to an additional 100,000 shares of Common Stock which options vest annually
over four years. All such options are exercisable at an exercise price of
$1.093, the fair market value of the Common Stock on the date of hire. The
foregoing employment agreements with Messrs. Jackson and Western also provide
for severance payments to such executive officers upon the termination of
employment by the Company without cause. The amount of severance payments will
be equal to two months' salary for Mr. Jackson and two weeks' salary for Mr.
Western.
Additionally, pursuant to a non-competition agreement with the Company, each
of such executive officers has agreed not to compete with the Company for a
period of 12 months following the qualified termination of his employment, as
defined in his respective employment agreement. The Company, at its option,
may extend the non-compete period for an additional 12 months provided the
Company pays the employee an amount equal to 50% of the highest base salary
rate the Company paid him in the last year of employment.
In addition, in October 1997 the Company's Board of Directors adopted an
executive compensation policy for certain of its executive officers. This
policy provides for incentive-based equity compensation to the Company's
executive officers based on the Company's performance and its achieving
certain financial targets
41
<PAGE>
established by the Board of Directors for each fiscal year. Under the policy,
if the Company meets between 50 and 100 percent of its financial targets for
the fiscal year, the executive officers entitled to participate in the policy,
as determined by the Board of Directors, will receive stock options under the
Company's 1998 Stock Option Plan to purchase such number of shares of Common
Stock as determined by the Board of Directors. If the Company fails to meet at
least 50 percent of its financial targets, no additional equity compensation
will be paid. Eligible executive officers who serve less than the full year
may be entitled to receive their pro rata portion of any equity compensation
payable under the policy. For fiscal year 1998, the Company does not expect to
pay any equity compensation to its officers under its executive compensation
policy.
In January 1999, the Board of Directors adopted a new executive bonus plan
for fiscal year 1999. The purpose of the plan is to provide incentive equity
compensation to the Company's executive management team and other employees
based on the Company meeting certain financial performance goals as set by the
Board. Satisfaction of the financial performance goals will be determined upon
review of the Company's audited financial statements for 1999. The plan
provides for the grant of stock options to purchase up to 1,500,000 shares of
Common Stock, of which options for up to 750,000 shares will be available to
the management team and options for up to 750,000 shares will be available for
other Company employees. Options under the plan may be granted upon
satisfaction of the financial goals and at the then fair market value of the
Common Stock and at such vesting schedules as set by the Board.
1998 Stock Option Plan
On April 15, 1998, the Company's shareholders approved the 1998 Stock Option
Plan (the "Option Plan") as adopted by the Board of Directors on January 1,
1998. The purpose of the Option Plan is to promote the success of the
Company's business by attracting the best available personnel for positions of
substantial responsibility, and to provide an incentive to officers,
directors, employees, consultants and advisors of the Company. The Option Plan
provides for the granting of both incentive stock options (stock options that
are intended to qualify for favorable tax treatment under Section 422) and
nonqualified stock options. The Option Plan is not qualified under Section
401(a) of the Code and is not subject to the Employee Retirement Income
Security Act of 1974. The Company has reserved a total of 2,000,000 shares of
Common Stock for issuance under the Option Plan. At February 8, 1999, the
Company had awarded options to purchase an aggregate of 1,648,750 shares of
Common Stock, which options are exercisable at a weighted average exercise
price of approximately $1.40 per share. On November 4, 1998, the Company
repriced all outstanding stock options held by current employees and directors
to a price of $1.406, representing the last trade price of the Common Stock on
the OTC Bulletin Board on such date. In addition, as a result of the
restructuring in November 1998 in which the Company reduced its employee base
from 23 to 13 employees and the resignations of Messrs. Smith and Guarino as
officers of the Company, options for 50,375 shares terminate if not exercised
within 90 days after the date of the restructuring.
The Option Plan is administered by the Board of Directors which has full
power and authority to administer and interpret the Plan and to adopt such
rules and agreements for the administration of the Option Plan as the Board of
Directors deems necessary or advisable.
The Board of Directors selects the participants to receive stock options and
determines the number of shares, the type of option and the exercise price as
well as the time or times at which options may be exercised and other terms
and conditions. For incentive stock options, the exercise price may not be
less than the fair market value of the Common Stock on the date of grant. For
nonqualified stock options, the exercise price may be less than the fair
market value of the Common Stock on the date of grant. In no case, however,
may options (whether incentive stock options or nonqualified stock options) be
granted under the Option Plan at an exercise price which is less than the
initial public offering price of the shares of Common Stock offered hereby. In
the event of stock dividends, stock splits and similar capital changes, the
Option Plan provides for appropriate adjustments in the number of shares
available for options and the number of shares subject to and exercise prices
of outstanding options.
The term of each option granted under the Option Plan may be no more than
ten years from the date of grant. Options granted to employees expire 90 days
following termination of employment (but in no event later
42
<PAGE>
than the date of expiration of the option), except in the case of permanent
disability or death. In the case of termination of employment due to permanent
disability or death, the option terminates one year from the date that the
employee ceases work as a result of disability or death (but in no event later
than the date of expiration of such option). The Board of Directors has the
authority to extend the expiration dates of any outstanding option in
circumstances it deems appropriate, provided that it may not extend an option
beyond the original term of such option.
The exercise price of options is generally payable in cash. For nonqualified
options, the option holder must also pay to the Company, at the time of
purchase, the amount of federal, state, and local withholding taxes required
to be withheld by the Company. Under certain limited circumstances, shares of
Common Stock may be used for payment of the exercise price or satisfaction of
withholding obligations.
Notwithstanding any vesting requirements of an option, in the event of a
merger, reorganization, sale of substantially all of the assets of the
Company, change of control of the Company, liquidation, dissolution or other
corporate transaction wherein the Company is not the surviving corporation, an
option holder typically has the right to immediately exercise all of his or
her options, whether vested or unvested.
The options are assignable only (i) by will or by the laws of descent and
distribution or (ii) in the case of a nonqualified stock option, by gift to
immediate family members of the optionee, to partnerships of which the only
partners are members of the optionee's immediate family and trusts established
solely for the benefit of such immediate family members.
The Option Plan may be modified, amended or terminated by the Board of
Directors except with respect to options granted prior to such action.
Notwithstanding the foregoing, shareholder approval is required for any
amendment which increases the number of shares subject to the Option Plan
(other than in connection with the anti-dilution provisions described above or
the assumption or substitution of options in connection with certain mergers
and other similar events. The Board of Directors may delegate its power and
authority with respect to the Option Plan to a committee thereof.
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<PAGE>
CERTAIN TRANSACTIONS
On July 11, 1997, the Company entered into a three-year consulting agreement
with Northwest Capital Partners, L.L.C. to serve as the Company's financial
advisor. Brent Nelson, a director and shareholder of the Company, also serves
as president and managing partner of Northwest Capital. Pursuant to the terms
of the consulting agreement, the Company is obligated to pay Northwest Capital
a fee of $5,000 per month for 36 months from December 31, 1997, in
consideration for Northwest Capital's efforts and assistance in raising
capital for the Company. This monthly fee was decreased by mutual agreement of
the parties to $3,000 beginning November 1, 1998. Under the agreement, the
Company issued 1,200,000 shares of Common Stock to Northwest Capital in
consideration for its assistance with the Neoteric Acquisition and other
financings for the Company. In addition, for the three-year period from
September 10, 1997, the Company granted to Northwest Capital certain rights of
first refusal on any offering of Company securities by the Company involving
more than 1,000 shares of stock. Under the terms of the consulting agreement,
Northwest Capital also has the right for a period of five years to nominate
one director for election to the Company's Board of Directors, and its
director nominee is Brent Nelson. In addition, for a three-year period
following the term of the consulting agreement, the Company has granted to
Northwest Capital a right of first refusal to act as financial advisor to the
Company.
On September 23, 1996, Neoteric Media entered into an asset purchase
agreement with Steve Jackson, an officer and shareholder of the Company for
the purchase of a software application developed by Mr. Jackson in
consideration for $67,500 in cash, a promissory note for $62,500 and 80,000
shares of common stock of Neoteric Media (which shares represented 640,000
shares of common stock following the Neoteric Acquisition). The promissory
note was subsequently paid in full in accordance with its terms. Neoteric
Media also entered into a one-year employment agreement with Mr. Jackson
effective on September 23, 1996 that provided for compensation based on a
percentage of sales of the software application. That employment agreement
expired by its terms and the Company has subsequently entered into a new
employment agreement with Mr. Jackson effective January 1, 1998. See
"MANAGEMENT--Executive Compensation and Other Information--Employment
Contracts."
On September 23, 1996, Thad E. Wardall, a director and shareholder of the
Company, loaned $125,000 to Neoteric Media to fund the acquisition of the
software application developed by Mr. Jackson. The loan was evidenced by a
promissory note, secured by a lien on certain of the Company's assets.
Subsequently, on August 25, 1997, the Company entered into a note exchange
agreement with Mr. Wardall for the exchange of the prior promissory note for a
new convertible promissory note in principal amount of $73,194 (the "Wardall
Note"). On October 7, 1997, Mr. Wardall exercised his option to convert all
outstanding principal and accrued interest on the Wardall Note into 112,607
shares of Common Stock (at a conversion rate of $0.65 per share) and the
security interest terminated.
Effective in October 1998, Ryan Smith, the Company's former Chief Executive
Officer and Chairman of the Board, and John Guarino, the Company's former
Senior Vice President and a Director, resigned from their respective positions
as officers and directors of the Company. The Company is currently in
negotiations and expects to enter into mediation and/or arbitration with each
of Messrs. Smith and Guarino and Jay Paulson, former officers and/or directors
and significant shareholders of the Company, in connection with certain
severance and other matters arising out of their employment with the Company.
In addition, the Company has been served with a complaint filed by Jay Paulson
in King County Superior Court in the State of Washington on November 18, 1998
(case no. 98-2-27751-1SEA) for declaratory and injunctive relief and
unspecified damages in connection with a requested transfer of restricted
securities held by Mr. Paulson. The Company believes it has taken appropriate
action and intends to vigorously defend this lawsuit.
Except as described above, there have not been, nor is there currently
proposed, any transaction or series of similar transactions to which the
Company was or is to be a party in which the amount involved exceeds $60,000
and in which any director, executive officer or holder of more than 5% of the
Common Stock of the Company had or will have a direct or indirect material
interest.
44
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of February 8, 1999 by: (i) each director,
(ii) the Company's former Chief Executive Officer, (iii) all directors and
executive officers of the Company as a group, and (iv) each person who is
known by the Company to beneficially own more than 5% of the Common Stock. The
information includes options exercisable by the respective person within 60
days of February 8, 1999 (the "Vested Options"). Except as otherwise noted,
the address of each such person is c/o Interactive Objects, Inc., 17720 NE
65th, Suite 202, Redmond, WA 98052.
<TABLE>
<CAPTION>
Shares of Common
Stock Beneficially
Owned(1)
---------------------
Number Percent
Beneficial Owner of Shares of Total(2)
---------------- --------- -----------
<S> <C> <C>
Ryan Smith............................................ 1,680,800 11.4%
1020 W. Lake Sammamish Parkway N.E.
Bellevue, WA 98008
Jay R. Paulson........................................ 1,600,000 10.9
1839 - 280th Ave. N.E.
Carnation, WA 98014
John J. Guarino....................................... 1,200,000 8.2
15515 - 184th Pl. N.E.
Woodinville, WA 98072
Thad E. Wardall(3).................................... 1,202,607 8.1
Brent Nelson(4)....................................... 665,000 4.5
Steve Wollach(5)...................................... 453,332 3.0
All executive officers and directors as a group (seven
persons)(6).......................................... 3,042,189 19.8%
</TABLE>
- --------
* Less than 1%
(1) This table is based on information supplied by executive officers,
directors and shareholders. Subject to applicable community property
laws, each shareholder named in the table has sole voting and investment
power with respect to the shares set forth opposite such shareholder's
name.
(2) Based on 14,708,927 shares of Common Stock issued and outstanding as of
February 8, 1999.
(3) Includes 112,607 shares being registered and offered in this Prospectus.
See "SELLING SHAREHOLDERS." Also includes 50,000 shares of Common Stock
subject to Vested Options held by Mr. Wardall.
(4) Includes 65,000 shares of Common Stock subject to Vested Options held by
Mr. Nelson. In addition, includes 600,000 shares of Common Stock held of
record by Northwest Capital Partners, L.L.C. for which Mr. Nelson serves
as president and managing partner; Mr. Nelson disclaims beneficial
ownership over all of such except to the extent of his pecuniary interest
therein. See "CERTAIN TRANSACTIONS."
