PROSPECTUS OBJECTSOFT CORPORATION
1,366,050 Shares of Common Stock
1,366,050 Redeemable Warrants
This Prospectus is being delivered to the holders of 1,366,050 shares
of Common Stock, par value $.0001 per share (the "Common Stock") and 1,366,050
Redeemable class A Warrants (the "Class A Warrants") that were issued by
ObjectSoft Corporation, a Delaware corporation (the "Company") in its initial
public offering of certain Units that became effective on November 12, 1996 (the
"Offering"). Each Class A Warrant entitles the registered holder thereof to
purchase one share of Common Stock at an exercise price of $6.50, subject to
adjustment, at any time until November 12, 2001. Beginning November 12, 1997 (or
earlier at the discretion of the Company with the consent of the Company's
underwriter, Renaissance Financial Securities Corporation (the "Underwriter")),
the Class A Warrants are subject to redemption by the Company at a redemption
price of $.10 per Warrant on 30 days' prior written notice to the holders
thereof, provided the average closing bid quotation of the Common Stock as
reported on the NASDAQ SmallCap market ("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 Common Stock and the Class A Warrants are listed on the NASDAQ
SmallCap Market ("NASDAQ") under the symbols OSFT and OSFTW, respectively. There
can be no assurance that an active trading market in the Company's securities
will be sustained. On October 8, 1997, the closing sales price for the Common
Stock and the Class A Warrants was $5.063 and $0.938, respectively.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK. ONLY INVESTORS WHO CAN BEAR THE RISK OF LOSS OF THEIR
ENTIRE INVESTMENT SHOULD INVEST. FOR A DESCRIPTION OF CERTAIN RISKS
REGARDING AN INVESTMENT IN THE COMPANY SEE "RISK FACTORS" ON PAGE 11.
------------------------
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.
Concurrently with this offering, the Company registered the offering
of 1,086,963 shares of Common Stock that are outstanding or issuable upon the
exercise of warrants and 412,500 Class A Warrants issuable upon the exercise of
warrants (collectively, the "Selling Securityholder Securities") under the
Securities Act, on behalf of certain of its stockholders and holders of certain
warrants (the "Selling Securityholders"), pursuant to a Selling Securityholder
Prospectus included within the Registration Statement of which this Prospectus
forms a part. The Selling Securityholders include the Underwriter with respect
to 37,500 shares of Common Stock and 37,500 Class A Warrants issuable upon the
exercise of a warrant to purchase Units (the "Placement Agent's Warrant")
granted to the Underwriter in its capacity as the placement agent for a private
offering, in April - June 1996, of bridge loans (the "Bridge Loans") and
warrants (the "Bridge Loan Offering"). The Selling Securityholder Securities are
not part of this Offering by the Company. The Company will not receive any of
the proceeds from the sale of the Selling Securityholder Securities, but will
receive the proceeds of the exercise, if any, of the various warrants pursuant
to which certain of the Selling Securityholder Securities are issuable. See
"Certain Transactions" and "Concurrent Offering."
================================================================================
Price to Warrant Underwriting Discounts Proceeds to
holders(1) and Commissions(2) Company(3)
- --------------------------------------------------------------------------------
Per Share............. $6.50 $.325 $6.175
- --------------------------------------------------------------------------------
Total (4)............. $8,879,325 $443,966.25 $8,435,358.75
================================================================================
(continued on following page)
THE DATE OF THIS PROSPECTUS IS OCTOBER 22, 1997
<PAGE>
(continued from previous page)
_____________________________
(1) Includes only Class A Warrants. The exercise price of the Class A Warrants
was arbitrarily determined in connection with the Company's initial public
offering in November 1996, and is not related to the Company's assets, book
value, operating reserves or net worth. There is no assurance that the
market value of the shares of Common Stock underlying such Warrants will at
any time after exercise thereof exceed the exercise price paid therefor.
(2) Assumes the exercise of all of the Class A Warrants.
(3) Pursuant to an Underwriting Agreement entered into between the Company and
the Underwriter on November 12, 1996, in connection with its initial public
offering, the Company agreed to pay the Underwriter, a warrant solicitation
fee of five (5%) percent of the aggregate exercise price of the Warrants
whose exercise is solicited by a member of the National Association of
Securities Dealers, Inc. ("NASD") and meets certain other criteria. The
Company cannot presently estimate to what extent any such warrant
solicitation fee will be paid.
(4) Assumes exercise of all of the presently outstanding Class A Warrants. All
funds received from the exercise of the Warrants will be turned over to the
Company with the exception of: (i) expenses incurred in connection with the
preparation of this Prospectus, including printing and professional fees
estimated at $45,000; and (ii) a five (5%) percent warrant solicitation fee
which may be paid to the Underwriter upon the exercise of Warrants. Does
not include additional proceeds to be received by the Company upon the
exercise by the Underwriter of the Unit Purchase Options.
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<PAGE>
----------------------
TABLE OF CONTENTS
----------------------
Page
Prospectus Summary.......................................................... 5
Risk Factors................................................................ 11
Use of Proceeds............................................................. 23
Dividend Policy............................................................. 23
Capitalization.............................................................. 24
Market for Registrant's Common Equity and Related
Stockholder Matters........................................................ 25
Selected Financial Data..................................................... 26
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 27
Glossary.................................................................... 30
Business.................................................................... 32
Management.................................................................. 47
Principal Stockholders...................................................... 55
Certain Transactions........................................................ 56
Description of Securities................................................... 58
Shares Eligible for Future Sale............................................. 63
Concurrent Offering......................................................... 64
Legal Matters............................................................... 65
Experts..................................................................... 65
Additional Information...................................................... 65
Index to Financial Statements............................................... F-1
The Company is subject to the reporting requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"), and, in accordance
therewith, files 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), SmartSign(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").
-3-
<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 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.
-4-
<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 assumes that the Underwriter's Unit Purchase Option is 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 30 of this Prospectus.
THE COMPANY
The Company currently provides information and services through
Interactive Public Access Terminals ("IPATs" or "Kiosks"), known as
SmartStreet(TM), that combine the advantages of local and wide network
technology. Like an intranet, the communication between the IPAT 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. Generally, the IPATs have been installed in high density pedestrian
traffic areas. The Company anticipates that revenues from the IPATs will be
provided by leasing fees paid by advertisers and service providers and by usage
fees paid by consumers who obtain services through the IPATs.
Prior to 1996, the Company's activities consisted primarily of
consulting, writing, training and custom software development for various
corporate and government clients, including Microsoft Corporation ("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
initially developed and operated 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. The Company discontinued active marketing of
OLEBroker(TM) at the end of 1996 in order to concentrate on its IPAT- and
Internet-related businesses. However, 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 IPAT and Internet
service delivery programs. The Company anticipates that the IPAT and Internet
service delivery programs will constitute the most significant part of its
business. It may continue to engage in consulting activities as resources
permit. In selecting consulting opportunities, the Company will focus primarily
on assignments in connection with the sale of IPAT services or that can
otherwise enhance its skill base.
In early 1996, as part of its IPAT Demonstration Project, the City of
New York (the "City") entered into an agreement with the Company (the "City
Agreement") to develop public IPATs 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 IPATs, and the Company
may deploy additional IPATs throughout the New York City area at its own risk
and expense, subject to City approval of IPAT locations. The first five IPATs
were deployed in New York City in July 1996. A sixth IPAT was installed in
August, 1997. All IPATs providing City services for information, whether
operated by the Company or other suppliers, carry the City's CityAccess(TM)
logo. Pursuant to the City Agreement, the Company has developed IPATs through
which members of the public can obtain 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.
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<PAGE>
The City has recently requested pricing information for extending the City
Agreement to include an additional 12 to 36 IPATs to be installed in the third
quarter of 1997. However, there can be no assurance that a contract for this
extension will ultimately be entered into.
The Company's goal in designing the SmartStreet(TM) IPATs was to
maximize potential use by developing software that would be inviting and easy to
use. The IPATs are designed so that a potential user is attracted to the IPAT 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 IPATs and how to use them, and shows people from many walks of
life using them successfully.
The IPATs are configured to permit the Company to offer additional
services provided either by the Company or third parties and to sell advertising
on such IPATs. The City Agreement requires the Company to pay to the City 50% of
advertising and third party service revenues from the first five IPATs and 15%
of such revenues from such additional IPATs that carry the CityAccess logo. The
Company plans to exercise these rights and to actively solicit additional
service providers and advertisers. 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.
In connection with the development of the IPATs and the deployment
and operation of the first five IPATs, the City agreed to pay to the Company an
aggregate of $661,080, of which $361,080 is payable in the form of monthly
payments of $30,090 ($6,018 per IPAT), which were commenced as of August 1,
1996, and the balance of $300,000 is payable in partial amounts as certain
milestones in the development, deployment and operation of the IPATs are
achieved, of which $279,000 has been earned prior to September 30, 1997.
For the first 43 weeks the Company's IPATs were used an average of
2,434 times per week. In recent weeks average usage has exceeded 4,000 uses per
week. In the most recent week for which figures are available, the Company's
IPATs averaged 805 uses per week each. In comparison, IPATs of the other two
participants in the demonstration project averaged 294 and 787 uses each. The
City has indicated that it intends to extend the contract through the end of
1998.
The Company may also receive transaction fees in connection with the
use of the IPATs by the public to obtain documents or certain other services. As
of May 31, 1997, the first five IPATs 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 IPATs.
In August 1997, ObjectSoft announced the development and immediate
availability of SmartSign(TM), a modular line of IPATs contained in an enclosure
that is only 7-1/2" in depth, with each module weighing less than 70 lbs.,
making the units suitable for regular shipment through UPS and Federal Express.
The modules initially consist of (a) a Pentium class processor unit,
(b) an active-matrix touch screen, with optional sealed heavy-duty keyboard, and
optional credit card reader, (c) a printer unit with page printer and optional
receipt printer, (d) a light-box advertising module with optional plasma
display, and (e) an optional touch-sensitive light-box. Although a working unit
has been delivered and is operational, there can be no assurances that there
will be any commercial sales of this line.
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<PAGE>
As of September 30, 1997 no revenues have been generated by user
transactions or advertising. The IPATs became available to support on-line
inquiries into City databases as of June, 1997.
Recently, the Walt Disney Company agreed to a trial with advertising
of the IPATs installed in New York.
Pursuant to the City Agreement, the Company has the right to install
additional IPATs 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 IPATs, but it is
anticipated, although there can be no assurance, that use by the public will
generate transaction fees. The Company had commenced evaluating potential sites
and will seek to install up to 25 additional IPATs over the next year. The first
of these additional IPATs was installed in July 1997 in the Museum of Science in
Queens.
