<PAGE>
PROSPECTUS
OBJECTSOFT CORPORATION
1,142,088 SHARES OF COMMON STOCK AND 412,500 CLASS A WARRANTS
ISSUABLE UPON THE EXERCISE OF WARRANTS
This Prospectus relates to (i) 1,142,088 shares of the common stock, par
value $.0001 per share (the "Common Stock"), of ObjectSoft Corporation (the
"Company") and (ii) 412,500 Redeemable Class A Warrant (the "Class A
Warrants") of the Company. Such shares of Common Stock and Class A Warrants
are collectively referred to herein as the "Selling Securityholder
Securities," and the holders of the Selling Securityholder Securities and the
warrants exercisable for certain of the Selling Securityholder Securities are
collectively referred to herein as the "Selling Securityholders." The 412,500
Class A Warrants and 412,500 of the shares of Common Stock are issuable, in
the form of units (the "Units"), each Unit consisting of one share of Common
Stock and one Class A Warrant. The Units are issuable upon the exercise of
(1) 375,000 warrants (the "Bridge Warrants") issued to investors in a private
placement by the Company in April through June, 1996 (the "Bridge Loan
Offering") and (2) 37,500 warrants issued to Renaissance Financial Securities
Corporation ("Renaissance") in its capacity as placement agent of the Bridge
Loan Offering (the "Placement Agent's Warrant"). Of the other 729,588 shares
of Common Stock to which this Prospectus is related, (1) 273,001 shares are
issued and outstanding and were issued to investors in a private placement by
the Company in July and August 1996 (the "July 1996 Offering"), (2) 182,004
shares are issuable upon the exercise of warrants issued to the investors in
the July 1996 Offering (the "July 1996 Warrants"), (3) 45,500 shares are
issuable upon the exercise of a warrant (and the July 1996 Warrants issuable
upon the exercise thereof) issued to Win Capital Corporation ("Win Capital")
in its capacity as placement agent of the July 1996 Offering (the "July
Placement Warrant"), (4) 106,250 shares are issuable upon the exercise of
warrants issued by the Company in connection with certain private placements
in 1992 and 1993 (the "Investor Warrants"), (5) 43,333 shares are issuable
upon the exercise of warrants originally issued to a former executive officer
of the Company (the "Officer Warrants") and (6) 79,500 shares are held by
certain stockholders of the Company. See "Selling Securityholders" and "Plan
of Distribution." The Selling Securityholders (other than Renaissance and
holders of 41,500 shares of Common Stock and 25,000 Investor Warrants) have
agreed not to sell any Selling Securityholder Securities for a period of 12
months (or nine months, in the case of the holders of 81,250 of the Investor
Warrants, 43,333 of the Officer Warrants and 38,000 Selling Securityholder
shares of Common Stock) from the date of this Prospectus without the prior
written consent of Renaissance, in its capacity as representative of the
Underwriters (the "Representative") of the Company's underwritten initial
public offering (the "Public Offering"). See "Plan of Distribution" and
"Concurrent Public Offering." With respect to the Selling Securityholder
Securities subject to the 12-month lock-up, the Representative has agreed
with NASDAQ SmallCap Market ("NASDAQ") not to give such consent for sales
during the six month period after the date of this Prospectus.
The shares of Common Stock and Class A Warrants that comprise the Units
are immediately detachable and separately transferable. Each Class A Warrant
entitles the holder thereof to purchase one share of Common Stock at an
exercise price of $6.50 per share, subject to adjustment, at any time
commencing November 11, 1997, until November 11, 2001. The Class A Warrants
are redeemable by the Company at a price of $.10 per Class A Warrant
commencing one year after the date of this Prospectus (or earlier with the
prior consent of the Representative), on not less than 30 days prior written
notice to the holders thereof, provided the average closing bid quotation of
the Common Stock as reported on the NASDAQ, if traded thereon, or if not
traded thereon, the average closing bid quotation of the Common Stock if
listed on a national securities exchange (or other reporting system that
provides last sale prices), has been at least 130% of the then current
exercise price of the Class A Warrants (initially, $8.45 per share), for a
period of 20 consecutive trading days ending within 15 days of the date on
which the Company gives notice of redemption. The Class A Warrants will be
exercisable until the close of business on the day immediately preceding the
date fixed for redemption. See "Description of Securities -- Class A
Warrants."
The Selling Securityholder Securities may be sold from time to time by the
Selling Securityholders or by their transferees. The distribution of the
Selling Securityholder Securities by the Selling Securityholders may be
effected in one or more transactions that may take place on the
over-the-counter market, including ordinary brokers' transactions, privately
negotiated transactions or through sales to one or more dealers for resale of
such securities as principals, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Securityholders. The Selling
Securityholders may, but are not obligated to, effect transactions through or
to Renaissance.
<PAGE>
The Selling Securityholders, and intermediaries through whom such
securities are sold, may be deemed underwriters within the meaning of the
Securities Act of 1933 (the "Securities Act") with respect to the securities
offered, and any profits realized or commissions received may be deemed
underwriting compensation. The Company has agreed to indemnify the certain
Selling Securityholders against certain liabilities, including liabilities
under the Securities Act.
The Company will not receive any of the proceeds from the sale of the
Selling Securityholder Securities by the Selling Securityholders. In the
event the Placement Agent's Warrant and all of the Bridge Warrants and the
other warrants exercisable to acquire shares of Common Stock are exercised in
full, the Company will receive gross proceeds of $2,757,939. See "Selling
Securityholders" and "Plan of Distribution."
On the date of this Prospectus, a registration statement under the
Securities Act with respect to the Public Offering of 1,250,000 Units,
through the Underwriters for which Renaissance is the Representative, was
declared effective by the Securities and Exchange Commission (the
"Commission"). The Company will receive net proceeds of approximately
$5,718,750 from the Public Offering (assuming no exercise of the
Representative's Over-allotment Option) after payment of underwriting
discounts and commissions and estimated expenses of the Public Offering. See
"Concurrent Public Offering."
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. See
"Risk Factors" immediately following the "Prospectus Summary" section.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is November 12, 1996
<PAGE>
No person is authorized in connection with any offering made hereby to
give any information or to make any representation not contained in this
Prospectus, and, if given or made, such information or representation must
not be relied upon as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or the solicitation of an offer to buy
any security other than the securities offered by this Prospectus, nor does
it constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered by this Prospectus to any person to whom, or by any
person in any jurisdiction in which it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale hereunder
shall under any circumstances create any implication that information
contained herein is correct as of any date subsequent to the date of this
Prospectus.
------
TABLE OF CONTENTS
------
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary ...................................................................... 4
Risk Factors ............................................................................ 7
Dividend Policy ......................................................................... 20
Capitalization .......................................................................... 20
Selected Financial Data ................................................................. 21
Management's Discussion and Analysis of Financial Condition and Results of Operations ... 22
Glossary ................................................................................ 25
Business ................................................................................ 27
Management .............................................................................. 41
Principal Stockholders. ................................................................. 47
Selling Securityholders ................................................................. 50
Certain Transactions .................................................................... 54
Description of Securities ............................................................... 56
Shares Eligible for Future Sale ......................................................... 61
Plan of Distribution .................................................................... 62
Concurrent Public Offering .............................................................. 62
Legal Matters ........................................................................... 63
Experts ................................................................................. 63
Additional Information. ................................................................. 63
Index to Financial Statements ........................................................... F-1
</TABLE>
------
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934 (the "Exchange
Act"), and, in accordance therewith, will file reports, proxy and information
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy and information statements and other
information can be inspected and copied at the Public Reference Section of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the following regional offices: New York
Regional Office, Suite 1300, 7 World Trade Center, New York, New York 10048,
and Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511, and copies of such material may also be obtained by mail
from the Public Reference Section of the Commission at prescribed rates.
Electronic registration statements made though the Electronic Data Gathering
Analysis and Retrieval ("EDGAR") System are publicly available through the
Commission's Website (http://www.sec.gov). See "Additional Information."
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other reports as the Company
deems appropriate or as may be required by law.
ObjectSoft(TM), SmartStreet(TM), OLEBroker(TM), and CafeOLE(TM) are
trademarks of the Company. This Prospectus also includes other trademarks and
trade names of the Company and trademarks, service marks and trade names of
other companies, including ActiveX(TM), a trademark of Microsoft Corporation
("Microsoft").
2
<PAGE>
CALIFORNIA RESIDENTS
WITH RESPECT TO SALES OF THE SECURITIES BEING OFFERED HEREBY TO CALIFORNIA
RESIDENTS, SUCH SECURITIES MAY BE SOLD ONLY TO: (1) "ACCREDITED INVESTORS"
WITHIN THE MEANING OF REGULATION D UNDER THE SECURITIES ACT OF 1933, (2)
BANKS, SAVINGS AND LOAN ASSOCIATIONS, TRUST COMPANIES, INSURANCE COMPANIES,
INVESTMENT COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY OF 1940, PENSION
AND PROFIT-SHARING TRUSTS, CORPORATIONS OR OTHER ENTITIES WHICH, TOGETHER
WITH THE CORPORATION'S OR OTHER ENTITY'S AFFILIATES, HAVE A NET WORTH ON A
CONSOLIDATED BASIS ACCORDING TO THEIR MOST RECENT REGULARLY PREPARED
FINANCIAL STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED, BUT NOT NECESSARILY
AUDITED, BY OUTSIDE ACCOUNTANTS) OF NOT LESS THAN $14,000,000 AND
SUBSIDIARIES OF THE FOREGOING OR (3) ANY PERSON (OTHER THAN A PERSON FORMED
FOR THE SOLE PURPOSE OF PURCHASING THE SECURITIES OFFERED HEREBY) WHO
PURCHASES AT LEAST $1,000,000 AGGREGATE AMOUNT OF THE SECURITIES OFFERED
HEREBY, OR (4) ANY PERSON WHO (A) HAS AN INCOME OF $60,000 AND A NET WORTH OF
$60,000, OR (B) HAS A NET WORTH OF $125,000 (IN EACH CASE, EXCLUDING HOME,
HOME FURNISHINGS AND PERSONAL AUTOMOBILES). EACH CALIFORNIA RESIDENT
PURCHASING THE SECURITIES OFFERED HEREBY WILL BE DEEMED TO REPRESENT BY SUCH
PURCHASE THAT IT COMES WITHIN ONE OF THE AFOREMENTIONED CATEGORIES, THAT IT
WILL NOT SELL OR OTHERWISE TRANSFER SUCH SECURITIES TO A CALIFORNIA RESIDENT
UNLESS THE TRANSFEREE COMES WITHIN ONE OF THE AFOREMENTIONED CATEGORIES AND
THAT IT WILL ADVISE THE TRANSFEREE OF THIS CONDITION, WHICH TRANSFEREE, BY
BECOMING SUCH, WILL BE DEEMED TO BE BOUND BY THE SAME RESTRICTIONS ON RESALE.
TEXAS RESIDENTS
WITH RESPECT TO SALES OF THE SECURITIES BEING OFFERED HEREBY TO TEXAS
RESIDENTS, SUCH SECURITIES MAY BE SOLD ONLY TO: (1) "ACCREDITED INVESTORS"
WITHIN THE MEANING OF REGULATION D UNDER THE SECURITIES ACT OF 1933; (2)
BANK, TRUST COMPANY, BUILDING AND LOAN ASSOCIATION, INSURANCE COMPANY, SURETY
OR GUARANTY COMPANY, SAVINGS INSTITUTION, INVESTMENT COMPANY AS DEFINED IN
THE INVESTMENT COMPANY ACT OF 1940, SMALL BUSINESS COMPANY AS DEFINED IN THE
SMALL BUSINESS INVESTMENT ACT OF 1958 PROVIDED THE SECURITIES ARE PURCHASED
BY SUCH INSTITUTION FOR ITS OWN ACCOUNT OR AS A BONA FIDE TRUSTEE OF A TRUST
ORGANIZED AND EXISTING OTHER THAN FOR THE PURPOSE OF ACQUIRING THE
SECURITIES; (3) ANY QUALIFIED INSTITUTIONAL BUYER AS DEFINED IN SEC RULE
144A; OR (4) ANY CORPORATION, PARTNERSHIP, TRUST, ESTATE OR OTHER ENTITY
(OTHER THAN AN INDIVIDUAL) HAVING A NET WORTH OF NOT LESS THAN $5,000,000 OR
A WHOLLY-OWNED SUBSIDIARY OF SUCH ENTITY, NOT FORMED FOR THE PURPOSE OF
ACQUIRING THE SECURITIES. EACH TEXAS RESIDENT PURCHASING THE SECURITIES
OFFERED HEREBY WILL BE DEEMED TO REPRESENT BY SUCH PURCHASE THAT IT COMES
WITHIN ONE OF THE AFOREMENTIONED CATEGORIES, THAT IT WILL NOT SELL OR
OTHERWISE TRANSFER SUCH SECURITIES TO A TEXAS RESIDENT UNLESS THE TRANSFEREE
COMES WITHIN ONE OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL ADVISE THE
TRANSFEREE OF THIS CONDITION, WHICH TRANSFEREE, BY BECOMING SUCH, WILL BE
DEEMED TO BE BOUND BY THE SAME RESTRICTIONS ON RESALE. IN ADDITION, THE
COMPANY HAS INSTRUCTED ITS TRANSFER AGENT, FOR A PERIOD ENDING ON THE SECOND
ANNIVERSARY DATE OF THE CITY AGREEMENT REFERRED TO IN THIS PROSPECTUS, NOT TO
PERMIT ANY TRANSFER, WHETHER OR NOT BY A TEXAS RESIDENT, TO A TEXAS RESIDENT
UNLESS THE TRANSFEREE REPRESENTS IN WRITING THAT IT COMES WITHIN ONE OF THE
AFOREMENTIONED CATEGORIES.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated, all of
the information contained herein (i) gives effect to the mandatory redemption
of the 212,500 outstanding shares of the Company's Series A Preferred Stock
upon closing of the Public Offering and (ii) assumes that the Over-allotment
Option and the Representative's Unit Purchase Option are not exercised and
that no other outstanding options or warrants to purchase Common Stock are
exercised. To aid the reader, a Glossary of technical terms has been included
on page 25 of this Prospectus.
THE COMPANY
The Company is in the business of providing information and
transaction-based services using proprietary software and off-the-shelf,
reusable software components based on Microsoft's ActiveX(TM) (formerly OLE)
component technology. The Company's strategy is initially to provide
information and services through public access kiosks, known as
SmartStreet(TM), over private networks known as Intranets. The kiosks will be
located in high density pedestrian traffic areas. The first five kiosks were
deployed in New York City in July 1996 under an agreement with the City of
New York (the "City"). Kiosk users are able to obtain information and will be
able to obtain documents and transact certain business without the necessity
of interacting directly with City employees or appearing personally at
certain City offices.
In early 1996, as part of its Kiosk Demonstration Project, the City of New
York entered into an agreement with the Company (the "City Agreement") to
develop public kiosks to be located in City offices and other public
locations in an effort to expedite transactions with the City. Under the City
Agreement, the City agreed to lease the first five kiosks, and the Company
may deploy additional kiosks throughout the New York City area at its own
risk and expense, subject to City approval of the kiosk locations. The
initial term of the City Agreement is one year, which may be extended by the
City for a period of up to 24 months. Any extension or renewal of the City
Agreement will be contingent upon the City's evaluation of the Kiosk
Demonstration Project as a whole and of the Company's kiosks. Pursuant to the
City Agreement, the Company has developed kiosks through which members of the
public can obtain certain information from, and will be able to transact
certain business with, the Buildings Department and the Department of Health,
as well as information about City government and elected officials and
general information about transportation and attractions in New York.
The kiosks are configured to permit the Company to offer additional
services provided either by the Company or third parties and to sell
advertising on such kiosks. Under the City Agreement, a portion of the
revenue, if any, derived from such services and advertising will be shared
with the City. The Company will seek to provide SmartStreet(TM) services to
other municipalities, states and government agencies and to organizations in
the private sector that provide a large volume of information, records and
documents to the public. The Company may also seek to enter into agreements
with the City and other customers to provide information and services over
the Internet, in order to significantly expand the accessibility of such
information and services. To date, the Company has not entered into any
agreements to offer any of the foregoing additional services or products.
As of August 31, 1996, the Company had received, under the City Agreement,
payments of $158,424, consisting of payment by the City of one month's
$30,090 lease payment and $128,334 of a total of $300,000 due upon the
achievement of certain milestones. As of August 31, 1996, the first five
kiosks were available only to provide City information and did not provide
transaction services or carry any paid advertising or third party services.
Consequently, no revenues had been generated by user transactions or
advertising. The kiosks are expected to be available to conduct City
transactions on a fee basis by January 31, 1997.
After its inception in 1990, the Company's activities consisted initially
of consulting, writing, training and custom software development for various
corporate and government clients, including Microsoft,
4
<PAGE>
for which it produced technical papers and provided consulting services. In
performance of these activities, the Company developed skills in rapid
application development and a base of courseware and reusable software
objects to which it retains title. In 1995, the Company decided to direct
these skills and its expanding body of reusable software objects toward the
development of services through which it can derive revenue on a "per
transaction" basis. It developed and operates OLEBroker(TM), an
Internet-based subscription service that allows customers to search its
database of information about software objects, find the information needed
and at the customer's option, purchase needed objects on-line. This service
is of benefit to customers developing computer programs for Microsoft
Windows. In connection with the development of OLEBroker(TM), the Company
developed significant additional software objects, which it then used in the
development of technology for the kiosk and Internet service delivery
programs. While the Company anticipates that the kiosk and Internet service
delivery programs will constitute the most significant part of its business,
it intends to continue to engage in consulting activities as resources permit
and in the operation of OLEBroker(TM). In selecting consulting opportunities,
the Company will focus primarily on assignments in connection with the sale
of kiosk services or that can otherwise enhance its skill base. The Company
believes that there will continue to be a market for the OLEBroker(TM)
service, consisting primarily of persons involved in computer programming,
rather than computer users in general, as the use of Microsoft Windows
programs increases.
ObjectSoft Corporation was incorporated in Delaware in January 1996 and is
the surviving corporation of the merger on January 31, 1996 (the "Merger")
between it and its predecessor, ObjectSoft Corporation, a New Jersey
corporation ("ObjectSoft-NJ"), which was incorporated in December 1990. The
sole purpose of the Merger was to effect a change of the corporate domicile
of ObjectSoft-NJ to Delaware. The Company was organized as a wholly-owned
subsidiary of ObjectSoft-NJ; prior to the Merger, the Company conducted no
business unrelated to its organization or to effecting the Merger. Throughout
this Prospectus, the "Company" will, unless the context otherwise requires,
include ObjectSoft-NJ.
The Company's executive offices are located at Continental Plaza III, 433
Hackensack Avenue, Hackensack, New Jersey 07601; its telephone number is
(201) 343-9100; its facsimile number is (201) 343-0056; its Internet e-mail
address is WebmasterObjectsoftcorp.com; and its homepage on the World-Wide
Web is at http://www.objectsoftcorp.com.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
(In thousands, except per share amounts)
The summary financial information set forth below is derived from the
financial statements appearing elsewhere in this Prospectus. Such information
should be read in conjunction with such financial statements, including the
notes thereto.
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
-------------------------- --------------------------
Statement of Operations Data: 1996 1995 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Consulting ...................... $258,000 $282,562 $447,976 $509,920
Development and Training ........ 37,954 97,900 118,618 245,836
Net loss .......................... (300,722) (13,798) (122,400) (45,504)
Net loss applicable to common stock. (316,535) (23,361) (141,525) (64,629)
Net loss per share of common stock.. (0.11) (0.01) (0.05) (0.02)
Weighted average number of common...
stock outstanding ................ 2,800,734 2,797,134 2,797,134 2,797,134
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
----------------------------------------------- -----------------
Balance Sheet Data: Historical Pro forma(1) As Adjusted(2)
------------- ------------- --------------
<S> <C> <C> <C> <C>
Working capital (deficiency) $ 246,384 $ 937,669 $ 2,971,950 ($ 390,290)
Total assets ............... 1,107,160 1,698,445 5,421,205 343,534
Redeemable preferred stock . 393,469 268,469 -- 383,906
Accumulated deficit ........ (1,193,939) (1,193,939) (1,385,201) (877,404)
Total stockholders' equity
(capital deficiency) ...... (787,854) 28,431 5,089,919 (598,844)
</TABLE>
- ------
(1) Gives effect to the sale of 273,001 shares of Common Stock and July 1996
Warrants to purchase 182,004 shares of Common Stock in July and August
1996 and the redemption of the Company's Series B Preferred Stock in July
1996.
(2) Gives effect to an offering price per Unit, in the Public Offering, of
$5.00 and gives effect to (i) the sale of 1,250,000 Units offered hereby
and the application of the estimated net proceeds therefrom, including
the repayment of $1,250,000 principal amount of the Bridge Loans
outstanding, plus accrued interest thereon and redemption of the Series A
Preferred Stock at its liquidation value of $212,500 plus accrued
dividends, (ii) the sale of the July 1996 Units and the issuance of the
July Placement Warrant and (iii) the redemption of the Series B Preferred
Stock at its liquidation value of $125,000 and the issuance of the
warrants to purchase 20,000 shares of Common Stock at $7.00 per share in
connection therewith. See "Use of Proceeds" and "Certain Transactions."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be carefully considered in evaluating the Company before
purchasing the securities offered by this Prospectus:
LIMITED OPERATING HISTORY; OPERATING LOSSES; ACCUMULATED DEFICIT
The Company was founded in 1990, has only a limited operating history and
recently changed its focus from consulting and training services to
transactional fee-based products and services. Consequently, any analysis of
the Company's prior operations has only minimal relevance to an evaluation of
the Company, its current products and services, and its prospects.
Although the Company has generated revenues from operations, it has
experienced losses. The Company has incurred, and will continue to incur,
significant costs in connection with the development of its Intranet kiosk
and Internet operations, which may result in operating losses. There can be
no assurance that such operations will ultimately generate significant
revenues for the Company or that the Company will achieve profitable
operations. As of June 30, 1996, the Company had an accumulated deficit of
$1,193,939. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements.
RECENT CHANGE OF OPERATING FOCUS
The Company's Intranet-based SmartStreet(TM) kiosk service business, as
well as its Internet service business (consisting primarily of the operation
of OLEBroker(TM)), have been recently created, are limited in scope and have
not generated significant revenues to date. The operations to which the
Company is now devoting its resources are in the early stages of development.
There can be no assurance that the Company will be successful in attracting
new customers or retaining current customers for its new business divisions
or in generating significant revenues or profits from such business
divisions. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving
markets. To address these risks, the Company must, among other things,
respond to competitive developments, attract, retain and motivate qualified
product development and marketing personnel, continue to upgrade its existing
technologies, develop new technologies and commercialize products and
services incorporating such technologies. There can be no assurance that the
Company will be successful in addressing such risks. The Company may also be
required to enter into strategic alliances to effect cooperative development
efforts in order to have the financial and technical resources to respond to
changing market demands on a timely basis. There can be no assurance that
entities with the necessary technical or financial resources will be willing
to enter into such alliances with the Company on acceptable terms or at all.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business -- ObjectSoft Strategy."
RECENT BRIDGE AND EQUITY FINANCINGS; USE OF PROCEEDS TO
REPAY BRIDGE LOANS AND REDEEM PREFERRED STOCK
During the period of April through June 1996, in the Bridge Loan Offering,
the Company issued promissory notes in the aggregate amount of $1,250,000 and
the Bridge Warrants. The Company will be required to amortize the "original
issue discount" incurred in connection with such bridge loans (the "Bridge
Loans") and the issuance of the Bridge Warrants over the period of time such
loans are outstanding. Assuming such Bridge Loans are repaid not later than
October 31, 1996, the Company's financial statements reflected, and will
reflect, amortization of the discount of approximately $77,000, $134,000 and
$57,000 in the three month periods ending June 30, September 30, and December
31, 1996, respectively. The Company incurred a loss for the six months ended
June 30, 1996 and even if it shows earnings from operations for the three
months ending September 30, 1996, it will, in all likelihood, incur a loss
for the nine months ending September 30, 1996. In addition, the issuance, in
the July 1996 Offering, of shares of Common Stock and warrants to purchase
Common Stock at prices below the price per Unit of the Units offered in the
Public Offering reduces the loss per share for the year ended December 31,
1995 and the six months ended June 30, 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Certain
Transactions" and Note D of the Notes to Financial Statements.
7
<PAGE>
BENEFITS TO AFFILIATES
A portion of the net proceeds of the Bridge Loans, as well as a portion of
the proceeds of the July 1996 Offering, were used to pay a portion of accrued
but unpaid salaries to the executive officers of the Company. To the extent
revenues from future operations are not sufficient to pay the salaries of
such executive officers in full, a portion of the proceeds of the Public
Offering allocated to expansion or working capital may used to pay such
salaries. A portion of the proceeds of the July 1996 Offering was also used
to redeem the convertible Series B Preferred Stock owned by Cyndel & Co.,
Inc. ("Cyndel"), a principal stockholder of the Company. See "Use of
Proceeds" and "Certain Transactions."
DEPENDENCE ON NEW, UNTESTED PRODUCT
The Company has recently refocused its efforts to concentrate on the
development of kiosks based on Internet technology from which it hopes to
derive transaction-based and advertising revenues. In January 1996, the
Company entered into an agreement with the City of New York, as part of the
City's Kiosk Demonstration Project, pursuant to which the Company agreed to
install and operate a minimum of five kiosks at City offices and other
locations to provide expedited public access to various City government
services. However, the City has also entered into agreements with two other
entities to install and operate kiosks. The Company installed its first five
kiosks in July 1996, and such kiosks have been operating on a limited basis
since that time.
The Company anticipates that revenues from the kiosks will be provided by
leasing fees paid by the service providers, such as the City, and by usage
fees paid by consumers who obtain City or other services through the kiosks.
Although kiosks are in operation in other municipalities, there can be no
assurance that the Company's kiosks will be able to operate consistently and
efficiently to provide the anticipated services, that members of the general
public will find the kiosks user-friendly, that they will be comfortable with
or be willing to pay the additional cost for the convenience of using the
kiosks to transact business with the City or other service providers by
electronic means, that the City will be satisfied with the results of the
operations of the Company's kiosks, or that even if the kiosks perform
adequately, that the City and other potential users of similar kiosks will
not opt for the products of the Company's competitors. The Company does not
have any agreements to provide kiosks or other Intranet services to any other
customers, and its ability to market such services to other potential
customers will be highly dependent on the success and acceptance of the New
York City kiosks. Furthermore, the municipalities, states and other
government agencies that constitute a primary target market for the Company's
kiosks are subject to potentially severe budgetary constraints and cuts that
may limit their ability to fund the acquisition of new technology such as the
kiosks.
In addition, the Company anticipates that a significant portion of the
revenues related to the kiosks will consist of leasing fees and usage fees
derived by providing unrelated transactions, such as restaurant information
and shopping services, to the users of the kiosks and from commercial
advertising by local and national companies and businesses. The Company has
engaged only in negotiating for agreements to provide such services or
advertising and has not as yet entered into any significant agreements. There
can be no assurance that commercial entities will be interested in marketing
or advertising their products and services by means of kiosks providing
government services, that such services or advertising can be sold at rates
that will provide significant revenues to the Company, or that such services
or advertising, if commenced, will prove to be effective and will be
continued. See "Business -- Products and Services -- SmartStreet(TM) Kiosk
Services."
RISKS RELATED TO OLEBROKER(TM) AND CONSULTING AND TRAINING SERVICES
Although the development of the OLEBroker(TM) service included the
development of much of the software used in the development and configuration
of the Company's kiosk technology, the service itself currently generates
limited revenues. The Company believes that while there will continue to be a
growing market for the OLEBroker(TM) service, particularly as the use of
Microsoft Windows programs increases, such market may consist primarily of
persons involved in computer programming, rather than computer users in
general.
The Company has historically provided consulting and training services
primarily on a project basis, and long-term continuing projects have been
limited. There can be no assurance that the Company will obtain future
8
<PAGE>
consulting projects. Furthermore, the Company will seek to accept consulting
and training assignments primarily in connection with the sale of kiosk
services or that will otherwise expand its skill base. See "Business --
Products and Services -- OLEBroker(TM) -- Consulting, Training and Authoring
Services."