(5) Includes 428,332 shares of Common Stock subject to Vested Options held by
Mr. Wollach.
(6) Consists of Messrs. Wollach, Nelson, Wardall, Western, Phillips, and
Jackson and Ms. Byrd. See "MANAGEMENT." Includes 624,582 shares of Common
Stock subject to Vested Options held by the executive officers and
directors as a group.
45
<PAGE>
DESCRIPTION OF SECURITIES
The following summary description of the Company's capital stock and of
certain provisions of the Company's Articles of Incorporation (the "Articles")
and Bylaws are not intended to be complete and are subject to and qualified in
this entirety by reference to, the Articles and the Bylaws, copies of each of
which are filed as exhibits to the Registration Statement on Form SB-2, of
which this Prospectus forms a part.
General
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock having a par value of $.01 and 10,000,000 shares of preferred
stock having a par value of $.01. As of February 8, 1999, there were issued
and outstanding 14,708,927 shares of Common Stock held by approximately 258
holders of record (excluding shares issuable upon exercise of any outstanding
stock options or the Warrants) and no shares of preferred stock issued and
outstanding.
Common Stock
Holders of outstanding shares of Common Stock are entitled to one vote per
share on all matters submitted to a vote of the shareholders. There are no
cumulative voting rights. Holders of a majority of the outstanding shares of
Common Stock constitute a quorum at any meeting of shareholders and the vote
by the holders of a two-thirds of the outstanding shares of Common Stock is
required to effect certain fundamental corporate changes, including any
liquidation, merger or sale of substantially all of the Company's assets.
Holders of outstanding shares of Common Stock are entitled to receive
dividends, if, as, and when declared by the Board of Directors out of funds
legally available therefore, subject to dividend rights of holders of
preferred stock, if any. Upon liquidation of the Company, holders of
outstanding shares of Common Stock are entitled to share ratably in all assets
of the Company remaining after payment of liabilities. Holders of outstanding
shares of Common Stock have no preemptive rights or other rights to subscribe
for unissued or treasury shares or securities convertible into or exercisable
or exchangeable for shares of Common Stock. The outstanding shares of Common
Stock are fully paid and nonassessable.
Preferred Stock
Pursuant to the Articles, the Company is authorized to issue shares of
preferred stock, which may be issued from time to time in one or more series
upon authorization by the Company's Board of Directors. The Board of
Directors, without further approval of the Company's shareholders, is
authorized to fix the dividend rights and terms, conversion rights, voting
rights, redemption rights and terms, liquidation preferences, and any other
rights, preferences, privileges and restrictions applicable to each series of
the preferred stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, among other things, could adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, may make it more
difficult for a third party to gain control of the Company, discourage bids
for the Company Common Stock at a premium to the prevailing market price or
otherwise adversely affect the market price of the Common Stock. The Company
has no present plans to issue any shares of preferred stock.
Common Stock Purchase Warrants
From April 1998 through May 1998, the Company issued stock purchase warrants
to purchase up to an aggregate of 853,401 shares of Common Stock at an
exercise price of $4.00 per share, as follows: the Berliner Warrants to
purchase up to 200,000 shares were granted on April 9, 1998; the Brokers'
Warrants to purchase up to 153,401 shares were granted on May 22, 1998; and
the National Day Warrants to purchase up to 500,000 shares were granted on May
22, 1998. The National Day Warrant was subsequently repriced by the Company in
January 1999 to an exercise price of $1.406 per share, in consideration for
the consultant's on-going services to the Company. The terms of these Warrants
expire two years from their respective dates of issuance. These
46
<PAGE>
Warrants are non-transferable and are subject to appropriate adjustment upon
any stock dividend, stock split, subdivision, consolidation or
reclassification of the Common Stock. In addition, the Company has granted to
the holders of the Berliner Warrants, Brokers' Warrants and National Day
Warrants certain registration rights on the shares underlying the Warrants,
which shares are included in the Registration Statement on Form SB-2. As of
the date of this Prospectus, none of the Berliner Warrants, Brokers' Warrants
or National Day Warrants has been exercised. See "SELLING SHAREHOLDERS."
In July 1998, the Company issued an additional series of warrants to
purchase up to 200,000 shares of Common Stock. The GlobeMedia Warrants entitle
the holder to purchase shares of Common Stock at any time prior to July 15,
2000 at the following schedule: warrants to purchase 25,000 shares have an
exercise price of $5.00 per share and expired without being exercised on
October 15, 1998; warrants to purchase 50,000 shares have an exercise price of
$5.50 per share and expired without being exercised on January 15, 1999;
warrants to purchase 25,000 shares have an exercise price of $6.00 per share
and expire on July 15, 1999; warrants to purchase 50,000 shares have an
exercise price of $6.50 per share and expire on January 15, 2000; and warrants
to purchase 50,000 shares have an exercise price of $7.00 per share and expire
on July 15, 2000. The exercise prices are subject to appropriate adjustment
upon any stock dividend, stock split, subdivision, consolidation or
reclassification of the Common Stock. The holder of the GlobeMedia Warrants
has certain registration rights on the shares underlying the Warrants, which
shares are included in the Registration Statement on Form SB-2. As of the date
of this Prospectus, none of the GlobeMedia Warrants has been exercised. See
"SELLING SHAREHOLDERS."
Anti-Takeover Legislation
The Company is subject to the Washington Business Corporation Act ("RCW
23B"), which contains provisions that have the effect of discouraging non-
negotiated takeover attempts. RCW 23B.19, as recently amended, generally
prohibits any "significant business transaction" within five years of the date
a person acquires ten percent or more of the outstanding voting shares of a
public corporation, unless the transaction first receives the approval of a
majority of the disinterested directors prior to the time the ten percent
threshold is crossed.
RCW 23B.19, as recently amended, also imposes a fair price restriction on
public corporations. The statute provides, subject to certain exceptions, that
specified change-of-control transactions between a corporation and an
interested shareholder (defined as a person or affiliated group beneficially
owning 20% or more of a corporation's outstanding voting stock) will be
prohibited unless a majority of disinterested directors determine the price
offered by the interested shareholder to be fair or unless two-thirds of the
shareholders of each voting group entitled to vote separately on the
transaction (not including the interested shareholder) approve.
Director and Officer Liability and Indemnification
The Company's Articles provide that the liability of the Company's directors
is limited and that the Company will indemnify its directors and officers to
the fullest extent permitted by law. Insofar as indemnification for liability
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to those provisions, 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.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is American Registrar
and Transfer Co., whose address is 10 Exchange Place, Suite 705, P.O. Box
1798, Salt Lake City, Utah 84110.
47
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the OTC Bulletin Board under the symbol
"OBJX". On February 8, 1999, the closing bid and asked prices of the Common
Stock as reported on the OTC Bulletin Board were $1 5/16 and $1 1/2,
respectively, and the Common Stock was held of record by approximately 258
persons on such date (excluding holders of shares issuable upon exercise of
outstanding stock options and Warrants). The Common Stock first began trading
on the OTC Bulletin Board under the "OBJX" trading symbol on September 25,
1997. The table below sets forth, for the calendar quarters indicated since
the date that the Common Stock began trading, the high and low bid prices for
the Common Stock as reported by the OTC Bulletin Board. These prices reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not represent actual transactions.
<TABLE>
<CAPTION>
Interactive
Objects,
Inc. Common
Stock
-----------
High Low
----- -----
<S> <C> <C>
1997
First Quarter................................................. -- --
Second Quarter................................................ -- --
Third Quarter (beginning September 25, 1997).................. $2.50 $1.88
Fourth Quarter................................................ 2.66 1.88
1998
First Quarter................................................. 4.50 1.88
Second Quarter................................................ 9.94 3.84
Third Quarter................................................. 4.72 1.41
Fourth Quarter ............................................... 1.94 0.91
1999
First Quarter (through February 8, 1999)...................... $1.75 $1.13
</TABLE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Common Stock is currently traded on the OTC Bulletin Board and
there is a limited public market for the Common Stock. Sales of substantial
amounts of the Common Stock in the public market, or the perception that such
sales may occur, could adversely affect market price of the Common Stock from
time to time in the public market and could impair the Company's ability to
raise additional capital through the sale of its equity securities in the
future.
As of the date of this Prospectus, there are 14,708,927 shares of Common
Stock issued and outstanding (exclusive of shares reserved for issuance upon
exercise of outstanding stock options and the Warrants). Assuming exercise in
full of the Warrants to purchase up to 978,401 shares of Common Stock (which
shares are included in the Registration Statement on Form SB-2), there will be
15,687,328 shares of Common Stock issued and outstanding, consisting of
2,925,018 shares offered hereby, 7,596,784 restricted shares of Common Stock,
and 5,165,526 shares of Common Stock that are currently freely tradable
without restriction. In addition, the Company has reserved up to 2,000,000
shares of Common Stock for issuance upon exercise of options which may be
granted under the 1998 Stock Option Plan, of which there are currently
outstanding options to purchase 1,648,750 shares of Common Stock. The shares
issuable upon exercise of any of such stock options will be restricted until
the Company files a registration statement on Form S-8, or any successor form,
with the Commission or until sold in accordance with Rule 144.
The 2,925,018 shares of Common Stock being offered hereby will be freely
tradable without restriction or further registration under the Securities Act
by persons other than affiliates of the Company. The 7,596,784 restricted
shares will become freely tradable if subsequently registered under the
Securities Act or to the extent
48
<PAGE>
permitted by Rule 144 or some other exemption from registration under the
Securities Act. Other than the Shares being registered hereunder, the Company
has not granted any registration rights with regard to any additional shares
of Common Stock.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the date of acquisition of restricted shares from the Company or an
affiliate of the Company, the holder will be entitled to sell in the public
market, during any three month period, a certain amount of shares of Common
Stock. The maximum number of shares of Common Stock that may be sold during
such period will be the greater of 1% of the total number of the then
outstanding shares of Common Stock or the average weekly trading volume of
shares of Common Stock during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. Sales under Rule 144
are also subject to certain requirements as to the manner of sale, notice and
availability of current public information about the Company. If the holder of
the shares has held the Common Stock for at least two years, the shareholder,
other than an affiliate of the Company, will be entitled to sell the
restricted shares in the public market under Rule 144(k) without regard to the
volume limitations, manner of sale requirements, public information
requirements or notice requirements.
Of the restricted shares, 5,984 shares of Common Stock are currently
eligible for resale under Rule 144 under the Securities Act without regard to
volume limitations. Approximately 6,960,800 restricted shares are eligible for
sale pursuant to Rule 144 (subject to volume limitations) having been held for
at least one year, of which 6,760,800 shares are held by affiliates of the
Company. The remaining 630,000 restricted shares will become eligible for sale
under Rule 144 (subject to volume limitations) upon the expiration of one-year
holding periods beginning in May and June 1999.
PLAN OF DISTRIBUTION
The Selling Shareholders may from time to time sell all or a portion of the
Shares in the over the counter market, on any other national securities
exchange on which the Common Stock is listed or traded, in negotiated
transactions or otherwise, at prices then prevailing or related to the then
current market price or at negotiated prices. The Shares will not be sold in
an underwritten public offering. The Shares may be sold directly or through
brokers or dealers. The methods by which the Shares may be sold include: (a) a
block trade (which may involve crosses) in which the broker or dealer so
engaged will attempt to sell the securities as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus; (c) ordinary brokerage
transactions and transactions in which the broker solicits purchasers; and (d)
privately negotiated transactions. In effecting sales, brokers and dealers
engaged by Selling Shareholders may arrange for other brokers or dealers to
participate. Brokers or dealers may receive commissions or discounts from
Selling Shareholders (or, if any such broker-dealer acts as agent for the
purchaser of such shares, from such purchaser) in amounts to be negotiated
which are not expected to exceed those customary in the types of transactions
involved. Broker-dealers may agree with the Selling Shareholders to sell a
specified number of such shares at a stipulated price per share, and, to the
extent such broker-dealer is unable to do so acting as agent for a Selling
Shareholder, to purchase as principal any unsold shares at the price required
to fulfill the broker-dealer commitment to such Selling Shareholder. Broker-
dealers who acquire shares as principal may thereafter resell such shares from
time to time in transactions (which may involve crosses and block transactions
and sales to and through other broker-dealers, including transactions of the
nature described above) in the over-the-counter market or otherwise at prices
and on terms then prevailing at the time of sale, at prices then related to
the then-current market price or in negotiated transactions and, in connection
with such resales, may pay to or receive from the purchasers of such shares
commissions as described above.