At the time the City Agreement with the Company was executed, the
City also signed similar agreements with two other companies for additional
IPATs. 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 IPATs throughout the City.
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 IPATs. Microsoft
supports the Company in marketing its public access services, and has informally
agreed to exhibit the Company's IPATs in Microsoft displays at various trade
shows. 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
exclusive regional host and sponsor of Microsoft Developer Days, an ongoing
series of technical conferences organized and operated by Microsoft. The most
recent conference was held on March 19, 1997. The conference attracted over
5,000 paid registrants and was completely sold out. The Company has also
produced technical papers for, and provided consulting services to, Microsoft.
The next conference is expected to be held in February, 1998.
The Company intends to market IPATs 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 IPATs. Recently,
the Company was the successful bidder in Seattle, Washington, for the
installation of eight IPATs providing information regarding ferry service.
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 [email protected]; and its homepage on the World-Wide Web
is at http://www.objectsoftcorp.com.
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<PAGE>
THE OFFERING
Securities being Offered Hereby.............1,366,050 shares of Common Stock and
1,366,050 Class A Warrants. Each
Class A Warrant entitles the holder
thereof to purchase one share of
Common Stock at a price of $6.50 per
share, subject to adjustment, at any
time commencing November 12, 1997
until November 12, 2001. The Class A
Warrants may be redeemed by the
Company commencing November 12, 1997
(or earlier with the consent of the
Underwriter), upon 30 days notice,
provided the closing bid quotation
for the Common Stock has exceeded
130% of the exercise price of the
Class A Warrants (initially, $8.45
per share) for at least 20
consecutive trading days ending
within 15 days of the date of the
notice of redemption. See
"Description of Securities."
Securities offered Concurrently
by Selling Securityholders...............1,086,963 shares of common Stock and
412,500 Class A Warrants
(collectively, the "Selling
Securityholder Securities"), all for
resale by the holders thereof or of
certain outstanding warrants (the
"Selling Securityholders") from time
to time subject to the contractual
restrictions pursuant to which
certain Selling Securityholders may
not sell their Selling
Securityholder Securities for a
period of 12 months ending November
12, 1997 without the prior written
consent of the Underwriter.
Common Stock Outstanding
prior to Offering (1).......................4,082,676 shares
Common Stock to be Outstanding after
the Offering (1)............................4,082,676 shares
Class A Warrants Outstanding prior to
the Offering (2)............................1,366,050 Class A Warrants
Risk Factors................................The securities offered hereby
involve a high degree of risk. See
"Risk Factors".
Use of Proceeds.............................Proceeds received from exercise of
the Class A Warrants are intended to
be used for working capital and
general corporate purposes. See "Use
of Proceeds."
NASDAQ symbols:
Common Stock.............................OSFT
Class A Warrants.........................OSFTW
- --------------
(1) Does not include: (i) 1,366,050 shares issuable upon exercise of the Class
A Warrants included in the Units offered in connection with the Company's
initial public offering in November 1996, (ii) 175,000 shares included in
the Units (and upon exercise of the Class A Warrants included in such
Units) issuable upon exercise of the Underwriter's Unit Purchase Option,
(iii) 143,333 shares issuable upon exercise of warrants issued to certain
present and former members of senior management (the "Officer Warrants"),
(iv) 750,000 shares included in the Units (and upon exercise
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<PAGE>
of the Class A Warrants included in such Units) issuable upon exercise of
warrants issued to investors in the Bridge Loan Offering (the "Bridge
Warrants"), (v) 75,000 shares included in the Units (and upon exercise of
the Class A Warrants included in such Units) issuable upon the exercise of
the Placement Agent's Warrant issued to the Underwriter in connection with
the Bridge Loan Offering, (vi) 182,004 shares issuable upon exercise of
warrants (the "July 1996 Warrants") issued to investors in the Company's
July and August 1996 private equity offering (the "July 1996 Offering") of
273,001 units each consisting of one share of Common Stock and the July
1996 Warrant (the "July 1996 Units"), (vii) 45,500 shares issuable upon
exercise of the warrant (and the July 1996 Warrants issuable upon exercise
of such warrant) issued to the placement agent of the July 1996 Offering
(the "July Placement Warrant"), (viii) 20,000 shares issuable upon the
exercise of warrants issued to a principal stockholder of the Company in
connection with the redemption of the Company's Series B Preferred Stock,
(ix) 250,000 shares reserved for issuance under the Company's 1996 Stock
Option Plan, options for 250,000 shares of which have been granted after
taking into account the cancellation of an option for 5,000 shares and (x)
500,000 additional shares reserved for issuance under the Company's 1996
Stock Option Plan, subject to approval by the holders of a majority of the
Company's Common Stock if required. See "Business," "Management," "Certain
Transactions" and "Description of Securities."
(2) Does not include 500,000 Class A Warrants, of which (i) 87,500 are included
in the units issuable upon the exercise of the Underwriter's Unit Purchase
Option, (ii) 375,000 are included in the units issuable upon the exercise
of the Bridge Warrants, and (iii) 37,500 are included in the units issuable
upon the exercise of the Placement Agent's Warrant. See "Certain
Transactions" and "Description of Securities."
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<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: 1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Consulting $ 109,401 $ 258,000 $ 269,401 $ 447,976
Development and Training 37,954 21,279 118,618
Rental Income 180,540 150,450
Net loss (1,380,404) (300,722) (1,240,695) (122,400)
Net loss applicable to common stock (1,380,404) (316,535) (1,272,746) (141,525)
Net loss per share of common stock (0.34) (0.11) (0.45) (0.05)
Weighted average number of common stock 4,050,952 2,800,734 2,848,943 2,797,134
outstanding
BALANCE SHEET DATA: June 30, 1997 December 31, 1996
------------- -----------------
Working capital $ 2,747,686 $ 4,011,015
Total assets 3,703,883 4,982,161
Accumulated deficit (3,530,554) (2,150,150)
Total stockholders' equity 3,411,716 4,729,120
</TABLE>
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<PAGE>
RISK FACTORS
An investment in the securities offered hereby is speculative in
nature and involves a high degree of risk. In addition to the other information
in this Prospectus, prospective investors should carefully consider the
following risk factors 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 and 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 IPAT 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, 1997, the Company had an accumulated deficit of $3,530,554. 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) IPAT 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."
BROAD DISCRETION IN USE OF PROCEEDS
The Company has broad discretion with respect to the specific
application of the net proceeds to be obtained by the Company upon the exercise
of the Class A Warrants. Such amounts are intended to be used for working
capital and general corporate purposes. Thus, purchasers of the Common Stock
upon exercise of the Warrants will be entrusting their funds to the Company's
management, upon whose judgment the investors must depend, with only limited
information concerning management's specific intentions. See "Use of Proceeds."
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DEPENDENCE ON NEW, UNTESTED PRODUCT
The Company has recently refocused its efforts to concentrate on the
development of IPATs 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 IPAT
Demonstration Project, pursuant to which the Company agreed to install and
operate a minimum of five IPATs 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
IPATs. The Company installed its first five IPATs in July 1996, and such IPATs
have been operating since that time.
The Company anticipates that revenues from the IPATs 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 IPATs.
Although IPATs are in operation in other municipalities, there can be no
assurance that the Company's IPATs will be able to operate consistently and
efficiently to provide the anticipated services, that members of the general
public will find the IPATs user-friendly, that they will be comfortable with or
be willing to pay the additional cost for the convenience of using the IPATs 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 IPATs, or that even if the IPATs perform adequately, that the City and
other potential users of similar IPATs will not opt for the products of the
Company's competitors. Although the Company has an agreement to provide IPATs to
Kings County, Washington (Seattle), its ability to market such services to other
potential customers will be highly dependent on the success and acceptance of
the New York City IPATs. Furthermore, the municipalities, states and other
government agencies that constitute a primary target market for the Company's
IPATs are subject to potentially severe budgetary constraints and cuts that may
limit their ability to fund the acquisition of new technology such as the IPATs.
In addition, the Company anticipates that a significant portion of the
revenues related to the IPATs 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 IPATs and from commercial advertising by
local and national companies and businesses. There can be no assurance that
commercial entities will be interested in marketing or advertising their
products and services by means of IPATs 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) IPAT 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 IPAT 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.
Consequently, the Company discontinued active marketing of OLEBroker(TM) at the
end of 1996 in order to concentrate on its IPAT and Internet-related businesses.
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
consulting projects. Furthermore, the Company will seek to accept consulting and
training assignments primarily in connection with the sale of IPAT services or
that will otherwise expand its skill base. See "Business - Products and Services
- - OLEBroker(TM) - Consulting, Training and Authoring Services."
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UNCERTAINTY OF PRODUCT DEVELOPMENT
It is common for hardware and software as complex and sophisticated as
that employed by the Company in its IPATs to experience errors, or "bugs," both
during development and subsequent to commercial introduction. As IPATs 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 IPATs could
materially and adversely affect the Company's ability to achieve significant
market penetration with the IPATs.
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 IPATs 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 is subject to competition from different sources for its
different services. The Company's intranet IPAT business competes with numerous
companies, including IBM, North Communications, Golden Screens and NCR (formerly
a division of AT&T). 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 IPATs to other
municipalities. After fulfillment of the initial contracts, if the City chooses
to install additional IPATs throughout the City of New York, it may award to
others, and not the Company, the contract to install such additional IPATs.
Further, there can be no assurance that other municipalities or other entities
will seek to acquire IPATs from the Company. In addition, if the use of IPATs
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
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to enter the market. Many of such competitors may have resources far greater
than the Company. 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. See "Business -- Competition."
POSSIBLE DIFFICULTY IN COMPLYING WITH GOVERNMENT CONTRACT REQUIREMENTS
The Company's IPATs 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 IPATs. Microsoft has
provided technical and marketing support to the Company in connection with the
development and marketing of its IPAT services, has exhibited the Company's
IPATs 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. In the event Microsoft were to sever
its relationships with the Company, the Company's sales and financial condition
could be severely and materially 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."
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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 materially and adversely effected. See "Business -
Products and Services."
DEPENDENCE ON THE INTERNET
Sales of the Company's Internet-related products and services,
including its public access IPATs, 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
IPATs and with advertisers to use the IPATs as an advertising medium, but
ultimately upon the willingness of consumers to pay fees to transact business by
means of the IPATs. To date, the Company is operating only six public IPATs,
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 IPATs 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 IPATs to
other potential service providers and advertisers. In addition, there can be no
assurance that the volume of use by consumers of the IPATs 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, 1997, the City of New York accounted for 73% of the Company's
revenues pursuant to the City Agreement. During 1996, 2 customers accounted for
approximately 71% of the Company's revenues, and during 1995, two customers
accounted for approximately 48% of revenues. The Company provided consulting and
related services, and more recently, services related to the development of
OLEBroker(TM) and Intranet and IPAT technology, to such customers. There can be
no assurance that such customers or others will retain the Company to install
IPATs 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."