UNCERTAINTY OF PRODUCT DEVELOPMENT
It is common for hardware and software as complex and sophisticated as
that employed by the Company in its kiosks to experience errors, or "bugs,"
both during development and subsequent to commercial introduction. As kiosks
are installed in New York City, the Company may identify such problems,
either in the software platforms developed by others or in its proprietary
software. There can be no assurance that all the potential problems will be
identified, that any bugs that are located can be corrected on a timely basis
or at all, or that additional errors will not be located in existing or
future products at a later time or when usage increases. Any such errors
could delay commercial introduction or use of existing or new products and
require modifications in systems that have already been installed. Remedying
such errors could be costly and time consuming, and bugs involving the
proprietary software of third parties could require the redesign of the
Company's proprietary software. Delays in debugging or modifying the
Company's products could materially and adversely affect the Company's
competitive position with respect to existing and new technologies and
products offered by its competitors. In particular, delays in remedying
existing or newly identified errors in the Company's kiosks could materially
and adversely affect the Company's ability to achieve significant market
penetration with the kiosks.
VULNERABILITY TO TECHNOLOGICAL CHANGES; NEED FOR MARKET ACCEPTANCE
The markets the Company serves are subject to rapid technological change,
changing customer requirements, frequent new product introductions and
evolving industry standards that may render existing products and services
obsolete. As a result, the Company's position in its existing markets or
other markets that it may enter could be eroded rapidly by product
advancements by competitors. The life cycles of the Company's products and
services are difficult to estimate. The Company's future success will depend,
in part, upon its ability to enhance existing products and services and to
develop new products and services on a timely basis. In addition, its
products and services must keep pace with technological developments, conform
to evolving industry standards, particularly client/server and Internet
communication and security protocols, and publishing formats, and address
increasingly sophisticated customer needs. In particular, the success of the
Company's kiosks will depend in large measure on their being user-friendly to
the general public and capable of operating reliably. There can be no
assurance that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of new
products and services, or that new products and services and enhancements
will meet the requirements of the marketplace and achieve market acceptance.
If the Company is unable to develop and introduce products and services in a
timely manner in response to changing market conditions or customer
requirements, the Company's financial condition and results of operations
would be materially and adversely affected.
COMPETITION
The Company's Intranet kiosk business competes with numerous companies,
including IBM, North Communications, Golden Screens and NCR (currently a
division of AT&T). All of these companies have resources much greater than
those of the Company. The Company's contract with the City of New York is
presently the most significant part of this business. The City has also
awarded demonstration contracts, comparable to the contract awarded to the
Company, to North Communications and Golden Screens. Both North
Communications (through its subsidiary, MetroNet) and DSSI (which awarded a
subcontract to Golden Screens) have supplied kiosks to other municipalities.
After fulfillment of the initial contracts, if the City chooses to install
additional kiosks throughout the City of New York, it may award to others,
and not the Company, the contract to install such additional kiosks. Further,
there can be no assurance that other municipalities or other entities will
seek to acquire kiosks from the Company. In addition, if the use of kiosks
provided by the Company and others proves to be successful in New York City
and other municipalities and locations, additional companies in the software,
hardware and communications areas, among others, may seek to enter the
market.
OLEBroker's(TM) competition includes Fawcette Technical Publications,
which offers a website concerning OLE components and which is supported by
advertising revenues. At this time, the site does not offer vendor's
9
<PAGE>
help files, although this could change in the future. Cybersource offers a
website called SoftwareNet for the sale of software, including software
components on-line, and a Canadian subsidiary of Sterling Software also
provides objects through electronic commerce. Objects are generally listed on
OLEBroker(TM) on a non-exclusive basis. While OLEBroker(TM) competes on the
basis of the organization, comprehensiveness and accessibility of its
offerings, the barriers to entry in the field are limited and additional
competitors are expected to enter the field. Many of these will have
resources far greater than the Company. See "Business -- Competition."
POSSIBLE DIFFICULTY IN COMPLYING WITH GOVERNMENT CONTRACT REQUIREMENTS
The Company's kiosks are initially being marketed to entities including
municipalities, states and other government agencies, among others. As
governmental authorities, these prospective purchasers are subject to public
contract requirements which vary from one jurisdiction to another and include
regulations relating to insurance coverage, non-discrimination in hiring
practices, access to the disabled, and record-keeping, among other
requirements. Some public contract requirements may be onerous or even
impossible for the Company to satisfy, such as large bonding requirements,
and the Company may be precluded from making sales in these jurisdictions. In
addition, public contracts frequently are awarded only after a formal
competitive bidding process. The process to date has been and may continue to
be protracted. Even following contract award, significant delays in contract
implementation are possible. See "Business -- Governmental Regulation."
RELIANCE ON MICROSOFT IN MARKETING
The Company has established a strategic relationship with Microsoft that
it believes is important to its sales, marketing and support activities, as
well as to its product development efforts relating to its kiosks. Microsoft
has provided technical and marketing support to the Company in connection
with the development and marketing of its kiosk services, has exhibited the
Company's kiosks in Microsoft displays at various trade shows and has
indicated its willingness to continue to do so in the future. It has also
issued public statements that included favorable references to the Company's
products. Since 1994, the Company has served as regional director of
Microsoft's "Developer Days" program, an on-going series of conferences, the
next one of which is scheduled for the first quarter of 1997, from which the
Company derives publicity and exposure to senior Microsoft personnel. In
addition, the Company also benefits from Microsoft's continued willingness to
enter into non- disclosure agreements with the Company with respect to
unannounced Microsoft products, under which the Company has the opportunity
to have advance knowledge of software technology being developed by
Microsoft. There is no assurance that Microsoft will continue to support the
Company's products, continue the Company's participation in the Developer
Days program or enter into such agreements with the Company in the future.
The Company also obtains benefits from a Cooperation Agreement, under which
Microsoft offers customers for certain of its software products a discounted
subscription rate on OLEBroker(TM). The Cooperation Agreement has an initial
one year term that concludes in November 1996. While an extension of the term
is currently being negotiated, there is no assurance that Microsoft in the
future will not elect to terminate the Cooperation Agreement or enter into
similar agreements with the Company's competitors. The Company believes that
the non- renewal of the Cooperation Agreement would not have a material
effect on the Company. However, if Microsoft were to sever its relationships
with the Company, the Company's sales and financial condition could be
severely and adversely affected. See "Business -- Products and Services --
Relationship with Microsoft."
DEPENDENCE UPON MICROSOFT'S WINDOWS OPERATING SYSTEM
The Company has invested in software built on Microsoft's Internet
Explorer, Windows NT and Windows 95 platforms and written in certain
programming languages designed for these operating systems. To the extent
that such platforms do not remain competitive, the Company might have to
expend significant time and resources to port its software to other
platforms. Any factor adversely affecting the demand for, or use of,
Microsoft's Windows operating system could have an impact on demand for the
Company's products or services causing a material adverse effect on the
Company's business, results of operations and financial condition.
Additionally, any changes to the underlying components of the Windows
operating system that would require changes to the Company's products would
materially adversely affect the Company if it were not able successfully to
develop or implement such changes in a timely fashion. See "Business --
Products and Services."
10
<PAGE>
DEPENDENCE UPON COMMON CARRIERS AND INTERNET ACCESS PROVIDERS
The Company is also dependent on various regulated common carriers and
unregulated Internet access providers, such as AT&T, Bell Atlantic, NYNEX,
SPRINT and NYSERNET. In the event such carriers or providers cannot timely
respond to the Company's requirements for service, fail to provide reliable
service or increase their rates substantially, the Company's service or
profitability could be adversely effected. See "Business -- Products and
Services."
DEPENDENCE ON THE INTERNET
Sales of the Company's Internet-related products and services, including
its OLEBroker(TM) and new or expanded products and services, if any, will
depend in large part upon a robust industry and infrastructure for providing
commercial Internet access and carrying Internet traffic and upon increased
commercial use of the Internet. If the necessary infrastructure or
complementary products are not developed or available to the Company on
reasonable terms, or if development of the Internet as a significant
commercial marketplace is interrupted or delayed, the Company's business,
operating results and financial condition could be materially adversely
affected. See "Business -- Products and Services."
LIMITED CUSTOMER BASE
The long term success of the Company's business will depend not only on
the Company's ability to enter into arrangements with municipalities, other
government entities and private entities to make services available through
kiosks and with advertisers to use the kiosks as an advertising medium, but
ultimately upon the willingness of consumers to pay fees to transact business
by means of the kiosks. To date, the Company is operating only five public
kiosks, which were installed pursuant to the agreement with the City of New
York and which have been available for public use for a short period of time.
The decision by the City to acquire kiosks from providers other than the
Company would have a direct and materially adverse effect on the prospects of
the Company and could also decrease the Company's ability to market the
kiosks to other potential service providers and advertisers. In addition,
there can be no assurance that the volume of use by consumers of the kiosks
to obtain City services and conduct other transactions will be sufficient to
generate significant revenues for the Company.
The Company historically has derived a significant portion of its revenues
from a relatively limited number of customers. During the six months ended
June 30, 1996, the City of New York accounted for 56% of the Company's
revenues pursuant to the City Agreement and Microsoft, for which the Company
provided consulting services, accounted for 20% of the Company's revenues.
During 1995, two customers accounted for approximately 56% of the Company's
revenues, and during 1994, four customers accounted for approximately 67% of
revenues. The Company provided consulting and related services, and more
recently, services related to the development of OLEBroker(TM) and Intranet
and kiosk technology, to such customers. There can be no assurance that such
customers or others will retain the Company to install kiosks or provide such
services in the future. Furthermore, no customers of OLEBroker(TM) account
for a material portion of the Company's revenues, and there can be no
assurance that the Company will be able to develop a significant customer
base for this service. See "Business -- Customers."
RISK OF MANUFACTURING ACTIVITIES
The Company's kiosks involve the design by the Company, and the
engineering and manufacture by subcontractors, of the hardware and graphical
components of the kiosks. Only a limited number of kiosks have been
fabricated to date, so it is difficult for the Company to predict if its
current subcontractors will be able to engineer and produce kiosks on a
satisfactory basis. While the Company believes that it could arrange to have
kiosks fabricated by other subcontractors on comparable terms, there can be
no assurance that the need to establish relationships with other
subcontractors would not result in costs and delays to the Company. The
future success of the Company will depend in part on its ability to retain,
and maintain good relationships with, subcontractors in order to assure the
timeliness and quality of the manufacture of its kiosks. See "Business --
Products and Services -- SmartStreet(TM) Kiosk Services -- SmartStreet(TM)
Kiosk Technology."
11
<PAGE>
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have in the past and may in the
future vary significantly depending upon factors such as the timing of
significant orders, which in the past have been, and will in the future be,
delayed from time to time by delays in the contracting process. The potential
customers for the Company's kiosks are expected to include municipalities,
government agencies and large organizations; that is, entities that typically
engage in extended competitive bidding, approval and negotiation procedures
with respect to contracts, with no assurance that the contract will
ultimately be awarded to the Company. Additional factors contributing to
variability of operating results include the pricing and mix of services and
products sold by the Company, terminations of service, new product
introductions by the Company and its competitors, market acceptance of new
and enhanced versions of the Company's products and services, changes in
pricing or marketing policies by its competitors and the Company's responses
thereto, the Company's ability to obtain sufficient vendors, to obtain
supplies of sole or limited source components, changes in the Company's
network infrastructure costs, as a result of demand variation or otherwise,
the lengthening of the Company's sales cycle and the timing of the expansion
of the Company's network infrastructure. Variations in the timing and amounts
of revenues and costs could have a materially adverse effect on the Company's
quarterly operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of
its executive officers and key employees, and on its ability to attract key
personnel. In particular, the future success of the Company is dependent upon
the personal efforts of the Company's founders, David E. Y. Sarna and George
J. Febish, each of whom is a director and an executive officer of the
Company. Messrs. Sarna and Febish have long-term employment agreements with
the Company. The Company has in place key person life insurance policies, of
which it is the beneficiary, on the lives of Messrs. Sarna and Febish in the
amount of $1,000,000 each. However, the loss of the services of its executive
officers or other key employees could delay the Company's ability to fully
implement the operating strategy, which could have a materially adverse
effect on the business, operating results and financial condition of the
Company. See "Business -- ObjectSoft Strategy" and "Management."
ATTRACTION AND RETENTION OF EMPLOYEES AND CONTRACT PROVIDERS
The Company's success will depend in large part upon its ability to
attract, develop, motivate and retain highly skilled technical employees,
particularly software developers, project managers and other senior
personnel, as well as independent providers of creative content for the
Company's kiosks and websites. Qualified project managers and skilled
developers with Intranet, Internet and ActiveX(TM) skills are in particularly
great demand and are likely to remain a limited resource for the foreseeable
future. Although the Company expects to continue to be able to attract and
retain sufficient numbers of highly skilled technical employees, developers,
project managers and independent content providers for the foreseeable
future, there can be no assurance that the Company will be able to do so. The
loss of some or all of the Company's project managers and other senior
personnel could have a materially adverse impact on the Company, particularly
on its ability to secure and complete engagements. Other than Messrs. Sarna
and Febish, no other senior personnel have entered into employment agreements
obligating them to remain in the Company's employ for any specific term;
however, substantially all key employees of the Company are parties to
nonsolicitation, confidentiality and noncompetition agreements with the
Company. See "Business -- Employees" and "Management."
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's success and ability to compete is dependent in part upon its
proprietary technology. While the Company relies on trade secret, contract,
trademark and copyright law to protect its technology, the Company 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 more essential to establishing and
maintaining a technology leadership position. The Company presently has no
patents or patent applications pending. There can be no assurance that others
will not develop technologies that are similar or superior to the Company's
technology. The source code for the Company's proprietary software is
protected as
12
<PAGE>
a trade secret. In addition, because the Company does not sell or license its
technology to third parties, but rather delivers services thorough its kiosks
and OLEBroker(TM), its proprietary software is not disclosed to third
parties. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain aspects of the
Company's products or to obtain and use information that the Company regards
as proprietary or to develop similar technology independently. Policing
unauthorized use of the Company's products is difficult. In addition,
effective trade secret and copyright protection may be unavailable or limited
in certain foreign countries. There can be no assurance that the steps taken
by the Company will prevent misappropriation of its technology. In addition,
litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, operating results or
financial condition.
Certain technology used in the Company's products or services is licensed
or leased from third parties, generally on a nonexclusive basis. While the
licenses involved are primarily "shrink wrap licenses;" that is, licenses
available to anyone who purchases publicly available software programs, the
termination of any of these licenses or leases or the discontinuance of the
underlying programs may have a material adverse effect on the Company's
operations. Replacement of certain technologies licensed or leased by the
Company could be costly and could result in product delays which would
materially and adversely affect the Company's operating results. While it may
be necessary or desirable in the future to obtain other licenses or leases
relating to one or more of the Company's products or services or relating to
current or future technologies, there can be no assurance that the Company
will be able to do so on commercially reasonable terms or at all. See
"Business -- Proprietary Rights."
RISK OF SYSTEM FAILURE; SECURITY RISKS; LIABILITY RISKS
The Company's operations are dependent upon its ability, and the ability
of its suppliers, such as AT&T, Bell Atlantic, NYSERNET, SPRINT and NYNEX, to
protect its network infrastructure against damage from fire, earthquakes,
power loss, telecommunications failures and similar events. Despite
precautions taken by the Company and its suppliers, the occurrence of a
natural disaster or other unanticipated problems at the Company's network
operations center or kiosks in the future could cause interruptions in the
services provided by the Company. In addition, failure of the Company's
telecommunications providers to provide the data communications capacity
required by the Company as a result of a natural disaster, operational
disruption or for any other reason could cause interruptions in the services
provided by the Company. Any damage or failure that causes interruptions in
the Company's operations could have a material adverse effect on the
Company's business, financial condition and results of operations.
Despite the implementation of security measures, the core of the Company's
network infrastructure is vulnerable to computer virus attacks and other
disruptive problems. The Company and Internet access providers have in the
past experienced, and may in the future experience, interruptions in service
as a result of the accidental or intentional actions of Internet users,
current and former employees or others. Unauthorized use could also
potentially jeopardize the security of confidential information stored in the
computer systems of the Company and its customers, which may result in
liability of the Company to its customers and also may deter potential users.
Although the Company intends to continue to implement industry-standard
security measures, such measures have been circumvented in the past, and
there can be no assurance that measures implemented by the Company will not
be circumvented in the future. Eliminating computer viruses and alleviating
other security problems may require interruptions, delays or cessation of
service to the Company's customers which could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company's success will depend upon the capacity, reliability and
security of its network infrastructure, including processing capability and
the facilities and capacity leased from access providers and
telecommunications vendors. The Company must continue to expand and adapt its
network infrastructure as the number of users and the amount of information
they wish to transfer increases, and to meet changing customer requirements.
The expansion and adaptation of the Company's network infrastructure will
require substantial financial, operational and management resources. There
can be no assurance that the Company will be able to expand or adapt its net-
13
<PAGE>
work infrastructure to meet additional demand or its customers' changing
requirements on a timely basis, at a commercially reasonable cost, or at all.
Any failure of the Company to expand its network infrastructure on a timely
basis or adapt it either to changing customer requirements or to evolving
industry standards could have a material adverse effect on the Company's
business, financial condition and results of operations.
The kiosks that were installed in various locations in New York City in
July 1996 have only been operating for a short time, so the Company has only
limited experience with actual consumer interaction with the kiosks. While
the Company has designed the kiosks to be resistant to vandalism, there can
be no assurance that vandals will not succeed in damaging or disabling the
kiosks. In addition, although the Company believes it is unlikely, users of
the kiosks may seek to hold the Company liable for injuries allegedly
incurred in connection with the use of the kiosks.
While the Company maintains insurance covering, among other things, losses
resulting from business interruptions caused by system failures, damages to
kiosks or claims by users of the kiosks, with an annual limit of $2,000,000,
and a $5,000,000 umbrella policy, there can be no assurance that such
insurance will provide sufficient coverage or that if there are multiple
claims, such insurance will be not terminated or will be available for terms
affordable to the Company. See "Business -- Products and Services."
GOVERNMENT REGULATION; POTENTIAL LIABILITY FOR INFORMATION AND
CONTENT DISSEMINATED THROUGH NETWORK
The Company is not currently subject to direct regulation by the Federal
Communications Commission or any other agency, other than regulations
applicable to businesses generally and businesses doing business with
governmental agencies. In connection with its contract with the City of New
York and future contracts, if any, with the City and other municipalities or
government entities, the Company will have to comply to such regulations,
including bidding procedures and record-keeping, audit, insurance, bonding
and anti-discrimination provisions, among others.
Changes in the regulatory environment relating to the Internet access
industry could have an adverse effect on the Company's business. Due to the
increase in Internet use and publicity, it is possible that laws and
regulations may be adopted with respect to the Internet, including with
respect to privacy, pricing and characteristics of products or services. The
Company cannot predict the impact, if any, that future laws and regulations
or legal or regulatory changes may have on its business.
The law relating to the liability of on-line services companies and
Internet access providers for information carried on or disseminated through
their systems is currently unsettled. Several private lawsuits seeking to
impose such liability upon on-line services companies and Internet access
providers are currently pending. In addition, legislation has been proposed
which would impose liability for or prohibit the transmission on the Internet
of certain types of information and content. In the event the Company were to
make services such as the one offered through its kiosks available over the
Internet, the imposition upon Internet access providers of potential
liability for information carried on or disseminated through their systems
could require the Company to implement measures to reduce its exposure to
such liability, which may require the expenditure of substantial resources,
or to discontinue certain product or service offerings. The increased
attention focused upon liability issues as a result of these lawsuits and
legislative proposals could impact the growth of Internet use. While the
Company carries insurance, it may not be adequate to compensate the Company
in the event the Company becomes liable for information carried on or
disseminated through its systems. Any costs not covered by insurance incurred
as a result of such liability or asserted liability could have a material
adverse effect on the Company's business, financial condition and results of
operations.
CONTINUING CONTROL BY CURRENT MANAGEMENT
Upon completion of the Public Offering, David E. Y. Sarna, the Company's
Chairman and Co-Chief Executive Officer, and George J. Febish, the Company's
President and Co-Chief Executive Officer, each of whom is a director of the
Company and a principal stockholder of Company, together with The David E. Y.
Sarna Family Trust and The George J. Febish Family Trust (the trusts,
collectively. the "Family Trusts"), will beneficially own, in the aggregate,
approximately 45% of the issued and outstanding shares of Common Stock. As a
result,
14
<PAGE>
these stockholders will have effective control over the Company and on the
outcome of any matters submitted to the Company's stockholders for approval,
which influence might not be consistent with the interests of other
stockholders. In addition, if they were to act in concert, they would be able
to elect a majority of the Company's directors, deter or cause a change in
control of the Company and otherwise generally control the Company's affairs.
See "Principal Stockholders."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company's current policy is to own and operate its kiosks, which may
require substantial capital investment. It is the Company's intention to
enter into lease financing arrangements for the kiosks. While the Company has
entered into such an arrangement to cover a portion of the costs of the first
five kiosks, it has not entered into an agreement for such financing for
future kiosks, if any, and there can be no assurance that it will be able to
do so on acceptable terms or at all. The Company believes that the net
proceeds from the Public Offering, together with anticipated revenues from
operations, and assuming the establishment of an acceptable lease financing
arrangement, will be sufficient to meet its presently anticipated working
capital and capital expenditure requirements for at least 24 months. However,
if the Company's expectations are not fulfilled, there can be no assurance
that the net proceeds of the Public Offering will be sufficient to implement
successfully the Company's business plan or meet its working capital or
financing requirements. The Company may need to raise additional funds
through public or private debt or equity financings in order to take
advantage of unanticipated opportunities, including acquisitions of
complementary businesses or technologies, or to develop new products or
otherwise respond to unanticipated competitive pressures. In addition, if the
Company experiences rapid growth, it may require additional funds to expand
its operations or enlarge its organization. In any such event, continued
operation of the Company may be dependent on the ability of the Company to
procure additional financing through sales of additional equity or debt. If
the Company were to issue any equity or convertible debt securities, such
issuance could substantially dilute the interests of the Company's then
existing security holders. Such equity securities may also have rights,
preferences or privileges senior to those of the holders of the Company's
Common Stock. There can be no assurance that additional financing will be
available on terms favorable to the Company, or at all. If adequate funds are
not available or are not available on acceptable terms, the Company may not
be able to take advantage of unanticipated opportunities, develop new
products or otherwise respond to unanticipated competitive pressures. Such
inability could have a materially adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources" and "Business -- ObjectSoft Strategy."
DIVIDENDS
Other than distributions made prior to 1993, when the Company was a
closely-held "S corporation," the Company has not paid any dividends on its
Common Stock in the past, and does not anticipate that it will declare or pay
any dividends in the foreseeable future. However, the Company's Series A
Preferred Stock currently accrues dividends at the annual rate of 9%. The
Company is obligated to pay all accrued but unpaid dividends on the Series A
Preferred Stock in connection with the redemption of the Series A Preferred
Stock upon closing of the Public Offering. See "Dividend Policy" and
"Description of Securities -- Preferred Stock."
NO PRIOR MARKET FOR THE COMPANY'S SECURITIES; POSSIBLE VOLATILITY
OF MARKET PRICE OF THE COMPANY'S SECURITIES
Prior to the Public Offering, there has been no public market for the
Company's securities. There can be no assurance that an active public market
will develop or be sustained after the Public Offering or that the market
price of the Company's securities will not decline below the public offering
price. Future announcements concerning the Company or its competitors,
quarterly variations in operating results, announcements of technological
innovations, the introduction of new products or services or changes in
product or service pricing policies by the Company or its competitors,
litigation concerning proprietary rights or other matters, changes in
earnings estimates by analysts or other factors could cause the market price
of the Company's securities to fluctuate sub-
15
<PAGE>
stantially. In addition, stock prices for many technology companies fluctuate
widely for reasons which may be unrelated to operating results. These
fluctuations, as well as general economic, market and political conditions
such as recessions or military conflicts, may materially and adversely affect
the market price of the Company's securities.
POSSIBLE DELISTING AND RISK OF LOW PRICED SECURITIES
The Units, Common Stock and Class A Warrants comprising the Units have been
approved for listing on the NASDAQ SmallCap Market. No assurance can be given
that the Company will continue to be able to satisfy certain specified financial
tests and market-related criteria required for continued quotation on NASDAQ
following the Public Offering. If the Company is unable to satisfy such
maintenance criteria in the future, the Units, Common Stock and Class A Warrants
may be delisted from trading on NASDAQ and consequently an investor could find
it more difficult to dispose of, or to obtain accurate quotations as to the
price of, the Company's securities, and the Class A Warrants would no longer be
redeemable.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection
with trades in any stock defined as a penny stock. Commission regulations
generally define a penny stock to be an equity security that has a market
price of less than $5.00 per share, subject to certain exceptions. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.
In addition, if the Company's securities are not quoted on NASDAQ, or if
the Company does not meet the other exceptions to the penny stock regulations
cited above, trading in the Company's securities would be covered by Rule
15g-9 promulgated under the Exchange Act for non-NASDAQ and non-national
securities exchange listed securities. Under such rule, broker/dealers who
recommend such securities to persons other than established customers and
accredited investors must make a special written suitability determination
for each purchaser and receive the purchaser's written agreement to a
transaction prior to sale. Securities also are exempt from this rule if the
market price is at least $5.00 per share.
If the Company's securities become subject to the regulations applicable
to penny stocks, the market liquidity for the Company's securities could be
adversely affected. In such event, such regulations could limit the ability
of broker/dealers to sell the Company's securities and thus the ability of
purchasers of the Company's securities to sell their securities in the
secondary market.
POSSIBLE NEGATIVE EFFECT ON TRADING OF WARRANT SOLICITATION ACTIVITIES OF
REPRESENTATIVE
The Representative may participate in the solicitation of the exercise of
the Class A Warrants. In connection with the solicitation of the Class A
Warrant exercises, unless the Representative is granted an exemption by the
Commission from Rule 10b-6 under the Exchange Act, the Representative and any
other soliciting broker-dealer will be prohibited from engaging in any
market-making activities with respect to the Company's securities for the
period commencing either two or nine business days (depending on the market
price of the Common Stock) prior to any solicitation activity until the later
of (i) the termination of such solicitation activity, and (ii) the
termination (by waiver or otherwise) of any right that the Representative or
any other soliciting broker-dealer may have to receive a fee for the exercise
of Class A Warrants following such solicitation. As a result, the
Representative or other soliciting broker-dealer may be unable to provide a
market for the Company's securities, should it desire to do so, during
certain periods while the Class A Warrants are exercisable. In addition,
under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Selling Securityholder Securities may not
simultaneously engage in market-making activities with respect to any
securities of the Company for the applicable "cooling off" period (at least
two and possibly nine business days) prior to the commencement of such
distribution. Accordingly, in the event the Representative is engaged in a
distribution of any Selling Securityholder Securities, it will not be able to
make a market in the Company's securities during the applicable restrictive
period. Such restrictions may adversely affect the price and liquidity of the
Units, Common Stock and the Class A Warrants. See "Description of Securities"
and "Concurrent Public Offering."
16
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
All of the shares of Common Stock issued and outstanding prior to the
Public Offering are "restricted securities," as that term is defined under
Rule 144 promulgated under the Securities Act, in that such shares were
issued and sold by the Company in private transactions not involving a public
offering. In general, under Rule 144 as currently in effect, beginning 91
days after the date hereof, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company, after at least
two years have elapsed from the sale by the Company or any affiliate of the
restricted securities, can (along with any person with whom such individuals
is required to aggregate sales) sell, within any three-month period, a number
of shares of restricted securities that does not exceed the greater of 1% of
the total number of outstanding shares of the same class, or, if the Common
Stock is quoted on NASDAQ or a stock exchange, the average weekly trading
volume during the four calendar weeks preceding the sale. A person who has
not been an affiliate of the Company for at least three months, after at
least three years have elapsed from the sale by the Company or an affiliate
of the restricted securities, is entitled to sell such restricted shares
under Rule 144 without regard to any of the limitations described above. The
Company's executive officers, David E. Y. Sarna and George J. Febish, and the
Family Trusts have agreed not to sell or otherwise transfer any of their
securities in the Company for a period of 18 months after the date of this
Prospectus without the prior written consent of the Representative, and have
agreed with various state securities administrators not to sell (other than
in a pledge or hypothecation) any of their shares of Common Stock for a
period ending on the second anniversary of the execution date of the City
Agreement. At the request of the Representative, the Company has attempted to
obtain agreements from the other securityholders of the Company who hold
718,000 shares of Common Stock and 169,583 warrants not to sell any of their
shares of Common Stock for a period of nine months after the date of this
Prospectus without the prior written consent of the Representative. Through
November 11, 1996, the Company has obtained such agreements from the holders
of 580,500 shares of Common Stock and 150,833 warrants. In addition,
concurrently with the Public Offering, the Company is registering for sale by
the Selling Securityholders 1,142,088 shares of Common Stock and 412,500
Class A Warrants that are outstanding or issuable upon the exercise of
currently exercisable warrants; however, the Selling Securityholders, other
than the Representative and holders intended to be subject to the nine month
agreements with the Representative described above, have agreed not to sell
any of such securities for a period of 12 months after the date of this
Prospectus without the prior written consent of the Representative, which
consent can be given only for sales beginning six months after the date of
this Prospectus. Furthermore, certain holders of the Company's outstanding
Common Stock, warrants and options (including current and former executive
officers) have "piggyback" registration rights and/or demand registration
rights that they may exercise commencing one year from the date of this
Prospectus.