In connection with the distribution of the Shares, the Selling Shareholders
may enter into hedging transactions with broker-dealers. In connection with
such transactions, broker-dealers may engage in short sales of the Shares in
the course of hedging the positions they assume with the Selling Shareholders.
The Selling
49
<PAGE>
Shareholders may also sell the Shares short and redeliver the Shares to close
out the short positions. The Selling Shareholders may also enter into option
or other transactions with broker-dealers which require the delivery to the
broker-dealer of the Shares. The Selling Shareholders may also loan or pledge
the Shares to a broker-dealer and the broker-dealer may sell the Shares so
loaned or upon a default the broker-dealer may effect sales of the pledged
shares. In addition to the foregoing, the Selling Shareholders may enter into,
from time to time, other types of hedging transactions.
The Selling Shareholders and any broker-dealers participating in the
distributions of the Shares may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any profit on the sale of
Shares by the Selling Shareholders and any commissions or discounts given to
any such broker-dealer may be deemed to be underwriting commissions or
discounts under the Securities Act.
The Shares may also be sold pursuant to Rule 144 under the Securities Act
beginning one year after the Shares were issued.
The Company has filed the Registration Statement, of which this Prospectus
forms a part, with respect to the sale of the Shares. The Company has agreed
to use its best efforts to keep the Registration Statement current and
effective for a period commencing on the effective date of the Registration
Statement and terminating 24 months after the Registration Statement is filed
with the Commission. There can be no assurance that the Selling Shareholders
will sell any or all of the Shares offered hereunder.
Under the Exchange Act and the regulations thereunder, any person engaged in
a distribution of the shares of Common Stock of the Company offered by this
Prospectus may not simultaneously engage market making activities with respect
to the Common Stock of the Company during the applicable "cooling off" periods
prior to the commencement of such distribution. In addition, and without
limiting the foregoing, the Selling Shareholders will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder, which
may limit the timing of purchases and sales of Common Stock by the Selling
Shareholders.
The Company will pay all of the expenses incident to the offering and sale
of the Shares, other than commissions, discounts and fees of underwriters,
dealers or agents.
LEGAL MATTERS
The validity of the issuance of the Shares of Common Stock offered hereby
has been passed upon for the Company by Cairncross & Hempelmann, P.S.,
Seattle, Washington.
EXPERTS
The financial statements and notes thereto at December 31, 1997, and for
each of the two years in the period ended December 31, 1997 appearing in this
Prospectus and the Registration Statement have been audited by Peterson
Sullivan P.L.L.C., independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
50
<PAGE>
FINANCIAL STATEMENTS
OF
INTERACTIVE OBJECTS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Financial Statements
Balance Sheet as of September 30, 1998.................................. F-2
Statements of Operations for the Nine Months ended September 30, 1998
and 1997............................................................... F-3
Statements of Cash Flows for the Nine Months ended September 30, 1998
and 1997............................................................... F-4
Notes to Unaudited Financial Statements................................. F-5
Audited Financial Statements
Independent Auditors' Report............................................ F-6
Balance Sheet as of December 31, 1997................................... F-7
Statements of Operations for the Years ended December 31, 1997 and 1996. F-8
Statements of Stockholders' Equity for the years ended December 31, 1997
and 1996............................................................... F-9
Statements of Cash Flows for the Years ended December 31, 1997 and 1996. F-10
Notes to Audited Financial Statements................................... F-11
</TABLE>
F-1
<PAGE>
INTERACTIVE OBJECTS, INC.
BALANCE SHEET (unaudited)
as of September 30, 1998
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
------
Current Assets
Cash.............................................. $ 4,007,151 $ 214,967
Certificate of deposit............................ 105,295 101,309
Accounts receivable............................... 47,555 10,698
Prepaid expenses.................................. 181,801 46,557
----------- ----------
Total current assets............................ 4,341,802 373,531
Furniture and equipment, at cost, less accumulated
depreciation of $70,872 and $31,111................ 234,293 190,451
Other Assets
Capitalized software costs........................ 165,000 130,000
Deposits.......................................... 6,935 880
----------- ----------
171,935 130,880
Total Assets.................................... $ 4,748,030 $ 694,862
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accounts payable.................................. $ 385,242 $ 185,938
Accrued expenses.................................. 132,140 62,894
Notes payable..................................... -- 62,500
----------- ----------
Total current liabilities....................... 517,382 311,332
Stockholders' Equity
Preferred stock, $.01 par value; 10,000,000
authorized, no shares issued and outstanding..... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 14,708,927 shares issued and
outstanding at September 30, 1998................ 147,089 19,417
Additional paid-in capital........................ 9,003,475 1,907,277
Retained deficit.................................. (4,919,916) (1,543,164)
----------- ----------
4,230,648 383,530
Total Liabilities and Stockholders' Equity...... $ 4,748,030 $ 694,862
=========== ==========
</TABLE>
See Notes to Unaudited Financial Statements
F-2
<PAGE>
INTERACTIVE OBJECTS, INC.
STATEMENTS OF OPERATIONS (unaudited)
For the Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues
Service revenue.................................. $ 2,090,402 $ 122,109
Expenses
Labor and benefits............................... 2,971,887 177,747
Selling, general and administrative.............. 2,562,643 137,502
----------- ---------
5,534,530 315,249
Loss before interest expense................... (3,444,128) (193,140)
Interest expense................................. (12,392) (10,682)
Miscellaneous Income/Interest Income............. 79,769 --
----------- ---------
Net Loss....................................... $(3,376,752) $(203,822)
=========== =========
Retained deficit, beginning of period.............. (1,543,164) (84,587)
----------- ---------
Retained deficit, end of period.................... (4,919,916) $(288,409)
=========== =========
Basic earnings (loss) per share of common stock.... $ (0.24) $ (0.26)
=========== =========
Weighted average common and common equivalent
shares outstanding................................ 13,862,461 782,600
=========== =========
</TABLE>
See Notes to Unaudited Financial Statements
F-3
<PAGE>
INTERACTIVE OBJECTS, INC.
STATEMENTS OF CASH FLOWS (unaudited)
For the Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net loss.......................................... $(3,376,752) $(203,824)
Depreciation and amortization..................... 39,762 11,362
Securities issued in exchange for services........ 1,084,841 --
----------- ---------
Changes in operating assets and liabilities..... (2,252,149) (192,462)
Accounts receivable............................... (36,857) (25,919)
Prepaid expenses.................................. (135,244) (1,976)
Deposits.......................................... (6,055) --
Accounts payable.................................. 199,304 7,167
Accrued expenses.................................. 69,246 17,954
----------- ---------
Cash used in operating activities............... (2,161,755) (195,236)
----------- ---------
Cash Flows from Investing Activities
Purchase of Certificate of Deposit................ (3,986) --
Purchase of equipment............................. (83,603) (21,236)
Purchase of software.............................. (35,000) --
----------- ---------
Cash used in investing activities............... (122,589) (21,236)
----------- ---------
Cash Flows from Financing Activities
Issuance of common stock.......................... 6,139,028 600,002
Proceeds on notes payable......................... 600,000 --
Payments on notes payable......................... (662,500) (80,500)
----------- ---------
Cash provided by investing activities........... 6,076,528 519,502
----------- ---------
Net increase in cash............................ 3,792,184 303,030
----------- ---------
Cash, beginning of period........................... 214,967 15,788
----------- ---------
Cash, end of period................................. $ 4,007,151 $ 313,818
=========== =========
</TABLE>
See Notes to Unaudited Financial Statements
F-4
<PAGE>
INTERACTIVE OBJECTS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Unaudited Interim Financial Information
The financial information as of September 30, 1998 and for the nine months
ended September 30, 1998 and 1997 is unaudited, but includes all adjustments
that the Company considers necessary for a fair presentation of the financial
position at such dates and the operations and cash flows for the periods then
ended. Operating results for the nine months ended September 30, 1998 are not
necessarily indicative of results that may be expected for the entire year.
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Interactive Objects, Inc.
Redmond, Washington
We have audited the accompanying balance sheet of Interactive Objects, Inc.
as of December 31, 1997, and the related statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1997 and
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 Interactive Objects, Inc.
as of December 31, 1997, and the results of its operations and its cash flows
for the years ended December 31, 1997 and 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, on August 31, 1997,
Neoteric Media, Inc. d/b/a Interactive Objects, Inc. was sold to a Company
named Asia Pacific Chemical Engineering Co., Ltd. ("Asia Pacific"). Neoteric
Media, Inc. d/b/a Interactive Objects, Inc. then merged into Asia Pacific and
the Company changed its name to Interactive Objects, Inc.
As discussed in Note 2 to the financial statements, a required adjustment in
the valuation of stock issued for services was discovered as of December 31,
1997, after the 1997 financial statements had been issued. Accordingly, the
1997 financial statements have been restated for this adjustment.
/s/ Peterson Sullivan P.L.L.C.
March 4, 1998
(except for Note 7, the date of
which is July 31, 1998 and for
Note 2, the date of which is
February 8, 1999)
F-6
<PAGE>
INTERACTIVE OBJECTS, INC.
BALANCE SHEET (audited)
as of December 31, 1997
<TABLE>
<CAPTION>
December 31,
1997
------------
ASSETS
------
<S> <C>
Current Assets
Cash............................................................ $ 214,967
Certificate of deposit.......................................... 101,309
Accounts receivable............................................. 10,698
Prepaid expenses................................................ 46,557
----------
Total current asset........................................... 373,531
Furniture and equipment, at cost, less accumulated depreciation of
$31,111.......................................................... 190,451
Other Assets
Capitalized software costs...................................... 130,000
Deposits........................................................ 880
----------
130,880
----------
Total Assets.................................................. $ 694,862
==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
Current Liabilities
Accounts payable................................................ $ 185,938
Accrued expenses................................................ 62,894
Notes payable................................................... 62,500
----------
Total current liabilities..................................... 311,332
Stockholders' Equity
Preferred stock, $.01 par value; 2,000,000 authorized, no shares
issued and outstanding......................................... --
Common stock, $.0015 par value; 50,000,000 shares authorized,
12,944,917 shares issued and outstanding....................... 19,417
Additional paid-in capital...................................... 1,907,277
Retained deficit................................................ (1,543,164)
----------
383,530
----------
Total Liabilities and Stockholders' Equity.................... $ 694,862
==========
</TABLE>
See Notes to Financial Statements
F-7
<PAGE>
INTERACTIVE OBJECTS, INC.
STATEMENTS OF OPERATIONS (audited)
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Revenues
Service revenue..................................... $ 365,631 $ 57,832
Expenses
Labor and benefits.................................. 787,458 67,072
Selling, general and administrative................. 1,256,432 61,490
----------- --------
2,043,890 128,562
----------- --------
Loss before interest expense...................... (1,678,259) (70,730)
Interest expense.................................... (7,007) (4,134)
----------- --------
Net Loss.......................................... $(1,682,266) $(74,864)
=========== ========
Basic earnings (loss) per share of common stock....... $ (0.18) $ (0.01)
=========== ========
</TABLE>
In 1996 and during a portion of 1997, Interactive Objects (then Neoteric)
was an S corporation for income tax purposes. Pro forma tax expense and
related per share data if the Company had been a C corporation for all periods
presented would be the same as that shown above. Interactive Objects incurred
losses in 1996 and 1997. If it were a C corporation, any benefit from these
losses would be fully reserved.
See Notes to Financial Statements
F-8
<PAGE>
INTERACTIVE OBJECTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (audited)
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Additional
Common Common Paid-in Retained
Shares Stock Capital Deficit Total
---------- ------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balances, December 31,
1995................... 760,000 $ 3,000 $ 41,121 $ (9,722) $ 34,399
Capital contribution.... -- -- 42,709 -- 42,709
Issuance of shares in
conjunction with
acquisition of Visual
Gateway Interface 8,000 -- -- -- --
Other allocations and
adjustments among
shareholders........... (57,400) -- -- -- --
Net loss................ -- -- -- (74,864) (74,864)
---------- ------- ---------- ----------- ----------
Balances, December 31,
1996................... 782,600 3,000 83,830 (84,586) 2,244
Reclassification of
undistributed losses on
effective date of
change from S
corporation to C
corporation status..... -- -- (226,688) 226,688 --
Affect on capital
structure resulting
from reverse purchase
Cancellation of shares
of Interactive at the
time of reverse
purchase............. (782,600) -- -- -- --
Issuance of stock as
consideration for
shares cancelled
above................ 7,460,800 8,191 (8,191) -- --
Acquisition of Asia
Pacific.............. 1,100,082 1,650 (5,150) -- (3,500)
Exchange of note payable
for common stock. The
note was for $62,500
with accrued interest
of $12,502............. 112,607 169 74,833 -- 75,002
Issuance of stock in
exchange for services.. 1,200,000 1,800 778,200 -- 780,000
Issuance of stock for
cash................... 3,071,428 4,607 1,210,443 -- 1,215,050
Net loss................ -- -- -- (1,685,266) (1,685,266)
---------- ------- ---------- ----------- ----------
Balances, December 31,
1997................... 12,944,917 $19,417 $1,907,277 $(1,543,164) $ 383,530
========== ======= ========== =========== ==========
</TABLE>
See Notes to Financial Statements
F-9
<PAGE>
INTERACTIVE OBJECTS, INC.