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RISK OF MANUFACTURING ACTIVITIES
The Company's IPATs involve the design by the Company, and the
engineering and manufacture by subcontractors, of the hardware and graphical
components of the IPATs. Only a limited number of IPATs 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 IPATs on a satisfactory
basis. While the Company believes that it could arrange to have IPATs 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 IPATs. See "Business -Products and Services - SmartStreet(TM) IPAT
Services - SmartStreet(TM) IPAT Technology."
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 IPATs 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."
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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 IPATs 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 a trade
secret. In addition, except for SmartSign(TM), the Company does not sell or
license its technology to third parties, but rather delivers services thorough
its IPATs 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."
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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 IPATs 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 network 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 IPATs that were installed in various locations in New York City
since July 1996 have only been operating for a short time, so the Company has
only limited experience with actual consumer interaction with the IPATs. While
the Company has designed the IPATs to be resistant to vandalism, there can be no
assurance that vandals will not succeed in damaging or disabling the IPATs. In
addition, although the Company believes it is unlikely, users of the IPATs may
seek to hold the Company liable for injuries allegedly incurred in connection
with the use of the IPATs.
While the Company maintains insurance covering , among other things ,
losses resulting from business interruptions caused by system failures, damages
to IPATs or claims by users of the IPATs, 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 not be terminated or will be available for terms affordable to
the Company. See "Business - Products and Services."
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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 with 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 IPATs 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
As of the date of this Prospectus., 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"), beneficially own, in the aggregate,
approximately 42% of the issued and outstanding shares of Common Stock. As a
result, assuming no exercise of any of the Class A Warrants or other warrants
and options issued by the Company, and subject to the effect of additional
issuances of voting shares by the Company in the future, 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 IPATs, which
may require substantial capital investment. It is the Company's intention to
enter into lease financing arrangements for the IPATs. While the
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Company has entered into such an arrangement to cover a portion of the costs of
the first five IPATs, it has not entered into an agreement for such financing
for future IPATs, if any, and there can be no assurance that it will be able to
do so on acceptable terms or at all. 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 "Use
of Proceeds," "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. See "Dividend Policy."
POSSIBLE NEGATIVE EFFECT ON TRADING OF WARRANT SOLICITATION
ACTIVITIES OF UNDERWRITER
The Underwriter may participate in the solicitation of the exercise of
the Class A Warrants. In connection with the solicitation of the Class A Warrant
exercises the Underwriter and any other soliciting broker-dealer will be
prohibited from engaging in any market-making activities with respect to the
Company's securities for certain periods of time. As a result, the Underwriter
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 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
period prior to the commencement of such distribution. Accordingly, in the event
the Underwriter 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 Common Stock and the Class A Warrants. See
"Description of Securities" and "Concurrent Offering."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Except for 1,366,050 shares of Common Stock issued by the Company in
connection with its initial public offering in November 1996 and 39,500 shares
of Common Stock sold by certain Selling Securityholders since November 12, 1996,
all of the shares of Common Stock currently issued and outstanding 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, a person, including an affiliate of the Company,
after at least one year has elapsed from the sale by the Company or any
affiliate of the restricted
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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 two 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 commencing November 12, 1996 without the prior written consent of the
Underwriter, 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. In addition, concurrently with this offering, the Company is
registering for resale by the Selling Securityholders 1,086,963 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 Underwriter) have agreed not to sell any of such securities for
a period of 12 months ending November 11, 1997, without the prior written
consent of the Underwriter. 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 November 12, 1997.
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 this 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"
and "Shares Eligible For Future Sale."
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 by the Company in its initial public
offering in November 1996. 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 490,337 shares of Common Stock (in addition
to 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 20,000 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 by the Company in its initial public
offering. The Company has also granted to the Underwriter the Unit Purchase
Option, consisting of the right to purchase, commencing on November 12, 1997,
87,500 Units. The sale of 1,086,963 shares of Common Stock, as well as 412,500
Class A Warrants, has been registered in the Concurrent Offering, 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 Underwriter's Unit Purchase Option. While certain holders of certain of
these rights (including certain Selling Securityholders other than the
Underwriter) have agreed not to sell the securities issuable upon the exercise
of outstanding options and warrants for 12 months ending November 11, 1997,
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" and "Concurrent
Offering."
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ADVERSE EFFECT OF REDEMPTION OF CLASS A WARRANTS
The Company has the right to redeem the Class A Warrants, commencing
November 12, 1997 (or earlier, with the consent of the Underwriter), 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
Although Class A Warrants were not knowingly sold to purchasers in
jurisdictions in which the Class A Warrants are not registered or otherwise
qualified for sale or exempt, purchasers may buy or have bought Class A Warrants
in the after-market or may move or have moved 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 hereby 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 of
which this Prospectus is a part 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
hereby 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
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further vote or action by 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
has 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.
USE OF PROCEEDS
The net proceeds which may be realized by the Company upon the
exercise of all of the Company's Class A Warrants which were issued in
connection with the Company's initial public offering in November 1996, after
provision for the possible payment of a warrant solicitation fee of five (5%)
percent and deduction of expenses of this offering, will be approximately
$45,000. Inasmuch as the Company has received no firm commitments for the
exercise of such Class A Warrants, no assurance can be given that any such Class
A Warrants will be exercised.
Any net proceeds received from the exercise of the Class A Warrants
offered hereby are intended to be used for general corporate purposes and
working capital.
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.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1997:
June 30, 1997
-------------
Preferred stock, $.0001 par value; 5,000,000 shares
authorized; no shares to be issued and outstanding
as adjusted .............................................
Common stock, $.0001 par value; 4,081,676 shares
authorized; issued and outstanding(1).....................$ 408
Additional Paid in Capital......................................... 6,941,862
Accumulated deficit................................................ (3,530,554)
------------
Total stockholders' equity................................$ 3,411,716
============
______________________
(1) Does not include: (i) 1,366,050 shares of Common Stock issuable upon
exercise of the Class A Warrants included in the Units offered hereby, (ii)
175,000 shares of Common Stock issuable upon the exercise of the
Underwriter's Unit Purchase Option and the Class A Warrants issuable upon
the exercise thereof, and (iii) 610,837 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."
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<PAGE>
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On November 12, 1996, the Company's Common Stock and Class A Warrants
were listed for quotation on the SmallCap Market on the Nasdaq System under the
symbols OSFT and OSFTW, respectively. The following table sets forth, for the
periods indicated the high and low bid prices for the Common Stock and Class A
Warrants as reported by Nasdaq. Quotations reflect prices between dealers,
without retail mark-up, mark down or commissions and may not necessarily
represent actual transactions.
Common Stock High Bid Low Bid
- ------------ -------- -------
1996
4th Quarter $5.50 $5.25
1997
1st Quarter $5.75 $5.00
2nd Quarter $6.375 $5.00
3rd Quarter $5.50 $4.00
4th Quarter $5.188 $4.875
(through October 7 , 1997)
Class A Warrants
- ----------------
1996
4th Quarter $0.688 $0.75
1997
1st Quarter $1.438 $0.75
2nd Quarter $1.50 $1.00
3rd Quarter $1.218 $0.938
4th Quarter $1.00 $0.938
(through October 7, 1997)
As of October 7, 1997, the Company believes that there were in excess
of 300 shareholders both of record and beneficial, of the Company's Common
Stock.
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SELECTED FINANCIAL DATA
The selected financial data set forth below as at December 31, 1996
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, 1996, 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, 1997 and 1996 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, 1997 may not be
indicative of results expected for the year ending December 31, 1997.
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------- -----------------------
STATEMENT OF OPERATIONS DATA: 1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Consulting $ 109,401 $ 258,000 $ 269,401 $ 447,976
Development and Training -- 37,954 21,279 118,618
Rental Income 180,540 -- 150,450 --
Net loss (1,380,404) (300,722) (1,240,695) (122,400)
Net loss applicable to common stock (1,380,404) (316,535) (1,272,746) (141,525)
Net loss per share of common stock (0.34) (0.11) (0.45) (0.05)
Weighted average number of common stock
outstanding 4,050,952 2,800,734 2,848,943 2,797,134
</TABLE>
BALANCE SHEET DATA: June 30, 1997 December 31, 1996
----------- -----------------
Working capital $ 2,747,686 $ 4,011,015
Total assets 3,703,883 4,982,161
Accumulated deficit (3,530,554) (2,150,150)
Total stockholders' equity 3,411,716 4,729,120
- ----------------
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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 currently provides information and services through
IPATs, known as SmartStreet(TM), that combine the advantages of local and wide
network technology. Like an intranet, the communication between the IPAT 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. Generally, the IPATS have been installed in high density
pedestrian traffic areas. The Company anticipates that revenues from the IPATs
will be provided by leasing fees paid by advertisers and service providers and
by usage fees paid by consumers who obtain services through the IPATs.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net revenues decreased $125,464 or 22.1% to $441,130 for the fiscal
year ended December 31, 1996 over net revenues of $566,594 for the fiscal year
ended December 31, 1995. Consulting revenues decreased by $178,575 or 39.8%.
Training revenue decreased from $118,618 to $21,279 or 82%. Rental income
increased from $0 to $150,450. The Company's decreased revenues from consulting,
training and custom development services resulted from redirection of the
Company resources to transactional fee-based products and services.
The Company continues to devote its resources toward the growth in
transactional fee-based products and services utilizing intranet technology and
believes this trend will continue in the future. Kiosk-based rental revenues
represented approximately 34.1% of 1996 net revenues and kiosk-related
consulting, training and custom development represented approximately $145,000
or 38.8% of 1996 net revenues.
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<PAGE>
Costs and expenses for the year ended December 31, 1996 increased to
$1,681,825 from $688,994 in 1995. This increase is a result of an increase in
expensed development costs for the SmartStreet(TM) operations and financing
expenses.
Costs of services for the year ended December 31, 1996 declined to
$424,336 from $429,604 in 1995. This decline is a result of expenses for costs
relating to the New York City contract which management expects to use in other
SmartStreet(TM) applications.
General and administrative expenses as a percentage of net revenues
were 189.3% in 1996 as compared with 34.1% in 1995. Such increase is principally
attributable to startup costs for the Company's SmartStreet(TM) program.
Interest expense increased to $329,836 in fiscal year ended December
31, 1996 from $3,502 for the fiscal year ended December 31, 1995, primarily
reflecting the amortization of discount and interest on the $1,250,000 loan. See
"Financial Condition, Liquidity and Capital Resources" and Note D of Notes to
Financial Statements.