No prediction can be made as to the effect, if any, the future sales of
Common Stock or the availability of Common Stock for future sale will have on
the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock (including shares issued upon exercise of
stock options or warrants) in the public market following the Public
Offering, or the perception that such sales could occur, could adversely
affect prevailing market prices of the Common Stock. See "Description of
Securities -- Registration Rights," "Shares Eligible For Future Sale" and
"Plan of Distribution."
EFFECT OF OUTSTANDING WARRANTS, OPTIONS AND CONVERTIBLE SECURITIES
The Company has outstanding warrants to purchase an aggregate of 412,500
Units, all of which are exercisable at a price per Unit below the per Unit
offering price of the Units offered in the Public Offering. In addition,
412,500 shares of Common Stock will be issuable upon the exercise of the
Class A Warrants issuable upon the exercise of such outstanding warrants. The
Company also has outstanding other options and warrants to purchase an
aggregate of 656,587 shares of Common Stock (as well as the July Placement
Warrant to purchase (1) 27,300 shares of Common Stock and (2) July 1996
Warrants to purchase 18,200 shares), of which all except warrants to purchase
57,500 shares of Common Stock are exercisable at a price below the per share
offering price (assuming no value is ascribed to the Class A Warrants
included in the Units) of the Units offered in the Public Offering. The
Company has also agreed to grant to the Representative the Unit Purchase
Option, consisting of the right to purchase, commencing one year from the
date of this Prospectus, 87,500 Units. The sale of 1,142,088 shares of Common
Stock, as well as 412,500 Class A Warrants, has been registered and may be
offered by this Prospectus, and the Company has granted certain demand and
piggyback registration rights to the holders of certain shares of Common
Stock, outstanding options and warrants and the Representative's Unit Pur-
17
<PAGE>
chase Option. While holders of certain of these rights (including the Selling
Securityholders other than the Representative) have agreed not to sell the
securities issuable upon the exercise of outstanding options and warrants for
nine or 12 months after the date of this Prospectus, these rights could
result in substantial expense to the Company and restrict the Company's
ability to obtain future financing. The exercise of such options and warrants
and the sale of the Common Stock subject to these registration rights would
have a dilutive effect on the Company's stockholders. See "Certain
Transactions," "Description of Securities -- Registration Rights," "Plan of
Distribution" and "Concurrent Public Offering."
ADVERSE EFFECT OF REDEMPTION OF CLASS A WARRANTS
The Company has the right to redeem the Class A Warrants, commencing one
year from the date of the prospectus used in the Public Offering (or earlier,
with the consent of the Representative), provided that the average closing
bid price of the Common Stock has exceeded 130% of the then current exercise
price of the Class A Warrants (initially $8.45 per share), for a period of 20
consecutive trading days ending within 15 days prior to the date on which the
Company gives notice of redemption. If the Company gives such notice of
redemption, holders of the Class A Warrants will lose their rights to
exercise the Warrants after the date fixed therein for their redemption. Upon
the receipt of a notice of redemption of the Class A Warrants, the holders
thereof would be required to (i) exercise the Class A Warrants and pay the
exercise price at a time when it may disadvantageous for them to do so, (ii)
sell the Class A Warrants at the then market price, if any, when they might
otherwise wish to hold the Class A Warrants or (iii) accept the redemption
price, which is likely to be substantially less than the market value of the
Class A Warrants at the time of redemption. See "Description of Securities --
Class A Warrants."
NECESSITY OF FUTURE REGISTRATION OF CLASS A WARRANTS AND STATE BLUE SKY
REGISTRATION; EXERCISE OF CLASS A WARRANTS
The shares of Common Stock and the Class A Warrants comprising the Units
are immediately detachable and separately transferable upon issuance.
Although Units will not knowingly be sold to purchasers in jurisdictions in
which the Class A Warrants are not registered or otherwise qualified for sale
or exempt, purchasers may buy Class A Warrants in the after-market or may
move to jurisdictions in which the Class A Warrants and the Common Stock
underlying the Class A Warrants are not so registered or qualified or exempt.
In this event, the Company would be unable lawfully to issue Common Stock to
those persons desiring to exercise their Class A Warrants (and the Class A
Warrants will not be exercisable by those persons) unless and until the Class
A Warrants and the underlying Common Stock are registered or qualified for
sale in jurisdictions in which such purchasers reside or an exemption from
such registration or qualification requirements exists in such jurisdictions.
There can be no assurance that the Company will be able to effect any
required registration or qualification.
The Class A Warrants offered in the Public Offering will not be
exercisable unless the Company maintains a current registration statement on
file with the Commission either by filing post-effective amendments to the
Registration Statement with respect to the Public Offering or by filing a new
registration statement with respect to the exercise of such Class A Warrants.
The Company has agreed to use its best efforts to file and maintain, so long
as the Class A Warrants offered in the Public Offering are exercisable, a
current registration statement with the Commission relating to such Class A
Warrants and the shares of Common Stock underlying such Class A Warrants.
However, there can be no assurance that it will do so or that such Class A
Warrants or such underlying Common Stock will be or continue to be so
registered.
The value of the Class A Warrants could be adversely affected if a then
current prospectus covering the Common Stock issuable upon exercise of the
Class A Warrants is not available pursuant to an effective registration
statement or if such Common Stock is not registered or qualified for resale
or exempt from registration or qualification in the jurisdictions in which
the holders of Class A Warrants reside. See "Description of Securities --
Class A Warrants."
POSSIBLE NEGATIVE EFFECT OF ANTI-TAKEOVER PROVISIONS, STAGGERED BOARD AND
PROVISIONS RELATING TO STOCKHOLDER ACTIONS
Certain provisions of Delaware law and the Company's Certificate of
Incorporation, as amended, and its Amended and Restated Bylaws could make it
more difficult for a third party to acquire, and could discourage a third
party from attempting to acquire, control of the Company. Certain of these
provisions allow the Company to issue Preferred Stock with rights senior to
those of the Common Stock without any further vote or action by
18
<PAGE>
the stockholders, eliminate the right of stockholders to act by written
consent and impose various procedural and other requirements which could make
it more difficult for stockholders to effect certain corporate actions. The
classification of the Company's Board of Directors could have the effect of
delaying a change in control of the Company. In addition, the Company will
have 5,000,000 shares of authorized Preferred Stock, which the Company could
issue in the future without further stockholder approval and upon such terms
and conditions, and have such rights, privileges and preferences, as the
Board of Directors may determine. The rights of the holder of Common Stock
will be subject to, and may be adversely affected by, the rights of the
holders of Preferred Stock that may be issued in the future. The Company has
no current plans to issue any additional Preferred Stock. See "Certain
Transactions," "Management -- Executive Officers and Directors" and
"Description of Securities -- Preferred Stock -- Delaware Takeover Statute
and Certain Charter Provisions."
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
The Certificate of Incorporation, as amended, and the Amended and Restated
Bylaws of the Company contain provisions limiting the liability of directors
of the Company for monetary damages to the fullest extent permissible under
Delaware law. This is intended to eliminate the personal liability of a
director for monetary damages on an action brought by or in the right of the
Company for breach of a director's duties to the Company or its stockholders
except in certain limited circumstances. In addition, the Certificate of
Incorporation, as amended, and the Amended and Restated Bylaws contain
provisions requiring the Company to indemnify directors, officers, employees
and agents of the Company serving at the request of the Company against
expenses, judgments (including derivative actions), fines and amounts paid in
settlement. This indemnification is limited to actions taken in good faith in
the reasonable belief that the conduct was lawful and in or not opposed to
the best interests of the Company. The Certificate of Incorporation, as
amended, and the Amended and Restated Bylaws provide for the indemnification
of directors and officers in connection with civil, criminal, administrative
or investigative proceedings when acting in their capacities as agents for
the Company. The foregoing provisions may reduce the likelihood of derivative
litigation against directors and executive officers and may discourage or
deter stockholders or management from suing directors or executive officers
for breaches of their duties to the Company, even though such an action, if
successful, might otherwise benefit the Company and its stockholders.
19
<PAGE>
DIVIDEND POLICY
Other than distributions made prior to 1993, when the Company was a
closely-held "S corporation," the Company has never declared or paid cash
dividends on its Common Stock. The Company currently anticipates that it will
retain all available funds for use in the operation of its business, and
therefore does not anticipate paying any cash dividends on the Common Stock
in the foreseeable future. The Company's Series A Preferred Stock currently
accrues dividends at the annual rate of 9%. The Company is obligated to pay
all accrued but unpaid dividends on the Series A Preferred Stock in
connection with the redemption of the Series A Preferred Stock upon closing
of the Public Offering. See "Description of Securities -- Preferred Stock."
CAPITALIZATION
The following table sets forth, as of June 30, 1996, (i) the
capitalization of the Company, (ii) the pro forma capitalization of the
Company, as adjusted to give effect to the sale in July and August 1996 of
273,001 shares of Common Stock and July 1996 Warrants to purchase 182,004
shares of Common Stock and the redemption of the Company's Series B Preferred
Stock in July 1996, and (iii) the capitalization of the Company as further
adjusted to give effect to (A) the sale of the Units in the Public Offering
(at an offering price of $5.00 per Unit) and the receipt by the Company of
the estimated net proceeds therefrom, after deducting estimated underwriting
discounts and commissions and other expenses of the Public Offering, (B)
repayment of the $1,250,000 principal balance of the outstanding Bridge Loans
and the accrued interest thereon, and (C) the concurrent mandatory redemption
of all the outstanding shares of Series A Preferred Stock.
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------
Historical Pro Forma As Adjusted
------------- ------------- -------------
<S> <C> <C> <C>
Note payable .......................... $ 1,058,738 $ 1,058,738 $ --
============= ============= =============
Preferred stock, $.0001 par value;
5,000,000 shares authorized; 212,500
shares of Series A Preferred Stock
issued and outstanding actual and pro
forma; no shares to be issued and
outstanding as adjusted .............. 268,469 268,469 --
1,250 shares of Series B Preferred
Stock issued and outstanding; no
shares to be issued and outstanding
pro forma and as adjusted ............ 125,000 -- --
------------- ------------- -------------
393,469 268,469 --
============= ============= =============
Common stock, $.0001 par value;
20,000,000 shares authorized;
2,293,000 issued and outstanding;
2,566,001 issued and outstanding pro
forma; and 3,816,001 to be issued and
outstanding as adjusted (1) .......... 229 257 382
Capital in excess of par value ........ 405,856 1,222,113 6,474,738
Accumulated deficit (2). .............. (1,193,939) (1,193,939) (1,385,201)
------------- ------------- -------------
Total stockholders' equity (capital
deficiency) ...................... $ (787,854) $ 28,431 $ 5,089,919
============= ============= =============
</TABLE>
- ------
(1) Does not include: (i) 1,250,000 shares of Common Stock issuable upon
exercise of the Class A Warrants included in the Units offered in the
Public Offering, (ii) up to 375,000 shares of Common Stock issuable upon
exercise of the Over-allotment Option and the Class A Warrants underlying
the Over-allotment Option, (iii) 175,000 shares of Common Stock issuable
upon the exercise of the Representative's Unit Purchase
20
<PAGE>
Option and the Class A Warrants issuable upon the exercise thereof, and
(iv) 1,114,587 shares of Common Stock issuable upon exercise of
outstanding options and warrants and the Class A Warrants issuable upon
the exercise of certain of such warrants. See "Management," "Certain
Transactions" and "Description of Securities."
(2) Reflects, among other things, the write-off of unamortized note payable
discounts and deferred financing costs amounting to $191,262 upon
repayment of an aggregate of $1,291,000, consisting of the principal and
accrued interest of the Bridge Loans received by the Company in the
Bridge Loan Offering during the period of April though June 1996 and
repayable from the proceeds of the Public Offering.
SELECTED FINANCIAL DATA
The selected financial data set forth below as at December 31, 1995 and
for each of the two fiscal years then ended have been derived from the
audited financial statements of the Company. The financial statements of the
Company as at December 31, 1995, and for each of the two fiscal years then
ended, including the notes thereto, and the related report of Richard A.
Eisner & Company, LLP, independent auditors, are included elsewhere in this
Prospectus. The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements of the Company and
related notes thereto included elsewhere in this Prospectus. Data for the six
month periods ended June 30, 1996 and 1995 are derived from unaudited
statements, but in the opinion of management include all adjustments
necessary for a fair presentation of the data. Results for the six month
period ended June 30, 1996 may not be indicative of results expected for the
year ending December 31, 1996.
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
-------------------------- -------------------------
Statement of Operations Data: 1996 1995 1995 1994
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Consulting ....................... $258,000 282,562 $447,976 $509,920
Development and training ......... 37,954 97,900 118,618 245,836
Net loss ........................... (300,722) (13,798) (122,400) (45,504)
Net loss applicable to common stock (316,535) (23,361) (141,525) (64,629)
Net loss per share of common stock . (0.11) (0.01) (0.05) (0.02)
Weighted average number of common
stock outstanding ................ 2,800,734 2,797,134 2,797,134 2,797,134
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
----------------------------------------------- -----------------
Balance Sheet Data: Historical Pro Forma(1) As Adjusted(2)
------------- ------------- --------------
<S> <C> <C> <C> <C>
Working capital (deficiency) ...... $ 246,384 937,669 $ 2,971,950 $(390,290)
Total assets ...................... 1,107,160 1,698,445 5,421,205 343,534
Redeemable preferred stock ........ 393,469 268,469 -- 383,906
Accumulated deficit ............... (1,193,939) (1,193,939) (1,385,201) (877,404)
Total stockholders' equity (capital
deficiency) ...................... (787,854) 28,431 5,089,919 (598,844)
</TABLE>
- ------
(1) Gives effect to the sale of 273,001 shares of Common Stock and July 1996
Warrants to purchase 182,004 shares of Common Stock in July and August
1996 and the redemption of the Company's Series B Preferred Stock in July
1996.
(2) Gives effect to an offering price per Unit, in the Public Offering, of
$5.00 and gives effect to (i) the sale of 1,250,000 Units offered hereby
and the application of the estimated net proceeds therefrom, including
the repayment of $1,250,000 principal amount of the Bridge Loans
outstanding, plus accrued interest thereon and redemption of the Series A
Preferred Stock at its liquidation value of $212,500 plus accrued
dividends, (ii) the sale of the July 1996 Units and the issuance of the
July Placement Warrant and (iii) the redemption of the Series B Preferred
Stock at its liquidation value of $125,000 and the issuance of the
warrants to purchase 20,000 shares of Common Stock at $7.00 per share in
connection therewith. See "Certain Transactions."
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the notes thereto included elsewhere in this Prospectus.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
A number of statements contained in this Prospectus are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995 that involve risks and uncertainties that could cause actual results
to differ materially from those expressed or implied in the applicable
statements. These risks and uncertainties include but are not limited to:
limited operating history; recent establishment of new business divisions;
potential future operating losses; dependence on new untested product; risks
related to technological factors; potential manufacturing difficulties;
dependence on certain third parties and on the Internet; limited customer
base; risk of manufacturing activities; dependence on key personnel and
proprietary technology; risk of system failure, security risks and liability
risks; uncertainty of additional financing; the Company's vulnerability to
rapid industry change and technological obsolescence; the limited nature of
its product life and the uncertainty of market acceptance of the Company's
products; the unproven status of the Company's products in widespread
commercial use, including the risks that the Company's current and future
products may contain errors that would be difficult and costly to detect and
correct; uncertainties with respect to the Company's business strategy;
general economic conditions; and other risks described in this Prospectus.
See "Risk Factors."
OVERVIEW
The Company provides information and transaction-based services using
proprietary software and off-the-shelf, reusable software components based
on Microsoft's ActiveX(TM) (formerly OLE) component technology. The Company's
strategy is initially to provide information and services through public
access kiosks, known as SmartStreet(TM), over Intranets. The kiosks are
located in high density pedestrian traffic locations. In addition to
developing products and services for its own account, the Company has in the
past provided, and continues to provide, educational and consulting services
related to the Internet, reusable software components and rapid application
development. Beginning in mid-1994, the Company changed its focus from
consulting and training services to transactional, fee-based and
advertising-supported products and services. The Company has sustained net
losses in each of the last two fiscal years with a net loss of $122,400 in
1995 and a net loss of $45,504 in 1994. For the six months ended June 30,
1996, the Company had a net loss of $300,722. In September 1995, the Company
introduced OLEBroker(TM), its fee-based website on the Internet. The
Company's SmartStreet(TM) kiosks were introduced in July 1996. The Company
has not recognized any significant income to date from the SmartStreet(TM)
kiosk rentals or from OLEBroker(TM). Consequently, any analysis of the
Company's prior operations has only minimal relevance to an evaluation of the
Company, its current products and services and its prospects. Although the
Company anticipates that it will begin to recognize greater revenues from the
SmartStreet(TM) kiosks and from OLEBroker(TM) during the second half of 1996,
it cannot predict the actual timing or amount of such revenues.
RESULTS OF OPERATIONS
The Company commenced operations in December 1990. Through 1994, the
Company derived the majority of its revenues from consulting, custom
development and training. In this connection, beginning in mid-1994, the
Company began developing a core of reusable software objects. These objects
were used in the development of OLEBroker(TM) and in the Company's
SmartStreet(TM) kiosks. In accordance with the provisions of generally
accepted accounting principles (GAAP), much of the costs associated with this
development have been expensed.
Therefore, the Company may be dependent upon obtaining additional debt
financing, raising additional capital and/or achieving sustained profitable
operations or a combination thereof. The Company anticipates that its kiosk
operations are unlikely to produce a positive cash flow until at least early
1997. It is management's opinion that these conditions are a result of the
start-up of operations and are not permanent.
22
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
During the year ended December 31, 1995 the net loss of the Company
increased to $122,400 ($.05 per share) from $45,504 ($.02 per share) for the
year ended December 31, 1994, reflecting the expensed development and
marketing expenses for OLEBroker(TM).
During the year ended December 31, 1995, revenues declined to $566,594
from $755,756 for the year ended December 31, 1994. Consulting revenue
declined from $509,920 to $447,976 and development and training revenues
declined from $245,836 to $118,618. These declines were due to the Company's
shift away from fee-based consulting, training, and custom development and
redirection of its resources toward the development of transactional,
fee-based and advertising-supported products and services.
Costs and expenses for the year ended December 31, 1995 declined to
$688,994 from $801,260 in 1994. The decline in costs and expenses reflects a
decline in revenue and management's emphasis on achieving profitability for
the consulting, training, and custom development business of the Company.
During the year ended December 31, 1995, research and development conducted
by the Company aggregated $62,863 as a result of expenditures for object
development.
Costs of services for the year ended December 31, 1995 declined to
$429,604 from $571,969 in 1994. This decline is as a result of a decline in
revenue. The difference of the costs of services between the years ended
December 31, 1995 and December 31, 1994 is, on a percentage basis,
inconsequential.
During the year ended December 31, 1995, the general and administrative
expenses declined to $193,025 from $225,430 for the year ended December 31,
1994, reflecting a temporary decrease in market-building activities while the
Company's new products were in development.
At December 31, 1995, the Company had federal net operating loss
carryforwards of approximately $350,000. A valuation allowance has been
recorded for the entire deferred tax asset as a result of uncertainties
regarding the realization of the asset due to the lack of earnings history of
the Company. See Note I of Notes to Financial Statements.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
During the six months ended June 30, 1996, the net loss of the Company
increased to $300,722 ($.11 per share) from $13,798 ($.01 per share) for the
six months ended June 30, 1995, reflecting increased expenses primarily in
connection with the Bridge Loan Offering, professional fees and marketing
expenses for OLEBroker(TM) and SmartStreet(TM).
During the six months ended June 30, 1996, revenues declined to $295,954
from $380,462 for the six months ended June 30, 1995. Consulting revenue
declined from $282,562 to $258,000 and development and training revenues
declined from $97,900 to $37,954. This decline was due to the Company's shift
away from fee-based consulting training, and custom development and
redirection of those resources to SmartStreet(TM).
Costs and expenses for the six months ended June 30, 1996 increased to
$596,676 from $394,260 for the six months ended June 30, 1995. The increase
in general and administrative expenses reflects an increase in expenses
related to SmartStreet(TM).
Cost of services for the six months ended June 30, 1996 increased to
$256,720 from $244,542 for the six months ended June 30, 1995. The increase
in cost of services and the change in gross profit percentages was primarily
the result of the expensing of objects built for a specific project that are
reusable and the initial costs with respect OLEBroker(TM) exceeding the
revenue recognized with respect thereto for the six months ended June 30,
1995 as against the same six months ended June 30, 1996.
For the six months ended June 30, 1996 and 1995, respectively, development
expenses were either charged to cost of services (if related to income from
one or more clients) or were capitalized in accordance with GAAP.
In the six months ended June 30, 1996, general and administrative costs
increased to $249,160 from $147,763 for the six months ended June 30, 1995,
primarily reflecting costs associated with the SmartStreet(TM) kiosk program
and the agreement with the City of New York.
23
<PAGE>
In the six months ended June 30,1996, interest expense increased to
$90,796 from $1,955 in the six months ended June 30, 1995, primarily
reflecting the ratable amortization of the discount and interest on the
Bridge Loans. See "Certain Transactions -- Recent Financings."
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of financing for its operations and working
capital requirements has been from sales of its consulting, training and
development services and from certain private placements by the Company of
debt and equity securities. In April through June 1996 the Company sold 12.5
Bridge Units for a net consideration of $1,105,000 and in July and August
1996, the Company sold an aggregate of 273,001 July 1996 Units for net
consideration of $816,285. See "Certain Transactions -- Recent Financings."
The Company has generated a net loss in each of the last two fiscal years,
with a net loss of $122,400 in 1995 and a net loss of $45,504 in 1994. For
the six months ended June 30, 1996, the Company had a net loss of $300,722.
During the period ended June 30, 1996, the Company's accounts payable and
accounts receivable were significantly greater than in prior periods. The
increase in accounts payable was related to the costs incurred in connection
with financings and with the development of software for the first five
kiosks and fabrication of the such kiosks under the City Agreement during the
June 30, 1996 period. The increase in accounts receivable was related to the
activities under the City Agreement. At June 30, 1996, the Company had
$424,059 in cash and working capital of $246,384.
As of June 30, 1996 the Company was committed to spending an additional
$100,000 on the initial five kiosks. In addition it expects to spend
approximately $1,700,000 for hardware and software in connection with the
additional 25 kiosks which it intends to install in the New York City area in
the next six to nine months. The Company intends to lease as much of this
equipment as possible. However, there is no assurance that such equipment
lease financing will be available on favorable terms to the Company or at
all. The Company also plans to increase the number of its employees.
The Company anticipates that it will require an additional $2,600,000 to
fund its operations, primarily to further expand its SmartStreet(TM) kiosk
operations in the next 24 months and that such funding will be obtained
through the net proceeds of the Offering and from operations. In the event
additional capital is required to fund the Company's operations during such
period, such additional capital may be obtained through anticipated revenue
which may be derived from the Company's operations, principally monthly base
charges, transaction fees and advertising revenues. No assurance can be given
that any of the amounts referred to in this paragraph will be obtained. If
such amounts are not available, the Company could be required to seek
additional financing sooner than currently anticipated.
24
<PAGE>
GLOSSARY
ALGORITHM -- A detailed sequence of actions to perform or to accomplish some
task. The term is named after an Iranian mathematician, Al-Khawarizmi. An
algorithm reaches a result after a finite number of steps. The term is also
used loosely for any sequence of actions (which may or may not terminate).
ActiveX(TM) TECHNOLOGY -- Microsoft's implementation of OLE designed to run
over slow Internet links.
APPLETS -- A program, written in the Java language, which can be distributed
as an attachment in a WorldWide Web document and executed either by a browser
or server that supports Java.
CLIENT/SERVER COMPUTING -- A computer system architecture in which two
independent processors communicate via an established protocol. The client is
typically a single user personal computer with a graphical user interface
operated by the end-user that makes requests to the server. The server
typically runs database software, maintains information and responds to one
or more clients.
FIREWALL -- A system that controls the flow of data between an internal
network and the Internet or between internal network segments.
FRAME RELAY -- A wide area communications interface. Frame Relay could
connect dedicated lines and X.25 to ATM, SMDS, BISDN and other "fast packet"
technologies. Frame Relay uses the same basic framing and Frame Check
Sequence at layer 2 so current X.25 hardware still works. It adds addressing
(a 10 bit Datalink Connection Identifier (DLCI) and a few control bits but
does not include retransmissions, link establishment, windows or error
recovery. It has none of X.25's layer 3 (session layer) but adds some simple
interface management. Any layer three protocol can be used inside the layer
two Frames.
GRAPHIC USER INTERFACE (GUI) -- Interfacing with a computer by manipulating
graphical icons and windows (usually by pointing and clicking a mouse) rather
than using text commands.
HYPERTEXT MARKUP LANGUAGE (HTML) -- A page description language used to
convey both content and formatting information about content to a Web
browser.
INTEROPERABILITY -- The ability of software and hardware on multiple machines
from multiple vendors to communicate.
INTERNET -- An open global network of interconnected commercial, educational
and governmental computer networks that utilize a common communications
protocol.
INTERNET SERVICE PROVIDER -- (ISP) A company which provides other companies
or individuals with access to, or presence on, the Internet. Most ISPs are
also Internet Access Providers; extra services include help with design,
creation and administration of World-Wide Websites, training, and
administration of Intranets.
INTERNET PROTOCOL (IP) -- The network layer for the TCP/IP protocol suite
widely used on Ethernet networks, defined in STD 5, RFC 791. IP is a
connectionless, best-effort packet switching protocol. It provides packet
routing, fragmentation and re-assembly through the Datalink layer.
INTRANET -- An organization's private network of its local area networks that
utilizes Internet data formats and communications protocols and that may use
the Internet's facilities as the backbone for network communications.
LOCAL AREA NETWORK (LAN) -- A group of one or more computers connected
together within a localized environment for the purpose of sharing data and
networked resources such as printers, modems or servers.
MICROSOFT WINDOWS -- Computer operating systems providing graphical user
interfaces and, in the case of Windows NT, that is optimized for use as a
network server.
OLE -- Microsoft's component architecture which competes with OpenDoc and
CORBA. See "Business -- Industry Background -- Reusable Software Components."
PRIME NUMBERS -- numbers divisible only by themselves and one (1).
25
<PAGE>
RAPID APPLICATION DEVELOPMENT (RAD) -- a technique for developing software
quickly that makes use of prototyping and reusable software components.
SHRINK WRAP LICENSE -- A printed agreement included in product packaging that
typically provides that opening the package indicates the user's acceptance
of its terms and conditions.
UNIVERSAL RESOURCE LOCATOR (URL) -- a complete address to reach a site on the
World-Wide Web specifying the protocol and fully qualified address.
WEB BROWSER -- Client programs that allow users to browse the Web.
WEB SERVER -- A server process running at a website which sends out web pages
in response to requests from remote browsers. If one site runs more than one
server they must use different port numbers.
WEBSITE -- Any computer on the Internet running a World-Wide Web server
process. A particular website is identified by the hostname part of a URL.
WIDE AREA NETWORK (WAN) -- A communications network that uses commercial
transmission resources to connect geographically dispersed users or LANs.