STATEMENTS OF CASH FLOWS (audited)
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss........................................... $(1,685,266) $(74,864)
Adjustments to reconcile net loss to net cash used
in operating activities:
Issuance of stock in exchange for services....... 780,000 --
Depreciation and amortization.................... 17,023 13,370
Changes in operating assets and liabilities:
Accounts receivable............................ (10,698) --
Prepaid expenses and deposits.................. (43,893) (2,239)
Accounts payable............................... 164,513 6,142
Accrued expenses............................... 50,618 12,275
----------- --------
Cash used in operating activities............ (727,703) (45,316)
----------- --------
Cash Flows from Investing Activities
Purchase of equipment.............................. (177,862) (17,303)
Investment in certificate of deposit............... (101,309) --
Purchase of Visual Gateway Interface............... -- (67,500)
----------- --------
Cash used in investing activities................ (279,171) (84,803)
----------- --------
Cash Flows from Financing Activities
Issuance of common stock........................... 1,286,552 --
Capital contribution............................... -- 42,709
Increase (decrease) in notes payable............... (80,500) 80,500
----------- --------
Cash provided by financing activities............ 1,206,052 123,209
----------- --------
Net increase (decrease) in cash.................. 199,178 (6,910)
----------- --------
Cash, beginning of year.............................. 15,789 22,699
----------- --------
Cash, end of year.................................... $ 214,967 $ 15,789
=========== ========
</TABLE>
See Notes to Financial Statements
F-10
<PAGE>
INTERACTIVE OBJECTS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization and Significant Accounting Policies
Organization
Neoteric Media, Inc. d/b/a Interactive Objects, Inc. ("Neoteric") was
incorporated under the laws of Washington on October 20, 1995. Effective
August 31, 1997, the stockholders of Neoteric exchanged their stock for the
common stock of another company named Asia Pacific Chemical Engineering Co.,
Ltd. ("Asia Pacific"). This business combination has been accounted for as a
purchase, with Neoteric as the continuing company. Because Neoteric is the
continuing company, this transaction is accounted for as a reverse purchase.
Asia Pacific had no assets, but did have liabilities of $3,500. The assumption
of these liabilities was considered the cost of Asia Pacific. Asia Pacific's
operations, which were insignificant, have been included in these financial
statements since the effective date of the exchange. The unaudited proforma
results of operations as if Asia Pacific's operations were included in these
financial statements as of January 1, 1996, would appear as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Operating revenue.................................... $ 365,631 $ 57,832
Operating expenses................................... 1,281,397 133,916
---------- ---------
Loss from operations............................. (915,766) (76,084)
Discontinued operations.............................. (15,686) (76,137)
Extraordinary item--debt forgiveness................. 185,991
---------- ---------
Net loss......................................... $ (745,461) $(152,221)
========== =========
Basic earnings (loss) per share of common stock
Income from continuing operations.................. $ (.10) $ (.01)
Discontinued operations............................ (.01)
Extraordinary item................................. .02
---------- ---------
$ (.08) $ (.02)
========== =========
</TABLE>
Subsequent to the business acquisition, Neoteric merged into Asia Pacific
and Asia Pacific changed its name to Interactive Objects, Inc. ("Interactive
Objects").
Concentration of Market and Credit Risk
Interactive Objects sells computer consulting services. In addition, it
began to market Visual Gateway Interface ("VGI") in February of 1998. Revenue
from consulting services provided to two international companies (Microsoft
and SAFECO) accounted for 100% of total revenue during the years ended
December 31, 1997 and 1996. Accounts receivable from one of these customers
accounted for 100% of total accounts receivable at December 31, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Accordingly, actual results could differ from the estimates
that were used.
Software Consulting Services Revenue Recognition
For most contracts, software consulting service revenue (including post
contract customer support) is recognized as the services are performed and is
determined by multiplying the hours incurred by an established
F-11
<PAGE>
INTERACTIVE OBJECTS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
hourly rate. On occasion, other contracts stipulate billings be made at
certain points based on performance of specified tasks. In these situations,
software consulting revenue is recognized as billings are made at the amount
of the billing. This revenue recognition method is not materially different
than recognizing revenue as services are performed.
Advertising Costs
Advertising costs are expensed as incurred and totaled $91,278 for the year
ended December 31, 1997, and $4,039 for the year ended December 31, 1996.
Cash
Cash includes cash balances held at a bank and all highly liquid debt
instruments with original maturities of three months or less. Cash balances
are in excess of amounts insured by the Federal Deposit Insurance Corporation.
No cash payments for interest or income taxes were made during the years
ended December 31, 1997 and 1996.
Certificate of Deposit
Certificates of deposit are stated at market value which approximates cost.
Accounts Receivable
Interactive Objects uses the allowance method for recognizing bad debts.
Management believes no allowance is necessary at December 31, 1997.
Furniture and Equipment
Furniture and equipment are depreciated using the straight-line method over
the estimated useful lives of the related assets.
Visual Gateway Interface
Visual Gateway Interface is a computer software product purchased from a
partnership partially owned by a stockholder of Neoteric and is recorded at a
cost of $130,000. It was paid for with cash of $67,500, a note payable for
$62,500, and 80,000 shares of common stock of Neoteric (due to reverse
purchase, this is equivalent to 640,000 shares of Interactive Objects common
stock at December 31, 1997). At the time of the transaction, the stock was
determined to have an insignificant value. Amortization of the software will
begin when the product is available for general release to customers.
Amortization recorded will be the greater of the amount computed using the
ratio that gross revenues for the software bear to the total of all
anticipated revenues for the software or the straight-line method over the
remaining estimated economic life of the product. No research and development
costs have been incurred.
Taxes on Income
Interactive Objects accounts for income taxes under an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for expected future tax consequences of events that have been recognized in
Interactive Objects' financial statements or tax returns. In estimating future
tax consequences, Interactive Objects generally considers all expected future
events other than enactments of changes in the tax laws or rates.
F-12
<PAGE>
INTERACTIVE OBJECTS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In 1996 and for a portion of 1997, Interactive Objects (then Neoteric) was
an S-corporation for income tax purposes, so income tax effects were
recognized at the stockholder level.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128")
which is effective for interim and annual financial statements for periods
ending after December 15, 1997. Under FAS 128, basic and diluted earnings per
share are to be presented. Basic earnings per share is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding in the period. Diluted earnings per share takes into
consideration common shares outstanding (computed under basic earnings per
share) and potentially dilutive common shares. The stock warrants have not
been reflected as exercised for the purposes of computing earnings or loss per
share since the exercise of such warrants would be antidilutive. The weighted
average number of shares was 9,191,569 and 7,460,800 for the years ended
December 31, 1997 and 1996. The adoption of FAS 128 did not result in a
restatement of earnings per share in prior periods.
In order to be comparative, the number of shares of common stock outstanding
used to calculate earnings per share has assumed the Interactive Objects (then
Neoteric) shareholders had exchanged their 782,600 of Neoteric stock for
7,460,800 shares of Asia Pacific stock as of January 1, 1996.
Preferred Stock
The rights and restrictions of preferred stock is to be determined by
Interactive Objects when the stock is issued. Each preferred stock issuance
will be in a series, and each series will have the same rights and
restrictions.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value.
Although there was no stock-based compensation in 1997, Interactive Objects
has chosen to account for stock-based compensation using Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
compensation cost for stock options granted to employees is measured as the
excess, if any, of the quoted market price of the Corporation's stock at the
date of the grant over the amount an employee is required to pay for the
stock.
New Accounting Standards
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," is effective for years beginning after December 15,
1997. The primary objective of this statement is to report and disclose a
measure of all changes in equity of a company that result from transactions
and other economic events in a period other than transactions with owners.
Interactive Objects does not anticipate that the statement will have a
significant impact on its financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosure About
Segments of an Enterprise and Related Information," is effective for years
beginning after December 15, 1997. This statement requires use of the
"management approach" model for segment reporting. The management approach
model is based on the way a company's management organizes segments within the
company for making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal structure,
F-13
<PAGE>
INTERACTIVE OBJECTS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
management structure, or any other manner in which management disaggregates a
company. Interactive Objects does not anticipate that the adoption of the
statement will have a significant impact on its financial statements other
than potentially providing more financial statement disclosures.
Statement of Financial Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," standardizes the disclosure
requirements for pensions and other postretirement benefits. This statement
requires additional information on changes in benefit obligations and fair
values of plan assets. It revises prior standards and is effective for years
beginning after December 15, 1997. Because Interactive Objects does not
currently have such employer benefit plans nor intends to initiate any in the
near-term, there should not be an impact on its financial statements.
Note 2. Consulting Agreement
Interactive Objects has a consulting agreement with a company ("consultant")
that is a shareholder of Interactive Objects. The consultant's main goal was
to assist Interactive Objects in obtaining equity financing in the fall of
1997. The agreement provides for monthly payments of $3,000 to the consultant
from July 1997 to October 1997, and monthly payments of $5,000 from October
1997 to June 2000. The consultant acquired common stock of the Company for
services rendered as part of the organizational changes described in Note 1
which resulted in total ownership of 1.2 million common shares. The consultant
was not a shareholder when the consulting agreement was signed, but became a
shareholder when the 1.2 million shares were issued.
Compensation expense associated with the portion of the consulting agreement
for obtaining equity financing was based on a value of $.65 per share, which
was determined based on discounting the then-market price of the Company's
common stock, because the shares issued to the consultant were restricted and
because the volume of trading of the Company's stock that was not restricted
was relatively low. Finally, the value was discounted further because of the
risks involved with the Company being a relatively new company. The resulting
compensation expense recognized for the stock issuance was $780,000 in 1997.
In addition, Interactive Objects paid the consultant $18,000 during the year
ended December 31, 1997.
Initially, the compensation expense associated with the portion of the
consulting agreement for obtaining equity financing was deemed to have little
or no value. Subsequent to the issuance of the 1997 financial statement, it
was determined the value discussed in the preceding paragraph was appropriate.
Accordingly, the 1997 financial statements have been restated for this
adjustment.
Note 3. Notes Payable
The note is payable to a stockholder and is non-interest bearing. The note
is due in 1998 and is unsecured. The fair value of this note is estimated to
be $60,100 at December 31, 1997. Fair values are based on an assumed payment
date of June 30, 1998, and an assumed interest rate of 8%.
Another note payable (a convertible promissory note) to a stockholder for
$73,194 was converted into 112,607 shares of Interactive Objects common stock.
This conversion was made at the election of the stockholder. The conversion
rate was determined to be $0.65 per share and was established by negotiations
between the stockholder and Interactive Objects. There was no market for
Interactive Objects common stock at the time the negotiations took place.
F-14
<PAGE>
INTERACTIVE OBJECTS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 4. Leases
The Company leases an office under an operating lease expiring in November
2000. The following are the future minimum rental payments required under the
lease for the years ending December 31:
<TABLE>
<S> <C>
1998............................................................ $121,406
1999............................................................ 130,668
2000............................................................ 124,993
--------
Total........................................................... $377,067
========
</TABLE>
Rent expense was $42,566 and $12,327 for the years ended December 31, 1997
and 1996.
Note 5. Warrants Outstanding
At December 31, 1997, Interactive Objects had warrants outstanding for the
purchase of 2,000,000 shares of its common stock at prices ranging from $3.00
to $5.00 per share. The warrants are exercisable at any time. Of the total
warrants outstanding, 1,000,000 expire March 31, 1998, and 1,000,000 expire
November 10, 1998.
Note 6. Income Taxes
The reconciliation of income tax on income computed at the federal statutory
rates to income tax expense is as follows:
<TABLE>
<S> <C>
Tax at statutory rate........................................... $ 572,990
Change in valuation allowance for deferred tax asset............ (261,120)
Costs associated with raising capital (nondeductible)........... (265,200)
Effect of loss being taxed at stockholder level................. (46,670)
---------
Income tax expense.............................................. $ --
=========
</TABLE>
For 1996 (and for a portion of 1997), Interactive Objects (then Neoteric)
was an S-corporation for tax purposes.