Net loss increased by $1,118,295 or 913.6% to a net loss of
$1,240,695 for the fiscal year ended December 31, 1996 over net loss of $122,400
for the fiscal year ended December 31, 1995. The increase in losses occurred
primarily because of financing costs and startup costs relating to the Company's
SmartStreet kiosk program.
At December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $2,200,000. 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 A[3] of Notes to Financial Statements.
Three Months and Six Months ended June 30, 1997, Compared with Three Months
and Six Months ended June 30, 1996
The results of operations for the six months ended June 30, 1997 are
not necessarily indicative of the results that may be expected for any other
interim period or for the fiscal year ending December 31, 1997.
Net revenue for the three months ended June 30, 1997 increased by 11%
over the three months ended June 30, 1996 (from $180,625 to $200,688) and net
revenue for the six months ended June 30, 1997 increased by 27% over the six
months ended June 30, 1996 (from $295,954 to $374,613). Revenue for the six
months increased due to interest and dividend income earned on short term
investments and revenue received from the New York Kiosk Demonstration Program.
This was offset by a reduction in consulting and training revenue as the Company
continued its shift away from fee-based consulting, training and custom
development activities and redirected its resources towards the development of
transactional, fee-based and advertising-supported products and services.
Revenue changes were not a result of increases or decreases in prices.
Costs of services for the three months ended June 30, 1997 increased
by 23% over the three months ended June 30, 1996 (from $138,247 to $170,343) and
the cost of services for the six months ended June 30, 1997 increased by 129%
over the six months ended June 30, 1996 (from $173,467 to $396,481) due to
higher personnel expenses and kiosk expenses.
Research and development expenses for the three months ended June 30,
1997 compared to the three months ended June 30, 1996, increased to $188,993
from zero, and to $287,608 from zero for the six months ended June 30, 1997
compared to the six months ended June 30, 1996 due to the expensed development
costs for the SmartStreet(TM) operations.
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General and administrative expenses for the three months ended June
30, 1997 increased by 166% (from $186,628 to $495,883) compared to the three
months ended June 30, 1996, and by 175% for the six months ended June 30, 1997
compared to the six months ended June 30, 1996 (from $332,413 to $913,960) due
principally to increases in salaries and personnel related expenses,
professional fees and insurance for directors and officers.
The Company has also provided for a loss on a loan receivable to
InteractiVisions, Inc. in the amount of $150,000 (See below Liquidity and
Capital Resources).
The net loss for the three months ended June 30, 1997 compared to the
three months ended June 30, 1996, increased by 244% (from $234,596 to $807,779)
and by 359% for the six months ended June 30, 1997 compared to the six months
ended June 30, 1996 (from $300,722 to $1,380,404). This change is primarily due
to increases in costs associated with the Company's newer emphasis on
transactional and advertising-supported products and services, an increase in
research and development expenses, an increase in general and administrative
expenses due to higher costs associated with being a public company and to
support the redirection in revenue sources, and a provision for loss on loan
receivable.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1997 the Company incurred a net
loss of $1,380,404. The accumulated deficit increased to $3,530,554 as the
Company continues to incur operating losses as expenses exceed revenue. The
Company had working capital of $2,747,686 as of June 30, 1997 as compared to
$4,011,015 as of December 31, 1996, or a decrease of $1,263,329. Capital
expenditures and capitalized software amounted to $111,052.
In November 1996, the Company completed the sale in a public offering
of 1,366,050 Units, from which it received net proceeds of approximately
$5,465,000. Of such amount, approximately $1,583,000 was applied to the
repayment of certain bridge loans and redemption of Preferred Stock. The Company
expects to fund the deployment of additional SmartStreet(TM) IPATs in New York
City and elsewhere, and make IPAT related acquisitions, from available working
capital and from funds that will be derived from future operating revenues.
However, there can be no assurance that future revenues will be generated in
sufficient amounts or that additional funds will not be required for the
expansion of operations. The Company intends to lease equipment whenever
possible on acceptable terms.
On May 2, 1997, the Company and InteractiVisions, Inc.
("InteractiVisions") signed a letter of intent which contemplated the
acquisition of all the outstanding stock of InteractiVisions in exchange for the
issuance of 600,000 shares of the Company's Common Stock, subject to certain
adjustments. Simultaneous with the signing of the letter of intent, the Company
loaned InteractiVisions $250,000, payable 60 days after the termination of the
letter of intent, together with interest at the prime rate plus 3 points. On
August 8, 1997, the Company terminated the letter of intent. The Company has
provided an allowance for loss on the loan receivable of $150,000.
The rate of inflation was insignificant during the quarter ended June
30, 1997. In the past, the effects of inflation on personnel costs have been
offset by the Company's ability to increase its charges for services rendered.
The Company anticipates that it will be able to continue to do so in the near
future. The Company continually reviews its costs in relation to the pricing of
its products and services.
The Company anticipates that its existing working capital will be
sufficient to fund its operations at least through the end of 1997.
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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.
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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).
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.
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BUSINESS
GENERAL
The Company currently provides information and services through
IPATs, known as SmartStreet(TM), that combine the advantages of local and wide
network technology. Like an intranet, the communication between the IPAT 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. Generally, the IPATS have been installed in high density
pedestrian traffic areas. The Company anticipates that revenues from the IPATs
will be provided by leasing fees paid by advertisers and service providers and
by usage fees paid by consumers who obtain services through the IPATs.
Prior to 1996, the Company's activities consisted primarily 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 initially developed and
operated 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. The Company discontinued active marketing of OLEBroker(TM) at the end
of 1996 in order to concentrate on its IPAT- and Internet-related businesses.
However, 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 IPAT and Internet service delivery programs.
The Company anticipates that the IPAT and Internet service delivery programs
will constitute the most significant part of its business. It may continue to
engage in consulting activities as resources permit. In selecting consulting
opportunities, the Company will focus primarily on assignments in connection
with the sale of IPAT services or that can otherwise enhance its skill base.
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
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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 the 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.
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
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- -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.
IPAT TECHNOLOGY
IPATs 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
IPATs, and movie ticketing dispensers.
Many IPATs today are self-contained. Others may be linked to a
central site. IPATs have traditionally used conventional or proprietary
technology. In contrast, the Company's IPAT 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. 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.
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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
The Company's strategy is to focus on development and marketing of
the IPAT 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 IPAT 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.
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 IPAT and Internet based transaction services.
PRODUCTS AND SERVICES
SMARTSTREET(TM) IPAT SERVICES
The Company makes transactional services available via public access
IPATs that combine the advantages of Internet and Intranet technology. Like an
Intranet, the communication between the IPAT 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
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from the IPATs 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 IPATs.
In early 1996, as part of its IPAT Demonstration Project, the City of
New York entered into the City Agreement to develop public IPATs 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
IPATs, and the Company may deploy additional IPATs throughout the New York City
area at its own risk and expense, subject to City approval of IPAT locations.
The first five IPATs were deployed in New York City in July 1996. A sixth IPAT
was installed in August, 1997. All IPATs providing City services for
information, whether operated by the Company or other suppliers, carry the
City's CityAccess(TM) logo. Pursuant to the City Agreement, the Company has
developed IPATs through which members of the public can obtain access to the
records of the Department of Buildings, certain Department of Health services,
including 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. The
City has recently requested pricing information for extending the City Agreement
to include an additional 12 - 35 IPATs to be installed in the third quarter of
1997. However, there can be no assurance that a contract for this extension will
ultimately be entered into.
The Company's goal in designing the SmartStreet(TM) IPATs was to
maximize potential use by developing software that would be inviting and easy to
use. The IPATs are designed so that a potential user is attracted to the IPAT 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 IPATs and how to use them, and shows people from many walks of
life using them successfully.
The IPATs are configured to permit the Company to offer additional
services provided either by the Company or third parties and to sell advertising
on such IPATs. The City Agreement requires the Company to pay to the City 50% of
advertising and third party service revenues from the first five IPATs and 15%
of such revenues from such additional IPATs that carry the CityAccess logo. The
Company plans to exercise these rights and to actively solicit additional
service providers and advertisers. 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.
In connection with the development of the IPATs and the deployment
and operation of the first five IPATs, the City agreed to pay to the Company an
aggregate of $661,080, of which $361,080 is payable in the form of monthly
payments of $30,090 ($6,018 per IPAT), which were commenced as of August 1,
1996, and the balance of $300,000 is payable in partial amounts as certain
milestones in the development, deployment and operation of the IPATs are
achieved, of which $279,000 has been earned prior to September 30, 1997.
For the first 43 weeks the Company's IPATs were used an average of
2,434 times per week. In recent weeks average usage has exceeded 4,000 uses per
week. In the most recent week for which figures are available, the Company's
IPATs averaged 805 uses per week each. In comparison, IPATs of the other two
participants in the demonstration project averaged 294 and 787 uses each. The
City has indicated that it intends to extend the contract through the end of
1998.
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The Company may also receive transaction fees in connection with the
use of the IPATs by the public to obtain documents or certain other services. As
of May 31, 1997, the first five IPATs 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 IPATs.
In August 1997, ObjectSoft announced the development and immediate
availability of SmartSign(TM), a modular line of IPATs contained in an enclosure
that is only 7-1/2" in depth, with each module weighing less than 70 lbs.,
making the units suitable for regular shipment through UPS and Federal Express.
The modules initially consist of (a) a Pentium class processor unit,
(b) an active-matrix touch screen, with optional sealed heavy-duty keyboard, and
optional credit card reader, (c) a printer unit with page printer and optional
receipt printer, (d) a light-box advertising module with optional plasma display
and (e) an optional touch-sensitive light-box. Although a working unit has been
delivered and is operational, there can be no assurances that there will be any
commercial sales of this line.
As of September 30, 1997 no revenues have been generated by user
transactions or advertising. The IPATs became available to support on-line
inquiries into City databases as of June, 1997.
Recently the Walt Disney Company agreed to a trial with advertising
of the IPAT's installed in New York.
Pursuant to the City Agreement, the Company has the right to install
additional IPATs 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 IPATs, but it is
anticipated, although there can be no assurance, that use by the public will
generate transaction fees. The Company had commenced evaluating potential sites
and will seek to install up to 25 additional IPATs over the next year. The first
of these additional IPAT's was installed in July 1997 in the Museum of Science
in Queens.
At the time the City Agreement with the Company was executed, the
City also signed similar agreements with two other companies for additional
IPATs. 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 IPATs throughout the City.
The Company intends to market IPATs 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 IPATs. Recently,
the Company was the successful bidder in Seattle, Washington, for the
installation of eight IPAT's providing information regarding ferry service.