WORLD-WIDE WEB (Web or WWW) -- A network of computer servers that uses a
special communications protocol to link different servers throughout the
Internet, allowing a user to move from document to related document, no
matter where it is stored on the Internet, and permits communication of
graphics, video and sound.
26
<PAGE>
BUSINESS
The Company is in the business of providing information and
transaction-based services using proprietary software and off-the-shelf,
reusable software components based on Microsoft's ActiveX(TM) (formerly OLE)
component technology. The Company's strategy is initially to provide
information and services through public access kiosks, known as
SmartStreet(TM), over private networks known as Intranets. The kiosks will be
located in high density pedestrian traffic areas. The first five kiosks were
deployed in New York City in July 1996 under an agreement with the City of
New York (the "City"). Kiosk users are able to obtain information and
documents and transact certain business without the necessity of interacting
directly with City employees or appearing personally at certain City offices.
In early 1996, as part of its Kiosk Demonstration Project, the City of New
York entered into an agreement with the Company (the "City Agreement") to
develop public kiosks to be located in City offices and other public
locations in an effort to expedite transactions with the City. Under the City
Agreement, the City agreed to lease the first five kiosks, and the Company
may deploy additional kiosks throughout the New York City area at its own
risk and expense, subject to City approval of kiosk locations. The initial
term of the City Agreement is one year, which may be extended by the City for
a period of up to 24 months. Any extension or renewal of the City Agreement
will be contingent upon the City's evaluation of the Kiosk Demonstration
Project as a whole and of the Company's kiosks. Pursuant to the City
Agreement, the Company has developed kiosks through which members of the
public can obtain certain information from, and transact certain business
with, the Buildings Department and the Department of Health, as well as
information about City government and elected officials and general
information about transportation and attractions in New York.
The kiosks are configured to permit the Company to offer additional
services provided either by the Company or third parties and to sell
advertising on such kiosks. Under the City Agreement, a portion of the
revenue, if any, derived from such services and advertising will be shared
with the City. The Company will seek to provide SmartStreet(TM) services to
other municipalities, states and government agencies and to organizations in
the private sector that provide a large volume of information, records and
documents to the public. The Company may also seek to enter into agreements
with the City and other customers to provide information and services over
the Internet, in order to significantly expand the accessibility of such
information and services. To date, the Company has not entered into any
agreements to offer any of the foregoing additional services or products.
As of August 31, 1996, the Company had received, under the City Agreement,
payments of $158,424, consisting of payment by the City of one month's
$30,090 lease payment and $128,334 of a total of $300,000 due upon the
achievement of certain milestones. As of August 31, 1996, the first five
kiosks were available only to provide City information and did not provide
transaction services or carry any paid advertising or third party services.
Consequently, no revenues had been generated by user transactions or
advertising. The kiosks are expected to be available to conduct City
transactions on a fee basis by January 31, 1997.
After its inception in 1990, the Company's activities consisted initially
of consulting, writing, training and custom software development for various
corporate and government clients, including Microsoft, for which it produced
technical papers and provided consulting services. In performance of these
activities, the Company developed skills in rapid application development and
a base of courseware and reusable software objects to which it retains title.
In 1995, the Company decided to direct these skills and its expanding body of
reusable software objects toward the development of services through which it
can derive revenue on a "per transaction" basis. It developed and operates
OLEBroker(TM), an Internet-based subscription service that allows customers
to search its database of information about software objects, find the
information needed and at the customer's option, purchase needed objects
on-line. This service is of benefit to customers developing computer programs
for Microsoft Windows. In connection with the development of OLEBroker(TM),
the Company developed significant additional software objects, which it then
used in the development of technology for the kiosk and Internet service
delivery programs. While the Company anticipates that the kiosk and Internet
service delivery programs will constitute the most significant part of its
business, it intends to continue to engage in consulting activities as
resources permit and in the operation of OLEBroker(TM). In selecting
consulting opportunities, the Company will focus primarily on assignments in
connection with the sale of kiosk services or that can otherwise enhance its
skill base. The Company believes that there will continue to be a market for
the OLEBroker(TM) service, consisting primarily of persons involved in
computer programming, rather than computer users in general, as the use of
Microsoft Windows programs increases.
27
<PAGE>
INDUSTRY BACKGROUND
INTERNET DEVELOPMENT
In recent years, computers have become increasingly interconnected through
local area networks, wide area networks, and a technology for linking
computers together known as the Internet Protocol (IP), as well as through
various proprietary services. Increasingly, desktop personal computers (PCs)
communicate with larger, shared servers using an arrangement known as
client/server technology, as well as with other PCs on a peer to peer basis.
The Internet, in particular, has experienced explosive growth in recent years
as a means for computers to communicate with each other. While in its initial
years, the Internet was used primarily for the transmission of electronic
mail and for the dissemination of information, a technology called the World
Wide Web ("WWW" or "Web"), a graphical approach to seeking and providing
information, has proven to be very popular, and more than 40,000 websites
operate to support Web browsers.
Recently, CommerceNet, through Nielsen Media Research, conducted the
Internet Demographics Survey, which the companies say is the first
population-projectable survey regarding Internet usage. Among the survey's
findings were these: there is a sizable base of Internet users--some 24
million people--in the United States and Canada; users of the World Wide Web
are potentially ideal targets for business applications since they were found
typically to be more educated and to have higher incomes than the rest of the
population; and some 2.5 million people have already made purchases using the
Web. The study found that users access the Internet fairly frequently, with
31% accessing it at least once a day. In addition, Internet users spend an
average of five hours and 28 minutes online per week. The CommerceNet study
has been criticized by some as unrepresentative, in that it over-represents
highly educated individuals and under-represents individuals with less than a
high school education. However, the critics generally acknowledge that even
if the sample is skewed, the overall conclusions, if not their magnitude, are
valid.
Leading developers of Web browser software include Netscape, NCSA Mosaic
and Microsoft. Leading developers of software for web servers include
Netscape, O'Reilly and Purveyor. In 1996, Microsoft released an Internet
server, called Internet Information Server, that it subsequently included as
part of Release 4.0 of its NT operating system package.
Internet technology has been enhanced in various ways to permit
conventional applications to interact with users having access to an Internet
connection and a web browser, to effect purchases and other transactions over
the Internet. Such commercial use typically requires custom programming, and
special techniques to provide for an acceptable level of security, given that
the Internet is inherently an insecure network. Visa and Mastercard have
announced standards to support the secure approval of credit card
transactions over the Internet. These standards were developed jointly with
Microsoft and Netscape. Separately, Netscape and VeriFone Inc. announced
plans to develop software to support this standard with Netscape's commerce
server software. DigiCash, N.A., CyberCash, Inc., and First Virtual Holdings
have implemented their own Internet payment systems. The ability to accept
payments easily over the Internet opens up many possibilities; for example,
users can pay on a "per transaction" basis for use of specialized software or
for obtaining information such as documents, price quotations, and the like.
Many vendors, including Microsoft, offer techniques for improving the
level of security on the Internet, including secure servers, firewalls,
encryption techniques and other devices; however, even in the aggregate,
these techniques are not wholly foolproof and the lack of full security may
impede the growth of commerce on the Internet. New studies using very large
Prime Numbers propose to have keys that all computing power in the world
today would take over a million years to break. Although this may be
drastically reduced by new techniques in factoring Prime Numbers, finding a
pattern to Prime Numbers, or future computer power growing much more than
expected, these new techniques would offer far greater security than any
codes in use today.
In the past year, reusable software components have begun to be adapted
for the Internet. Two strategies have emerged. The first is a language called
Java created by Sun Microsystems for development of "applets" of downloadable
and reusable software components over the Internet. More recently, Microsoft
has developed software to support its ActiveX(TM) technology over the
Internet, and has released a beta version of Visual Basic called Visual Basic
Script for the development and support of ActiveX(TM) components over the
Internet. Microsoft has also signed an agreement with Sun for support of Java
applets in its Internet Explorer, an Internet Browser used by the Company.
28
<PAGE>
INTRANET TECHNOLOGY
Internet software is being used in private networks also. Such usage is
referred to as an Intranet and it is increasingly becoming a part of the
information services delivery strategy of many large organizations. Using
Internet software to organize a private network can provide the same ease of
use, hypertext capabilities, and downloading as does the Internet today.
Intranets can be used to support a broad range of business solutions; that
is, software programs that support business functions. Drawing from the usage
of Internet e-mail and the Internet's World-Wide Web, Intranets can be used
to publish and exchange information within a company.
Additionally, Intranets can be used to make interactive business
applications broadly accessible to a company's users wherever they are
located. This is not just the traditional automating of business processes
within a company. These applications can also tie together business processes
between companies. An example of this would be linking suppliers with a
manufacturing company's inventory system. This inter-company communication
can take place by combining Intranets and the Internet. A new capability,
called point-to-point tunneling protocol (PPTP), makes it feasible for secure
business processes to operate over the Internet. In this connection,
according to Microsoft, over 1.2 million people use the Microsoft Office
family of web authoring tools.
KIOSK TECHNOLOGY
Kiosks are public access stations that can supply information or perform
transactions. They are becoming more and more common across the United States
and include such applications as custom greeting card machines, automotive
parts look-up centers, music CD-preview stations, museum information kiosks,
and movie ticketing dispensers.
Many kiosks today are self-contained. Others may be linked to a central
site. Kiosks have traditionally used conventional or proprietary technology.
In contrast, the Company's kiosk technology combines the advantages of
Internet and Intranet technology.
REUSABLE SOFTWARE COMPONENTS
Historically, the Company engaged in rapid application development for
others. It was attracted to this field because, as noted by Microsoft,
software development in many companies today accounts for half or more of
total expenditure for information processing. Often, software development
takes longer than expected to complete, and fails to live up to expectations.
In "Software's Chronic Crisis," W. Wayt Gibbs reports that over half of
complex software projects fail (Scientific American, September 1994).
Although U.S. corporations and institutions spend an annual $250 billion on
software development, the Standish Group International reports that only 16%
of projects come in on budget, on time, with all the planned features.
Fifty-three percent are either over budget, delayed, have fewer functions
than planned, or any combination thereof (Investor's Business Daily, January
25, 1995). Several techniques have been developed to remedy this situation,
including a trend towards client/server computing, the use of graphical user
interfaces, such as Windows, rapid application development languages and
environments such as Visual Basic, PowerBuilder and Delphi and SQLWindows,
and the development of techniques for reuse of software components such as
OLE and OpenDoc.
Reusable software has been a goal of software developers for many years,
as a means of reducing the cost and time frames for software development.
Programming languages that are "object-oriented" provide facilities that
encourage development of reusable blocks of software called "objects." The
leading languages which support object development are C++ and Smalltalk.
Such objects can be reused only in their own environments, and modest success
has been reported using such tools. More recently, the software community has
begun to develop mechanisms for larger reuse through language- and
platform-independent reusable software components. The goal of reusable
software components is to provide a mechanism for reusing tested objects,
without the necessity for the programmer reusing the code to need to
understand the internal algorithms or structures of the code being reused.
This reuse is accomplished by establishing a "contract" or agreed-upon
mechanism for objects to interoperate.
Currently, the leading technology for reusable components is called Object
Linking and Embedding (OLE), now known as ActiveX(TM), and was developed by
Microsoft. It is supported by over 300 independent software vendors (ISVs)
who have developed several thousand reusable objects that are offered for
commercial sale.
29
<PAGE>
Many organizations also develop their own reusable software components that
they do not market to others. OLE is a proprietary Microsoft standard, but it
is an open standard in the sense that it is published and anyone can build
components conforming to this standard without payment of fees to Microsoft
and without obtaining a license. Microsoft has recently taken steps to
establish an independent standard-making body for ActiveX(TM) technology.
A competing standard, developed by IBM and Apple and known as OpenDoc, was
contributed to Component Integration Laboratories (CILabs), a non-profit
industry-wide organization and is offered as an "open" cross-platform
standard (that is, it can be used with computers with different operating
systems). Initial supporters of CILabs include Apple, IBM, Novell, Oracle,
SunSoft and Xerox. Microsoft has not endorsed this standard. To date, few
components have been developed to support OpenDoc. Once OpenDoc becomes
available for the Windows platform, an effort which IBM has announced is
underway, additional vendors may be motivated to develop for this
specification.
OLE is available for the Windows platforms and the Apple Macintosh line of
computers with support provided by Microsoft. IBM, Microsoft, Computer
Associates, Wang as well as specialized vendors such as Sheridan and Progress
among others, have developed and offer for sale OLE components for these
environments. In addition, Microsoft has licensed several third parties,
including Digital Equipment Corporation, Software AG, and Insignia and
Bristol Technologies to develop support for OLE on Digital's VMS platform,
IBM's MVS mainframes and AS/400 computers, and UNIX platforms, respectively.
Microsoft has estimated that 98% of computers will support OLE by 1998.
A third standard, known as CORBA, a specification endorsed by the Object
Management Group, is designed to allow objects written on different and
otherwise incompatible platforms to interact using software known as object
request brokers (ORBs). ORBs are offered by vendors including Digital, Orbit
and Software AG.
OBJECTSOFT STRATEGY
Since its founding in 1990, the Company has been active in the field of
rapid application development (RAD). It was an early user of OLE as well as
RAD languages such as Visual Basic. Initially, the Company directed its
efforts to, and derived its revenues principally from, consulting, writing,
training and custom development for clients that included large corporations
in the computer, consulting, banking, manufacturing, cosmetics and apparel
industries, among others, as well as government agencies.
In performance of its consulting and related activities, the Company
developed a base of courseware and software objects to which it retains
title. In 1995, the Company made a strategic decision to leverage its skills
in rapid application development and its expanding body of reusable software
objects toward the development of services through which it can derive
revenue on a "per transaction" basis. In connection with its development of
the OLEBroker(TM) program, the Company developed significant additional
software objects which it then used in the development of technology for the
kiosk and Internet service delivery programs.
The Company's strategy is to focus on development and marketing of the
kiosk and Internet service delivery products. In this regard, it will seek to
enter into strategic alliances with, and provide Intranet and/or Internet
software to, entities that have a need to provide information and documents
contained in proprietary databases to, or conduct a large volume transactions
of transactions with, the general public or specific, but large, audiences in
an expeditious, widely and easily accessible manner. Such entities include
municipalities, other government entities and agencies and large public and
private entities such as publishers, trade and business associations and
others. The Company will seek to develop alliances with software and hardware
manufacturers whose products may be used in or integrated with the software
being developed and marketed by the Company. The Company intends to retain an
ownership interest in the objects it develops in support of such projects.
Wherever possible, the Company also intends to contract, as it has with the
City of New York, to own and operate the services itself.
In addition, the Company will seek to structure its arrangements with
customers to permit it to offer related and unrelated information and
services, particularly to kiosk users who might not otherwise have access to
the Internet. This could include commercial and public service advertising
and potentially the ability to make purchases and conduct other transactions
through the Internet.
30
<PAGE>
There can be no assurance that the Company will be able to fully implement
its strategic objectives or that it will be able to successfully market its
kiosk and Internet based transaction services.
PRODUCTS AND SERVICES
SMARTSTREET(TM) KIOSK SERVICES
The Company makes transactional services available via public access
kiosks that combine the advantages of Internet and Intranet technology. Like
an Intranet, the communication between the kiosk and its servers is
accomplished over private, secure lines. Like an Internet, it enables an
organization to interact with the general public, not just its own employees
and customers. The Company anticipates that revenues from the kiosks will be
provided by leasing fees paid by the service providers, such as the City, and
by usage fees paid by consumers who obtain services through the kiosks.
On January 11, 1996 the Company entered into an agreement with The City of
New York (the "City Agreement") to provide a minimum of five kiosks to
transact municipal services as part of the City's Kiosk Demonstration
Project. Services to be provided from these kiosks include access to the
records of the Department of Buildings, certain Department of Health
services, including obtaining copies (for a fee) of birth certificates, death
certificates and dog licenses, obtaining public health information, and
registering for certain courses offered by the Department of Health.
Information on City government, directional information and information about
New York City's events, museums, tourist attractions, shopping and similar
matters is provided without fee. Kiosks are located in the Department of
Health building at 125 Worth Street in Manhattan, in the Bronx Borough Hall,
in the Municipal Buildings of Brooklyn, and Queens, and in the Staten Island
(St. George) terminus of the Staten Island Ferry. All kiosks providing City
services or information, whether operated by the Company or other suppliers,
carry the City's "CityAccess(TM)" logo.
In connection with the development of the kiosks and the deployment and
operation of the first five kiosks, the City agreed to pay to the Company an
aggregate of $661,080. Of this amount, $361,080 is payable in the form of
monthly payments of $30,090 ($6,018 per kiosk), which were commenced as of
August 1, 1996. The balance of $300,000 is payable in partial amounts as
certain milestones in the development, deployment and operation of the kiosks
are achieved. To date, two of such milestones have been fully achieved and
two have been partially achieved, and $128,334 has been paid to the Company.
Of the $171,666 balance remaining of the payment for development, $50,000 is
payable upon completion of the two partially completed milestones, $76,666 is
payable upon the activation of certain functions, including the ability to
conduct fee transactions, and $45,000 is payable upon acceptance in writing
by the City of "final approval testing" after the kiosks have been fully
operational with certain functions for three months and with certain
additional functions for one month. The kiosks are currently capable of
performing fee transactions, subject only to completion of connections to
City facilities, expected to occur by January 31, 1997. It is anticipated,
although there can be no assurance, that final approval testing will be
completed by February, 1997. The Company may also receive transaction fees in
connection with the use of the kiosks by the public to obtain documents or
certain other services. As of August 31, 1996, the first five kiosks were
available only to provide City information and did not provide transaction
services or carry any paid advertising or third party services. Consequently,
no revenues have been generated to date by user transactions or advertising.
The amount of future transaction and advertising revenues, if any, will
depend on user and advertiser acceptance of the kiosks.
The City Agreement has a term of one year after all five kiosks are
installed, and is renewable for up to two years at the option of the City.
The City commenced monthly lease payments as of August 1, 1996. The Company
has certain other rights, including the right to sell advertising and
additional services developed by the Company or third parties. The City
Agreement requires the Company to pay to the City 50% of advertising and
third party service revenues from the first five kiosks and 15% of such
revenues from additional kiosks. The Company plans to exercise these rights
and to actively solicit additional service providers and advertisers.
Pursuant to the City Agreement, the Company has the right to install
additional kiosks in the City, at the Company's risk and expense and subject
to certain conditions including site approval by the City. The City will not
be required to pay additional monthly payments for such kiosks, but it is
anticipated, although there can be no assurance, that use by the public will
generate transaction fees. The Company has commenced evaluating potential
sites and will seek to install up to 25 additional kiosks over the next six
to nine months.
31
<PAGE>
At the time the City Agreement with the Company was executed, the City
also signed similar agreements with two other companies for additional
kiosks. The City expects to evaluate its success with this program and, if it
deems it successful, to issue a Request for Proposals for competitive bidding
to supply additional kiosks throughout the City.
The Company intends to market kiosks to other municipalities, government
agencies and organizations in the private sector. In the future, the Company
may seek to make its transactional services available over the Internet and
to make the Internet available from the Company's public kiosks.
There can be no assurance that the Company's initial kiosks will perform
on a commercial basis as anticipated, that the Company will be able to
install and operate additional kiosks pursuant to the City Agreement, that
City will seek to acquire additional kiosks, that the Company will secure a
contract to supply additional kiosks to the City, that it will succeed in
marketing its kiosks to other potential users, or that it will be able to
attract additional service providers or advertisers to kiosks that may be
located in New York City or elsewhere.
OPERATION OF SMARTSTREET(TM) Kiosks
The Company's goal in designing the SmartStreet(TM) kiosks was to maximize
potential use by developing software that would be inviting and easy to use.
The kiosks are designed so that a potential user is attracted to the kiosk by
digital videos played from the upper monitor. Initially these videos will
include an "attract loop," narrated by the noted actor Tony Randall
(currently Director of the National Repertory Theater) and a message from
Mayor Rudolph W. Giuliani, as well as "spot" advertisements. The attract loop
explains what can be done with the kiosks and how to use them, and shows
people from many walks of life using them successfully.
32
<PAGE>
Once a user approaches the kiosk, he or she is greeted by a message, and
invited to press on the touchscreen to continue. In the future, the Company
expects to make the kiosks accessible in multiple languages. The user is
guided with verbal and on-screen prompts to the various services and
categories of information available from the kiosk. As currently configured,
the Opening Screen is divided into five parts or frames (see Figure 1 below):
1. Multimedia Frame -- The upper left corner presents graphics, pictures of
people or places, and "talking heads" to help the user navigate
SmartStreet(TM).
2. Toolbar Frame -- SmartStreet(TM) navigation buttons are located just below
the Multimedia Frame. These buttons are always visible and allow the user,
at any time, to:
a) Return to Home Menu
b) Take a survey
c) Get on-screen help in using the kiosk
3. Content Frame -- Located to the right of the Multimedia and Toolbar
Frames, this contains the content and menus of the information and
services available on SmartStreet(TM).
4. Footer Frame -- Located below the Toolbar Frame and most of the Content
Frame, this contains a place for local advertising and the keyboard for
data input when needed.
5. Volume Frame -- Located to the right of the Footer Frame and beneath the
Content Frame, this controls the kiosk volume. When a user walks away and
the kiosk resets itself (after about two minutes of idle time), it
automatically resets the volume to 5 (mid position). A small feedback area
confirms the current setting for the user.
INSERT CHART
SmartStreet(TM) Kiosk -- Opening Screen
The user has several choices on the Opening Screen to begin the
SmartStreet(TM) experience. The user can:
1. Touch the Touch Here to Begin link in the Content Frame, the Home button
in the Toolbar Frame, or the graphic in the Content Frame to jump to the
Home Menu (see Figure 2 below).
2. Touch I'm Finished to take a short survey on his or her experience on the
kiosk or leave a message.
3. Touch I Need Help to get online verbal or video help on
a) What is available on the kiosk
b) How to use the kiosk
33
<PAGE>
INSERT CHART
SmartStreet(TM)Kiosk -- Home Menu
The Home Menu contains the starting point for each service available
through SmartStreet(TM). The current services are:
1. Keys To City Hall -- This service allows a user to look up city agencies,
elected officials and city transportation (see below).
2. Around New York City -- This service provides information on New York City
attractions, tours, hospitals, churches, museums, theaters, sports arenas,
etc. Most of the items in this section include maps of the attraction.
3. Department of Health ("DOH") -- DOH services and publications are listed
as well as the ability to print applications for Birth Certificates, Death
Certificates, and Dog Licenses.
4. CityAccess(TM) Kiosks -- Lists the location and services available at all
CityAccess(TM) kiosks.
5. Department of Buildings ("DOB") -- DOB services include review of
outstanding violations against a building, tracing of ownership records
and review of heat complaint information.
6. Marketing on SmartStreet(TM) -- Information on how to contact the Company.
7. Transportation -- Maps and routes for subways, buses and railroads, as
well as street maps.
If a user wants to carry out a transaction for which there is a cost (such
as obtaining a license or an official copy of a document), the user is
advised of the charge and prompted to insert a credit card. The credit card
reader in use is designed so that the user never lets go of the card, for
added security. The transaction request is sent to the central server site
over a secure frame-relay network. In turn, the server sends the credit
information to a credit authorizer for approval. If the transaction is
declined, the user is advised and invited to submit another card. If the
transaction is accepted, a reservation is made against the user's credit
line, and the server then proceeds to initiate a transaction with the City's
computers, to which it is connected via private leased lines. Once the
required service has been performed by the City's computers, and a confirming
transaction number sent back, the credit authorizer is again contacted and
the transaction is settled. The authorizer causes the user's account to be
debited, and the merchant accounts of the City and the Company to be
credited, for the transaction fee and service fee, respectively. The Company
expects that a credit card transaction capability will be functional by
January 31, 1997.
SMARTSTREET(TM) Kiosk Technology
SmartStreet(TM) kiosks were designed using advanced Internet technology.
This technology allows the kiosks to operate either on a private Intranet or
as an Internet site. The "browser" in the kiosk is Microsoft's Internet
34
<PAGE>
Explorer 3.0 (IE3), and the server is Microsoft's Internet Information Server
1.1 (IIS). By using IE 3 as an OLE object running full screen, hiding the
Windows environment from the user, the Company was able to present a custom
interface without having to develop custom operating system software or
add-ons. The browser operates in a fashion suitable for use by the general
public from a touch screen. Scroll bars, menus and status areas are turned
off, and only functions which are specifically programmed or permitted are
allowed.
IE3 allows the use of new "light-weight" ActiveX(TM) controls and supports
client-side VB Script and Java. IE3 also supports SSL 2.0, SSL 3.0, and PCT
1.0 security standards as well as advanced HTML Features such as Style
Sheets, Frames & Tables, which convey content to the user at the kiosk. Many
of these pages contain VB Script code to perform functions beyond the scope
of normal HTML. This code uses objects, many of which were initially
developed by the Company in connection with consulting contracts or
OLEBroker(TM), to perform complex tasks on behalf of the kiosk. Some of the
tasks these objects perform are:
1. Printing formatted documents
2. Reading a credit card
3. Printing a receipt
4. Transmitting credit card information to a bank for approval/disapproval
5. Logging and error handling
6. Storing the survey results into a database
7. Adjustment of volume
8. Production of custom maps (in the future)
In addition, many third party ActiveX(TM) controls are or will be used,
including:
1. ESRI's Map Objects (custom maps)
2. Wall Data's Rumba (mainframe connections)
3. Microsoft's custom controls and timers (look and feel of the kiosk)
4. Microsoft Visual Basic's buttons (keyboards)
The Server is built on Windows NT and runs Microsoft Internet Information
Server, which supports "server-side" Visual Basic, and ActiveX(TM) controls.
Microsoft BackOffice is also used for the databases and for system
management. The connection between the remote kiosks (each of which is
operated as a separate LAN) and the Server is accomplished through Frame
Relay connections, and uses equipment manufactured by RAD and by Cisco. The
connection is transmitted via regulated common carriers.
The kiosks were designed to comply with the accessibility requirements of
the Americans with Disabilities Act. The Company used subcontractors for the
design hardware and graphics associated with its kiosks, and the kiosks are
constructed by a subcontractor in accordance with the specifications
developed by the Company. They are constructed of hardened steel, with
baked-on, vandal-resistant paint. The touchscreen in use is made of tempered
glass for secure and vandal-resistant operation.
MARKETING
To market kiosks successfully, the Company believes it must obtain the
rights to place its kiosks in compelling high-density locations. In addition,
the Company will seek to attract advertisers based on the number and
demographics of "impressions" that the Company can offer to advertisers. To
this end, the Company has commissioned site surveys that will count the
actual population at each existing location. The Company has retained a
consultant to assist the Company in leasing space in favorable locations and
on satisfactory terms. In addition, the Company has retained a media
consultant to prepare a media kit and to target it to suitable advertisers.
The Company has retained a public relations consultant to disseminate news
related to its kiosks and to stimulate demand. Additional marketing efforts
focus on identifying content-providers whose offerings can create additional
transaction revenue for the Company's kiosks. In seeking content-providers,
the Company will exhibit at major trade shows where it will partner with
several of its major vendors. For example, the Company partnered with Dell
and Microsoft at the Government Technology trade show held in Albany, New
York in September 1996, and it expects to participate in similar joint
efforts on an ongoing basis. A telemarketing program has been initiated to
target tourist, recreational and similar facilities to list their facilities
on the Company's kiosks. This effort has been contracted to a telemarketing
firm on a commission basis.
35
<PAGE>
The Company's marketing activities are currently performed by its
executive officers and consultants under such officers' supervision. The
Company intends to devote a portion of the proceeds of the Public Offering to
marketing activities, which may include the employment of one or more
dedicated marketing personnel, as well as the continued engagement of
specialized consultants.
OLEBROKER(TM)
The Company's first commercial product for the Internet was OLEBroker(TM),
introduced in November 1995. OLEBroker is an on-line subscription service for
OLE reusable components. This service is operated on the Internet with the
Universal Resource Locator (URL) of http://www.olebroker.com. The service
contains the searchable full text of the help files of OLE and ActiveX(TM)
components that have been provided for listing by component vendors. In
addition, it contains white papers, specifications, standards, training
materials, and news articles. OLEBroker(TM) is designed to be a one stop
place to get information on OLE, as well as to find component needs for
particular purposes.