Interactive Objects' deferred tax asset as of December 31, 1997, is as
follows:
<TABLE>
<S> <C>
Net operating loss carryforwards (before valuation allowance).. $ 261,120
=========
Less valuation allowance for deferred tax asset................ (261,120)
---------
Net deferred tax asset... $ --
=========
</TABLE>
Interactive Objects has net operating loss carryforwards of $768,000 at
December 31, 1997. These losses expire in 2012.
Note 7. Subsequent Event
Subsequent to year end, Interactive Objects established a stock option plan
for employees and other individuals that may provide services to the
Corporation. Interactive Objects reserved 2,000,000 shares of common stock for
this plan. In general, any options issued have an exercise price established
by the plan administrator, and options cannot be issued for less than the fair
value of the stock at the date of issuance.
F-15
<PAGE>
INTERACTIVE OBJECTS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In addition, subsequent to year-end, Interactive Objects granted stock
options to directors to acquire up to 125,000 shares of common stock at prices
ranging from $1.88 to $2.75 per share. All options vest one year after the
date of grant. The directors were also eligible to acquire additional options
to purchase up to an aggregate additional 250,000 shares of common stock. All
such options were granted at exercise prices equal to or greater than the
quoted market price for Interactive Objects common stock on the respective
dates of grant. Accordingly, in accordance with Accounting Principals Board
Opinion No. 25, no compensation expense was recognized.
Also, subsequent to year end, Interactive Objects made a down payment of
$20,000 towards the purchase of certain software that will eventually be
marketed. In addition to the down payment, $90,000 is payable to the seller in
six monthly installments of $15,000.
In May 1998, Interactive Objects issued 1,534,010 shares of common stock in
a private placement to certain foreign investors for $4 per share. In
connection with this offering, Interactive Objects issued warrants to purchase
up to 153,401 shares of common stock at an exercise price of $4 per share.
These warrants expire in May 2000.
In April 1998 and May 1998, Interactive Objects issued warrants to purchase
up to 700,000 shares of common stock at an exercise price of $4 per share.
These warrants expire in April 2000 and May 2000.
In May 1998, Interactive Objects issued 230,000 shares of common stock in
exchange for services.
In July 1998, Interactive Objects issued additional warrants to purchase up
to 200,000 shares of common stock at exercise prices ranging from $5 to $7 per
share. These warrants expire at various dates from October 1998 to July 2000.
F-16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Company. This Prospectus does not constitute an offer of
any securities other than those to which it relates or an offer to sell, or a
solicitation of an 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
any implication that there has been no change in the affairs of the Company
since the dates as to which information is given in this Prospectus.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information..................................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 15
Selling Shareholders...................................................... 15
Dividend Policy........................................................... 20
Capitalization............................................................ 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 27
Management................................................................ 38
Certain Transactions...................................................... 44
Principal Shareholders.................................................... 45
Description of Securities................................................. 46
Market for Common Equity and Related Shareholder Matters.................. 48
Shares Eligible for Future Sale........................................... 48
Plan of Distribution...................................................... 49
Legal Matters............................................................. 50
Experts................................................................... 50
Index to Financial Statements............................................. F-1
</TABLE>
----------------
Until , 1999, all dealers effecting transaction in the
registered securities, whether or not participating in this distribution, may
be required to deliver a Prospectus. This delivery requirement is in addition
to the obligation of the dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,925,018 Shares
Common Stock
----------------
PROSPECTUS
----------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. Indemnification Of Directors And Officers
(a) Section 23B.08.500 et seq. of the Washington Business Corporation Act
(Title 23B of the Revised Code of Washington) permits indemnification by a
corporation of its directors, officers, employees and agents under certain
circumstances and subject to certain limitations.
(b) The Articles of Incorporation (Exhibit 3.1 hereto) provide that
Registrant will indemnify its directors to the fullest extent permitted by
law. The Articles of Incorporation contain further provisions and conditions
for indemnification by Registrant for liabilities arising in connection with
or by reason of the fact that a person is an officer, director, employee or
agent of Registrant.
ITEM 25. Other Expenses Of Issuance And Distribution
The following is an itemized statement of the estimated cost and expenses
payable by the Registrant in connection with the sale of the Common Stock
offered hereby:
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee...................... $ 4,000
Printing and engraving expenses.................................... 17,000
Accounting fees and expenses....................................... 6,500
Legal fees and expenses............................................ 75,000
Miscellaneous expenses............................................. 10,000
--------
Total............................................................ $112,500
========
</TABLE>
ITEM 26. Recent Sales Of Unregistered Securities
The Company was incorporated in the State of Washington in October 1995 and
operated under the name Neoteric Media, Inc., d/b/a Interactive Objects, until
August 1997. In August 1997, pursuant to the terms of an acquisition agreement
with Asia Pacific Chemical Engineering Corp., a publicly-held Utah corporation
with nominal assets and liabilities, Neoteric Media entered into a business
combination with APEC. In the Neoteric Acquisition, the shareholders of
Neoteric Media exchanged their stock, representing 782,600 shares, for
6,260,800 shares of common stock of APEC, representing approximately 57.3% of
the common stock outstanding following the Neoteric Acquisition, and Neoteric
Media became a wholly-owned subsidiary of APEC (which changed its name to
Interactive Objects). No cash was exchanged in the transaction and the total
number of shares of common stock outstanding following the Neoteric
Acquisition was 10,932,310 shares. The shares issued in the Neoteric
Acquisition were issued in reliance on Section 4(2) under the Securities Act,
as further described below. For accounting purposes, the Neoteric Acquisition
was accounted for as a reverse purchase, with Interactive Objects as the
continuing entity. The Company's audited financial statements include, since
August 1997, the results of APEC operations, which were insignificant. In
1998, the Company was reincorporated from Utah to the State of Washington.
The following paragraphs set forth information with respect to all
securities of the Company and its predecessors in interest since November 11,
1995. All of the securities issued and sold, as described below, were sold in
reliance on exemptions under the Securities Act and were not registered under
the Securities Act.
The following paragraphs set forth information with respect to all
securities of Neoteric Media sold since incorporation and Interactive Objects
sold following the Neoteric Acquisition. All references below to "Interactive
Objects" or the "Company" include (i) Interactive Objects, Inc. following the
Neoteric Acquisition and (ii) Neoteric Media, Inc. prior to the Neoteric
Acquisition.
II-1
<PAGE>
. The Company was incorporated in October 1995 and in November 1995 issued
an aggregate of 760,000 shares of its common stock to the persons listed
below, in consideration for their contributions to the business of the Company
and certain contributions of property and/or capital to the Company. Each of
these persons was a founder and an employee and, although not an accredited
investor, the Company reasonably believed each person to be a sophisticated
investor and had access to Company information necessary to make an informed
investment decision. The shares were issued in reliance on Section 4(2) under
the Securities Act, as follows:
<TABLE>
<CAPTION>
Number
of
Name Shares
---- -------
<S> <C>
Ryan L. Smith...................................................... 306,000
Jay R. Paulson..................................................... 294,000
John J. Guarino.................................................... 150,000
Ray E. Johnson..................................................... 5,000
Randolph A. Webb................................................... 5,000
-------
Total............................................................ 760,000
=======
</TABLE>
. On January 5, 1996, the Company and its shareholders approved at a special
meeting of the shareholders a redistribution of the outstanding capital stock
of the Company and accepted the subscription of two additional shareholders as
key employees of the Company. Although not accredited, the Company reasonably
believed each new employee to be a sophisticated investor. Each employee had
access to the Company's books and records and information necessary to make an
informed investment decision. The shares were issued and redistributed in
reliance on Section 4(2) and Section 3(9) under the Securities Act and were
held as follows:
<TABLE>
<CAPTION>
Number
of
Name Shares
---- -------
<S> <C>
Ryan L. Smith...................................................... 283,434
Jay R. Paulson..................................................... 273,233
John J. Guarino.................................................... 173,333
Ray E. Johnson..................................................... 5,000
Randolph A. Webb................................................... 5,000
Bob Theriault...................................................... 5,000
Durene Nelson...................................................... 2,500
-------
Total............................................................ 747,500
=======
</TABLE>
. On February 20, 1996, the Company repurchased 169,900 shares from certain
of its shareholders and issued 130,000 shares to Thad Wardall in a private
offering, in connection with Mr. Wardall agreeing to serve as a director of
the Company. Mr. Wardall had access to the Company's books and records and
information necessary to make an informed investment decision and the Company
believes Mr. Wardall to be a sophisticated investor. The shares issued to Mr.
Wardall were issued in reliance on Section 4(2) under the Securities Act.
. In September 1996, Ray Johnson, a shareholder of the Company, tendered for
cancellation his 5,000 shares of common stock in connection with his
termination of employment with the Company.
. On September 23, 1996, the Company entered into an asset purchase
agreement with Steve Jackson for the purchase of a software application
developed by Mr. Jackson in consideration for $67,500 in cash, a promissory
note for $62,500 and 80,000 shares of common stock of Neoteric Media. Mr.
Jackson had access to the Company's books and records and information
necessary to make an informed investment decision and the Company believes Mr.
Jackson to be a sophisticated investor. The shares were issued in reliance on
Section 4(2) under the Securities Act.
. On September 23, 1996, the Company borrowed $125,000 from Thad Wardall, a
director and shareholder of the Company, in part to fund the acquisition of
the software application developed by
II-2
<PAGE>
Mr. Jackson. The loan was evidenced by a promissory note, secured by a lien on
certain of the Company's assets. Subsequently, on August 25, 1997, the Company
entered into a note exchange agreement with Mr. Wardall for the exchange of
the prior promissory note for a new convertible promissory note in principal
amount of $73,194. As a director and major shareholder of the Company, the
Company believes Mr. Wardall to be a sophisticated investor, with access to
all Company records and information. These notes were issued in reliance on
Section 4(2) under the Securities Act. On October 7, 1997, Mr. Wardall
exercised his option to convert all outstanding principal and accrued interest
on the Wardall Note into 112,607 shares of Common Stock (at a conversion rate
of $0.65 per share) and the security interest terminated. The Company has
agreed with Mr. Wardall to register for resale on this Registration Statement
on Form SB-2 the 112,607 shares. See "CERTAIN TRANSACTIONS" and "SELLING
SHAREHOLDERS."
. On September 29, 1997, upon consummation of the Neoteric Acquisition, the
Company issued an aggregate of 6,260,800 unregistered shares of Common Stock
to the former shareholders of Neoteric Media pursuant to the terms of that
certain Acquisition Agreement between Neoteric Media and APEC dated August 27,
1997. The Neoteric Acquisition was effected by means of a reverse merger and
the shareholders of Neoteric Media exchanged their 782,600 shares in Neoteric
Media for shares of Company Common Stock. Each of such persons had access to
information about APEC and Neoteric Media necessary to make an informed
decision, and the Company believes each such person to be a sophisticated
investor. The shares were issued in reliance on Section 4(2) under the
Securities Act, as follows:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Ryan L. Smith.................................................... 1,680,800
Steve Jackson.................................................... 640,000
Jay R. Paulson................................................... 1,600,000
John J. Guarino.................................................. 1,200,000
Thad E. Wardall.................................................. 1,040,000
Bob Theriault.................................................... 40,000
Randolph A. Webb................................................. 40,000
Durene Nelson.................................................... 20,000
---------
Total.......................................................... 6,260,800
=========
</TABLE>
. On September 29, 1997, the Company issued 1,200,000 unregistered shares of
Common Stock to Northwest Capital pursuant to the terms of that certain
Consulting Agreement entered into between the Company and Northwest Capital in
July 1997, in consideration for Northwest Capital's assistance in the reverse
merger with APEC. The value of the services was approximately $12,000. The
Company believes Northwest Capital to be a sophisticated investor and had
access to Company information necessary to make an informed investment
decision. The shares were issued in reliance on Section 4(2) of the Securities
Act.
. On September 29, 1997, the Company issued 100,000 unregistered shares of
Common Stock in a private placement pursuant to Section 4(2) of the Securities
Act to Marvin Belcher. Mr. Belcher had access to information about the Company
and had opportunity to ask questions necessary to make an informed investment
decision. The Company believes Mr. Belcher to be a sophisticated investor
based on other transaction in which Mr. Belcher has participated. The total
offering price was $65,000, or $.65 per share.