There can be no assurance that the Company's initial IPATs will
perform on a commercial basis as anticipated, that the Company will be able to
install and operate additional IPATs pursuant to the City Agreement, that the
City will seek to acquire additional IPATs, that the Company will secure a
contract to supply additional IPATs to the City, that it will succeed in
marketing its IPATs to other potential users, or that it will be able to attract
additional service providers or advertisers to IPATs that may be located in New
York City or elsewhere.
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Operation of SmartStreet(TM) IPATs
- ----------------------------------
The Company's goal in designing the SmartStreet(TM) IPATs was to
maximize potential use by developing software that would be inviting and easy to
use. The IPATs are designed so that a potential user is attracted to the IPAT 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 IPATs and how to use them, and shows people from many walks of
life using them successfully.
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Once a user approaches the IPAT, 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 IPATs 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 IPAT. 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 IPAT
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 IPAT volume. When a user walks
away and the IPAT 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.
[GRAPHIC OMITTED]
[See above for description]
SmartStreet(TM) IPAT - Opening Screen
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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 IPAT or leave a message. 3. Touch I Need Help to get online
verbal or video help on
a) What is available on the IPAT;
b) How to use the IPAT.
[GRAPHIC OMITTED]
[See above for description]
SmartStreet(TM) IPAT - 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) IPATs - Lists the location and services available at
all CityAccess(TM) IPATs.
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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's credit card transaction capability became functional
in September, 1997.
SmartStreet(TM) IPAT Technology
- -------------------------------
SmartStreet(TM) IPATs were designed using advanced Internet
technology. This technology allows the IPATs to operate either on a private
Intranet or as an Internet site. The "browser" in the IPAT is Microsoft's
Internet 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 IPAT. 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 IPAT. 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 IPAT)
4. Microsoft Visual Basic's buttons (keyboards)
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<PAGE>
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 IPATs (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 IPATs 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 IPATs, and the IPATs 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
- ---------
The objective of the Company's marketing efforts is to obtain the
rights to place its IPATs in compelling high-density locations. In addition, the
company seeks 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 count that 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 IPATs and to stimulate demand.
Additional marketing efforts focus on identifying content-providers whose
offerings can create additional transaction revenue for the Company's IPATs. 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 IPATs. This effort will be contracted to a telemarketing firm on a
commission basis.
The Company's marketing activities are currently performed by its
executive officers and consultants under such officers' supervision. In March
1997, the Company engaged June R. Petroff as Senior Vice President of Sales and
Marketing. Ms. Petroff was formerly employed as Vice President-Corporate
Marketing for Gateway Outdoor Advertising, and has significant experience in
non-traditional media.
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. The Company discontinued active marketing of OLEBroker(TM) at the end
of 1996 in order to concentrate on its IPAT - and Internet-related businesses.
However, 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 IPAT and Internet service delivery programs.
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<PAGE>
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 IPAT services
or that can otherwise enhance its skill base.
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 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").
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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 IPATs. Microsoft
supports the Company in marketing its public access services, and has informally
agreed to exhibit the Company's IPATs in Microsoft displays at various trade
shows. 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
exclusive regional host and sponsor of Microsoft Developer Days, an ongoing
series of technical conferences organized and operated by Microsoft. The most
recent conference was held on March 19, 1997. The conference attracted over
5,000 paid registrants and was completely sold out. The Company has also
produced technical papers for, and provided consulting services to, Microsoft.
The next conference is expected to be held in February 1998.
COMPETITION
The Company is subject to competition from different sources for its
different services. The Company's intranet IPAT business competes with numerous
companies, including IBM, North Communications, Golden Screens and NCR
(currently a division of AT&T). 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 IPATs
to other municipalities. After fulfillment of the initial contracts, if the City
chooses to install additional IPATs throughout the City of New York, it may
award to others, and not the Company, the contract to install such additional
IPATs. Further, there can be no assurance that other municipalities or other
entities will seek to acquire IPATs from the Company. In addition, if the use of
IPATs 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. Many of such competitors may have resources far greater than the
Company. 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.
CUSTOMERS
The customer base for the Company's IPAT business consists
principally of municipalities and other public sector or commercial entities to
which the Company would sell or lease IPATs, prospective advertisers and
ultimately consumers accessing IPAT services or products. The Company also
intends to market its consulting services to mall operators.
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, 1997, the City of New York accounted for 73%
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of the Company's revenues pursuant to the City Agreement. During the twelve
months ended December 31, 1996, two customers, the City of New York and
Microsoft accounted for 71% of the Company's revenues. During 1995, two
customers accounted for approximately 48% of the Company's revenues.
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
jurisdiction.
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 IPATs 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. 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.
Research and development expenditures were $287,608 for the six
months ended June 30, 1997 and $92,693 in 1996 and $62,863 in 1995. In addition,
during the years ended December 31, 1996 and December 31, 1995, the Company has
capitalized additional software development costs which aggregated $137,904 and
$118,478, respectively.
GOVERNMENT REGULATIONS AND LICENSING
The Company believes that it has all licenses necessary to operate
its business as currently conducted in New Jersey and New York.
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 and future
contracts, if any, with the City and other municipalities or government
entities, the Company will have to comply with such regulations, including
bidding procedures and record-keeping, audit, insurance, bonding and
anti-discrimination provisions, among others.
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. See "Risk Factors -
Government Regulation; Potential Liability for Information and Content
Disseminated through Network."
FACILITIES
The Company occupies approximately 4,300 square feet of office space
in Hackensack, New Jersey, under a lease with an unaffiliated landlord that
expires on March 31, 2003 and provides for a base rent of $58,008 per annum in
1997, subject to certain increases in subsequent periods.
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<PAGE>
EMPLOYEES
As of September 30, 1997, the Company had 13 employees, 12 of which
were full-time, and all of whom are based in its Hackensack, NJ offices. These
include 6 in product development, 3 in management and sales, 2 in operations and
2 in finance and administration.
Although the Company expects to increase its full-time staff to 17 or
more, on an "as-needed" basis, the Company intends to continue with its policy
to outsource non-strategic functions such as 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
In or about January 1997, the Company commenced an action in the
United States District Court for the District of New Jersey against Harvey
Bayard ("Bayard"), a former stockholder, officer and director of the Company. In
its complaint, the Company alleges, among other things, that Bayard wrongfully
induced certain shareholders and investors to repudiate and breach their
commitments to enter into lock-up agreements in connection with the Company's
November 1996 initial public offering, that Bayard wrongfully interfered with
the Company's contractual relations with Renaissance Financial Securities
Corporation, that Bayard breached his own agreement with the Company and his own
agreement to execute a lock-up agreement, and that Bayard breached certain of
his fiduciary obligations to the Company and engaged in other actionable conduct
that damaged the Company. The Company seeks compensatory damages in excess of
$3,500,000.00 and punitive damages. In April 1997, Bayard asserted a
counterclaim against the Company and David E.Y. Sarna ("Sarna"), the Chairman of
the Board of the Company. Bayard's counterclaim alleges, among other things,
that the Company and Sarna commenced a scheme to coerce Bayard into entering
into a lock-up agreement (which Bayard never signed) with respect to his shares
in the Company and to compel him to act on the Company's behalf in inducing
other shareholders to enter into lock-up agreements. Bayard also alleges that
the Company and Sarna communicated with his business associates for the purpose,
among other things, of damaging Bayard's professional reputation. Bayard seeks
compensatory and punitive damages in an unspecified amount. The Company moved to
dismiss the counterclaim and intends to vigorously prosecute its claims against
Bayard. The Court subsequently ruled that Bayard's counterclaim will be
dismissed if it is not properly amended within the period of time provided by
the Court's Order.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
NAME AGE POSITION
---- --- --------
David E. Y. Sarna1 47 Chairman, Secretary and Director
George J. Febish(1) 48 President, Treasurer and Director
June Petroff 45 Senior Vice President - Sales and
Marketing
Daniel E. Ryan(1)(2)(3)(4) 49 Director
Gunther L. Less 66 Director
(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 B.S. 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.
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<PAGE>
June Petroff has been the Senior Vice President of Sales and
Marketing for the Company since March 1997. From 1992 until she joined the
Company, Ms. Petroff was Vice President of Marketing for Gateway Outdoor
Advertising, where she was Marketing Manager from 1991 - 1992. Ms. Petroff has a
B.A. from Colgate University and did graduate work at New York University
Graduate School of Business.
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 B.S./BA in Industrial Management from Manhattan College. Mr. Ryan
is a Certified Systems Professional.
Gunther L. Less. 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. Mr. Less was the
director nominee of the Underwriter.
The Company's Board of Directors is divided into two classes. The
Board is composed of two Class I Directors (Messrs. Sarna and Less) and two
Class II Directors (Messrs. Febish and Ryan). The term of office Class I
Directors expires at the second Annual Meeting of Stockholders following the
Company's 1997 Annual Meeting of Stockholders. The term of office of Class II
Directors expires at the Company's 1998 Annual Meeting of Stockholders.
Directors elected to succeed those whose terms expire are elected to a term of
office expiring at the second Annual Meeting of Stockholders following their
election. 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."
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.
DIRECTOR COMPENSATION
In 1996, directors who were not officers or employers of the Company
received no compensation for attendance at Board meetings or Committee meetings,
however, each director is reimbursed for out-of-pocket expenses incurred in
connection with attendance at meetings or other Company business.
In March 1996 the Board of Directors adopted the 1996 Stock Option
Plan ("Plan") pursuant to which each director who is not a salaried employee of
the Company on the date the Plan is approved by stockholders, was granted an
option to purchase 10,000 shares of Common Stock. Thereafter when each director
who is not a salaried employee of the Company first becomes a director, such
individual is granted an option to purchase 10,000 shares of Common Stock. In
addition, immediately following each Annual Meeting of Stockholders at which
directors are elected, each person who is not a salaried employee of the Company
and is then a director is granted an option to purchase an additional 5,000
shares of Common
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Stock. The exercise price of each share of Common Stock under any option granted
to a director under the Plan shall be equal to the fair market value of a share
of Common Stock on the date the option is granted.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has established (i) a Compensation Committee whose sole
member is Mr. Ryan, (ii) an Audit Committee whose sole member is Mr. Ryan, (iii)
and Executive Committee whose members are Messrs. Sarna, Febish and Ryan, and
(iv) Stock Option Plan Committee whose sole member is Mr. Ryan.
EXECUTIVE COMPENSATION
The following table sets forth information concerning annual and
long-term compensation, paid or accrued, for the Chief Executive Officer and for
each other executive officer of the Company whose compensation exceeded $100,000
in fiscal 1996 (the "Named Executive Officers") for services in all capacities
to the Company during the last three fiscal years.