Component vendors participating in OLEBroker(TM) include: ASP of Japan,
Blue Sky Software, Crescent Division of Progress software, Crystal (a Seagate
Company), Kelro Software, Looking Glass Software, Media Architects,
Microsoft, Pronexus, Protoview, Sheridan Software, Soups, SQA, Stylus
Innovation, Sylvan Ascent, and Texas Instruments.
Microsoft and the Company entered into a Cooperation Agreement on November
7, 1995 with respect to OLEBroker(TM). The Cooperation Agreement provides
that Microsoft will undertake various promotional activities relating to
OLEBroker(TM), including the distribution of an OLEBroker(TM) subscription
offer in copies of Microsoft's Visual Basic 4.0 and Access Development
Toolkit and in a Magazine supplied to purchasers of Microsoft Visual C++. The
Company, in turn, provides Microsoft with a number of complementary
subscriptions and a discounted price for additional subscriptions. The term
of the Cooperation Agreement is initially one year, and the parties are
currently negotiating an extension of the initial term. The agreement may be
renewed for successive one-year terms upon written agreement of the parties
at least two months prior to the expiration of the then-current term.
The Company derives revenue related to OLEBroker(TM) from the sale of
subscriptions, and from advertising. Subscribers come from the United States
and approximately 15 other nations and there are currently approximately 120
subscribers. As of June 1996, OLEBroker(TM) subscriptions had a list price of
$199 per year, and an initial price of $129 per year is currently in effect.
In accordance with the Cooperation Agreement, Microsoft customers are
entitled to a discounted subscription rate of $99 per year. In the year ended
December 31, 1995 and the six month period ended June 30, 1996, revenues from
OLEBroker(TM) were not significant. The Company believes that while there
will continue to be a growing market for the OLEBroker(TM) service,
particularly as the use of Microsoft Windows programs increases, such market
may consist primarily of persons involved in computer programming, rather
than computer users in general.
CONSULTING, TRAINING AND AUTHORING SERVICES
The Company's historical business has been to assist clients in making the
transition from mainframes and minicomputers to client/server and rapid
application development. These services have included training, authoring and
consulting for numerous clients in a variety of industries, including the
insurance, manufacturing and fashion industries, as well as the public
sector. The Company intends to continue to engage in these activities as
resources permit. In selecting opportunities, the Company will focus
primarily on consulting and training assignments in connection with the sale
of kiosk services or that can otherwise enhance its skill base.
36
<PAGE>
TRAINING SERVICES
The Company has provided training courses in subjects including:
o Client/Server Rapid Application Development
o Graphical User Interface Design
o Internet Development
o Automated Testing of Software
o Introductory and Advanced Visual Basic
o Component Development with OLE 2.0
o Help Authoring and Software Documentation
Training fees are typically charged on the basis of per-diem fees of
$2,000 - $3,000 per day and a materials cost, if applicable, plus
reimbursement for out-of-pocket expenses. Most seminars are held at client
sites.
AUTHORING SERVICES
David E. Y. Sarna and George J. Febish, Co-Chief Executive Officers of the
Company, author of a monthly column, called Paradigm Shift, focusing on
development, Internet and Intranet issues, for Datamation, a magazine with a
circulation of approximately 225,000 published by Cahners Publishing Company,
a division of Reed Elsevier Inc. In addition, the Company has authored three
white papers for Microsoft covering OLE, Three-tier Client/Server
Architecture and Visual Basic for Enterprise Development, and completed
various assignments for other clients. Fees from these services are
negotiated on a project basis.
CUSTOM DEVELOPMENT AND CONSULTING SERVICES
Custom Development and Consulting Services include the design of OLE
objects, as well as complete multimedia systems. Fees for such services are
negotiated either on the basis of hourly billing rates for the staff assigned
or for fixed fees for specified services.
The Company entered into a contract in 1995 with ACORD Corporation, a
non-profit organization, whose members include property and casualty insurers
and about 40,000 independent agents ("ACORD"). ACORD develops and maintains
communications standards for the property and casualty industry. The Company
assisted ACORD in defining AL4, an OLE-based standard and set of objects for
implementing ACORD forms, which comply with 184 standards set by various
regulatory organizations. Developers from ACORD and the Company are creating
and distributing the reusable ACORD knowledge objects for particular
insurance forms. The standard also describes how ACORD's Independent Software
Developers (ISDs) can incorporate these OLE-based objects into their systems.
The Company intends to work with ISDs to assist them in implementing support
for AL4 on the basis of consulting agreements.
RELATIONSHIP WITH MICROSOFT
The Company has established a strategic relationship with Microsoft that
it believes is important to its sales, marketing and support activities, as
well as to its product development efforts relating to its kiosks. Microsoft
supports the Company in marketing its kiosk services, and has informally
agreed to exhibit the Company's kiosks in Microsoft displays at various trade
shows, such as the Government Technology Show, which was held in Albany, New
York in September 1996. It has also issued statements that included favorable
references relating to the Company's products. Microsoft has also entered
into various non-disclosure agreements with the Company with respect to
unannounced Microsoft products, under which the Company has the opportunity
to have advance knowledge of software technology being developed by
Microsoft. Microsoft has also provided, and continues to provide, fee-based
consulting services to the Company through Microsoft Consulting.
Since 1994, the Company has served as the regional host and sponsor of
Developer Days, an ongoing series of technical conferences organized and
operated by Microsoft. The Company's President and Chairman serve as
37
<PAGE>
Regional Directors for these events. Although the Company is not directly
compensated by Microsoft for its participation, the Company has derived
substantial benefit from this relationship, including access to senior
Microsoft executives, early disclosure of technology and publicity. The
Company will continue to act in this capacity for the fourth Developer Days
conference, currently scheduled for February 1997.
In November 1995, Microsoft and the Company entered into the Cooperation
Agreement with respect to OLEBroker(TM). The Cooperation Agreement provides
that Microsoft will undertake various promotional activities relating to the
Service including the distribution of a subscription offer in copies of
Microsoft's Visual Basic 4.0, Access Development Toolkit, and in a magazine
supplied to purchasers of Microsoft Visual C++. The Company, in turn, will
provide Microsoft with a number of complementary subscriptions and a
discounted price for additional subscriptions. An extension of the initial
term of the Cooperation Agreement, currently one year, is being negotiated,
and the agreement may be renewed for successive one year terms upon written
agreement of the parties at least two months prior to the expiration of the
then current term. The Company believes that the non-renewal of the
Cooperation Agreement would not have a material effect on the Company.
However, if Microsoft were to sever its relationships with the Company, the
Company's sales and financial condition could be severely and adversely
affected.
The Company has also produced technical papers for, and provided
consulting services to, Microsoft.
COMPETITION
The Company is subject to competition from different sources for its
different services. The Company's Intranet kiosk business competes with
numerous companies, including IBM, North Communications, Golden Screens and
NCR (currently a division of AT&T). All of these companies have resources
much greater than those of the Company. The Company's contract with the City
of New York is presently the most significant part of this business. The City
has also awarded contracts, comparable to the contract awarded to the
Company, to North Communications and DSSI (which awarded a subcontract to
Golden Screens), both of which have sold similar kiosks to other
municipalities. After fulfillment of the initial contracts, if the City
chooses to install additional kiosks throughout the City of New York, it may
award to others, and not the Company, the contract to install such additional
kiosks. Further, there can be no assurance that other municipalities or other
entities will seek to acquire kiosks from the Company. In addition, if the
use of kiosks provided by the Company and others proves to be successful in
New York City and other municipalities and locations, additional companies in
the software, hardware and communications areas, among others, may seek to
enter the market. A total of 19 companies competed for the contracts with the
City of New York, many of which can be expected to compete aggressively in
other competitive situations.
OLEBroker's(TM) competition includes Fawcette Technical Publications
("Fawcette"), which offers a web-site about OLE components which is supported
by advertising revenues. At this time, the Fawcette site does not offer
vendor's help files, and does not sell components, although this may change
in the future. Cybersource offers a website called software net for the sale
of software on-line, including components. A Canadian subsidiary of Sterling
Software also provides electronic commerce, and additional competitors are
expected to enter the field as barriers to entry are reduced or eliminated.
Many of these will have resources far greater than the Company.
The Company is subject to competition from different sources for its
different services. In its historical business, the Company competes with the
consulting division of Microsoft, the consulting arms of the "Big Six"
independent public accountants, IBM, EDS, and a host of small and large
consultants, integrators and trainers. Many of these organizations have
significant and long-standing relationships with their clients, and because
of their economies of scale may be able to offer more favorable terms or
prices.
CUSTOMERS
The long term success of the Company's business will depend not only on
the Company's ability to enter into arrangements with municipalities, other
government entities and private entities to make services available through
kiosks and with advertisers to use the kiosks as an advertising medium, but
ultimately upon the willingness of consumers to pay fees to transact business
by means of the kiosks. To date, the Company is operating only five public
kiosks, which were installed pursuant to the agreement with the City of New
York and which have been available for public use, on a limited basis, for a
short period of time. The decision by the City to
38
<PAGE>
acquire kiosks from providers other than the Company would have a direct and
materially adverse effect on the prospects of the Company and could also
decrease the Company's ability to market the kiosks to other potential
service providers and advertisers. In addition, there can be no assurance
that the volume of use by consumers of the kiosks to obtain City services and
conduct other transactions will be sufficient to generate significant
revenues for the Company.
The Company historically has derived a significant portion of its revenues
from a relatively limited number of customers. During the six months ended
June 30, 1996, the City of New York accounted for 56% of the Company's
revenues pursuant to the City Agreement and Microsoft, for which the Company
provided consulting services, accounted for 20% of the Company's revenues.
During 1995, two customers accounted for approximately 56% of the Company's
revenues, and during 1994, four customers accounted for approximately 67% of
revenues. The Company provided consulting and related services, and more
recently, services related to the development of OLEBroker(TM) and Intranet
and kiosk technology, to such customers. There can be no assurance that such
customers or others will retain the Company to install kiosks or provide such
services in the future. Furthermore, no customers of OLEBroker(TM) account
for a material portion of the Company's revenues, and there can be no
assurance that the Company will be able to develop a significant customer
base for this service.
PROPRIETARY RIGHTS
The Company's success is highly dependent on its proprietary technology.
The Company views its software as proprietary, and relies on a combination of
trade secret, copyright and trademark laws, non-disclosure agreements and
contractual provisions to establish and protect its proprietary rights. The
Company has no patents or patents pending and has not to date registered any
of its trademarks or copyrights. The Company plans to seek registrations in
the United States for the following trademarks: SmartStreet(TM),
ObjectSoft(TM), OLEBroker(TM) and CafeOLE(TM). In addition, the Company plans
to register certain of these trademarks in principal foreign jurisdictions.
The source code for the Company's proprietary software is protected as a
trade secret. In addition, because the Company does not sell or license its
technology to third parties, but rather delivers services through its kiosks
and OLEBroker(TM), its proprietary software is not disclosed to third
parties. Furthermore, the Company enters into agreements, as appropriate,
with employees, consultants and subcontractors containing provisions relating
to confidentiality and the assignment of inventions and other developments to
the Company. However, 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, such piracy can be expected to be a
persistent problem, particularly in international markets and as a result of
the growing use of the Internet. In addition, the laws of some foreign
countries either do not protect the Company's proprietary rights or offer
only limited protection for those rights. There can be no assurance that the
steps taken by the Company to protect its proprietary rights will be adequate
or that the Company's competitors will not independently develop technologies
that are substantially equivalent or superior to the Company's technologies
or products.
There has been substantial litigation in the software industry involving
intellectual property rights. Although the Company does not believe that it
is infringing the intellectual property rights of others, there can be no
assurance that such claims, if asserted, would not have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, as the Company may acquire or license a portion of
the software included in its products from third parties, its exposure to
infringement actions may increase because the Company must rely upon such
third parties for information as to the origin and ownership of such acquired
or licensed software. Although the Company would intend to obtain
representations as to the origins and ownership of such acquired or licensed
software and obtain indemnification to cover any breach of any such
representations, there can be no assurance that such representations will be
accurate or that such indemnification will provide adequate compensation for
any breach of such representations. In the future, litigation may be
necessary to enforce and protect trade secrets, copyrights and other
intellectual property rights of the Company. The Company may also be subject
to litigation to defend against claimed infringement of the rights of others
or to determine the scope and validity of the intellectual property rights of
others. Any such litigation could be costly and divert management's
attention, either of which could have a material adverse effect on the
Company's business,
39
<PAGE>
financial condition and results of operations. Adverse determinations in such
litigation could result in the loss of the Company's proprietary rights,
subject the Company to significant liabilities, require the Company to seek
licenses from third parties and prevent the Company from selling its
products, any one of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
FACILITIES
The Company's corporate headquarters were recently relocated to
Hackensack, New Jersey, in a leased facility consisting of approximately
4,300 square feet, which it occupied effective April 1, 1996 under a lease
expiring March 31, 2003. The rent paid by the Company for this office will be
approximately $36,000 for the period commencing April 1, 1996 and ending
December 31, 1996. The Company's rent payment obligations are subject to
certain increases in subsequent periods. See Note K[2] of Notes to Financial
Statements. The Company believes that its new space will be adequate to meet
its requirements through 1997. The Company has made no decision on how to
expand, if necessary, beyond this period.
EMPLOYEES
As of September 30, 1996, the Company had nine full-time employees and one
temporary employee, all of whom are based in its Hackensack, NJ offices.
These include three in product development, three in management and sales,
two in operations and two in finance and administration. The Company's
employees are not represented by any collective bargaining organization, and
the Company has never experienced a work stoppage and considers its relations
with its employees to be good.
Although the Company expects to increase its full-time staff to 12 or
more, on an "as-needed" basis, the Company intends to continue with its
policy to outsource non-strategic functions such as subscription fulfillment,
artwork development, repetitive testing, maintenance and bookkeeping rather
than using its own staff for these functions.
Other than Messrs. Sarna and Febish, the Company's executive officers, no
other senior personnel have entered into employment agreements obligating
them to remain in the Company's employ for any specific term; however,
substantially all key employees of the Company are parties to
nonsolicitation, confidentiality and noncompetition agreements with the
Company. In addition, independent contractors enter into confidentiality
agreements with the Company.
LEGAL PROCEEDINGS
The Company has not been, and is not currently, involved in any material
legal proceedings.
40
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- ---------
<S> <C> <C>
David E. Y. Sarna(1) 47 Chairman, Secretary and Director
George J. Febish(1) 48 President, Treasurer and Director
Daniel E. Ryan(1)(2)(3)(4) 48 Director
Julius Goldfinger(2)(4) 67 Director
Gunther L. Less 65 Director Nominee
</TABLE>
- ------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
(4) Member of Stock Option Plan Committee.
David E. Y. Sarna together with Mr. Febish founded the Company in 1990.
Mr. Sarna has been the Chairman, Co-Chief Executive Officer, Secretary and a
director of the Company since December 1990. He has also been, since 1994, a
Contributing Editor of Datamation magazine. Prior to co-founding the Company,
Mr. Sarna founded Image Business Systems Corporation, a computer software
development company, in 1988. Prior to founding Image Business Systems
Corporation, Mr. Sarna was formerly Executive Vice-President and a co-founder
of International Systems Services Corp. ("ISS"), a computer software company
that developed ISS Three(TM). From 1976 to 1981, Mr. Sarna was employed by
Price Waterhouse & Co., as a management consultant, beginning as a senior
consultant and rising to the position of senior manager. From 1970 to 1976
Mr. Sarna was employed by IBM Corporation in technical and sales positions.
Mr. Sarna began his professional career at Honeywell in 1968. Mr. Sarna holds
a BA degree from Brandeis University and did graduate work at the
Technion-Israel Institute of Technology. Mr. Sarna is a Certified Systems
Professional and a Certified Computer Programmer. He is the co-author, with
Mr. Febish, of PC Magazine Windows Rapid Application Development (published
by Ziff-Davis Press in 1994), several other books and over 50 articles
published in professional magazines. Mr. Sarna is also the co-inventor of
patented software for the recognition of bar-codes.
George J. Febish together with Mr. Sarna founded the Company in 1990. Mr.
Febish has been the President, Co-Chief Executive Officer, Treasurer and a
director of the Company since December 1990. He has also been, since 1994, a
Contributing Editor of Datamation magazine. Prior to co-founding the Company,
Mr. Febish was Executive Vice President and Chief Operating Officer of Image
Business Systems Corporation, a computer software development company, from
1988 to 1990. Prior to joining Image Business Systems Corporation, Mr. Febish
was the Director of Marketing at ISS, a computer software company that
developed ISS Three(TM). Prior to joining ISS, Mr. Febish was the Eastern
Regional Sales Manager for Bool & Babbage. In 1970, Mr. Febish began his
professional career with New York Life Insurance Company. Mr. Febish holds a
BS degree from Seton Hall University. He is the co-author, with Mr. Sarna, of
PC Magazine Windows Rapid Application Development and the author of numerous
published articles.
Daniel E. Ryan has been a director since 1991. Mr. Ryan has been employed
by New York Life Insurance Company since July, 1965 where, since 1981, he has
held the title of Corporate Vice President. Mr. Ryan is the head of the
Service Center Development of New York Life Insurance Company's Information
Systems organization. Mr. Ryan holds an MBA in Computer Science from Baruch
College and a BS/BA in Industrial Management from Manhattan College. Mr. Ryan
is a Certified Systems Professional.
Julius Goldfinger became a director in 1996. Mr. Goldfinger is the
Director, Investment Banking, of Marsh, Block & Company, Inc. He was the
founder and, from September 1995 to September 1996, the Managing Partner of
Plowshares Capital Group ("Plowshares"), a New York based international
business development company with interests in the former Soviet Union. Prior
to founding Plowshares, from February 1993 to September 1995, Mr. Goldfinger
was Manager of Corporate Finance at Redstone Securities, Inc. From December
1991 to February 1993, Mr. Goldfinger was a consultant to Herbert Young
Securities, and from July 1989 to November
41
<PAGE>
1991, Mr. Goldfinger was a consultant to Rosenkrantz, Lyon and Ross (now
Josephthal Lyon & Ross). Other than Plowshares, all of the foregoing
companies are members of the National Association of Securities Dealers, Inc.
Mr. Goldfinger was the manager of the venture capital group at The Bankers
Trust Company and President of Walnut Capital Corp, a Small Business
Investment Company that he co-founded. Mr. Goldfinger holds a BBA from Baruch
College, and he is a Chartered Financial Analyst.
Gunther L. Less has been nominated by the Representative to become a
director of the Company upon completion of the Public Offering. Mr. Less owns
and operates GLL TV Enterprises, through which he has acted as the producer
and host of "Journey to Adventure," a travel-documentary show that has
appeared in syndication on broadcast and cable television networks for over
35 years. He also acts as a special media consultant to the airline industry
and has held various executive and consulting positions in the travel
industry, including as an Agency Manager for American Express, President of
Planned Travel, Inc., a subsidiary of Diners Club, Inc., System Sales and
Marketing Manager for Avis Rent-A-Car and Manager-External Affairs for
Olympic Airways and personal consultant to the late Aristotle Onassis, and
consultant to Hyatt International Corporation. He is also a past president of
the American Association of Travel Editors.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve at the discretion of the Board of Directors.
Upon the closing of the Public Offering, the Company will have a
classified Board of Directors consisting of two classes as nearly equal in
size as possible, with staggered two-year terms. It is expected that
initially three directors, David E. Y. Sarna, Julius Goldfinger and Gunther
L. Less, will serve until the 1997 Annual Meeting of Stockholders and two
directors, George J. Febish and Daniel E. Ryan, will serve until the 1998
Annual Meeting of Stockholders and, thereafter, that directors will be
elected to serve two year terms as their initial terms expire. Directors hold
office until the expiration of their respective terms and until their
successors are elected or until death, resignation or removal. The
classification of the Board of Directors could have the effect of making it
more difficult for a third party to acquire, or discouraging a third party
from acquiring, control of the Company. Vacancies on the Board of Directors
may be filled only with the approval of a majority of the Board of Directors
then in office. Furthermore, any director elected by the stockholders, or by
the Board of Directors to fill a vacancy, may be removed only for cause and
by a vote of 75% of the outstanding shares of Common Stock. See "Description
of Securities -- Delaware Takeover Statute and Certain Charter Provisions."
DIRECTOR COMPENSATION
Members of the Board of Directors have not in the past received any
compensation for serving on the Board of Directors. Non-employee directors of
the Company shall each be granted, under the Company's 1996 Stock Option
Plan, (i) an outside director option for 10,000 shares of Common Stock when
first elected to the Board of Directors, and (ii) following each Annual
Meeting of Stockholders (commencing with the 1997 Annual Meeting), outside
director options to purchase 5,000 shares of Common Stock, in each case at an
exercise price equal to the fair market value of the Common Stock on the date
of grant, and exercisable for a term of five years commencing on the date of
grant.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has established a compensation committee whose sole member is
Daniel E. Ryan. The Company's audit committee consists of Messrs. Ryan and
Goldfinger.
EXECUTIVE COMPENSATION
The following table sets forth a summary of all compensation paid by the
Company during the last three fiscal years ended December 31 to each of its
Co-Chief Executive Officers. Other than the Co-Chief Executive Officers,
there are no employees of the Company whose compensation exceeded $100,000 in
1995.
42
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Principal
Position or Number
in Group Annual Compensation
------------------------ ---------------------------
Year Salary(1) Bonus
------ ---------- -------
<S> <C> <C> <C>
David E. Y. Sarna 1995 $200,000 0
Chairman, Co-Chief 1994 $200,000 0
Executive Officer and 1993 $200,000 0
Secretary
George J. Febish 1995 $200,000 0
President, Treasurer and 1994 $200,000 0
Co-Chief 1993 $200,000 0
Executive Officer
</TABLE>
- ------
(1) Includes $61,250, and $107,220 that were accrued but not paid to each of
Messrs. Sarna and Febish in 1993 and 1995, respectively. At December 31,
1995, the total amount of compensation accrued but not paid to each of
Messrs. Sarna and Febish, inclusive of prior years, was $195,844. Such
amounts were subsequently paid in full, with $100,000 and $50,000 paid to
each of Messrs. Sarna and Febish from the proceeds of the Bridge Loan
Offering and the July 1996 Offering, respectively, and the balance paid
from operating revenues. See "Certain Transactions."
No stock options or warrants were granted to, or exercised by, either of
the individuals named in the Summary Compensation Table during the fiscal
year ended December 31, 1995.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with each of David E.
Y. Sarna and George J. Febish, effective as of July 1, 1996, which expires on
December 31, 2001. The employment agreements each provide for a current
annual base salary of $208,000. Each of the employment agreements also
provides for a bonus of 5% per annum of the Company's Earnings Before
Depreciation, Interest, Taxes and Amortization. In addition, on an annual
basis, the Board of Directors will consider paying an additional bonus to
each of Messrs. Sarna and Febish that is based upon the increase in the
Company's gross revenues, taking into account any increase in the Company's
expenses. The annual base salary under the current agreements may be
increased at the discretion of the Board of Directors. The agreements provide
for (i) a severance payment of the base compensation and bonus of the prior
full fiscal year and payment of all medical, health, disability and insurance
benefits then payable by the Company for the longer of (a) the remainder of
the term of the employment agreement or (b) 12 months, as well as (ii) the
base compensation and bonus accrued to the date of termination, upon the
occurrence of (x) termination by the Company without cause, (y) termination
by the employee for good reason or (z) a change in control of the Company, if
the employee resigns after the occurrence of the such change in control. Each
of the employment agreements limit the severance payments to an amount that
is less than the amount that would cause an excise tax or loss of deduction
under the rules relating to golden parachutes under the Internal Revenue
Code.
OFFICER WARRANTS
Each of David E. Y. Sarna and George J. Febish have entered into a Warrant
and Warrant Agreement with the Company. The Warrant and Warrant Agreements,
dated April 15, 1993 (the "Officer Warrants") provides for the right of each
of them to purchase 50,000 shares of Common Stock at an exercise price per
share of $.50. The Officer Warrants permit the executive's estate to cause
the Company to purchase the underlying shares at the Company's book value per
share. The Officer Warrants provide that the number of shares and the
exercise price are subject to anti-dilution adjustments and grants
"piggyback" registration rights with respect to the underlying shares. See
"Description of Securities -- Outstanding Warrants and Options --
Officer/Stockholder Warrants; 1996 Stock Option Plan."
43
<PAGE>
1996 STOCK OPTION PLAN
The Company's 1996 Stock Option Plan (the "Plan") was approved by the
Company's Board of Directors in 1996. The Company has reserved 250,000 shares
of Common Stock under the Plan. Options granted under the Plan may include
those qualified as incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended, as well as non-qualified options. Key
employees as well as other individuals, such as outside directors,
consultants and advisors who provide necessary services to the Company are
eligible to participate in the Plan. Non-employees and part-time employees
may receive only non-qualified options. Options to purchase an aggregate of
145,000 options have been granted to date under the Plan, including 50,000
options granted to each of David E. Y. Sarna and George J. Febish, the
Company's Co-Chief Executive Officers.
The Plan will be administered by the Stock Option Committee of the Board
of Directors, which will be comprised solely of non-employee directors (who
are "outside directors" within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code") and "disinterested persons"
within the meaning of Rule 16b-3 under the Exchange Act (the "Committee").
The Committee can make such rules and regulations and establish such
procedures for the administration of the Plan as it deems appropriate. No
member of the Committee shall be eligible to receive discretionary grants of
options during, and for a period of one year following, their service on the
Committee. The Committee presently consists of Mr. Ryan. The description of
the Plan set forth herein is qualified in its entirety by reference to the
text of the Plan, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
The exercise price for the shares purchased upon exercise of non-qualified
options granted under the Plan is determined by the Committee. The exercise
price of an incentive stock option must be at the fair market value of the
Company's Common Stock on the date of grant (110% of the fair market value
for stockholders who, at the time the option is granted, own more than 10% of
the total combined classes of stock of the Company or any subsidiary). No
employees may exercise more than $100,000 in options held by them in any
year.
In addition, non-employee directors of the Company shall each be granted
(i) an outside director option for 10,000 shares of Common Stock upon
adoption of the Plan or when first elected to the Board of Directors after
the adoption of the Plan and (ii) following each Annual Meeting of
Stockholders (commencing with the 1997 Annual Meeting), outside director
options to purchase 5,000 shares of Common Stock, in each case at an exercise
price equal to the fair market value of the Common Stock on the date of
grant, and exercisable for a term of five years commencing on the date of
grant.
No option may have a term of more than ten years (five years for 10% or
greater stockholders and outside directors). Options generally may be
exercised only if the option holder remains continuously associated with the
Company or a subsidiary from the date of grant to the date of exercise.
However, options may be exercised upon termination of employment or upon
death or disability of any employee within certain specified periods.
The following is a general summary of the federal income tax consequences
under current tax law of nonqualified stock options ("NQSOs") and incentive
stock options ("ISOs"). It does not purport to cover all of the special
rules, including special rules relating to persons subject to the reporting
requirements of Section 16 under the Exchange Act who do not hold the shares
acquired upon the exercise of an option for at least six months after the
date of grant of the option and special rules relating to the exercise of an
option with previously- acquired shares, or the state or local income or
other tax consequences inherent in the ownership and exercise of stock
options and the ownership and disposition of the underlying shares.
An optionee will not recognize taxable income for federal income tax
purposes upon the grant of a NQSO or an ISO.
Upon the exercise of a NQSO, the optionee will recognize ordinary income
in an amount equal to the excess, if any, of the fair market value of the
shares acquired on the date of exercise over the exercise price thereof, and
the Company will generally be entitled to a deduction for such amount at that
time. If the optionee later sells shares acquired pursuant to the exercise of
a NQSO, he or she will recognize long-term or short-term capital gain or
loss, depending on the period for which the shares were held. Long-term
capital gain is generally subject to more favorable tax treatment than
ordinary income or short-term capital gain. Proposed legislation would treat
long-term capital gain even more favorably. There can be no assurance,
however, that such proposed legislation will be enacted.
44
<PAGE>
Upon the exercise of an ISO, the optionee will not recognize taxable
income. If the optionee disposes of the shares acquired pursuant to the
exercise of an ISO more than two years after the date of grant and more than
one year after the transfer of the shares to him or her, the optionee will
recognize long-term capital gain or loss and the Company will not be entitled
to a deduction. However, if the optionee disposes of such shares within the
required holding period, all or a portion of the gain will be treated as
ordinary income and the Company will generally be entitled to deduct such
amount.