. On November 10, 1997, the Company issued the November Warrants to purchase
up to 2,200,000 shares of Common Stock to certain foreign persons in the
following amounts, as consideration for consulting services and their acting
as finders for future financings for the Company. The Company estimates the
value of such services to have been approximately $19,500. Each such person
had access to books and records and information about the Company necessary to
make an informed decision and the Company believed each person to be a
sophisticated investor, based in part on other transactions in which each such
person participated. The November Warrants were issued in reliance on Section
4(2) under the Securities Act. The exercise prices for the November Warrants
ranged from $2.50 to $5.00 per share. None of the November Warrants was
exercised and all such warrants have expired by their terms.
II-3
<PAGE>
<TABLE>
<CAPTION>
No. of Shares
Underlying
Name Warrants
---- -------------
<S> <C>
Luzern Group, Inc............................................ 200,000
Chengchow Investments Ltd. .................................. 1,000,000
Ying Hung Assets Limited..................................... 250,000
Sum On Securities Limited.................................... 250,000
Tai Soong Management Limited................................. 250,000
Jinhui Securities Limited.................................... 250,000
</TABLE>
. On January 1, 1998, the Board of Directors adopted the Company's 1998
Stock Option Plan. Pursuant to the Option Plan, the Company reserved 2,000,000
unregistered shares of Common Stock for sale and issuance to employees,
officers, directors and consultants upon the exercise of options granted under
the Option Plan. As of the date of this Registration Statement, the Company
has granted 1,482,875 stock options, none of which has been exercised. Options
granted under the Option Plan were issued in reliance on Rule 701 under the
Securities Act.
. On April 9, 1998, the Company granted to Berliner Freiverkehr AG a stock
purchase warrant to purchase up to 200,000 unregistered shares of Common Stock
at a price of $4.00 per share in consideration for financial consulting
services rendered to the Company in Germany. The estimated value of such
services was approximately $77,000. The Berliner Warrant has a term of two
years. The total offering price, if the Berliner Warrant is exercised in full,
is $800,000. The Company believes Berliner Freiverkehr to be an accredited
investor. The Berliner Warrant was issued in reliance on Section 4(2) and
Regulation S of the Securities Act. As of the date of this Registration
Statement, the Berliner Warrant has not been exercised. The Company has agreed
with the warrant holder to register for resale on this Registration Statement
on Form SB-2 the shares underlying the warrant. See "SELLING SHAREHOLDERS."
. On May 22, 1998, the Company sold and issued in a private placement to
certain foreign investors an aggregate of 1,534,010 shares of Common Stock.
The private offering was made in reliance on Regulation S under the Securities
Act and was further limited to accredited investors pursuant to Regulation D
based on representations of such purchasers. The total offering price was
$6,136,040, or a price of $4.00 per share. In connection with the private
offering, the Company also issued warrants to purchase an aggregate of 153,401
shares of Common Stock (representing ten percent of the total number of shares
sold in the offering) to certain foreign brokers in consideration for their
assistance in the offering, which warrants were valued at approximately
$15,340. Copies of the Company's business plan and other information about the
Company necessary to an informed investment decision were provided to such
brokers. The Brokers' Warrants are exercisable at a price of $4.00 per share
have a term of two years. As of the date hereof, none of the Brokers' Warrants
has been exercised. The Company filed a Form D with the Commission on June 5,
1998 for the shares sold in the private offering and the Brokers' Warrants
issued to the foreign brokers. The Company has agreed with the foreign
investors and brokers to register for resale the shares issued in the private
offering and the shares underlying the Brokers' Warrants. See "SELLING
SHAREHOLDERS."
. On May 22, 1998, the Company granted to National Day Corporation a stock
purchase warrant to purchase up to 500,000 unregistered shares of Common Stock
at an exercise price of $4.00 per share in consideration for its efforts and
assistance in raising capital for the Company, in providing certain bridge
loans to the Company, and making introductions to foreign brokers and
investors. The agreed-upon estimated value of such services was $50,000. The
total offering price, if the National Day Warrants is exercised in full, is
$2,000,000. The National Day Warrant has a term of two years and has not been
exercise as of the date hereof. The Company believes National Day to be an
accredited investor. The National Day Warrant was issued in reliance on
Section 4(2). The Company has agreed with the warrant holder to register for
resale on this Registration Statement on Form SB-2 the shares underlying the
warrant. See "SELLING SHAREHOLDERS."
II-4
<PAGE>
. On May 22, 1998, the Company granted 30,000 unregistered shares of Common
Stock to SAFECO, a major customer of the Company, in consideration for SAFECO
awarding to the Company a project development agreement and in consideration
for future and on-going business relationships. The estimated value of the
securities was approximately $120,000. The Company believes SAFECO to be an
accredited investor. The shares were issued pursuant to Section 4(2) of the
Securities Act.
. On May 22, 1998, the Company issued 200,000 shares of Common Stock to
Starward Securities, Ltd., a foreign broker, in consideration for its services
as a finder for the Company in its recent equity offerings. The estimated
value of such securities was approximately $800,000. Starward Securities has
had access to information about the Company necessary to make an informed
investment decision and the Company believes Starward to be an accredited
investor. The shares were issued pursuant to Section 4(2) of the Securities
Act. The Company has agreed with Starward Securities to register for resale on
this Registration Statement on Form SB-2 the 200,000 shares. See "SELLING
SHAREHOLDERS."
. On July 15, 1998, the Company granted to GlobeMedia AG stock purchase
warrants to purchase up to 200,000 unregistered shares of Common Stock at a
graduated exercise price ranging from $5.00 to $7.00 per share. The GlobeMedia
Warrants were issued in connection with, and as compensation for, an agreement
entered into between the Company and GlobeMedia to provide media, marketing,
and publication relation services for the Company in Europe. The estimated
value of such services was approximately $22,500. The total offering price, if
the GlobeMedia Warrants are exercised in full, is $1,225,000. The Company
believes GlobeMedia to be an accredited investor. The GlobeMedia Warrants were
issued in reliance on Section 4(2) and Regulation S of the Securities Act and
have not been exercised as of the date of this Registration Statement. The
Company has agreed with GlobeMedia to register for resale on this Registration
Statement on Form SB-2 the shares underlying the warrant. See "SELLING
SHAREHOLDERS."
The following paragraphs set forth information with respect to all
securities of the Company's predecessors in interest, including APEC
(collectively referred to as the "Issuer"), sold since August 21, 1995 and
until consummation of the Neoteric Acquisition. All of the securities issued
and sold, as described below, were sold in reliance on exemptions under the
Securities Act and were not registered.
. On February 11, 1997, the Issuer issued a total of 14,894 unregistered
shares of Common Stock (consisting of 11,358 shares issued to Sam Sparks and
3,536 shares issued to Chinmaya Shrivastava) in consideration for the
performance of engineering and consulting services related to the design of
products for the Issuer. The shares were issued pursuant to Section 4(2) of
the Securities Act.
. On February 28, 1997, the Board of Directors of the Issuer approved a one-
for-25 reverse stock split of its 6,243,339 previously issued and outstanding
shares of common stock, thereby reducing the number of outstanding shares to
249,733.
. On February 28, 1997, the Issuer completed a private placement of a total
of 700,000 unregistered shares of Common Stock pursuant to Rule 504 of
Regulation D under the Securities Act. The aggregate offering price was
$7,000, or $.01 per share. The purchasers in the offering were as follows:
Northgate Group Limited (200,000 shares), CKL Associates, Inc. (100,000
shares), Kading Companies, SA (300,000 shares), and Olympic Capital Group,
Inc. (100,000 shares). The Issuer filed a Form D with the Commission on
February 13, 1997, as amended on March 3, 1997, relating to the offering.
. On February 28, 1997, the Issuer issued a total of 550,266 unregistered
shares of Common Stock in consideration for consulting services rendered in
connection with a merger between the Issuer and APEC (consisting of 400,000
shares issued to Pacific Chemical Holdings Limited and 150,266 shares issued
to Pacific Resource Group). The value of the shares issued was $5,502.66, or
$.01 per share. The shares were issued pursuant to Rule 504 of Regulation D.
The Issuer filed a Form D relating to the issuance on February 13, 1997, as
amended on March 3, 1997. Subsequently, in July 1997, pursuant to the terms of
a Rescission Agreement between the Issuer and the shareholders of APEC, all of
such shares were cancelled and returned to the Issuer, and the merger was
terminated, due to the failure of APEC to satisfy certain post-closing
obligations.
II- 5
<PAGE>
. On February 28, 1997, pursuant to a merger agreement between the Issuer
and APEC dated January 21, 1997, the Board of Directors for the Issuer
authorized the issuance of a total of 8,500,000 unregistered shares of Common
Stock to the following shareholders of APEC in exchange for their equity
ownership interest in APEC, in the following amounts:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Jiangsu Chengzing Phosp-Chemicals (Group) Co. ................... 6,900,000
GCC Limited...................................................... 450,000
Triangle Pacific Limited......................................... 450,000
Trinity Capital Incorporated..................................... 450,000
Jun Xia Zhang.................................................... 75,000
Jao Shun Pan..................................................... 75,000
Ming Gao......................................................... 50,000
Qing Hua Du...................................................... 50,000
---------
Total.......................................................... 8,500,000
=========
</TABLE>
These shares were issued pursuant to Section 4(2) of the Securities Act.
Subsequently, in July 1997, pursuant to the terms of a Rescission Agreement
between the Issuer and the shareholders of APEC, all of such shares were
cancelled and returned to the Issuer, and the merger was terminated, due to
the failure of APEC to satisfy certain post-closing obligations.
. Between August 27, 1997 and September 4, 1997, the Issuer issued a total
of 3,571,428 unregistered shares of Common Stock, in a private placement
pursuant to Rule 504 of Regulation D. The total offering price was
$249,999.96, or $.07 per share. The Issuer filed a Form D with the Commission
on September 30, 1997, as amended April 1998, for the offering to the
following persons in the following amounts:
<TABLE>
<CAPTION>
Number
of
Name Shares
---- -------
<S> <C>
Bright Outlook Consultants, Ltd. .................................. 350,000
Interlaken Securities, Ltd. ....................................... 350,000
Bonn Securities AG, Ltd. .......................................... 371,428
Mulhouse Investments, Ltd. ........................................ 350,000
Pan American Securities, Ltd. ..................................... 200,000
Matrix Securities PTY, Ltd. ....................................... 200,000
Jungfrau Investments, Ltd. ........................................ 250,000
Starward Securities, Ltd. ......................................... 350,000
Capricorn Resources Ltd. .......................................... 450,000
Frontier Equities Corp. ........................................... 350,000
National Day Corporation........................................... 350,000
</TABLE>
. On September 1, 1997, the Issuer issued stock purchase warrants to
purchase up to 600,000 shares of Common Stock in consideration for services
rendered in connection with the Neoteric Acquisition, to the following
persons: Pan American Securities, Ltd. (300,000 shares) and Matrix Securities
PTY, Ltd. (300,000 shares). Warrants to purchase 500,000 shares were issued in
reliance on Rule 504 of Regulation D and the remaining warrants were issued in
reliance on Section 4(2) under the Securities Act. Each such person had access
to books and records and information about the Company and the Company
believes such persons to be sophisticated investors. The exercise price for
the warrants was $1.50 per share. Between September 1997 and December 1997,
all of such warrants were subsequently exercised in accordance with their
terms for an aggregate exercise price of $900,000. The Issuer filed a Form D
with the Commission on September 30, 1997, as amended April 1998, for the
issuance of the warrants and shares upon exercise.
II-6
<PAGE>
EXHIBITS
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
*2.1 Acquisition Agreement between Asia Pacific Chemical Engineering Corp.
and Neoteric Media, Inc., dated August 27, 1997
*3.1 Articles of Incorporation filed April 14, 1998
*3.2 Articles of Merger filed April 16, 1998, for reincorporation of
Interactive Objects, Inc. in the State of Washington
*3.3 Bylaws
*4.1 Specimen Common Stock Certificate
*4.2 Form of Common Stock Purchase Warrant
*4.3 Form of Common Stock Purchase Warrant
*5.1 Opinion of Cairncross & Hempelmann, P.S.
*10.1 1998 Stock Option Plan
*10.2 Seattle Office Sublease Agreement between Interactive Objects, Inc.
and Intermind Corporation, dated December 30, 1997
*10.2A Olympic Tower Master Office Lease Agreement between Duchess Properties
Ltd. and Intermind Corporation, dated August 29, 1995, as amended
September 1, 1996, and as amended February 1, 1997
*10.3 Consulting Agreement between Interactive Objects, Inc. and Northwest
Capital Partners, L.L.C., dated July 11, 1997
*10.3A First Amendment to Consulting Agreement, dated August 25, 1998
*10.3B Second Amendment to Consulting Agreement, dated November 1, 1998
*10.4 Employment Agreement with Ryan Smith, dated January 1, 1998, as
amended as of July 1, 1998.