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------
Long-Term
Compensation
------------
Awards(1)
Other ---------
Name and Annual Securities
Principal Compen- Underlying All Other
Position Year Salary(2) sation (3) Options/SARs Compensation
- -------- ---- --------- ---------- ------------ ------------
<S> <C> <C> <C>
David E.Y. Sarna, 1996 $208,000 -- 50,000 --
Chairman, Secretary and 1995 $200,000 -- -- --
Co-Chief Executive Officer 1994 $200,000 -- -- --
George J. Febish, 1996 $208,000 -- 50,000 --
President, Treasurer and 1995 $200,000 -- -- --
Co-Chief Executive Officer 1994 $200,000 -- -- --
</TABLE>
- ----------------
(1) None of the Named Executive Officers received any Restricted Stock Awards
or LTIP Payouts in 1994, 1995 or 1996.
(2) Includes $107,220 that was accrued but not paid to each of Messrs. Sarna
and Febish in 1995. 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 a bridge loan offering of notes and warrants completed in
June 1996 (the "Bridge Loan Offering") and an offering of units of common
stock and warrants completed in August 1996 (the "July 1996 Offering"),
respectively, and the balance paid from operating revenues.
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(3) As to each individual named, the aggregate amounts of personal benefits
not included in the Summary Compensation Table do not exceed the lesser of
either $50,000 or 10% of the total annual salary and bonus reported for
the Named Executive Officer.
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 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."
STOCK OPTIONS
The following table sets forth information as to all grants of stock
options to the Named Executive Officers during fiscal 1996 under the 1996 Stock
Option Plan (and does not include any options granted by the Company subsequent
to December 31, 1996).
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OPTION GRANTS IN 1996(1)
Individual Grants (1)
---------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees Exercise Expiration
Name Granted in 1996 Price Date (2)
- ---- ------- ------- ----- --------
David E.Y. Sarna 50,000 34.5% $3.50 July 1, 2001
George J. Febish 50,000 34.5% $3.50 July 1, 2001
- --------------------------------------
(1) No stock appreciation rights ("SARs") were granted to any of the Named
Executive Officers during fiscal 1996.
(2) The options became exercisable immediately on the grant date.
There were no stock option or SAR exercises during fiscal 1996 and no
SARs were outstanding at December 31, 1996.
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 and an additional 500,000 shares have been approved
by the Company's Board, subject to approval of the holders of a majority of the
Company's Common Stock if required. 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 250,000 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 is 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
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stock of the Company or any subsidiary). No employees may exercise more than
$100,000 in options held by them in any year.
Each director who was not a salaried employee of the Company on the
date the Plan was approved by stockholders, was granted an option to purchase
10,000 shares of Common Stock. Thereafter, when each director who is not a
salaried employee of the Company first becomes a director, such individual is
granted an option to purchase 10,000 shares of Common Stock. In addition,
immediately following each Annual Meeting of Stockholders at which directors are
elected, each person who is not a salaried employee of the company and is then a
director is granted an option to purchase an additional 5,000 shares of Common
Stock. The exercise price of each share of Common Stock under any option granted
to a director under the Plan shall be equal to the fair market value of a share
of Common Stock on the date the option is granted.
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.
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
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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 1997)) to the SEP. The SEP plan is
intended to qualify under Section 408(k) of the Internal Revenue Code.
401(K) PLAN
Effective April 1, 1997, the Company adopted a Profit Sharing Plan
and Trust intended to qualify under Section 401(k) of the Internal Revenue code
of 1986, as amended. Company employees are eligible to participate in the plan
if they were employed by the Company on April 1, 1997, and otherwise become
eligible to participate in the plan if they have completed one-half year of
service with the Company and have attained age 21. Each participant in the plan
may elect to defer, in the form of contributions to the plan, no more than a
specified percentage of compensation that would otherwise be paid to the
eligible employee in the applicable year, not to exceed a statutorily prescribed
annual limit of $9,500 in 1997, provided that allocations to any participant's
account may generally be no more than the lesser of $30,000 or 25% of any such
participant's compensation in any year. The Company makes discretionary matching
contributions to the plan on behalf of participants as determined each year by
the Company, subject to certain conditions set forth in the plan, and may make a
special discretionary contribution equal to a percentage of the participant's
contribution. Each participant is always 100% vested in the amount that such
participant has contributed, is 100% vested in the Company's special
contributions made to the plan and is subject to certain vesting provisions
included in the plan with respect to the Company's discretionary matching
contributions (25% after each of the first four years of service).
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") provides 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.
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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.
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.
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of September 30, 1997, information
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the Named Executive Officers (as such term is herein defined) and (iv)
all directors and executive officers of the Company as a group.
Name and Number of Shares Percentage
Address of of Common Stock Ownership(3)
Beneficial Owners(1) Beneficially ------------
- -------------------- Owned(2)
----------
David E. Y. Sarna (4) (5) 847,500 20.3%
George J. Febish (4) (6) 907,500 21.7%
June Petroff (7) 20,000 *
Melvin Weinberg, Esq. (8) 300,000 7.3%
c/o Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Cyndel & Co., Inc. (9) 242,500 6.0%
26 Ludlam Avenue
Bayville, New York 11709
Steven Bayern (10) 288,000 7.0%
26 Ludlam Avenue
Bayville, New York 11709
Daniel E. Ryan (11) 15,000 *
Gunther L. Less (11) 15,000 *
All officers and directors as 1,805,000 41.7%
a group (5 persons) (3)(11)
- -----------
* Less than 1%.
(1) Unless otherwise indicated, the business address of each of the officers
and directors is c/o ObjectSoft Corporation, Continental Plaza III, 433
Hackensack Avenue, Hackensack, New Jersey 07601
(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) 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.
(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.
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(5) Includes 150,000 shares held by The David E. Y. Sarna Family Trust ("Sarna
Trust"), of which Rachel Sarna, the wife of Mr. Sarna, and Melvin
Weinberg, Esq. are the trustees. The children of Mr. and Mrs. Sarna are
the sole beneficiaries. Mr. Sarna disclaims beneficial ownership of the
shares held by the Sarna Trust.
(6) Includes 150,000 shares held by The George J. Febish Family Trust ("Febish
Trust"), of which Janis Febish, the wife of Mr. Febish, and Melvin
Weinberg, Esq. are the trustees. The children of Mr. and Mrs. Febish are
the sole beneficiaries. Mr. Febish disclaims beneficial ownership of the
shares held by the Febish Trust.
(7) Includes immediately exercisable options to purchase 20,000 shares of
Common Stock granted under the Company's 1996 Stock Option Plan.
(8) Melvin Weinberg, Esq., by virtue of his shared dispositive power as a
trustee over the shares of Common Stock held by both the Sarna Trust and
the Febish Trust (collectively the "Family Trusts"), may be deemed a
beneficial owner of a total of 300,000 shares of Common Stock,
representing the aggregate share holdings of the Family Trusts. The Sarna
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 Febish Trust was set up by Mr. Febish for the benefit of his
children. Mr. Weinberg and Mrs. Febish 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.
(9) Includes immediately exercisable warrants to purchase 20,000 shares of
Common Stock. Cyndel & Company, Inc. ("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.
(10) 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 a
placement agent warrant issued to Win Capital Corporation, the placement
agent of a private placement of units of Common Stock and warrants that
was completed in August 1996, and the 18,200 shares of Common Stock
issuable upon the exercise of the warrants included in such warrant. Mr.
Bayern is a 50% owner and the vice president of Cyndel and the Chairman
and approximately 50% owner of Win Capital Corporation. Mr. Bayern is
presumed to have shared dispositive power of the shares owned or to be
acquired by Cyndel and the shares to be acquired by Win Capital
Corporation.
(11) Includes, for each of Messrs. Ryan and Less, immediately exercisable
options to purchase 15,000 shares of Common Stock granted under the
Company's 1996 Stock Option Plan.
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.
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
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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-NJ 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 OFFICER WARRANTS
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 Underwriter, 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 "Concurrent Offering."
RECENT SALES OF SECURITIES
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 units (each unit consisting of one share of Common
Stock and one warrant to purchase one share of Common Stock at $4.50 per share)
at an exercise price of $4.50 per unit for a period of three years commencing
upon issuance (the "July Placement Warrant"). The shares of Common Stock
included in the units sold to investors in July and August 1996 and the shares
of Common Stock issuable upon the exercise of the warrants contained therein, as
well as the shares of Common Stock issuable upon the exercise of the July
Placement Warrant (and the warrants issuable upon the exercise thereof) have
been registered for resale. See "Principal Stockholders" and Concurrent
Offering."
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In December 1995, Cyndel, a principal stockholder of the Company,
acquired 1,250 shares of Series B Preferred Stock in consideration of the
payment of $125,000. The Series B Preferred Stock was convertible into 20,000
shares of Common Stock based upon an offering price in the initial public
offering of the Company of $5.00.
REDEMPTION OF SERIES A PREFERRED STOCK
Pursuant to the terms of the Series A Preferred Stock, upon the
effectiveness of the Company's initial public offering, all shares of Series A
Preferred Stock were redeemed at $1.00 per share plus all accumulated, but
unpaid, dividends with respect to which an aggregate redemption payment of
approximately $275,000 was made by the Company.
SERIES B PREFERRED REDEMPTION
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 a warrant, exercisable for a period of three years,
to purchase 20,000 shares of Common Stock at an exercise price of $7.00 per
share.
LOANS TO OFFICER
The Company made a loan to Mr. Sarna in the amount of $440,000 on
January 2, 1997. The loan is payable on November 30, 1997, together with accrued
interest at the rate of eight percent (8%) per annum on the outstanding
principal amount or ten percent (10%) per annum in the event of a default. The
loan was approved by all of the directors of the Company. Mr. Sarna utilized the
funds for a block purchase of 80,000 shares of the Company's Common Stock from
the market maker, who is also the Underwriter, in an open market transaction. In
February 1997, the Company loaned Mr. Sarna an additional $197,500 under similar
terms, which loan was repaid with interest in June, 1997.
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.
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 September 30, 1997, there were
4,082,676 shares of Common Stock outstanding.
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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.
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 share (130% of the initial
public offering price per Unit), subject to adjustment, at any time commencing
November 12, 1997 until November 12, 2001. The Class A Warrants are redeemable
by the Company at a price of $.10 per Class A Warrant commencing November 12,
1997 (or earlier with the consent of the Underwriter) 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 one year after the date of this Prospectus, until the
expiration of the exercise period of the Class A Warrants, the Company will pay
the Underwriter 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 Offering and at the
time of
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exercise of such warrant, (v) the solicitation of the exercise of such warrant
was not a violation of applicable provisions under the Exchange Act and (vi) the
Underwriter is designated in writing as the soliciting NASD member. The
Underwriter and any other soliciting broker/dealers may be prohibited from
engaging in any market making activities or solicited brokerage activities with
regard to the Company's securities during certain periods 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
Underwriter and any other soliciting broker/dealer may have to receive a fee for
the solicitation of the Class A Warrants.