In addition to the federal income tax consequences described above, an
optionee may be subject to the alternative minimum tax, which is payable to
the extent it exceeds the optionee's regular tax. For this purpose, upon the
exercise of an ISO, the excess of the fair market value of the shares over
the exercise price therefor is an adjustment which increases alternative
minimum taxable income. In addition, the optionee's basis in such shares is
increased by such excess for purposes of computing the gain or loss on the
disposition of the shares for alternative minimum tax purposes. If an
optionee is required to pay an alternative minimum tax, the amount of such
tax which is attributable to deferral preferences (including the ISO
adjustment) is allowed as a credit against the optionee's regular tax
liability in subsequent years. To the extent the credit is not used, it is
carried forward.
SEP
The Company established in 1990 a simplified employee pension ("SEP") plan
covering all qualified employees. Pursuant to the SEP, employees may elect to
contribute up to 15% of their compensation on a pre-tax basis (up to the
statutory prescribed annual limit ($9,500 in 1996) to the SEP. The SEP plan
is intended to qualify under Section 408(k) of the Internal Revenue Code.
KEY-MAN LIFE INSURANCE
The Company currently maintains key man insurance, of which it is the
beneficiary, on the lives of each of David E. Y. Sarna and George J. Febish
in the amount of $1,000,000 each.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation, as amended (the "Certificate
of Incorporation") and its Amended and Restated Bylaws (the "Bylaws") provide
that, except to the extent prohibited by the Delaware General Corporation
Law, its directors shall not be personally liable to the Company or its
stockholders for monetary damages for any breach of fiduciary duty as
directors of the Company. Under Delaware law, the directors have a fiduciary
duty to the Company which is not eliminated by the provisions of the
Certificate of Incorporation and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available. In addition, each director will continue to be subject to
liability under Delaware law for breach of the director's duty of loyalty to
the Company for acts or omissions which are found by a court of competent
jurisdiction to be not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit
to the director, and for payment of dividends or approval of stock
repurchases or redemptions that are prohibited by Delaware law. This
provision also does not affect the directors' responsibilities under any
other laws, such as the Federal securities laws or state or Federal
environmental laws.
The Certificate of Incorporation and Bylaws also provide that the Company
shall indemnify, to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law, all of its present and former officers and
directors, and any party agreeing to serve as an officer, director or trustee
of any entity at the Company's request, in connection with any civil or
criminal proceeding threatened or instituted against such party by reason of
actions or omissions while serving in such capacity. Indemnification by the
Company includes payment of expenses in defense of the indemnified party in
advance of any proceeding or final disposition thereof if the indemnified
party undertakes to repay the Company upon an ultimate determination that the
indemnified party was not entitled to indemnification by the Company. This
provision also requires Board of Director approval as a precondition to any
indemnification by the Company for proceedings instituted by the indemnified
party. The rights to indemnification provided in this provision do not
preclude the exercise of any other indemnification rights by any party
pursuant to any law, agreement or vote of the stockholders or the
disinterested directors of the Company.
45
<PAGE>
Section 145 of the Delaware General Corporation Law generally allows the
Company to indemnify the parties described in the preceding paragraph for all
expenses, judgments, fines and amounts in settlement actually paid and
reasonably incurred in connection with any proceedings so long as such party
acted in good faith and in a manner reasonably believed to be in or not
opposed to the Company's best interests and, with respect to any criminal
proceedings, if such party had no reasonable cause to believe his or her
conduct to be unlawful. Indemnification may only be made by the Company if
the applicable standard of conduct set forth in Section 145 has been met by
the indemnified party upon a determination made (1) by the Board of Directors
by a majority vote of a quorum of directors who are not parties to such
proceedings, or (2) if such a quorum is not obtainable or if directed by a
quorum of disinterested directors, by independent legal counsel in a written
opinion, or (3) by the stockholders.
The Company will seek to purchase and maintain directors and officers
insurance as soon as the Board of Directors determines practicable, in
amounts that is considers appropriate, insuring the directors and officers
against any liability arising out of their status as such, regardless of
whether the Company has the power to indemnify such persons against such
liability under applicable law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of October 31, 1996, by
(i) each person who is known by the Company to own beneficially more than 5%
of the outstanding shares of Common Stock, (ii) each director and nominee for
director, (iii) each executive officer and (iv) all officers and directors as
a group.
<TABLE>
<CAPTION>
Number of Shares Percentage of Outstanding Shares (1)
Name and of Common ----------------------------------------------------
Address of Stock Beneficially Before Public After Public After Concurrent
Beneficial Owners Owned(2) Offering Offering Offering(3)
----------------------------- ------------------ --------------- -------------- ----------------
<S> <C> <C> <C> <C>
David E. Y. Sarna (4) 867,500 32.5% 22.2% 18.4%
c/o ObjectSoft Corporation
Continental Plaza III
433 Hackensack Avenue
Hackensack, New Jersey 07601
George J. Febish (4) 907,500 34.0% 23.2% 19.3%
c/o ObjectSoft Corporation
Continental Plaza III
433 Hackensack Avenue
Hackensack, New Jersey 07601
Melvin Weinberg, Esq. (5) 300,000 11.7% 7.9% 6.5%
c/o Parker Chapin Flattau &
Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
The David E. Y. Sarna Family 150,000 5.9% 3.9% 3.3%
Trust/Rachel Sarna (6)
c/o Parker Chapin Flattau &
Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
The George J. Febish Family 150,000 5.9% 3.9% 3.3%
Trust/Janis Febish (7)
c/o Parker Chapin Flattau &
Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Cyndel & Co., Inc. (8) 242,500 9.4% 6.3% 5.2%
26 Ludlam Avenue
Bayville, New York 11709
Steven Bayern (9) 288,500 11.0% 7.5% 6.2%
26 Ludlam Avenue
Bayville, New York 11709
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Percentage of Outstanding Shares (1)
Name and of Common ----------------------------------------------------
Address of Stock Beneficially Before Public After Public After Concurrent
Beneficial Owners Owned(2) Offering Offering Offering(3)
----------------------------- ------------------ --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Daniel E. Ryan (10) 10,000 * * *
c/o ObjectSoft Corporation
Continental Plaza III
433 Hackensack Avenue
Hackensack, New Jersey 07601
Julius Goldfinger (10) 10,000 * * *
c/o ObjectSoft Corporation
Continental Plaza III
433 Hackensack Avenue
Hackensack, New Jersey 07601
Gunther L. Less (11) 0 * * *
c/o ObjectSoft Corporation
Continental Plaza III
433 Hackensack Avenue
Hackensack, New Jersey 07601
All officers and directors as
a group (4 persons) (4)(10) 1,795,000 64.3% 44.5% 37.2%
</TABLE>
- ------
* Less than 1%.
(1) Each person's percentage interest is determined assuming that all
options, warrants and convertible securities that are held by such
person (but not by anyone else) and which are exercisable or convertible
within 60 days have been exercised for or converted into Common Stock.
(2) Unless otherwise noted, the Company believes that all persons named have
sole voting and investment power with respect to all shares of Common
Stock listed as owned by them.
(3) Assumes the exercise in full of (i) the Placement Agent's Warrant for
37,500 Units, (ii) the Bridge Warrants for 375,000 Units, (iii) the July
Placement Warrant for 27,300 shares and the July 1996 Warrants issuable
upon the exercise of the July Placement Warrant for 18,200 shares of
Common Stock, (iv) the July 1996 Warrants for 182,004 shares of Common
Stock, (v) the Investor Warrants for 106,250 shares of Common Stock, and
(vi) Officer Warrants for 43,333 shares of Common Stock.
(4) Includes, for each of Messrs. Sarna and Febish, immediately exercisable
warrants to purchase 50,000 shares of Common Stock and 50,000 options
granted under the Company's 1996 Stock Option Plan. See "Management --
1996 Stock Option Plan" and "Description of Securities -- Outstanding
Options and Warrants -- Officer/Stockholder Warrants; 1996 Stock Option
Plan." Includes for Mr. Sarna, 150,000 shares of Common Stock held by
The David E. Y. Sarna Family Trust (the "Sarna Trust"). Rachel Sarna,
the wife of Mr. Sarna, is a trustee of the Sarna Trust. Mr. Sarna
disclaims beneficial ownership of the shares of Common Stock held by the
Sarna Trust. Includes, for Mr. Febish, 150,000 shares held by The George
J. Febish Family Trust (the "Febish Trust"). Janis Febish, the wife of
Mr. Febish, is a trustee of the Febish Trust. Mr. Febish disclaims
beneficial ownership of the shares of Common Stock held by the Febish
Trust.
(5) Melvin Weinberg, Esq., by virtue of his shared dispositive power as a
trustee over the shares of Common Stock held by both of the Family
Trusts, may be deemed a beneficial owner of a total of 300,000 shares of
Common Stock, representing the aggregate shareholdings of the Family
Trusts. The David E. Y. Sarna Family Trust was set up by Mr. Sarna for
the benefit of his children. Mr. Weinberg and Mrs. Sarna are trustees of
the Sarna Trust and share dispositive power with respect to the shares
of Common Stock owned by the Sarna Trust, but Mrs. Sarna has the sole
voting power with respect to such shares. The George J. Febish Family
Trust was set up by Mr. Febish for the benefit of his children. Mr.
Weinberg and Mrs. Feb-
48
<PAGE>
ish are trustees of the Febish Trust and share dispositive power with
respect to the shares of Common Stock owned by the Febish Trust, but
Mrs. Febish has the sole voting power with respect to such shares. Mr.
Weinberg disclaims beneficial ownership of the shares of Common Stock
held by the Family Trusts.
(6) These shares are held by The David E. Y. Sarna Family Trust, of which
Mrs. Sarna and Mr. Weinberg are the trustees. The children of Mr. and
Mrs. Sarna are the sole beneficiaries.
(7) These shares are held by The George J. Febish Family Trust, of which
Mrs. Febish and Mr. Weinberg are the trustees. The children of Mr. and
Mrs. Febish are the sole beneficiaries.
(8) Includes immediately exercisable warrants to purchase 20,000 shares of
Common Stock. Cyndel is engaged in the business of management consulting
and is owned by Steven Bayern and Patrick Kolenik. Mr. Kolenik, the
president of Cyndel, does not own any other securities of the Company.
(9) Includes (i) 222,500 shares of Common Stock and immediately exercisable
warrants to purchase 20,000 shares of Common Stock owned by Cyndel and
(ii) 27,300 shares of Common Stock issuable upon the exercise of the
July Placement Warrant issued to Win Capital Corporation, the placement
agent of the July 1996 Offering, and the 18,200 shares issuable upon the
exercise of the July 1996 Warrants included in such option. Mr. Bayern
is a 50% owner and the vice president of Cyndel and the Chairman and
approximately 50% owner of Win Capital Corporation. See "Description of
Securities -- Outstanding Options and Warrants -- Officer/Stockholder
Warrants; 1996 Stock Option Plan -- Placement Agent's Warrant; July
Placement Warrant."
(10) Includes, for each of Messrs. Ryan and Goldfinger, immediately
exercisable options to purchase 10,000 shares of Common Stock granted
under the Company's 1996 Stock Option Plan.
(11) Does not include immediately exercisable options to purchase 10,000
shares of Common Stock to be granted under the Company's 1996 Stock
Option Plan at such time as Mr. Less is elected a director.
49
<PAGE>
SELLING SECURITYHOLDERS
Up to an aggregate of 1,142,088 shares of Common Stock and 412,500 Class A
Warrants may be offered for resale by the Selling Securityholders. The Class
A Warrants and 412,500 shares of Common Stock are issuable in the form of
412,500 immediately separable Units upon the exercise of the Bridge Warrants
issued to investors in the Bridge Loan Offering and the Placement Agent's
Warrant. Of the other 729,588 Selling Securityholder shares of Common Stock,
273,001 shares are issued and outstanding and were issued to investors in the
July 1996 Offering, 182,004 shares are issuable upon the exercise of the July
1996 Warrants, 45,500 shares are issuable upon the exercise of the July
Placement Warrant (and the July 1996 Warrants issuable upon the exercise
thereof), 106,250 shares are issuable upon exercise of the Investor Warrants,
43,333 shares are issuable upon exercise of the Officer Warrants and 79,500
shares are held by certain stockholders of the Company.
The following table sets forth certain information with respect to each
Selling Securityholder for whom the Company is registering Selling
Securityholder Securities for resale to the public. The Company will not
receive any of the proceeds from the sale of such securities. Renaissance
acted as the Representative of the Underwriters of the Public Offering. A
principal of Win Capital is also a principal of Cyndel & Co., Inc., a
principal stockholder of the Company. Other than as described with respect to
Renaissance and Win Capital, to the Company's knowledge, there are no
material relationships between any of the Selling Securityholders and the
Company, nor have any such material relationships existed within the past
three years.
Other than Renaissance, which will own the Unit Purchase Option after
completion of the Public Offering, and the holders of the Investor and
Officer Warrants, no Selling Securityholder currently owns securities of the
Company other than the Selling Securityholder Securities or warrants
exercisable to purchase Selling Securityholder Securities. Assuming all of
the Selling Securityholder Securities are issued and sold, and based on the
securities of the Company currently owned by the Selling Securityholders, no
Selling Securityholder, with the possible exception of Renaissance, will
beneficially own 1% or more of the Company's Common Stock.
<TABLE>
<CAPTION>
Maximum
Number of Maximum Number of
Shares to be Sold Class A Warrants
Bridge Offering Investors (1) to be Sold (1)
--------------------------------------------- ------------------- -----------------
<S> <C> <C>
Renaissance Financial Securities Corporation 37,500(2) 37,500(2)
Nathan Eisen ................................ 7,500 7,500
Richard, Steven and Kenneth Etra ............ 15,000 15,000
William J. Ludwig ........................... 15,000 15,000
Joseph W. And Ann G. Schantz ................ 7,500 7,500
Gregg Gallant ............................... 7,500 7,500
Mary and Mark Albritton ..................... 15,000 15,000
Sydney Katz ................................. 7,500 7,500
Louis Falletta .............................. 7,500 7,500
Phillip Levien .............................. 7,500 7,500
Pamda Retirement Trust ...................... 15,000 15,000
Eric W. Larson .............................. 15,000 15,000
HRIS Associates, Inc. ....................... 15,000 15,000
Program Advisors Corporation ................ 7,500 7,500
Program Resource Organization, Inc. ......... 7,500 7,500
Association of Independent Employers, Ltd. .. 7,500 7,500
Peter S. Morford ............................ 7,500 7,500
Robert E. Coomes ............................ 7,500 7,500
Gary G. Hammon .............................. 7,500 7,500
Sheldon Sisken .............................. 7,500 7,500
Abraham David ............................... 7,500 7,500
Bay N. Sayegh ............................... 7,500 7,500
American Waste Oil Services Corp. ........... 15,000 15,000
Gastro Enterology Associates ................ 30,000 30,000
Servesting Investment Co. ................... 7,500 7,500
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Maximum
Number of Maximum Number of
Shares to be Sold Class A Warrants
Bridge Offering Investors (1) to be Sold (1)
--------------------------------------------- ------------------- -----------------
<S> <C> <C>
Martin Hodas ................................ 15,000 15,000
Richard Someck .............................. 15,000 15,000
Roger Testa ................................. 30,000 30,000
Cyril J. Galagan ............................ 15,000 15,000
Jack P. Conlon .............................. 15,000 15,000
Joseph Schanne and Theresa Schanne .......... 15,000 15,000
Anthony Quaranta ............................ 15,000 15,000
------------------- -----------------
Total ................................... 412,500 412,500
=================== =================
</TABLE>
<TABLE>
<CAPTION>
Maximum Number
of Shares Issuable
on Exercise of July
Maximum Number of 1996 Warrants
July 1996 Offering Investors Shares to be Sold to be Sold
------------------------------------ ----------------- -------------------
<S> <C> <C>
Win Capital Corporation (3) ........ 27,300 18,200
Lawrence Dell Aquila ............... 3,572 2,381
David Barron ....................... 10,000 6,667
Louis Chapman and Elaine Chapman ... 3,000 2,000
Michael Damiani and Beverly Damiani 5,000 3,333
Seymour Fertig ..................... 7,143 4,762
Theodore Kaplan & Selma Kaplan ..... 8,000 5,334
Edgar Lindblom ..................... 10,000 6,667
Thomas J. Luisi .................... 9,000 6,000
Donald Markowitz ................... 12,000 8,000
Gary O'Leary ....................... 10,000 6,667
PAMCO General Contracting Corp. .... 5,000 3,334
Pension Solutions .................. 10,000 6,667
Nicholas Ponzio .................... 7,143 4,762
Jeffrey Reizner .................... 5,000 3,334
Samuel Richman ..................... 3,000 2,000
Charles Ruppman .................... 25,000 16,667
Rose Salvato ....................... 16,000 10,667
James R. Smith ..................... 22,000 14,667
John H. Smith ...................... 5,000 3,333
Stourbridge Investment Ltd. ........ 62,143 41,429
Suan Investments Inc. .............. 30,000 20,000
Faye Zelmanovicz ................... 5,000 3,333
----------------- -------------------
Total ......................... 300,301 200,204
================= ===================
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Maximum Shares Owned
Number After the
of Shares Public
Investor Warrant Holders to be Sold Offering
------------------------------------------- ------------ --------------
<S> <C> <C>
Harold Greenberg .......................... 3,125 6,250
Gennaro P. Vanacore ....................... 3,125 6,250
Estate of Aaron Ascher .................... 12,500 25,000
Harmat Capital Corp. ...................... 3,125 6,250
Greenberg Associates ...................... 3,125 6,250
Jon Farbman ............................... 6,250 12,500
Scott Berman .............................. 6,250 12,500
George Mourges ............................ 12,500 25,000
Agamemnon R. Mourges ...................... 12,500 25,000
Marshall N. Cyrlin ........................ 6,250 12,500
Herbert Cyrlin ............................ 6,250 12,500
Josephine Chast ........................... 3,125 6,250
John P. Philis and Peter S. Philis, JTWROS 6,250 12,500
Elogeanne Grossman ........................ 3,125 6,250
Anthony Larosa ............................ 3,125 6,250
Catherine A. Lavin ........................ 6,250 12,500
Debra and Wesley Oler ..................... 3,125 6,250
Daniel Shapiro ............................ 3,125 6,250
Jerome Braunstein ......................... 3,125 6,250
------------ --------------
Total Investor Warrants ............... 106,250
============
Total Shares Owned After Public Offering 212,500(4)
==============
Officer Warrant Holders
Alice F. Wein ............................. 21,666 0
Arthur Wein ............................... 21,667 0
Arthur Wein and Alice F. Wein, JTWROS ..... -- 75,000
------------ --------------
Total Officer Warrants ................ 43,333
============
Total Shares Owned After Public Offering 75,000
==============
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Maximum
Number of
Shares to be
Outstanding Shares Sold
------------------------------------- --------------
<S> <C>
Gregory Lavin ....................... 2,500
Leslie Seiff ........................ 2,500
Bruce Seiff ......................... 2,500
Stanley Simon ....................... 2,000
Sylvia Bageac ....................... 2,000
William F. Yetman ................... 1,000
Dr. Michael Smart ................... 5,000
Barbara Bean Hemmer ................. 4,000
Regent Capital Group ................ 10,000
Aaron Lehman ........................ 18,000
Goldman, Zolotorofe & Corcoran, P.C. 20,000
David I. Grauer ..................... 10,000
--------------
Total Shares .................... 79,500
==============
</TABLE>
(1) Except as to Renaissance, as described in note (2) below, consists of
Common Stock and Class A Warrants comprising Units issuable upon the
exercise of the Bridge Warrants. See "Certain Transactions - Recent
Financings."
(2) Consists of Common Stock and Class A Warrants comprising Units issuable
upon the exercise of the Placement Agent's Warrant. Does not include
87,500 shares of Common Stock included in the Units (and issuable upon
the exercise of the Class A Warrants contained in such Units) issuable
upon the exercise of the Representative's Unit Purchase Option to be
issued to Renaissance in connection with the Public Offering, which
option is not exercisable until November 11, 1997. Assuming all of the
Selling Securityholder Securities are issued and sold and no other shares
of Common Stock are issued (upon the exercise of any Class A Warrants,
other outstanding options and warrants or otherwise) by the Company,
Renaissance by virtue of its ownership of the Representative's Unit
Purchase Option, will be deemed to own, as of September 13, 1997,
approximately 5.2% of the Company's Common Stock. See "Certain
Transactions - Recent Financings" and "Concurrent Public Offering."
(3) Consists of shares issuable upon the exercise of the July Placement
Warrant and upon the exercise July 1996 Warrants issuable upon such
exercise of the July Placement Warrant. Does not include 222,500 shares
of Common Stock and immediately exercisable warrants to purchase 20,000
shares of Common Stock owned by Cyndel. See "Principal Stockholders" and
"Certain Transactions - Recent Financings."
(4) Does not include 212,500 shares of Series A Preferred Stock, which are
being redeemed from the proceeds of the Public Offering.
53
<PAGE>
CERTAIN TRANSACTIONS
The Company believes that all transactions with affiliates were made on terms
no less favorable to the Company than those available from non-affiliated third
parties. All future transactions between the Company and its officers, directors
or 5% stockholders will be on terms no less favorable than could be obtained
from non-affiliated third parties and will be approved by a majority of the
independent, disinterested directors of the Company.
ISSUANCE AND REDEMPTION OF SERIES B PREFERRED STOCK
In December 1995, Cyndel, a principal stockholder, acquired 1,250 shares
of Series B Preferred Stock in consideration of the payment of $125,000
($25,000 of which was paid in January 1996). The Series B Preferred Stock was
convertible into a number of shares of Common Stock equal to a fraction the
numerator of which was $100 per share and the denominator of which was 125%
of the offering price per share for the shares of Common Stock in an initial
public offering. In July 1996, the Company used $125,000 of the proceeds of
the July 1996 Offering to redeem the Series B Preferred Stock. In connection
with the redemption, Cyndel received warrants, exercisable for a period of
three years, to purchase 20,000 shares of Common Stock at an exercise price
of $7.00 per share.
PAYMENT OF DEFERRED OFFICERS' COMPENSATION
Each of Mr. Sarna and Mr. Febish, Co-Chief Executive Officers of the
Company, agreed to defer a portion of his salary for various periods through
1995 until the Company had sufficient working capital to pay them. As of
December 31, 1995, the Company owed Messrs. Sarna and Febish an aggregate of
$391,687, of which $200,000 was paid from the proceeds of the Bridge Loan
Offering, $100,000 was paid from the proceeds of the July 1996 Offering, and
the balance was paid from operating revenues. See "Management -- Executive
Compensation."
MERGER
The Company is the successor-in-interest to the assets, liabilities and
business of ObjectSoft-NJ, which was merged into the Company in January 1996.
The purpose of the Merger was to effect the change of the state of
incorporation of ObjectSoft-NJ. The directors determined that it was in the
best interests of the Company that the Company be re-incorporated in the
State of Delaware. The re-incorporation was effected by a migratory merger of
ObjectSoft New Jersey into the Company. The stockholders of ObjectSoft-NJ
were duly noticed and voted in favor of the Merger at a Special Meeting of
the Stockholders held on January 30, 1996. Each share of capital stock of
ObjectSoft-NJ was exchanged for a like share of capital stock of the Company
upon the effectiveness of the Merger.
EXTENSION OF EXPIRATION DATES OF INVESTOR AND OFFICER WARRANTS
The Company has extended to November 29, 1996 the expiration date of the
106,250 Investor Warrants, which were issued to investors in a private
placement effected between September 1992 and November 1993 in which the
investors acquired the Investor Warrants, the Series A Preferred Stock and
shares of Common Stock. The result is that certain of these warrants will
expire at a date which effectively makes them four year warrants instead of
three year warrants. The resale of the shares issuable upon the exercise of
the Investor Warrants has been registered in the Selling Securityholder
Prospectus. In addition, in consideration of their waiver of the registration
rights with respect to the Public Offering and their agreement to enter into
an 18 month lock-up agreement with the Representative, the expiration date of
the Officer Warrants held by Messrs. Sarna and Febish was extended to April
30, 2000. See "Description of Securities -- Outstanding Warrants and Options
- -- Officer/Stockholder Warrants" and "Plan of Distribution."
RECENT FINANCINGS
The Company recently completed two financings in the form of private
placements to "accredited investors." In April through June 1996, in the
Bridge Loan Offering, the Company sold 12.5 Bridge Units, each Bridge Unit
consisting of a $100,000 7% Note (the "Bridge Notes") and Bridge Warrants to
purchase 30,000 shares of Common Stock or such other securities as might be
offered in the Company's initial public offering. Assuming the Public
Offering is completed, the Bridge Warrants will be exercisable to purchase
Units identical to the Units offered in the Public Offering.
54
<PAGE>
Interest on the Bridge Notes is payable semi-annually commencing December
31, 1996, and the Bridge Notes will mature and be payable in full within
fourteen (14) days of the date of closing of the Public Offering or September
30, 1997, whichever is earlier. The Bridge Notes may be prepaid in whole or
in part at the option of the Company at any time prior to maturity.
The Bridge Notes are senior unsecured obligations of the Company and will
rank senior in right of payment to all future subordinated indebtedness of
the Company. Although the Bridge Notes are senior obligations of the Company,
the Company does not have any commitments to issue indebtedness to which the
Bridge Notes would be senior in right of payment. The Bridge Notes will be
effectively subordinated to all secured indebtedness of the Company.
The Bridge Warrants are exercisable at a price equal to 70% of the
offering price for securities offered in an initial public offering. The
Bridge Warrant component of each Bridge Unit provides for the purchase either
(i) if the Company completes an initial public offering ("IPO") on or before
September 30, 1997, 30,000 shares of Common Stock (the "Shares") or other
securities at 70% of the per share or other security price in the IPO
exercisable for a period of three (3) years (the "IPO Securities"), or (ii)
if the Company does not complete an IPO on or before September 30, 1997,
30,000 shares of Common Stock, exercisable until September 30, 1999 at $3.50
per share. The term of the Bridge Warrants if exercisable into IPO securities
shall be extended for an additional period, up to one (1) year, equal to the
period that lapses between September 30, 1996 and the consummation of the
Company's initial public offering on or before September 30, 1997. If the
Public Offering is completed prior to September 30, 1997, each such Bridge
Warrant will be exercisable to purchase 30,000 Units at $3.50 per Unit. The
Class A Warrants included in such Units will be identical to the Class A
Warrants included in the Units offered in the Public Offering in all
respects, including the exercise price. The Bridge Warrants have piggyback
registration rights pari passu with other warrant holders. In addition, if
the Bridge Warrants are not included in any registration statement, then the
holders of Bridge Warrants shall have the right to one demand registration,
at the cost of the Company, one year after the Company is public.
The Representative acted as the placement agent for the Bridge Loan
Offering and, in connection with its services as placement agent, received
commissions equal to 8% of the gross proceeds of the Bridge Loan Offering, a
non-accountable expense allowance equal to 2% of the gross proceeds and the
Placement Agent's Warrant to purchase a number of securities equal to 10% of
the number of securities issuable upon the exercise of the Bridge Warrants at
an exercise price equal to 100% of the offering price for securities offered
in an initial public offering. Assuming the Public Offering is completed, the
Placement Agent's Warrant will entitle the Representative to purchase 37,500
Units at an exercise price of $5.00 per Unit for a period of five years
commencing on the date of this Prospectus. The shares of Common Stock and the
Class A Warrants comprising the Units issuable upon the exercise of the
Bridge Warrants and the Placement Agent's Warrant have been registered for
resale pursuant to the registration statement of which this Prospectus is a
part. See "Selling Securityholders" and "Plan of Distribution."
In the July 1996 Offering, the Company sold an aggregate of 273,001 units
(the "July 1996 Units") for an aggregate of $955,504, or $3.50 per July 1996
Unit. Each July 1996 Unit consists of one share of Common Stock and one July
1996 Warrant to purchase two-thirds (2/3) of a share of Common Stock at an
exercise price of $3.00 per 2/3 share (or $4.50 per share). The July 1996
Warrants are exercisable until the later of July 30, 1999 or three years
after the date of this Prospectus (but in no event later than September 30,
2000).