*10.5 Employment Agreement with John J. Guarino, dated January 1, 1998, as
amended as of July 1, 1998
10.6 Employment Agreement with Steven G. Wollach, dated November 1, 1998
*10.7 Employment Agreement with Dale Western, dated October 12, 1998
*10.8 Employment Agreement with Steve Jackson, dated January 1, 1998
23.1 Consent of Peterson Sullivan P.L.L.C.
*23.2 Consent of Cairncross & Hempelmann, P.S. (included in opinion filed as
Exhibit 5.1)
*24.1 Powers of Attorney (see Signature Page)
27.1 Financial Data Schedule
</TABLE>
- --------
* Previously filed
II-7
<PAGE>
UNDERTAKINGS
The Registrant hereby undertakes to file with the Commission, during any
period in which it offers or sells securities in reliance upon Rule 415 of the
Securities Act, a post-effective amendment to this Registration Statement.
Such post-effective amendment shall: (1) include any prospectus required under
Section 10(a)(3) of the Securities Act; (2) reflect in such prospectus any
facts or events that exist which, individually or together, represent a
fundamental change in the information contained in the registration statement;
provided, however, that notwithstanding the foregoing, any increase or
decrease in volume of the securities offered (if the total dollar value of the
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of Prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement; and (3) include any additional or changed material information on
the plan of distribution. In addition, Registrant hereby undertakes to file a
post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
For determining any liability under the Securities Act, Registrant hereby
undertakes to treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the securities at
that time to be the initial bona fide offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing, or otherwise, the Registrant 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. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-8
<PAGE>
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 authorized this Amendment
No. 2 to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Seattle, State of
Washington on February 10, 1999.
INTERACTIVE OBJECTS, INC.
/s/ Steven G. Wollach
By: _________________________________
Steven G. Wollach
President
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to the registration statement has been signed by the following
persons in the capacities and on February 10, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Steven G. Wollach President, Chief Financial
________________________________________ Officer and Director
Steven G. Wollach (Principal Executive,
Financial and Accounting
Officer)
/s/ Brent Nelson ** Director
________________________________________
Brent Nelson
/s/ Thad E. Wardall ** Director
________________________________________
Thad E. Wardall
**By /s/ Steven G. Wollach
____________________________________
Steven G. Wollach
as attorney-in-fact
</TABLE>
II-9
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
*2.1 Acquisition Agreement between Asia Pacific Chemical Engineering Corp.
and Neoteric Media, Inc., dated August 27, 1997
*3.1 Articles of Incorporation filed April 14, 1998
*3.2 Articles of Merger filed April 16, 1998, for reincorporation of
Interactive Objects, Inc. in the State of Washington
*3.3 Bylaws
*4.1 Specimen Common Stock Certificate
*4.2 Form of Common Stock Purchase Warrant
*4.3 Form of Common Stock Purchase Warrant
*5.1 Opinion of Cairncross & Hempelmann, P.S.
*10.1 1998 Stock Option Plan
*10.2 Seattle Office Sublease Agreement between Interactive Objects, Inc.
and Intermind Corporation, dated December 30, 1997
*10.2A Olympic Tower Master Office Lease Agreement between Duchess Properties
Ltd. and Intermind Corporation, dated August 29, 1995, as amended
September 1, 1996, and as amended February 1, 1997
*10.3 Consulting Agreement between Interactive Objects, Inc. and Northwest
Capital Partners, L.L.C., dated July 11, 1997
*10.3A First Amendment to Consulting Agreement, dated August 25, 1998
*10.3B Second Amendment to Consulting Agreement, dated November 1, 1998
*10.4 Employment Agreement with Ryan Smith, dated January 1, 1998, as
amended as of July 1, 1998.
*10.5 Employment Agreement with John J. Guarino, dated January 1, 1998, as
amended as of July 1, 1998
10.6 Employment Agreement with Steven G. Wollach, dated November 1, 1998
*10.7 Employment Agreement with Dale Western, dated October 12, 1998
*10.8 Employment Agreement with Steve Jackson, dated January 1, 1998
23.1 Consent of Peterson Sullivan P.L.L.C.
*23.2 Consent of Cairncross & Hempelmann, P.S. (included in opinion filed as
Exhibit 5.1)
*24.1 Powers of Attorney (see Signature Page)
27.1 Financial Data Schedule
</TABLE>
- --------
* Previously filed
<PAGE>
EXHIBIT 10.6
AMENDED AND RESTATED
COMPENSATION AGREEMENT
This Compensation Agreement (this "Agreement") is dated and made effective
as of the 1st day of November, 1998 (the "Effective Date") between INTERACTIVE
OBJECTS, INC., a Washington corporation (the "Company"), and STEVEN G. WOLLACH
(the "Employee"). This Agreement amends and supersedes in its entirety that
certain prior Compensation Agreement between the Company and Employee dated
January 1, 1998, as amended July 1, 1998 (the "Prior Agreement").
1. Employment. The Company employs and Employee accepts employment on the
terms and conditions in this Agreement.
2. Duties. Employee is employed in the capacity of President and Chief
Financial Officer. Employee shall perform the duties customarily performed by a
President and a Chief Financial Officer and shall report to the Company's Board
of Directors (the "Board"), provided that Employee's precise duties may be
changed, extended or curtailed, from time to time, at the Board's direction.
Employee shall assume and perform the further reasonable responsibilities and
duties that the Company may assign from time to time.
3. Intensity of Effort; Other Business. Employee shall devote Employee's
entire working time, attention and efforts to Company's business and affairs,
shall faithfully and diligently serve Company's interests and shall not engage
in any business or employment activity that is not on Company's behalf (whether
or not pursued for gain or profit) except for (a) activities approved in writing
in advance by the Board of Directors or (b) passive investments that do not
involve Employee providing any advice or services to the businesses in which the
investments are made.
4. Term. The term of this Agreement starts on the Effective Date and
expires on December 31, 1999 (the "Initial Term"). This Agreement shall
automatically be renewed for successive one-year terms (each referred to as an
"Extended Term") unless either party gives written notice of nonrenewal at least
thirty (30) days before the expiration of the term. Unless stated otherwise,
the word "year" as used in this Agreement refers to incremental periods of 365
days each (366 days in the case of a leap year), not calendar years. This
Agreement may terminate before the expiration of any term as provided below.
5. Compensation. Employee's compensation shall be as follows:
a. Employee's salary initially shall be $11,250 per month ($135,000
per year on an annualized basis), which shall be computed and paid in equal
installments consistent with Company's normal payroll procedures. The Company
has paid to Employee, in a lump sum payment, retroactive salary for the period
from January 1, 1998 to July 1, 1998 such that Employee's aggregate salary for
the 1998 calendar year shall be $135,000. At the end of each calendar year,
Employee's salary shall be reviewed by the Board and adjusted as determined by
the Board in its sole discretion, provided that, absent cause or Employee's
consent, it may not be adjusted downward.
-1-
<PAGE>
b. As of the Effective Date, Employee shall be granted stock options
to purchase an aggregate of 400,000 shares of Company Common Stock (the "New
Options") under the Company's 1998 Stock Option Plan, subject to the provisions
herein for termination. These stock options are in addition to the outstanding
stock options to purchase up to 200,000 shares granted to Employee under the
Prior Agreement (the "Old Options"). The vesting schedule for the New Options
shall be as follows: (i) options to purchase 200,000 shares shall be
immediately vested and fully exerciseable as of the Effective Date; and (ii)
options to purchase the remaining 200,000 shares shall vest pro rata on a
monthly basis over a period of two years from the Effective Date. In addition,
the vesting schedule for the Old Options is hereby amended as follows: (1)
options to purchase 60,000 shares shall be immediately vested and fully
exercisable as of the Effective Date; and (ii) options to purchase the remaining
140,000 shares shall vest pro rata on a monthly basis over a period of two years
from the Effective Date. The exercise price for the New Options shall be the
price at which all outstanding employee options were repriced in November 1998,
$1.406 per share.
The option agreements for the New Options shall provide, and the
option agreements for the Old Options shall be amended to provide, that (x) in
the event of a merger, consolidation, disposition of all or substantially all of
the assets, separation, reorganization or liquidation of the Company, as a
result of which the shareholders of the Company receive cash, stock or other
property in exchange for their shares of Common Stock, or (y) upon the
acquisition by a person (as defined in Section 3(a)(9) and 13(d)(3) of the
Exchange Act as in effective as of the date hereof) of a majority of the
Company's outstanding voting securities (whether directly or indirectly,
beneficially or of record), or (z) upon the issuance by the Company in a
transaction or series of transactions within a three-month period of more than
seventy-five percent (75%) of the then-outstanding shares of Common Stock, (each
of (x), (y) and (z), a "Change of Control"), all of the outstanding and unvested
options shall automatically accelerate so that each such option shall,
immediately prior to any such Change of Control become 100 percent vested. The
acceleration provisions of this paragraph shall not be impacted by (i) the
accounting treatment of the particular transaction (purchase or pooling) or (ii)
whether the acquiring company reissues new options to replace this option.
Except as otherwise set forth herein, the New Options shall be subject to all
the other terms and conditions of the stock option plan.
Notwithstanding any other provision herein to the contrary, Employee shall
not exercise any New Option to the extent such exercise would cause IRC Section
162(m) to limit any tax deduction of the Company. The Company hereby undertakes
to present to its shareholders at the next annual shareholders meeting certain
amendments to the option plan to, among other things, increase the number of
shares that may be granted in any one year in compliance with IRS Code Section
162(m) and the grant of options hereunder to ensure compliance with the
requirements of IRS Code Section 162(m).
The Board and Employee agree that the option grants described above are
intended to be part of Employee's compensation package for 1998 and 1999 and
that additional grants of comparable magnitude may be made to compensate
Employee for his services to the Company in future periods, at the discretion of
the Board.
-2-
<PAGE>
c. Employee shall be entitled to performance-based cash bonuses, up
to a maximum aggregate of $135,000 during calendar year 1999, based on the
events specified below. Any bonus due hereunder shall be paid to Employee in a
lump sum (less any required withholdings or deductions) within 30 days after the
full completion of any such event stated below. The performance-based criteria
shall be as follows:
(i) Listing of the Company Common Stock on The Nasdaq SmallCap
Market ($25,000 bonus);
(ii) The SEC's effectiveness order on the Company's Registration
Statement on Form SB-2 ($15,000);
(iii) Satisfaction of Company quarterly financial goals as set
in advance by the Board of Directors ($5,000 bonus per quarter, up to
aggregate of $20,000);
(iv) Satisfaction of Company yearly financial goals as set in
advance by the Board of Directors ($5,000 bonus);
(v) Closing of any acquisition by the Company, by purchase,
merger or otherwise, of on-going businesses, intellectual property,
software or other assets, which acquisition is accounted for using the
purchase or pooling method of accounting ($40,000 bonus per acquisition);
and
(vi) The next date on which the last trade price of the Common
Stock as reported on the OTC Bulletin Board is greater than or equal to
$4.00 (one-time $25,000 bonus).
Subject to the $135,000 performance-based cash bonuses described above, the
Board may award to Employee additional discretionary cash bonuses in 1999.
d. Employee shall be eligible to participate in any other profit
sharing and/or incentive compensation plan for executive officers or employees
as determined by the Board in its sole discretion. Employee shall participate
in the Company's executive bonus plan for calendar year 1998 from January 1,
1998.
e. Company shall reimburse Employee for his personal car expenses for
gas and oil-changes.
f. Employee shall be eligible for such other compensation as may be
provided by the Board in its sole discretion.
6. Benefit Plans. Employee shall be eligible for all benefit plans
(including retirement or pension plans, profit sharing plans and stock option
plans) that are provided generally to Company's executive employees. In
addition, the Company shall pay all premiums for Company sponsored health
insurance for Employee.
-3-
<PAGE>
7. Vacation and Personal Leave. Employee shall be entitled to four (4)
weeks' paid vacation per calendar year and such number of personal days per
calendar year as provided in the Company's benefit plan set forth in the
Company's Employee Handbook.
8. Disability. Employee shall be entitled to such disability benefits as
provided in the Company's benefit plan set forth in the Company's Employee
Handbook.
9. Business Expenses. Employee is authorized to incur reasonable travel
and entertainment expenses to promote the Company's business. The Company shall
reimburse Employee for those expenses. Employee shall provide to Company the
itemized expense account information that Company reasonably requests.