OTHER WARRANTS AND OPTIONS
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 Underwriter, 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 the Selling Securityholder Prospectus. See "Concurrent Offering."
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 July 31, 1997, options to purchase an aggregate of 250,000
shares had been granted under the Company's 1996 Stock Option Plan of which an
option for 5,000 shares was cancelled without exercise. See "Management -- 1996
Stock Option Plan."
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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 another consultant
pursuant to which the Company issued to such consultant 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. To date, 60,000 consultant options have
been received by two consultants of the Company, which were all exercised by
September 30, 1997.
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.
Placement Agent's Warrant; July Placement Warrant
In connection with the Bridge Loan Offering, the Company sold to the
Underwriter, 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 $5.00. The Placement Agent's
Warrant contains anti-dilution provisions providing for adjustments of $5.00 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 the Selling
Securityholder Prospectus. See "Description of Securities - Registration Rights"
and "Concurrent Offering."
-61-
<PAGE>
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 until November 11,
2001. The right to demand the registration of the Common Stock issuable upon
exercise of the Placement Agent's Warrant extends from November 11, 1997 to
November 11, 2001. 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
November 11, 1998 to November 11, 2001.
The Units and certain of the shares of Common Stock subject to
registration rights have been registered in the Selling Securityholder
Prospectus. Certain of the Selling Securityholders have agreed not to sell such
shares for periods of nine or 12 months commencing November 12, 1996 without the
prior consent of the Underwriter. See "Shares Eligible for Future Sale" and
"Concurrent Offering."
TRANSFER AGENT AND WARRANT AGENT
Continental Stock Transfer & Trust Company, New York, New York is the
transfer agent 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.
-62-
<PAGE>
In anticipation of, and subject to completion of, the 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.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 4,082,676
outstanding shares of Common Stock (assuming no exercise of outstanding options
or warrants). Of these shares, the 1,366,050 shares contained in the Units sold
to the public in the Company's initial public offering in November 1996 and
39,500 shares sold by certain Selling Securityholders since November 12, 1996,
are 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 2,677,126 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 one year may, every three
months after such one-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 two years.
-63-
<PAGE>
Under Rule 701 of the Securities Act, employees who purchased shares
upon exercise of options granted prior to November 12, 1996 are entitled to sell
such shares after the 90th day following such date 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.
Sales of substantial amounts of Common Stock pursuant to Rule 144
could subsequently adversely affect the market prices of the Common Stock
offered hereby. 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 commencing
November 12, 1996 without the prior written consent of the Underwriter, 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. As
of the date of this Prospectus, approximately 612,000 of the outstanding shares
of Common Stock are 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 this offering, the Company is
registering for resale by the Selling Securityholders 1,086,963 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 Underwriter and certain other holders, have
agreed not to sell their registered securities for a period of 12 months
commencing November 12, 1996. 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 November 12, 1997 (but
commencing November 12, 1998 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 "Concurrent Offering."
CONCURRENT OFFERING
Concurrently with the Offering, the Company has registered the
offering of 1,086,963 Selling Securityholder Shares and 412,500 Class A Warrants
under the Securities Act on behalf of the Selling Securityholders pursuant to a
Selling Securityholder Prospectus included within the Registration Statement of
which this Prospectus forms a part. The Selling Securityholder Securities are
outstanding or issuable upon the exercise of immediately exercisable warrants.
The Selling Securityholders include the Underwriter with respect to 37,500 Units
issuable upon the exercise of the Placement Agent's Warrant. The Selling
Securityholder Securities are not part of the underwritten Offering, however,
and, other than those held by the Underwriter, all the Selling Securityholder
Securities may not be sold prior to the expiration of 12 months commencing
November 12, 1996 without the prior written consent of the Underwriter. The
Company will not receive any of the proceeds from the sale of the Selling
Securityholder Securities, but will receive the proceeds of the exercise, if
any, of the various warrants pursuant to which the shares of Common Stock and
Class A Warrants comprising 412,500 Units and 270,837 other Selling
Securityholder Shares are issuable. It is anticipated that when the Selling
Securityholder Securities are eligible for sale free of contractual restriction
described above, they will be offered and sold from time to time in the
over-the-counter market, or otherwise, at prices and terms then prevailing or at
prices related to the then current market price, or in negotiated transactions.
-64-
<PAGE>
LEGAL MATTERS
The validity of the securities being offered hereby were 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, 1996 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 Units 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
Units, 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).
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.
-65-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS..............................................F-2
BALANCE SHEET - AS AT DECEMBER 31, 1996.....................................F-3
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND DECEMBER 31, 1995.....................................F-4
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY) FOR THE YEARS ENDED
DECEMBER 31, 1996 AND DECEMBER 31, 1995.....................................F-5
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND DECEMBER 31, 1995.....................................F-6
NOTES TO FINANCIAL STATEMENTS...............................................F-7
CONDENSED BALANCE SHEETS - AS AT JUNE 30, 1997 AND
DECEMBER 31, 1996..........................................................F-16
CONDENSED STATEMENTS OF OPERATIONS - THREE MONTHS
AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996................................F-17
CONDENSED STATEMENTS OF CASH FLOWS - THREE MONTHS
AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996................................F-18
NOTES TO CONDENSED FINANCIAL STATEMENTS....................................F-19
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, 1996, the related statements of operations,
changes in stockholders' equity (capital deficiency) and cash flows for each of
the years in the two-year period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
report.
In our opinion, the financial statements enumerated above present
fairly, in all material respects, the financial position of ObjectSoft
Corporation as at December 31, 1996 and the results of its operations and cash
flows for each of the years in the two-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Richard A. Eisner & Company, LLP
Richard A. Eisner & Company, LLP
Florham Park, New Jersey
March 7, 1997
F-2
<PAGE>
OBJECTSOFT CORPORATION
BALANCE SHEET
AS AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
A S S E T S
-----------
<S> <C>
Current assets:
Cash and cash equivalents (Notes A[9] and J[1]) ...................... $ 4,039,358
Accounts receivable .................................................. 5,900
Prepaid expenses and other current assets ............................ 180,463
-----------
Total current assets .......................................... 4,225,721
Equipment, at cost, net of accumulated depreciation (Notes A[2], B and E) 457,848
Capitalized software (Notes A[5] and C) ................................. 168,118
Other assets ............................................................ 130,474
-----------
T O T A L ..................................................... $ 4,982,161
===========
L I A B I L I T I E S
---------------------
Current liabilities:
Current portion of obligations under capital lease (Note E) ............. $ 45,740
Accounts payable ..................................................... 57,309
Accrued expenses ..................................................... 101,872
Other liabilities .................................................... 9,785
-----------
Total current liabilities ..................................... 214,706
-----------
Obligations under capital lease (Note E) ................................ 38,335
-----------
Commitments (Note K)
STOCKHOLDERS' EQUITY
--------------------
(Notes G and L)
Common stock, $.0001 par, authorized 20,000,000 shares,
issued and outstanding 4,022,676 shares ................................. 402
Additional paid-in capital .............................................. 6,878,868
Accumulated deficit ..................................................... (2,150,150)
-----------
Total stockholders' equity .................................... 4,729,120
-----------
T O T A L ..................................................... $ 4,982,161
===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE>
OBJECTSOFT CORPORATION
STATEMENTS OF OPERATIONS
Year Ended
December 31,
---------------------------
1996 1995
----------- -----------
Revenues (Note J[2]):
Consulting.................................... $ 269,401 $ 447,976
Training ..................................... 21,279 118,618
Rental income (Note K[1]) .................... 150,450 --
----------- -----------
Total revenues ......................... 441,130 566,594
----------- -----------
Expenses:
Cost of services ............................. 424,336 429,604
Research and development ..................... 92,693 62,863
General and administrative ................... 834,960 193,025
Interest ..................................... 329,836 3,502
----------- -----------
Total expenses ........................ 1,681,825 688,994
----------- -----------
NET (LOSS) ...................................... $(1,240,695) $ (122,400)
=========== ===========
Net loss per share .............................. $ (0.45) $ (0.05)
=========== ===========
Weighted average number
of shares outstanding ........................ 2,848,943 2,797,134
=========== ===========
The accompanying notes to financial statements are an integral part hereof.
F-4
<PAGE>
OBJECTSOFT CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-in
Shares Amount Capital (Deficit) Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 .............. 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 F) ............................ -- -- (2,500) -- (2,500)
Common Stock issued, net of costs ..... 18,000 1 15,499 -- 15,500
Compensatory option granted (Note ..... -- -- 10,000 -- 10,000
G[3])
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 G[3]) ......................... -- -- 16,000 -- 16,000
Dividends declared .................... -- -- -- (32,051) (32,051)
Units issued, net of costs (Note G[2]) 1,639,051 164 6,279,771 -- 6,279,935
Exercise of warrants (Note G[3]) ...... 90,625 9 181,241 -- 181,250
Net loss .............................. -- -- -- (1,240,695) (1,240,695)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 ............ 4,022,676 $ 402 $ 6,878,868 $(2,150,150) $ 4,729,120
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE>
OBJECTSOFT CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------
1996 1995
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) .................................................... $(1,240,695) $(122,400)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization ............................. 174,699 58,056
Amortization of discount on note payable .................. 268,525 --
Provision (recovery) for doubtful accounts ................ (16,200) 16,200
Stock options issued for services rendered ................ 16,000 10,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable ................................... 82,902 67,091
Prepaid expenses and other current assets ............. (153,884) 6,311
Other assets .......................................... (94,875) 34,587
Increase (decrease) in:
Accounts payable ...................................... (1,005) (48,332)
Accrued expenses ...................................... 7,617 (28,574)
Accrued officer compensation .......................... (391,687) 107,220
Other liabilities ..................................... 8,169 --
----------- ---------
Net cash provided by (used in) operating activities . (1,340,434) 100,159
----------- ---------
Cash flow from investing activities:
Capital expenditures .......................................... (419,096) --
Capitalized software and courseware ........................... (137,904) (118,478)
----------- ---------
Net cash (used in) investing activities ............. (557,000) (118,478)
----------- ---------
Cash flow from financing activities:
Proceeds from issuance of preferred and common stock .......... -- 113,000
Proceeds from issuance of warrants - bridge units ............. 123,525 --
Proceeds from note payable .................................... 981,475 --
Repayment of note payable ..................................... (1,250,000) --
Deferred offering costs ....................................... -- (30,250)
Proceeds from issuance of common stock and warrants ........... 6,279,935 --
Dividends ..................................................... (32,051) --
Proceeds from exercise of warrants ............................ 181,250 --
Principal payments on obligations under capital leases ........ (27,431) (7,928)
Redemption of preferred stock ................................. (383,906) --
----------- ---------
Net cash provided by financing activities ........... 5,872,797 74,822
----------- ---------
NET INCREASE IN CASH ............................................. 3,975,363 56,503
Cash, beginning of period ........................................ 63,995 7,492
----------- ---------
CASH, END OF PERIOD .............................................. $ 4,039,358 $ 63,995
=========== =========
Supplemental disclosures of cash flow Cash paid during the period:
Interest expense ............................................ $ 61,311 $ 3,502
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-6
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(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.