Win Capital Corporation, an affiliate of Cyndel, a principal stockholder
of the Company, acted as the placement agent for the July 1996 Offering and,
in connection with its services as placement agent, received commissions
equal to 10% of the gross proceeds of the July 1996 Offering, a
non-accountable expense allowance equal to 3% of the gross proceeds and a
warrant to purchase 27,300 July 1996 Units at an exercise price of $4.50 per
July 1996 Unit for a period of three years commencing upon issuance (the
"July Placement Warrant"). The shares of Common Stock included in the July
1996 Units and the shares of Common Stock issuable upon the exercise of the
July 1996 Warrants contained therein, as well as the shares of Common Stock
issuable upon the exercise of the July Placement Warrant (and the July 1996
Warrants issuable upon the exercise thereof) have been registered for resale
pursuant to the registration statement of which this Prospectus is a part.
See "Principal Stockholders," "Selling Securityholders" and "Plan of
Distribution."
55
<PAGE>
REDEMPTION OF SERIES A PREFERRED STOCK
Pursuant to the terms of the Series A Preferred Stock, upon the closing of
the Public Offering, all shares of Series A Preferred Stock are required to
be redeemed at $1.00 per share plus all accumulated, but unpaid, dividends.
The Company anticipates that the redemption will require an aggregate
redemption payment of approximately $275,000.
DESCRIPTION OF SECURITIES
The Company is authorized to issue up to 20,000,000 shares of Common
Stock, par value $.0001 per share and up to 5,000,000 shares of Preferred
Stock, par value $.0001 per share.
UNITS
Each Unit consists of one share of Common Stock and one Class A Warrant.
The Units are immediately detachable and separately transferable upon
issuance.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on
all matters that are submitted to the stockholders for their approval and
have no cumulative voting rights. Subject to the prior rights of Preferred
Stock, the holders of Common Stock are entitled to receive dividends, if any,
as may be declared by the Board of Directors from funds legally available
therefor, from time to time. Upon liquidation or dissolution of the Company,
the remainder of the assets of the Company will be distributed ratably among
the holders of Common Stock, after the payment of all liabilities and the
holders of any Preferred Stock. The Common Stock has no preemptive or other
subscription rights and there are no conversion or sinking fund provisions
with respect to such shares. All of the outstanding shares of Common Stock
are, and the shares issuable upon exercise of Class A Warrants will be, upon
payment of the exercise price, fully paid and nonassessable. As of October
31, 1996, there were 2,566,001 shares of Common Stock outstanding.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors without the approval of the stockholders of the Company. The Board
of Directors is authorized to issue these shares in different classes and
series and, with respect to each class or series, to determine the dividend
rights, the redemption provisions, conversion provisions, liquidation
preferences and other rights and preferences not in conflict with the
Certificate of Incorporation of the Company or Delaware law. The Board of
Directors, without stockholder approval, could issue Preferred Stock which
would adversely affect the voting and other rights of the holders of Common
Stock.
The Company has issued a series of Preferred Stock designated Series A.
There are currently 212,500 shares of Series A Preferred Stock issued and
outstanding. The Series A Preferred Stock accrues cumulative annual
dividends, payable quarterly, at the rate of 9% per annum, based upon the
liquidation value. Upon the closing of the Public Offering, as required by
the terms of the Series A Preferred Stock, all of the Series A Preferred
Stock will be redeemed by the Company at $1.00 per share plus all accumulated
dividends accrued but unpaid. The Company anticipates that this redemption
will require an aggregate redemption payment of approximately $275,000, which
will be paid out of the net proceeds of the Public Offering. Following the
redemption, no Series A Preferred Stock will be outstanding.
The Company also issued a series of Preferred Stock designated Series B,
with a redemption and liquidation value of $100 per share and issued 1,250
shares of Series B Preferred Stock. The holders of the Series B Preferred
Stock had the right, for the period commencing upon the close of an initial
public offering through December 31, 1997, to convert all of the Series B
Preferred Stock into shares of Common Stock at a conversion price equal to
125% of the per share offering price of shares of Common Stock in an initial
public offering. The Series B Preferred Stock accrued cumulative annual
dividends, payable quarterly, at the rate of 10% per annum, based upon the
liquidation value. The Company was required, commencing in March 31, 1998,
and in each subsequent calendar quarter, to the extent that the shares of
Series B Preferred Stock had not been redeemed or converted, to redeem at the
liquidation value of $100 per share of Series B Preferred Stock, 12.5% of the
outstanding Series B Preferred Stock, until all of the shares of Series B
Preferred Stock had been redeemed. In July 1996, the Company used a portion
of the proceeds of the July 1996 Offering to redeem the Series B Preferred
Stock. See "Certain Transactions."
56
<PAGE>
CLASS A WARRANTS
Each Class A Warrant entitles the holder thereof to purchase one share of
Common Stock at an exercise price of $6.50 per share, subject to adjustment,
at any time commencing November 11, 1997 until November 11, 2001. The Class A
Warrants are redeemable by the Company at a price of $.10 per Class A Warrant
commencing November 11, 1997 (or earlier with the prior consent of the
Representative) on not less than 30 days prior written notice to the holders
thereof, provided the average closing bid quotation of the Common Stock as
reported on NASDAQ, if traded thereon, or if not traded thereon, the average
closing bid quotation of the Common Stock if listed on a national securities
exchange (or other reporting system that provides last sale prices), has been
at least 130% of the then current exercise price of the Class A Warrants
(initially, $8.45 per share), for a period of 20 consecutive trading days
ending within 15 days of the date on which the Company gives notice of
redemption. The Class A Warrants will be exercisable until the close of
business on the day immediately preceding the date fixed for redemption.
The Class A Warrants may be exercised upon surrender of the Class A
Warrant certificate on or prior to the expiration date at the offices of the
warrant agent, with the exercise form on the reverse side of the Class A
Warrant certificate completed and executed as indicated, accompanied by full
payment of the exercise price (by certified check or bank draft payable to
the Company) to the warrant agent for the number of Class A Warrants being
exercised. The Class A Warrant Holders do not have the rights or privileges
of holders of Common Stock.
No Class A Warrant will be exercisable unless at the time of exercise the
Company has filed a current registration statement with the Commission
covering the shares of Common Stock issuable upon exercise of such Class A
Warrant and such shares have been registered or qualified or deemed to be
exempt from registration or qualification under the securities laws of the
state of residence of the holder of such Class A Warrant. The Company will
use its best efforts to have all such shares so registered or qualified on or
before the exercise date and to maintain a current prospectus relating
thereto until the expiration of the Class A Warrants, subject to the terms of
the Warrant Agreement. While it is the Company's intention to do so, there
can be no assurance that it will be able to do so.
No fractional shares will be issued upon exercise of the Class A Warrants.
However, if a Warrant Holder exercises all Class A Warrants then owned of
record by him, the Company will pay to such Warrant Holder, in lieu of the
issuance of any fractional share which is otherwise issuable, an amount in
cash based on the market value of the Common Stock on the last trading day
prior to the exercise date.
Commencing November 11, 1997, until the expiration of the exercise period
of the Class A Warrants, the Company will pay the Representative a fee of 5%
of the exercise price of each Class A Warrant exercised, provided, (i) the
market price of the Common Stock on the date such warrant was exercised was
greater than the warrant exercise price on that date, (ii) the exercise of
such warrant was solicited by a member of the NASD, (iii) such warrant was
not held in a discretionary account, (iv) the disclosure of compensation
arrangements was made both at the time of the Public Offering and at the time
of exercise of such warrant, (v) the solicitation of the exercise of such
warrant was not a violation of Rule 10b-6 under the Exchange Act and (vi) the
Representative is designated in writing as the soliciting NASD member. Unless
granted an exemption from Rule 10b-6 by the Commission, the Representative
and any other soliciting broker/dealers will be prohibited from engaging in
any market making activities or solicited brokerage activities with regard to
the Company's securities during the periods prescribed by exemption (xi) to
Rule 10b-6 before the solicitation of the exercise of any Class A Warrant
until the later of the terminating of such solicitation activity or the
termination of any right the Representative and any other soliciting
broker/dealer may have to receive a fee for the solicitation of the Class A
Warrants.
OUTSTANDING WARRANTS AND OPTIONS
INVESTOR WARRANTS
There are currently outstanding warrants to purchase 106,250 shares of
Common Stock (the "Investor Warrants"). The Investor Warrants were issued in
connection with the Company's private placement of its securities
57
<PAGE>
in 1992 and 1993. The Investor Warrants are exercisable at $2.00 per share of
Common Stock. The expiration date of the Investor Warrants has been extended
to November 29, 1996. The Investor Warrants contain anti-dilution provisions
providing for adjustments of the exercise price and the number of shares
underlying the Investor Warrants upon the occurrence of certain events,
including any recapitalization, reclassification, consolidation, merger,
sale, lease or conveyance of all or substantially all of the assets of the
Company, stock dividend, stock split, stock combination or similar
transaction. The resale of the shares issuable upon the exercise of the
Investor Warrants has been registered in this Prospectus. See "Selling
Securityholders."
OFFICER/STOCKHOLDER WARRANTS; 1996 STOCK OPTION PLAN
In April 1993 the Company issued common stock warrants to purchase an
aggregate of 143,333 shares of Common Stock, exercisable at $.50 per share of
Common Stock (the "Officer Warrants"). The Officer Warrants were issued to
two executive officers and a former officer of the Company in consideration
of their foregoing salaries in 1992. The Officer Warrants contain
anti-dilution provisions providing for adjustments of the exercise price and
the number of shares underlying the Officer Warrants upon the occurrence of
certain events, including any recapitalization, reclassification,
consolidation, merger, sale, lease or conveyance of all or substantially all
of the assets of the Company, stock dividend, stock split, stock combination
or similar transaction. The holders of the Officer Warrants have the right to
cause the Company to register the Officer Warrants and the shares of Common
Stock issuable upon exercise of the Officer Warrants, if the Company
registers any of its securities on a registration statement filed with the
SEC for sale to the general public. The original expiration date of the
Officer Warrants was April 30, 1998. In consideration of their waiver of the
registration rights with respect to the Offering and their agreement to enter
into an 18 month lock-up agreement with the Representative, the expiration
date of the 100,000 Officer Warrants held by Messrs. Sarna and Febish was
extended to April 30, 2000. The resale of the shares issuable upon the
exercise of the other 43,333 Officer Warrants has been registered in this
Prospectus. See "Selling Securityholders."
In July 1996, in connection with the redemption of the Company's Series B
Preferred Stock, the Company issued to Cyndel, a principal stockholder of the
Company, warrants to purchase 20,000 shares of the Company's Common Stock at
an exercise price of $7.00 per share. These warrants expire on July 29, 1999
and contain anti-dilution provisions providing for adjustments of the
exercise price and the number of shares underlying such warrants upon the
occurrence of certain events, including any recapitalization,
reclassification, consolidation, merger, sale, lease or conveyance of all or
substantially all of the assets of the Company, stock dividend, stock split,
stock combination or similar transaction.
As of August 31, 1996, options to purchase an aggregate of 145,000 shares
had been granted under the Company's 1996 Stock Option Plan. See "Management
- -- 1996 Stock Option Plan."
CONSULTANT STOCK OPTIONS
In August 1995, the Company issued to a consultant of the Company the
right to acquire up to 100,000 shares of Common Stock, exercisable at $1.00
per share in consideration of the consultant foregoing the payment of up to
$10,000 for services rendered. On September 15, 1995, the consultant accepted
the offer. This option was exercisable at any time from the date of grant
until the fifth anniversary of the date of grant. In May 1996, the agreement
with the consultant was amended, and warrants for 50,000 shares were canceled
in consideration of a cash payment of $5,000.
The Company has also entered into agreements with other consultants
pursuant to which the Company issued to such consultants options to purchase
an aggregate of 10,000 shares of Common Stock exercisable for a period of
five years at an exercise price of $1.00.
PRIVATE PLACEMENT WARRANTS
The Company has outstanding 375,000 Bridge Warrants and July 1996 Warrants
to purchase 182,004 shares of Common Stock, as described in "Certain
Transactions -- Recent Financings," above.
58
<PAGE>
PLACEMENT AGENT'S WARRANT; JULY PLACEMENT WARRANT
with Bridge Loan Offering, the Company sold to the
Representative, in its capacity as Placement Agent of such offering, the
Placement Agent's Warrant to purchase a number of Units equal to 10% of Units
issuable upon the exercise of the Bridge Warrants contained in the Bridge
Units. The exercise price of the Placement Agent's Warrant is either (i) in
the event an IPO is completed on or before September 30, 1997, 100% of the
per IPO Security offering price exercisable commencing on or after the
consummation of a public offering and ending on the fifth anniversary thereof
or (ii) in the event an IPO is not completed on or before September 30, 1997,
$4.55, exercisable for five (5) years from the date of issuance. Assuming the
Public Offering is completed prior to September 30, 1997, the Placement
Agent's Warrant will be exercisable at a price of $5.00 per Unit. The
Placement Agent's Warrant contains anti-dilution provisions providing for
adjustments of the exercise price and the number of shares underlying the
Placement Agent's Warrant upon the occurrence of certain events, including
any recapitalization, reclassification, stock dividend, stock split, stock
combination or similar transaction. None of the securities underlying the
Placement Agent's Warrant will be redeemable. The Placement Agent's Warrant
grants the holders thereof certain registration rights which are described
below.
In connection with the sale of the July 1996 Units, the placement agent
for such sale, Win Capital Corporation, was granted the July Placement
Warrant to purchase 27,300 July 1996 Units at an exercise price of $4.50 per
July 1996 Unit. The July Placement Warrant contains anti-dilution provisions
providing for adjustments of the exercise price and the number of shares
underlying the July Placement Warrant upon the occurrence of certain events,
including any recapitalization, reclassification, stock dividend, stock
split, stock combination or similar transaction. None of the securities
underlying the July Placement Warrant will be redeemable, and the holders of
the July Placement Warrant have certain registration rights, described below.
The resale of the shares of Common Stock issuable upon the exercise of the
Placement Agent's Warrant and the Class A Warrants issuable upon the exercise
thereof, as well as the resale of the shares of Common Stock issuable upon
the exercise of the July Placement Warrant and the July 1996 Warrants
issuable upon the exercise thereof, has been registered for sale in this
Prospectus. See "Description of Securities -- Registration Rights" and
"Selling Securityholders."
REGISTRATION RIGHTS
Currently, the holders of the Bridge Warrants, the July 1996 Warrants and
the Officer Warrants, as well as the holders of the shares of Common Stock
issued in the July 1996 Offering, have certain rights with respect to the
registration of such shares and the Units and shares of Common Stock issuable
upon the exercise of such warrants under the Securities Act. Under the terms
of the agreements between the Company and the holders of such registrable
securities, if the Company proposes to register any of its securities under
the Securities Act, either for its own account or for the account of other
security holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein. The stockholders benefiting from these rights may also require
the Company to file a registration statement under the Securities Act at its
expense with respect to their shares of Common Stock, and the Company is
required to use its best efforts to effect such registration. All of these
rights are subject to certain conditions and limitations, among them the
right of the underwriters of an offering to limit the number of shares
included in such registration.
The holders of the Common Stock issuable upon exercise of the Placement
Agent's Warrant have rights similar to those described in the preceding
paragraph. In addition, the right to notice and inclusion in any registration
statement filed by the Company is effective for five years after the
effective date of an initial public offering. The right to demand the
registration of the Common Stock issuable upon exercise of the Placement
Agent's Warrant extends from one year after the closing of the Public
Offering to the fifth (5th) anniversary of the date of the prospectus
utilized in the Public Offering. The holders of the July Placement Warrants
have similar registration rights, except that the right to demand the
registration of Common Stock issuable upon exercise of the July Placement
Warrants extends from two years after the closing of the Public Offering to
the fifth (5th) anniversary of the date of the prospectus utilized in the
Public Offering.
59
<PAGE>
The Units and certain of the shares of Common Stock subject to
registration rights have been registered in this Prospectus. Certain of the
Selling Securityholders have agreed not to sell such shares for periods of
nine or 12 months following the date of this Prospectus without the prior
consent of the Representative. See "Shares Eligible for Future Sale" and
"Selling Securityholders."
TRANSFER AGENT AND WARRANT AGENT
Continental Stock Transfer & Trust Company, New York, New York will act as
transfer agent for the Units and the Common Stock and Warrant Agent for the
Class A Warrants.
DELAWARE TAKEOVER STATUTE AND CERTAIN CHARTER PROVISIONS
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the Board of Directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned
(x) by persons who are directors and also officers and (y) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or subsequent to such date, the
business combination is approved by the Board of Directors and authorized at
an annual or special meeting of stockholders, and not by written consent, by
the affirmative vote of at least 66 2/3 % of the outstanding voting stock
which is not owned by the interested stockholder.
In anticipation of, and subject to completion of, the Public Offering, the
stockholders of the Company have approved an amendment to the Company's
Certificate of Incorporation which provides that the directors of the Company
be classified into two classes as nearly equal in size as possible, with
staggered two-year terms. Assuming the initial public offering occurs in
1996, the initial term of office of the first class of directors to expire at
the 1997 Annual Meeting of Stockholders and the initial term of office of the
second class of directors to expire at the 1998 Annual Meeting of
Stockholders. The Company's Certificate of Incorporation will further provide
that vacancies on the Board of Directors could be filled only with the
approval of a majority of the Board of Directors then in office. Furthermore,
any director elected by the stockholders, or by the Board of Directors to
fill a vacancy, could be removed only for cause and by a vote of 75% of the
combined voting power of the shares of Common Stock entitled to vote for the
election of directors, voting as a single class.
The Company's Certificate of Incorporation and Amended and Restated
Bylaws, after the closing of an initial public offering, will provide that
any action required or permitted to be taken by the stockholders of the
Company may be taken only at a duly called annual or special meeting of the
stockholders. These provisions, if adopted, could have the effect of delaying
until the next stockholders meeting stockholder actions which are favored by
the holders of a majority of the outstanding voting securities of the
Company, since special meetings of stockholders may be called only by (x) the
Board of Directors pursuant to a resolution adopted by a majority of the
entire Board of Directors, either upon motion of a director or upon written
request by the holders of at least 50% of the voting power of all the shares
of capital stock of the Corporation then entitled to vote generally in the
election of directors, voting together as a single class, or (y) the chairman
or the president of the Corporation.
The foregoing provisions, which could be amended only by a 75% vote of the
stockholders, could have the effect of making it more difficult for a third
party to effect a change in the control of the Board of Directors. In
addition, these provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from
attempting to acquire, an interest in the Company which constitutes less than
a majority of the outstanding voting stock of the Company and may make more
difficult or discourage a takeover of the Company.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Public Offering, the Company will have 3,816,001
outstanding shares of Common Stock (assuming no exercise of outstanding
options or warrants). Of these shares, the 1,250,000 shares contained in the
Units being sold to the public in the Public Offering will be freely
tradeable without restrictions or further registration under the Securities
Act, except for any shares held by "affiliates" of the Company within the
meaning of the Securities Act, which will be subject to the resale
limitations of Rule 144. The remaining 2,566,001 shares held by existing
stockholders were issued by the Company in private transactions in reliance
upon one or more exemptions under the Securities Act, are "restricted
securities" as that term is defined in Rule 144 promulgated under the
Securities Act and may be sold in compliance with such Rule, pursuant to
registration under the Securities Act or pursuant to an exemption therefrom.
Generally, under Rule 144, each person holding restricted securities for a
period of two years may, every three months after such two-year holding
period, sell in ordinary brokerage transactions or to market makers an amount
of shares equal to the greater of one percent of the Company's then
outstanding Common Stock or the average weekly trading volume during the four
weeks prior to the proposed sale. In addition, sales under Rule 144 may be
made only through unsolicited "broker's transactions" or to a "market maker"
and are subject to various other conditions. The limitation on the number of
shares which may be sold under the Rule and the "broker's transaction"
requirement do not apply to restricted securities sold for the account of a
person who is not and has not been an "affiliate" of the Company (as that
term is defined in the Act) during the three months prior to the proposed
sale and who has beneficially owned the securities for at least three years.
Under Rule 701 of the Securities Act, employees who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled
to sell such shares after the 90th day following the date of this Prospectus
in reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having
to comply with the public information, volume limitation or notice provisions
of Rule 144. Affiliates are subject to all Rule 144 restrictions after this
90-day period, but without the Rule 144 holding period requirement. If all
the requirements of Rule 701 are met, an aggregate of 288,333 shares of
Common Stock issuable on exercise of outstanding vested stock options will be
tradeable pursuant to such rule, subject to the lockup period described
below. Such options are exercisable at prices below the initial public
offering price of the Units.
Prior to the Public Offering, there has been no market for the Common
Stock, and no predictions can be made as to the effect, if any, that sales of
shares under Rule 144 or Rule 701 or the availability of shares for sale will
have on the market prices prevailing from time to time. Sales of substantial
amounts of Common Stock pursuant to Rule 144 could subsequently adversely
affect the market prices of the Common Stock. The Company's executive
officers, David E. Y. Sarna and George J. Febish, and the Family Trusts have
agreed not to sell or otherwise transfer any of their securities in the
Company for a period of 18 months after the date of this Prospectus without
the prior written consent of the Representative, and they have agreed with
various state securities administrators not to sell (other than in a pledge
or hypothecation) any of their shares of Common Stock for a period ending on
the second anniversary of the execution date of the City Agreement. At the
request of the Representative, the Company has attempted to obtain agreements
from the other current securityholders, who hold 718,000 shares of Common
Stock and 169,583 warrants (including the Investor Warrants and certain
Officer Warrants), not to sell any of their shares of Common Stock for a
period of nine months after the date of this Prospectus without the prior
written consent of the Representative. Through November 11, 1996, the Company
has obtained such agreements from the holders of 580,500 shares of Common
Stock and 150,833 warrants. Upon the expiration of the nine month period,
612,000 of the outstanding shares of Common Stock will be eligible for sale
under Rule 144, and the balance of the outstanding shares will become
eligible for sale under Rule 144 from time to time thereafter. In addition,
concurrently with the Public Offering, the Company is registering for sale by
the Selling Securityholders 1,142,088 shares of Common Stock and 412,500
Class A Warrants that are outstanding or issuable upon the exercise of
currently exercisable warrants; however, the Selling Securityholders other
than the Representative and holders intended to be subject to the nine month
agreements with the Representative described above, have agreed not to sell
their registered securities for a period of 12 months after the date of this
Prospectus without the prior written consent of the Representative (which
consent cannot be given for sales during the period of six months after the
date of this Prospectus, pursuant to a requirement of NASDAQ), and the
holders of 81,250 of the Investor Warrants, 43,333 of the Officer Warrants
and 38,000 shares
61
<PAGE>
of Common Stock have agreed not to sell their registered securities for a
period of nine months from the date of the Prospectus without the consent of
the Representative. Furthermore, certain holders of the Company's outstanding
Common Stock, warrants and options (including current and former executive
officers) have "piggyback" registration rights and/or demand registration
rights that they may exercise commencing one year from the date of this
Prospectus (but commencing two years from the date of this Prospectus with
respect to the July Placement Warrants). See "Risk Factors -- Shares Eligible
for Future Sale; Effect on Ability to Raise Capital; No Prior Public Market
for the Common Stock; Possible Volatility of Common Stock Price" and "Plan of
Distribution."
PLAN OF DISTRIBUTION
The sale of the Selling Securityholder Securities by the Selling
Securityholders may be effected from time to time in transactions (which may
include block transactions by or for the amount of the Selling
Securityholders) in the over-the-counter market or in negotiated
transactions, through the writing of options on the securities, a combination
of such methods of sale or otherwise. Sales may be made at fixed prices which
may be changed, at market prices prevailing at the time of sale or at
negotiated prices.
The Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents
for the Selling Securityholders or to broker-dealers who may purchase shares
as principals and thereafter sell the securities from time to time in the
over-the-counter market in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders or the purchasers
for whom such broker-dealers may act as agents or to whom they may sell as
principals or otherwise (which compensation as to a particular broker-dealer
may exceed customary commissions). The Selling Securityholders may, but are
not obligated to, effect transaction through or to Renaissance.
Each Selling Securityholder, other than Renaissance and holders of 41,500
shares of Common Stock and 25,000 Investor Warrants, has agreed not to sell,
transfer or otherwise dispose publicly of the Selling Securityholder
Securities for a period of 12 months (or nine months, in the case of the
holders of 81,250 of the Investor Warrants, 43,333 of the Officer Warrants
and 38,000 shares of Common Stock) after the date of this Prospectus without
the prior written consent of Renaissance in its capacity as representative,
which consent can be given for sales of Selling Securityholder Securities
subject to the 12 month agreements beginning six months after the date of
this Prospectus.
Under applicable rules and regulations under the Securities Exchange Act
of 1934 ("Exchange Act"), any person engaged in the distribution of the
Selling Securityholder Warrants may not simultaneously engage in market
making activities with respect to any securities of the Company during the
applicable "cooling-off" period (at least two, and possibly nine, business
days) prior to the commencement of such distribution. Accordingly, in the
event Renaissance is engaged in a distribution of Selling Securityholder
Securities, it will not be able to make a market in the Company's securities
during the applicable restrictive period. In addition, each Selling
Securityholder desiring to sell Selling Securityholder Securities will be
subject to the applicable provisions of the Exchange Act and the rules and
regulations thereunder, including without limitation, Rules 10b-6 and 10b-7,
which provisions may limit the timing of the purchases and sales of shares of
the Company's securities by such Selling Securityholders.
The Selling Securityholders and broker-dealers, if any, acting in
connection with such sale might be deemed to be underwriters within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of the securities might be deemed to be
underwriting discounts and commissions under the Securities Act.
CONCURRENT PUBLIC OFFERING
On the date of this Prospectus, a Registration Statement was declared
effective under the Securities Act with respect to an underwritten offering
by the Company of 1,250,000 Units by the Company and up to 187,500 additional
Units to cover over-allotments, if any. The initial offering price of the
Units in the Public Offering was $5.00, and the securities offered in the
underwritten offering were identical to the securities being offered by
certain Selling Securityholders pursuant to this Prospectus.
62
<PAGE>
Renaissance, a Selling Securityholder, acted as Representative of the
Underwriters of the Public Offering and, in connection therewith, was granted
an option (the "Representative's Unit Purchase Option") to purchase up to
87,500 Units at an exercise price equal to 160% of the initial public
offering price of the Units sold in the Public Offering. The Class A Warrants
included in the Units issuable upon the exercise of the Representative's Unit
Purchase Option will not be redeemable by the Company and will be exercisable
at a price equal to 160% of the exercise price of the Class A Warrants
included in the Units offered in the Public Offering.
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon
for the Company by Parker Chapin Flattau & Klimpl, LLP, New York, New York.
Melvin Weinberg, Esq., a partner of Parker Chapin Flattau & Klimpl, LLP, may
be deemed the beneficial owner of 300,000 shares of Common Stock as a result
of his being a trustee of each of the Family Trusts.
EXPERTS
The financial statements of the Company as at December 31, 1995 and for
each of the two years in the period then ended included in this Prospectus
have been so included in reliance on the report of Richard A. Eisner &
Company, LLP, independent auditors, given on the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Act of 1933, with
respect to the securities offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and such securities, reference is made to the Registration Statement
and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete, and, in each instance, if such contract
or document is an exhibit to the Registration Statement, reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects
by such reference to such exhibit. The Registration Statement, including
exhibits and schedules thereto, may be inspected without charge and copied at
the public reference facilities of the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. and at its Regional Offices at 7 World Trade
Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of such
material may be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of fees at
rates prescribed by the Commission. Electronic registrations statements made
through the Electronic Data Gathering Analysis and Retrieval ("EDGAR") System
are publicly available through the Commission's Website (http://www.sec.gov).
Prior to the Public Offering, the Company has not been subject to the
reporting requirements of the Exchange Act.
The Company will provide without charge to each person who receives this
Prospectus, upon written or oral request of such person, a copy of any of the
information that is incorporated by reference in this Prospectus. Any such
request should be directed to the attention of the Corporate Secretary,
ObjectSoft Corporation, Continental Plaza III, 433 Hackensack Avenue,
Hackensack New Jersey 07601, telephone number (201) 343-9100.