10. Termination. Employee's employment may be terminated before the
expiration of this Agreement as follows, in which event Employee's compensation
and benefits shall terminate except as otherwise provided below:
a. By Company Without Cause. Company may terminate Employee's
employment at anytime, without cause or good reason or advance notice. If
Company terminates Employee's employment without cause the Company shall pay to
Employee severance payments as described below.
(i) The amount of severance that Employee shall be entitled to
shall be equal to the product of Employee's then-current base salary
(excluding bonuses, commissions and other compensation) multiplied by a
fraction, the numerator of which shall be the number of partial and
complete calendar quarters between Employee's original date of hire with
the Company and the date of termination (up to a maximum of twelve (12)),
and the denominator of which shall be twelve (12). In addition, Employee's
severance payments shall include his pro rata portion to the date of
termination, if any, of any full performance bonus under the Company's
executive bonus plan for the year in which he is terminated.
(ii) Notwithstanding the foregoing, in the event of a Change of
Control, the amount of severance that Employee shall be entitled to shall
be determined by the Board at the time the transaction which causes the
Change of Control is approved by the Board, which severance amount shall be
no less than Employee's income (salary and bonuses) during the prior twelve
(12) months. In addition, upon a Change of Control, Employee shall be
entitled to the full amount, if any, of any performance bonus under the
Company's executive bonus plan for the year in which he is terminated.
Any severance payments shall be paid to Employee in a lump sum payment
(less any required withholdings or deductions) within 30 days after termination.
Employee shall not be required to mitigate the amount of these termination
payments by seeking other employment or otherwise, and no income to Employee of
any kind shall reduce the termination payments.
b. By Company for Cause. Company may terminate Employee's employment
for cause. If Company wishes to terminate Employee's employment for cause it
shall first give Employee 7 days' written notice of the circumstances
constituting cause and a
-4-
<PAGE>
thirty-day opportunity to cure, unless the circumstances are not subject to
being cured. Following the notice and opportunity to cure (if cure is not made),
or immediately if notice and opportunity to cure are not required, Company may
terminate Employee's employment for cause by giving written notice of
termination. The notice may take effect immediately or at such later date as
Company may designate, provided that Employee may accelerate the termination
date by giving five business days' written notice of the acceleration. Any
termination of Employee's employment for cause must be approved by a majority of
the Board other than Employee. Employee must be given reasonable advance notice
of the meeting at which termination is to be considered, and a reasonable
opportunity to address the Board.
For purposes of this Agreement "cause" means and is limited to dishonesty,
fraud, commission of a felony or of a crime involving moral turpitude,
destruction or theft of Company property, physical attack to a fellow employee,
intoxication at work, use of narcotics or alcohol to an extent that materially
impairs Employee's performance of his or her duties, willful malfeasance or
gross negligence in the performance of Employee's duties, violation of law in
the course of employment that has a material adverse impact on Company or its
employees, misconduct materially injurious to Company, or any material breach of
Employee's duties or obligations to Company that results in material harm to
Company.
c. By Employee Without Good Reason. Employee may terminate
Employee's employment at any time, with or without good reason, by giving thirty
(30) days' advance written notice of termination.
d. By Employee for Good Reason. Employee may terminate Employee's
employment for good reason, in which event Employee shall be entitled to the
same rights under this Agreement as if Company had terminated Employee's
employment without cause. If Employee wishes to terminate employment for good
reason Employee shall first give Company 30 days' written notice of the
circumstances constituting good reason and an opportunity to cure, unless the
circumstances are not subject to being cured. Following the notice and
opportunity to cure (if cure is not made), or immediately if notice and
opportunity to cure are not required, Employee may terminate employment for good
reason by giving written notice of termination. The notice may take effect
immediately or at such later date as Employee may designate, provided that
Company may accelerate the termination date by giving five business days'
written notice of the acceleration.
For purposes of this Agreement, "good reason" means and is limited to the
occurrence without cause and without Employee's consent of a material reduction
in the character of Employee's duties, level of work responsibility or working
conditions, Company requiring Employee to be based anywhere other than the
greater Seattle area, except for reasonable travel on Company's business, or any
material breach by Company of its duties or obligations to Employee that results
in material harm to Employee.
e. Death. Employee's employment shall terminate automatically upon
Employee's death.
11. Indemnification. Company shall defend and indemnify Employee from and
against any and all claims that may be asserted against Employee by third
parties (including
-5-
<PAGE>
derivative claims asserted by third parties on behalf of Company) that are
connected with Employee's employment by Company, to the extent permitted by
applicable law. The foregoing notwithstanding, Company shall not be required to
defend or indemnify Employee (a) in a criminal proceeding, or (b) in civil
proceedings where Employee is the plaintiff or (c) to the extent it is finally
adjudicated that Employee did not act in good faith and in the reasonable belief
that Employee's actions were appropriate in the discharge of Employee's duties
for Company. Company may fulfill its duty of defense by providing competent
legal counsel of Company's choosing. The foregoing rights are in addition to any
other rights to which Employee may be entitled under any other agreement,
policy, bylaw, insurance policy, ordinance, statute or other provision. This
Section 11 shall survive termination of this Agreement.
12. Invention, Confidentiality, Nonraiding and Noncompetition Agreement.
The parties each acknowledges and agrees that the Invention, Confidentiality,
Nonraiding and Noncompetition Agreement attached hereto as Exhibit A which was
previously executed and delivered by Employee shall continue in full force and
effect as though set forth herein.
13. Dispute Resolution. All disputes between Employee and Company that
otherwise would be resolved in court shall be resolved instead by the following
alternate dispute resolution process (the "Process" ).
a. Disputes Covered. This Process applies to all disputes between
Employee and Company, including those arising out of or related to this
Agreement or Employee's employment at Company. Disputes subject to this Process
include but are not limited to pay disputes, contract disputes, wrongful
termination disputes and discrimination, harassment or civil rights disputes.
This Process applies to disputes Employee may have with Company and also applies
to disputes Employee may have with any of Company's employees or agents so long
as the employee or agent with whom Employee has the dispute is also bound by or
consents to this Process. This Process applies regardless of when the dispute
arises and will remain in effect after Employee's employment with Company ends,
regardless of the reason it ends. This Process does not apply, however, to
workers' compensation or unemployment compensation claims.
b. Mediation. Before having an arbitration hearing, Employee and
Company agree to attempt to resolve all disputes by mediation using the
Employment Mediation Rules of the American Arbitration Association. Mediation
is a nonbinding process in which a neutral person helps the parties to try to
reach an agreement to resolve their disputes. If the mediation is done after
one party has started the arbitration process, the mediation shall not delay the
arbitration hearing date. Temporary or interim relief may be sought without
mediating first. Any failure to mediate shall not affect the validity of an
arbitration award or the obligation to arbitrate.
c. Arbitration. All disputes that are not resolved by agreement (in
mediation or otherwise) shall be determined by binding arbitration. Arbitration
is a process in which one or more neutral people decide the case after hearing
evidence presented by both sides. The arbitration shall be governed by the
rules of the American Arbitration Association.
d. Injunctive Relief. Either party may request a court to issue such
temporary or interim relief (including temporary restraining orders and
preliminary injunctions)
-6-
<PAGE>
as may be appropriate, either before or after mediation or arbitration is
commenced. The temporary or interim relief shall remain in effect pending the
outcome of mediation or arbitration. No such request shall be a waiver of the
right to submit any dispute to mediation or arbitration.
e. Attorneys' Fees, Venue and Jurisdiction in Court. In any lawsuit
arising out of or related to this Agreement or Employee's employment at Company,
the prevailing party shall recover reasonable costs and attorneys' fees,
including on appeal. Venue and jurisdiction of any such lawsuit shall exist
exclusively in state and federal courts in King County, Washington, unless
injunctive relief is sought by Company and, in Company's judgment, that relief
might not be effective unless obtained in some other venue. These provisions do
not give any party a right to proceed in court in violation of the agreement to
arbitrate described above.
f. Employment Status. This Dispute Resolution Process does not
guarantee continued employment, require discharge only for cause or require any
particular corrective action or discharge procedures.
14. Governing Law. This Agreement shall be governed by the internal laws
of the state of Washington without giving effect to provisions thereof related
to choice of laws or conflict of laws.
15. Saving Provision. If any part of this Agreement is held to be
unenforceable, it shall not affect any other part. If any part of this
Agreement is held to be unenforceable as written, it shall be enforced to the
maximum extent allowed by applicable law.
16. Survival. The indemnification (Section 11) and dispute resolution
(Section 13) provisions of this Agreement and all of the provisions of the
Confidentiality Agreement, including without limitation the confidentiality,
limitations on publicity, possession of materials, noncompetition, nonraiding
provisions, shall survive after Employee's employment by Company ends,
regardless of the reason it ends, and shall be enforceable regardless of any
claim Employee may have against Company.
17. Waiver. No waiver of any provision of this Agreement shall be valid
unless in writing, signed by the party against whom the waiver is sought to be
enforced. The waiver of any breach of this Agreement or failure to enforce any
provision of this Agreement shall not waive any later breach.
18. Assignment; Successors. Company may assign its rights and delegate
its duties under this Agreement. Employee may not assign Employee's rights or
delegate Employee's duties under this Agreement.
19. Binding Effect. This Agreement is binding upon the parties and their
personal representatives, heirs, successors and permitted assigns.
20. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original and all of which, taken
together, shall constitute a single agreement.
-7-
<PAGE>
21. Legal Representation. In connection with this Agreement, the law firm
of Cairncross & Hempelmann has represented only Company and has not represented
Employee. Employee acknowledges that Employee has been advised to consult with
independent legal counsel before signing this Agreement and has had the
opportunity to do so.
22. Complete Agreement. This Agreement, together with the attached
Exhibits, is the final and complete expression of the parties' agreement
relating to Employee's employment, and supercedes any prior employment
agreements and/or understandings between the parties, including without
limitation the Prior Agreement. This Agreement may be amended only by a writing
signed by both parties; it may not be amended orally or by course of dealing.
The parties are not entering into this Agreement relying on anything not set out
in this Agreement. This Agreement shall control over any inconsistent policies
or procedures of Company, whether in effect now or adopted later, but Company's
policies and procedures that are consistent with this Agreement, whether in
effect now or adopted later, shall apply to Employee according to their terms.
EMPLOYEE:
/s/ Steven G. Wollach Dated: January 7, 1999
-----------------------------
Steven G. Wollach
INTERACTIVE OBJECTS, INC.:
By: /s/ Brent Nelson Dated: January 7, 1999
------------------------
Brent Nelson, Director
By: /s/ Thad Wardall Dated: January 7, 1999
------------------------
Thad Wardall, Director
-8-
<PAGE>
Exhibit 23.1
[PETERSON SULLIVAN PLLC LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement, relating to 2,925,018
shares of common stock, of Interactive Objects, Inc. on Form SB-2 of our report
dated March 4, 1998 (except for Note 7, the date of which is July 31, 1998, and
for Note 2, the date of which is February 8, 1999), appearing in the Prospectus
which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Peterson Sullivan P.L.L.C.
Seattle, Washington
February 10, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The following schedule contains summary financial information as of December 31,
1997 and September 30, 1998 that has been extracted from the financial
statements of Interactive Objects, Inc. (the "Company") and is qualified in its
entirety by reference to such financial statements. The company's financial
statements as of December 31, 1997 has been audited by Peterson Sullivan, PLLC,
Independent Auditors and the financial information as of September 30, 1998 is
unaudited.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 SEP-30-1998
<CASH> 214,967 4,007,151
<SECURITIES> 101,309 105,295
<RECEIVABLES> 10,698 47,555
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 373,531 4,341,802
<PP&E> 221,562 305,165
<DEPRECIATION> 31,111 70,872
<TOTAL-ASSETS> 694,862 4,748,030
<CURRENT-LIABILITIES> 311,332 517,382
<BONDS> 0 0
0 0
0 0
<COMMON> 19,417 147,089
<OTHER-SE> 364,113 4,219,513
<TOTAL-LIABILITY-AND-EQUITY> 694,862 4,748,030
<SALES> 365,631 2,090,402
<TOTAL-REVENUES> 365,631 2,090,402
<CGS> 2,043,890 5,534,530
<TOTAL-COSTS> 2,043,890 5,534,530
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 7,007 12,392
<INCOME-PRETAX> (1,682,266) (3,376,752)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,682,266) (3,376,752)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,682,266) (3,376,752)
<EPS-PRIMARY> (.18) (.24)
<EPS-DILUTED> (.18) (.24)
</TABLE>