63
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Report of Independent Auditors .................................................................. F-2
Pro Forma Balance Sheet as at June 30, 1996 (Unaudited); Balance Sheet as at June 30, 1996
(Unaudited) and December 31, 1995 .............................................................. F-3
Statements of Operations for the Six Months Ended June 30, 1996 and 1995 (Unaudited) and the
Years Ended December 31, 1995 and 1994 ......................................................... F-4
Statements of Changes in Capital Deficiency for the Six Months Ended June 30, 1996 (Unaudited)
and the Years ended December 31, 1995 and 1994 ................................................. F-5
Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995 (Unaudited) and the
Years ended December 31, 1995 and 1994 ......................................................... F-6
Notes to Financial Statements ................................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
ObjectSoft Corporation
We have audited the accompanying balance sheet of ObjectSoft Corporation
as at December 31, 1995 and the related statements of operations, changes in
capital deficiency and cash flows for each of the two years in the period
then ended. 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 enumerated above present fairly,
in all material respects, the financial position of ObjectSoft Corporation as
at December 31, 1995 and the results of its operations and cash flows for
each of the two years in the period then ended, in conformity with generally
accepted accounting principles.
Florham Park, New Jersey
March 2, 1996
With respect to Note M
August 15, 1996
F-2
<PAGE>
OBJECTSOFT CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1996 December 31, 1995
--------------- --------------- -----------------
Pro Forma (Unaudited)
A S S E T S (Note M[1])
<S> <C> <C> <C>
Current assets:
Cash .................................................. $ 1,015,344 $ 424,059 $ 63,995
Accounts receivable, less allowance for doubtful
accounts of $16,200 at December 31, 1995 (Note A[4]) 226,397 226,397 72,602
Prepaid expenses and other current assets ............. 12,420 12,420 26,579
--------------- --------------- -----------------
Total current assets ............................... 1,254,161 662,876 163,176
Equipment, at cost, net of accumulated depreciation
(Notes A[2], B and E) ................................. 158,854 158,854 23,433
Capitalized software and courseware (Notes A[5] and C) .. 191,834 191,834 121,326
Other assets (Note F) ................................... 93,596 93,596 35,599
--------------- --------------- -----------------
TOTAL ............................................ $ 1,698,445 $ 1,107,160 $ 343,534
=============== =============== =================
L I A B I L I T I E S
Current liabilities:
Current portion of obligations under capital lease
(Note E) ........................................... $ 10,839 $ 10,839 $ 9,210
Accounts payable ...................................... 150,994 150,994 58,314
Accrued and other liabilities ......................... 62,972 62,972 94,255
Accrued officer compensation (Note A[1]) .............. 91,687 191,687 391,687
--------------- --------------- -----------------
Total current liabilities ........................ 316,492 416,492 553,466
--------------- --------------- -----------------
Noncurrent liabilities:
Note payable (Note D) ................................. 1,058,738 1,058,738
Obligations under capital lease (Note E) .............. 19,205 19,205 3,390
Other liabilities ..................................... 7,110 7,110 1,616
--------------- --------------- -----------------
Total noncurrent liabilities ..................... 1,085,053 1,085,053 5,006
--------------- --------------- -----------------
Preferred stock $.0001 par, authorized 5,000,000 shares:
Series A, 9% cumulative voting; issued and outstanding
212,500 shares ($212,500 aggregate liquidation
preference plus cumulative dividends) (Note G) ..... 268,469 268,469 258,906
Series B, 10% cumulative non-voting convertible; 1,250
shares issued and outstanding ($125,000 aggregate
liquidating preference) (Notes G and M) ............ 125,000 125,000
--------------- --------------- -----------------
268,469 393,469 383,906
--------------- --------------- -----------------
Commitments (Notes K and L)
S T O C K H O L D E R S' E Q U I T Y /
(C A P I T A L D E F I C I E N C Y)
(Note H)
Common stock, $.0001 par, authorized 20,000,000 shares
issued and outstanding 2,293,000 shares and (pro forma)
2,566,001 shares ...................................... 257 229 229
Additional paid-in capital .............................. 1,222,113 405,856 278,331
Accumulated deficit ..................................... (1,193,939) (1,193,939) (877,404)
--------------- --------------- -----------------
Total stockholders' equity (capital deficiency) .. 28,431 (787,854) (598,844)
--------------- --------------- -----------------
TOTAL ............................................ $ 1,698,445 $ 1,107,160 $ 343,534
=============== =============== =================
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE>
OBJECTSOFT CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
----------------------------- -----------------------------
1996 1995 1995 1994
------------- ------------ ------------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues (Note L):
Consulting .................... $ 258,000 $ 282,562 $ 447,976 $ 509,920
Development and training ...... 37,954 97,900 118,618 245,836
------------- ------------ ------------- ------------
Total revenues ............. 295,954 380,462 566,594 755,756
------------- ------------ ------------- ------------
Costs and Expenses:
Cost of services .............. 256,720 244,542 429,604 571,969
Research and development ...... 62,863
General and administrative .... 249,160 147,763 193,025 225,430
Interest ...................... 90,796 1,955 3,502 3,861
------------- ------------ ------------- ------------
Total costs and expenses ... 596,676 394,260 688,994 801,260
------------- ------------ ------------- ------------
NET (LOSS) (Note I) ............. $ (300,722) $ (13,798) $ (122,400) $ (45,504)
============= ============ ============= ============
Net loss per share .............. $ (0.11) $ (0.01) $ (0.05) $ (0.02)
============= ============ ============= ============
Weighted average number of shares
outstanding ................... 2,800,734 2,797,134 2,797,134 2,797,134
============= ============ ============= ============
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-4
<PAGE>
OBJECTSOFT CORPORATION
STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-in
Shares Amount Capital (Deficit) Total
----------- -------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 ......... 2,275,000 $228 $255,332 $ (671,250) $(415,690)
Accretion of dividends on the
Series A preferred stock ........ (19,125) (19,125)
Net loss ......................... (45,504) (45,504)
----------- -------- ------------ -------------- ------------
Balance, December 31, 1994 ....... 2,275,000 228 255,332 (735,879) (480,319)
Accretion of dividends on the
Series A preferred stock ........ (19,125) (19,125)
Series B preferred stock issuance
costs (Note G[2]) ............... (2,500) (2,500)
Common stock issued, net of costs 18,000 1 15,499 15,500
Compensatory option granted (Note
H) .............................. 10,000 10,000
Net loss ......................... (122,400) (122,400)
----------- -------- ------------ -------------- ------------
Balance, December 31, 1995 ....... 2,293,000 229 278,331 (877,404) (598,844)
Warrants issued in connection with
bridge loan, net of costs
(Note D) ........................ 123,525 123,525
Compensatory warrants granted
(Note H) ........................ 4,000 4,000
Accretion of dividends on the
Series A preferred stock ........ (9,563) (9,563)
Dividends declared on the Series B
preferred stock ................. (6,250) (6,250)
Net loss (unaudited) ............. (300,722) (300,722)
----------- -------- ------------ -------------- ------------
BALANCE, JUNE 30, 1996 (Unaudited) 2,293,000 $229 $405,856 $(1,193,939) $(787,854)
=========== ======== ============ ============== ============
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE>
OBJECTSOFT CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------------------- ----------------------------
1996 1995 1995 1994
------------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) .................................. $ (300,722) $ (13,798) $(122,400) $ (45,504)
Adjustments to reconcile net loss to net cash
provided by (used in) operating
activities:
Depreciation and amortization ............ 52,719 24,092 58,056 35,244
Amortization of discount on note payable . 77,263
Provision for doubtful accounts .......... 9,000 16,200
Stock options issued for services rendered 4,000 10,000
Changes in operating assets and
liabilities:
(Increase) decrease in:
Accounts receivable ................. (137,795) 66,254 67,091 (102,953)
Prepaid expenses and other current
assets ............................ 14,159 (37,117) 6,311 (1,028)
Other assets ........................ (8,961) 34,587 34,587 (175)
Increase (decrease) in:
Accounts payable .................... 92,680 (30,188) (48,332) 82,832
Accrued and other liabilities ....... (28,914) (104,073) (28,574) 104,100
Accrued officer compensation ........ (200,000) 58,333 107,220
------------- ------------ ------------ ------------
Net cash provided by (used in)
operating activities .............. (426,571) (1,910) 100,159 72,516
------------- ------------ ------------ ------------
Cash flow from investing activities:
Capital expenditures ........................ (126,258) (399)
Capitalized software and courseware ......... (109,684) (118,478) (60,757)
------------- ------------ ------------
Net cash (used in) investing
activities ........................ (235,942) (118,478) (61,156)
------------- ------------ ------------
Cash flow from financing activities:
Proceeds from note payable .................. 981,475
Proceeds from issuance of shares and options
(Note G[2]) .............................. 113,000
Proceeds from issuance of warrants (Note D) . 123,525
Deferred offering costs ..................... (74,036) (30,250)
Dividends ................................... (3,125)
Principal payments on obligations under
capital leases ........................... (5,262) (3,816) (7,928) (4,663)
------------- ------------ ------------ ------------
Net cash provided by (used in)
financing activities .............. 1,022,577 (3,816) 74,822 (4,663)
------------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH ............... 360,064 (5,726) 56,503 6,697
Cash, beginning of period ..................... 63,995 7,492 7,492 795
------------- ------------ ------------ ------------
CASH, END OF PERIOD ........................... $ 424,059 $ 1,766 $ 63,995 $ 7,492
============= ============ ============ ============
Supplemental disclosures of cash flow
Cash paid during the period:
Interest expense ............................ $ 1,512 $ 1,955 $ 3,502 $ 3,861
============= ============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-6
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1996 and the six months
ended June 30, 1996 and June 30, 1995 is unaudited)
(NOTE A) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
[1] THE COMPANY:
ObjectSoft Corporation (the "Company") is currently engaged in the
business of providing transaction based services over the Internet and
through kiosks, computer software training and consulting.
In January 1996, ObjectSoft Corporation, a New Jersey corporation merged
into a newly formed corporation, ObjectSoft Corporation, a Delaware
corporation. In conjunction with the merger, shares of the preferred and
common stock outstanding were exchanged for the same number of shares of
stock, the shares authorized increased to 5,000,000 preferred and 20,000,000
common and the par value was reduced to $.0001. This transaction is given
retroactive effect in the accompanying financial statements.
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate continuation
of the Company as a going concern. However, the Company sustained substantial
operating losses through June 30, 1996. The officer/shareholders of the
Company have agreed not to demand payment of their accrued compensation until
there is sufficient working capital. Upon the sale of the Bridge Units (see
Note D), $200,000 of the accrued officer compensation was paid.
Prior period financial statements have been reclassified to conform to the
present period presentation.
[2] EQUIPMENT:
Equipment is carried at cost, less accumulated depreciation. Depreciation
is provided using the straight-line method over estimated useful lives of the
assets (three to seven years).
[3] PROVISION FOR INCOME TAXES:
Deferred income taxes arise from temporary differences resulting primarily
from income and expense items being reported on an accrual basis for
financial reporting purposes and on a cash basis for tax purposes,
capitalized software and net operating loss carryforwards. The Company has
available at December 31, 1995, Federal net operating loss carryforwards of
approximately $350,000 which may be applied against future taxable income
through 2010. Upon consummation of the proposed initial public offering, the
Company may be subject to limitations on its use of the net operating loss
carryforwards.
[4] SOFTWARE REVENUE RECOGNITION POLICIES:
The Company is engaged as a developer in a number of software
transactions. Generally, revenue from generic software is recognized upon
delivery of the software. After the sale, if significant obligations remain
or significant uncertainties exist about customer acceptance of the software,
revenue is deferred until the obligations are satisfied or the uncertainties
are resolved. Revenue from software services is recognized as the services
are performed. Revenue from software leased through the Internet (generally
one year) is deferred and amortized over the lease term. Revenue from custom
software development (included in consulting revenue) is recognized based
upon its percentage completion. At June 30, 1996, $120,000 of unbilled
receivables was included in accounts receivable.
[5] SOFTWARE AND COURSEWARE DEVELOPMENT COSTS:
The Company capitalizes software development costs when project
technological feasibility is established and concluding when the project is
ready for release. Research and development costs related to software
development are expensed as incurred. Software development costs are
amortized on a straight-line basis over its expected life.
F-7
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1996 and the six months
ended June 30, 1996 and June 30, 1995 is unaudited) - (Continued)
(NOTE A) -- Summary of Significant Accounting Policies: - (Continued)
[5] SOFTWARE AND COURSEWARE DEVELOPMENT COSTS: -- (CONTINUED)
The Company capitalizes incremental costs associated with courseware
development which has an estimated economic life of more than one year (not
material through June 30, 1996). The courseware development costs are
amortized on a straight-line basis over its expected life.
[6] 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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.
The Company's policy is to amortize capitalized software costs by the
greater of (a) the ratio that current gross revenues for a product bears to
the total of current and anticipated future gross revenues for that product
or (b) the straight-line method over the remaining estimated economic life of
the product including the period being reported on. It is reasonably possible
that those estimates of anticipated future gross revenues, the remaining
economic useful life of the product or both will be reduced in the near term.
[7] STOCK OPTIONS:
The Company accounts for employee stock options using the intrinsic value
method. Options granted to nonemployees in exchange for services are
accounted for based upon the value of the services received.
[8] NET LOSS PER SHARE:
Net loss per share was computed based on the weighted average number of
shares of common stock outstanding during the year and the net loss increased
by the dividends accruing on the cumulative preferred stock. Since, in 1995
and 1996, certain shares of common stock and common stock equivalents were
issued at less than the anticipated offering price of the proposed initial
public offering, all such shares of common stock were considered outstanding
for all periods presented in accordance with certain rules of the Securities
and Exchange Commission. Fully diluted net loss per share is not shown since
it would be anti-dilutive.
In July 1996, the Company issued units consisting of common stock and
warrants (see Note M[1]) and utilized $125,000 of the proceeds to redeem the
Series B preferred stock. Additionally, the Company anticipates redeeming the
Series A preferred stock and repaying the short term debt with proceeds from
the proposed initial public offering. Had the Series A preferred been retired
on January 1, 1995, the Series B preferred stock not been issued on December
31, 1995 nor the short term debt initiated in 1996 and had the Company issued
common stock instead, the net loss per share for the year ended December 31,
1995 and the six months ended June 30, 1996 would have been $(0.04) and $
(0.07). These loss per share computations assume an additional weighted
average number of shares outstanding for the year ended December 31, 1995 and
the six months ended June 30, 1996 of 50,377 and 129,270, respectively.
[9] INTERIM FINANCIAL STATEMENTS:
The accompanying interim financial statements at June 30, 1996 and for the
six months ended June 30, 1996 and 1995 are unaudited. However, in the
opinion of management, all adjustments (consisting solely of normal recurring
adjustments) necessary to be in conformity with generally accepted accounting
principles have been made.
The results of operations and cash flows for the six months ended June 30,
1996 are not necessarily indicative of the results that may be expected for
the full year ending December 31, 1996.
F-8
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1996 and the six months
ended June 30, 1996 and June 30, 1995 is unaudited) - (Continued)
(NOTE B) -- EQUIPMENT:
At June 30, 1996 and December 31, 1995, equipment consists of:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- --------------
<S> <C> <C>
Kiosks under construction ... $107,436
Equipment .................. 114,113 72,585
---------- --------------
221,549 72,585
Accumulated depreciation .... 62,695 49,152
---------- --------------
Total .................... $158,854 $23,433
========== ==============
</TABLE>
Depreciation expense aggregated $13,543, $9,787, $19,573 and $15,818, for
the six months ended June 30, 1996 and 1995 and the years ended December 31,
1995 and 1994, respectively. Included in depreciation expense is depreciation
expense on equipment under capital lease which aggregated $5,657, $4,198,
$8,396 and $4,198, for the six months ended June 30, 1996 and 1995 and the
years ended December 31, 1995 and 1994, respectively.
In 1996 and 1994, the Company acquired equipment under capital lease
aggregating $22,706 and $25,188, respectively.
Kiosks under construction represents equipment acquired for the City of
New York agreement (see Note K[1]). This equipment is expected to be put into
service in August 1996.
(NOTE C) -- CAPITALIZED SOFTWARE AND COURSEWARE:
The Company developed software which is leased under annual subscriptions
through the Internet. During 1995, the Company capitalized software
development costs of $118,478. Amortization of capitalized software costs
aggregated $9,873 and $29,620 for the year ended December 31, 1995 and six
months ended June 30, 1996, respectively. During 1996, the Company has
capitalized additional software development costs of $109,684. Additionally
amortization of capitalized courseware costs aggregated $9,556, $14,305,
$28,610 and $19,426 for the six months ended June 30, 1996 and June 30, 1995
and for the years ended December 31, 1995 and 1994, respectively.
(NOTE D) -- FINANCING:
In 1996, the Company sold 12.5 bridge units, each consisting of a
$100,000, 7% note and warrants to purchase 30,000 shares of common stock or
such other securities as might be offered in the Company's initial public
offering ("IPO Securities"). The notes are due on the earlier of fourteen
days of closing of the initial public offering ("IPO") or September 30, 1997.
Additionally, the placement agent received a warrant to purchase 37,500
shares of common stock or IPO Securities.
The Company valued the warrants at $138,750. Accordingly, additional
paid-in capital has been credited $123,525 which represents the value of the
warrants less the allocable portion of the offering costs. The short- term
note has been discounted by the value of the warrants and the offering costs.
The discount is being amortized as additional interest expense from the date
of issuance to September 30, 1996, the anticipated maturity date. If the IPO
is completed by September 30, 1997, the bridge unit warrants are exercisable
into the IPO Securities at 70 percent of the offering price or, if the IPO is
not completed by then, into common stock at $3.50 per share. These warrants
expire September 30, 1999 if the IPO is not completed by September 30, 1997
or, if the IPO is completed by then, they expire three years after completion
of the IPO. If the IPO is completed by Sep-
F-9
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1996 and the six months
ended June 30, 1996 and June 30, 1995 is unaudited) - (Continued)
(NOTE D) -- Financing: - (Continued)
tember 30, 1997, the placement agent warrants are exercisable into IPO
Securities at 100 percent of the offering price or, if the IPO is not
completed by then, into the common stock at $4.55 per share. These warrants
expire from April 2001 through June 2001 if the IPO is not completed by
September 30, 1997 or, if IPO is completed, they expire five years after its
completion.
During the six months ended June 30, 1996, amortization aggregated
$77,263.
(NOTE E) -- OBLIGATIONS UNDER CAPITAL LEASE:
Minimum future lease payments under capital leases expiring through 2001,
as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
Twelve
Months
Ending
June 30, Amount
---------- ----------
<S> <C>
1997 ........................................................... $16,527
1998 ........................................................... 8,210
1999 ........................................................... 7,950
2000 ........................................................... 5,080
2001 ........................................................... 4,657
----------
42,424
Less amount representing interest ................................. 12,380
----------
Present value of net minimum lease payments ....................... 30,044
Less present value of net minimum lease payments due within one
year ............................................................. 10,839
----------
$19,205
==========
</TABLE>
Minimum future lease payments under capital leases as of December 31, 1995
are as follows:
<TABLE>
<CAPTION>
Year
Ending
December31,
-----------
<S> <C>
1996 ............................................................ $10,488
1997 ............................................................ 3,496
---------
13,984
Less amount representing interest ................................. 1,384
---------
Present value of net minimum lease payments ....................... 12,600
Less present value of net minimum lease payments due within one
year ............................................................. 9,210
---------
$ 3,390
=========
</TABLE>
(NOTE F) -- DEFERRED OFFERING COSTS:
The Company has incurred $79,286 of incremental costs in connection with a
proposed initial public offering of its common stock. Upon consummation of
the offering, the deferred offering costs will be charged against the gross
proceeds of the offering or, if not consummated, they will be charged to
expense. The Company will incur substantial additional offering costs.
(NOTE G) -- PREFERRED STOCK:
[1] SERIES A PREFERRED STOCK:
The Series A 9% cumulative voting preferred stock is redeemable at any
time at the Company's option and must be redeemed at the time of the initial
public offering. The redemption price is $1 per share plus accrued and unpaid
dividends.
F-10
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1996 and the six months
ended June 30, 1996 and June 30, 1995 is unaudited) - (Continued)
(NOTE G) -- Preferred Stock: - (Continued)
[1] SERIES A PREFERRED STOCK: -- (CONTINUED)
The Company has not declared any dividends. The cumulative unpaid
dividends at June 30, 1996 aggregated $55,969 ($.315 per share of stock
issued in 1992 and $.245 per share of stock issued in 1993).
[2] SERIES B PREFERRED STOCK:
In December 1995, the Company issued 1,250 shares of nonvoting convertible
preferred stock for $100,000 in cash and a note for $25,000. The note was
paid in January 1996 and is included in other current assets as of December
31, 1995. The cumulative dividend on the preferred stock is 10% per year.
During the six months ended June 30, 1996, the Company declared dividends
aggregating $6,250 (at June 30, 1996, $3,125 was included in accrued
liabilities). In July 1996, the Company redeemed the outstanding shares (see
Note M).
(NOTE H) -- CAPITAL DEFICIENCY:
As of January 1, 1994, the Company had issued warrants, expiring in April
1998, to purchase 143,333 shares of common stock at an exercise price of
$0.50 and warrants, expiring in March 1996, to purchase 106,250 shares of
common stock at an exercise price of $2.00. None of these warrants has been
exercised. In 1995, the Board of Directors extended the expiration of the
$2.00 warrants from March 1996 to November 1996.
In 1995, the Company granted an option to purchase 100,000 shares of
common stock at $1.00 per share in exchange for $10,000 of consulting
services. As a result $10,000 was charged to operations and credited to
additional paid-in capital. The options are exercisable through September
2000. In 1996, in exchange for an additional $5,000 payment to the option
holder, the Company cancelled the option on 50,000 shares.
In 1996, the Company granted a warrant to purchase 10,000 shares of common
stock at $1.00 per share in exchange for $20,000 of professional services to
be rendered during the vesting period. This warrant vests ratably over a ten
month period ending March 1997 and is exercisable through May 2001. During
1996, the Company recognized expense of $4,000.
The Company has reserved 1,134,587 shares of its common stock for issuance
upon exercise of the outstanding warrants and options.
See Notes M[1] and [2] with regard to warrants and options issued in July
and August 1996.
(NOTE I) -- INCOME TAXES:
The significant components of the Company's deferred tax assets and
liabilities at June 30, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- --------------
<S> <C> <C>
Accrual to cash adjustment ......... $ 67,000 $203,000
Capitalized software and courseware (70,000) (37,000)
Net operating losses carryforward .. 424,000 145,000
Valuation allowance ................ (421,000) (311,000)
----------- --------------
Net deferred tax asset ............. $ - 0 - $ - 0 -
=========== ==============
</TABLE>
F-11
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1996 and the six months
ended June 30, 1996 and June 30, 1995 is unaudited) - (Continued)
(NOTE I) -- Income Taxes: - (Continued)
The significant components of the provision for income taxes for each of
the six months ended June 30, 1996 and 1995 and the years ended December 31,
1995 and 1994, are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
----------------------------- ------------------------
1996 1995 1995 1994
------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Accrual to cash adjustment ......... $ (136,000) $ (15,000) $ 62,000 $ 34,000
Net operating loss carryforward .... 279,000 19,000 37,000 (19,000)
Capitalized software and courseware (33,000) 2,000 (35,000) 2,000
Increase in valuation allowance .... (110,000) (6,000) (64,000) (17,000)
------------- ------------ ---------- ----------
Provision for income taxes ......... $ - 0 - $ - 0 - $ - 0 - $ - 0 -
============= ============ ========== ==========
</TABLE>
The difference between the statutory federal income tax rate on the
Company's net loss and the Company's effective income tax rate for each of
the six months ended June 30, 1996 and 1995 and the years ended December 31,
1995 and 1994, respectively, is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
-------------------- --------------------
1996 1995 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0% 34.0%
Increase in valuation allowance .. (36.6) (43.5) (39.2) (30.8)
Research and development credit .. 7.3
Miscellaneous .................... 2.6 9.5 (2.1) (3.2)
-------- -------- -------- --------
Effective income tax rate ........ 0.0% 0.0% 0.0% 0.0%
======== ======== ======== ========
</TABLE>
(NOTE J) -- EMPLOYEE BENEFIT PLAN:
The Company maintains a noncontributory Employee Savings Plan, in
accordance with the provisions of Section 401(k) of the Internal Revenue
Code. Pursuant to the terms of the plan, participants can defer a portion of
their income through contributions to the Plan.
(NOTE K) -- COMMITMENTS:
[1] LEASE INCOME:
In 1995, the Company entered into an agreement with the City of New York
("New York") whereby the Company would develop custom software and upon final
acceptance of the software by New York, the Company will initially lease five
kiosks, hardware and software to New York for one year, renewable by New York
for two successive one year terms. The annual rental aggregates $361,080.
Additionally, the Company can earn fees based upon the number of transactions
effectuated in the kiosks. The Company anticipates purchasing additional
hardware related to the kiosks project of approximately $100,000.
F-12
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1996 and the six months
ended June 30, 1996 and June 30, 1995 is unaudited) - (Continued)
(NOTE K) -- Commitments: - (Continued)
[2] LEASES:
The Company leases office space and equipment under operating leases with
an initial or remaining term of more than one year expiring through 2003.
<TABLE>
<CAPTION>
Twelve
Months
Ending
June 30, Amount
- -------- ----------
<S> <C>
1997 .................................................... $ 49,908
1998 .................................................... 58,727
1999 .................................................... 78,444
2000 .................................................... 82,640
2001 .................................................... 86,933
Thereafter .............................................. 162,061
----------
Total ................................................. $518,713
==========
</TABLE>
Rent expense approximated $24,600, $9,100, $18,300 and $19,200 for the six
months ended June 30, 1996 and June 30, 1995 and for the years ended December
31, 1995 and December 31, 1994, respectively.
[3] EMPLOYMENT AGREEMENTS:
Effective July 1996, the Company entered into employment agreements with
two key executives expiring in December 2001. Under the terms of the
agreements, the aggregate initial annual compensation is $208,000 per
executive. Additionally, the agreements include provisions for bonuses
(aggregating the sum of 5 percent of earnings before depreciation, interest,
taxes and amortization and other amounts, if any, to be determined by the
board of directors), increases in compensation and severance payment based
upon certain events.
(NOTE L) -- CONCENTRATION OF RISK:
[1] REVENUES:
For the six months ended June 30, 1996 and June 30, 1995, 76 percent of
revenues were derived from two customers and 48 percent of revenues were
derived from one customer, respectively. For the years ended December 31,
1995 and December 31, 1994, 56 percent of revenues were derived from two
customers and 67 percent of revenues were derived from four customers,
respectively.
[2] MICROSOFT CORPORATION:
The Company's software is generally based upon Microsoft Windows
technology. Additionally, it has established a strategic relationship with
Microsoft that management believes is important to its sales, marketing and
support and product development activities. Accordingly, any change in this
relationship or any factor adversely affecting the demand for, or the use of,
Microsoft's Windows operating system could have a negative impact on demand
for the Company's products and services. Additionally, changes to the
underlying components of the Windows operating system would require changes
to the Company's products and could result in the loss of sales if the
Company did not implement changes in a timely manner.
[3] CASH:
The Company places its cash in banking institutions, which cash may at
times, be in excess of the FDIC insurance limit.
F-13
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1996 and the six months
ended June 30, 1996 and June 30, 1995 is unaudited) - (Continued)
(NOTE M) -- SUBSEQUENT EVENTS:
[1] PRIVATE PLACEMENT EQUITY OFFERING:
In August 1996, the Company issued 273,001 units consisting of one share
of common stock and a warrant to purchase two-thirds of a share of common
stock at an exercise price of $3.00 per two-thirds share. The Company
received proceeds of $816,285, net of estimated offering costs of $139,215.
Concurrently, the Company redeemed all of the outstanding shares of the
Series B preferred stock in exchange for $125,000 and warrants to purchase
20,000 shares of common stock at an exercise price of $7.00 per share. Both
issues of the warrants expire the earlier of September 2000 or three years
after the effective date of the Company's initial public offering.
Additionally, $100,000 of the accrued officer compensation is to be paid from
the net proceeds.
[2] STOCK OPTION PLAN:
In August 1996, the Company adopted a stock option plan under which
250,000 shares of common stock are reserved for issuance upon exercise of
either incentive or nonincentive stock options which may be granted from time
to time by the Board of Directors to employees and others. The Company
granted options on 145,000 shares at exercise prices ranging from $2.50 to
$3.50 per share, expiring July 2001.
F-14