[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, 1996, Federal net operating loss carryforwards of approximately
$2,200,000 which may be applied against future taxable income through 2011.
[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.
[5] Software 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.
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.
[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
F-7
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
- -----------------------------------------------------
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
[7] Stock-based compensation:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") allows companies to either expense
the estimated fair value of stock options or to continue to follow the intrinsic
value method set forth in APB Opinion 25, "Accounting for Stock Issued to
Employees" ("APB 25") but disclose the pro forma effects on net (loss) had the
fair value of the options been expensed. The Company has elected to continue to
apply APB 25 in accounting for its stock option incentive plans. See Note G[3]
to the financial statements for further information.
[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 period and the net loss
increased by the dividends accruing on the cumulative preferred stock. Since, in
1995 and prior to November 13, 1996, certain shares of common stock and common
stock equivalents were issued and, in accordance with certain rules of the
Securities and Exchange Commission all such shares of common stock and common
stock equivalents were considered outstanding for 1995 and through June 30,
1996. Fully diluted net loss per share is not shown since it would be
anti-dilutive.
During 1996, the Company issued units consisting of common stock and
warrants (see Note D) and utilized $125,000 of the proceeds to redeem the Series
B preferred stock. Additionally, the Company redeemed the Series A preferred
stock and repaid the short term debt with the proceeds from the 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 years ended December 31, 1996 and December 31, 1995 would have
been $(0.31) and ($0.04), respectively. These loss per share computations assume
an additional weighted average number of shares outstanding for the years ended
December 31, 1996 and December 31, 1995 of 173,834 and 43,367, respectively.
[9] Cash and cash equivalents:
Cash and cash equivalents include cash on hand, demand deposits and
all highly-liquid investments with a maturity of three months or less at the
time of purchase.
F-8
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - EQUIPMENT:
- --------------------
At December 31, 1996, equipment consists of:
Kiosks............................... $407,131
Equipment............................ 179,323
--------
586,454
Accumulated depreciation............. 128,606
--------
T o t a l............... $457,848
========
Depreciation expense aggregated $83,587 and $19,573 for the years
ended December 31, 1996 and 1995, respectively. Included in depreciation expense
is depreciation expense on equipment under capital lease which aggregated
$14,920 and $8,396, for the years ended December 31, 1996 and 1995,
respectively.
During 1996, the Company acquired equipment under capital lease
aggregating $98,906.
(NOTE C) - CAPITALIZED SOFTWARE:
- -------------------------------
During the years ended December 31, 1996 and December 31, 1995, the
Company has capitalized software development costs which aggregated $137,904 and
$118,478, respectively. Amortization of capitalized software costs aggregated
$78,392 and $9,873 for the years ended December 31, 1996 and December 31, 1995,
respectively. Additionally amortization of capitalized courseware costs
aggregated $12,720 and $28,610 for the years ended December 31, 1996 and
December 31, 1995, respectively.
(NOTE D) - FINANCING:
- --------------------
In 1996, prior to the IPO, 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 other securities as might be offered in the Company's IPO ("IPO
Securities"). Additionally, the placement agent received a warrant to purchase
37,500 shares of common stock or other securities as might be offered in the
Company's IPO. The notes were paid in full on November 22, 1996.
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
was discounted by the value of the warrants and the offering costs. The discount
was amortized as additional interest expense from the date of issuance to
November 22, 1996, the date the note was paid in full. The IPO was completed in
November 1996; the bridge unit warrants are exercisable into the IPO Securities
at $3.50 per unit. These warrants expire in November 1999. The placement agent
warrants are exercisable at $4.55 and expire in November 2001.
During the year ended December 31, 1996, amortization aggregated
$268,525.
F-9
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(NOTE E) - OBLIGATIONS UNDER CAPITAL LEASE:
- ------------------------------------------
Minimum future lease payments under capital leases expiring through
2001, as of December 31, 1996 are as follows:
Year Ending
December 31, Amount
------------ ------
1997....................................... $ 57,676
1998....................................... 30,933
1999....................................... 6,723
2000....................................... 5,080
2001....................................... 2,193
--------
102,605
Less amount representing interest.............. 18,530
--------
Present value of net minimum
lease payments............................... 84,075
Less present value of net minimum
lease payments due within one year........... 45,740
--------
T o t a l.................. $ 38,335
========
(NOTE F) - PREFERRED STOCK:
- --------------------------
The Series A 9% cumulative voting preferred stock was redeemed at the
time of the initial public offering for a total of $212,500 plus cumulative
dividends of $71,214.
The Series B 10% cumulative preferred stock was redeemed at the time
of the private placement for a total of $125,000 and warrants expiring November
13, 1999 to purchase 20,000 shares of common stock at an exercise price of $7.00
per share. Dividends paid in 1996 aggregated $7,243.
(NOTE G) - STOCKHOLDERS' EQUITY:
- -------------------------------
[1] Recapitalization:
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.
[2] Private placement and initial public offerings:
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 offering costs of $139,215. Additionally, the
F-10
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - STOCKHOLDERS' EQUITY: (CONTINUED)
- -------------------------------
placement agent was granted warrants to purchase 27,300 of these units at an
exercise price of $4.50 per unit. The warrants expire November 13, 1999.
In November 1996, the Company issued 1,366,050 units, consisting of
one share of common stock and a warrant to purchase one share of common stock at
an exercise price of $6.50 per share expiring November 2001. The Company
received proceeds of $5,463,650 net of offering costs of $1,366,600. In
connection with the IPO, the underwriter was granted an option to purchase
87,500 units at $8.00 per unit.
[3] Stock options and warrants:
As of January 1, 1995, 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 November 1996, to purchase 106,250 shares of
common stock at an exercise price of $2.00. In 1996, warrants to purchase 90,625
shares of common stock were exercised. Warrants to purchase 15,625 shares of
common stock expired.
In 1995, the Company granted an option to purchase 100,000 shares of
common stock at $1.00 per share in exchange for consulting services. 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 $16,000 and warrants to purchase 8,000 shares
of common stock were vested as of December 31, 1996.
In addition, 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.
Other than the warrants to purchase 90,625 shares of common stock,
no other options or warrants were exercised in 1995 or 1996.
The Company applies APB 25 in accounting for its stock option
incentive plan and, accordingly, recognizes compensation expense for the
difference between the fair value of the underlying common stock and the grant
price of the option at the date of grant. The effect of applying SFAS No. 123 on
1996 pro forma net loss as stated above is not necessarily representative of the
effects on reported net loss for future years due to, among other things (1) the
vesting period of the stock options and the (2) fair value of additional stock
options in future years. Had compensation cost for the Company's stock option
plans been determined based upon the fair value at the grant date for awards
under the plans consistent with the methodology prescribed under SFAS No. 123,
the Company's net loss in 1996 would have been approximately $1.4 million or
$(0.50) per share. The weighted average fair value of the options granted during
1996 are estimated as $1.20 per share on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: dividend
yield 0%, volatility of 40%, risk-free interest rate of 6.37% and expected life
of 5 years.
F-11
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - STOCKHOLDERS' EQUITY: (CONTINUED)
- -------------------------------
During 1996, the Company granted options on 145,000 shares of its
common stock at an average exercise price of $3.43. No options were either
exercised or forfeited during the year.
The following table summarizes information about the plan's options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (In Years) Price Exercisable Price
- -------------- ------------ ----------- -------- ----------- ----------
$2.50 to $3.50 145,000 5.0 $3.43 129,999 $3.42
The Company has reserved 2,961,887 shares of its common stock for
issuance upon exercise of the outstanding warrants and options.
(NOTE H) - INCOME TAXES:
- ------------------------
The significant components of the Company's deferred tax assets and
liabilities at December 31, 1996 as follows:
Accrual to cash adjustment..................... $ (52,000)
Capitalized software........................... (65,000)
Net operating losses carryforward.............. 909,000
Valuation allowance............................ (792,000)
----------
Net deferred tax asset......................... $ 0
==========
The significant components of the provision for income taxes consists
of the following:
December 31,
------------
1996 1995
---- ----
Accrual to cash adjustment...........$ (255,000) $ 62,000
Net operating loss carryforward...... 764,000 37,000
Capitalized software................. (28,000) (35,000)
Increase in valuation allowance...... (481,000) (64,000)
---------- --------
Provision for income taxes...........$ 0 $ 0
========== =========
F-12
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - INCOME TAXES: (CONTINUED)
- -----------------------
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
year ended December 31, 1996 and 1995, respectively, is summarized as follows:
December 31,
------------
1996 1995
---- ----
Statutory federal income tax rate............. 34.0% 34.0%
Increase in valuation allowance............... (38.8) (39.2)
Research and development credit............... 0.9 7.3
Miscellaneous................................. 3.9 (2.1)
------- -------
Effective income tax rate..................... 0.0% 0.0%
======= =======
(NOTE I) - EMPLOYEE BENEFIT PLAN:
- --------------------------------
The Company maintains a noncontributory Employee Savings Plan, in
accordance with the provisions of Section 401 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 J) - FINANCIAL INSTRUMENTS, REVENUES AND OTHER MATTERS:
- ------------------------------------------------------------
[1] Cash:
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash. The Company maintains its cash
in a highly rated financial institution. At December 31, 1996, the Company had
bank deposits exceeding Federally insured limits by approximately $4,000,000.
[2] Revenues:
For the years ended December 31, 1996 and December 31, 1995, 71
percent and 48 percent, respectively, of revenues were derived from two
customers.
[3] 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.
F-13
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(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 remaining rent receivable at December 31, 1996
under this agreement is $210,630.
[2] Lease:
The Company leases office space and equipment under operating leases
with an initial or remaining term of more than one year expiring through 2003.
Year Ending
December 31, Amount
------------ ------
1997.......................................... $ 58,008
1998.......................................... 77,822
1999.......................................... 80,494
2000.......................................... 84,787
2001.......................................... 89,080
Thereafter.................................... 116,984
--------
T o t a l................................ $507,175
========
Rent expense approximated $62,500 and $18,300, for the years ended
December 31, 1996 and December 31, 1995, respectively.
[3] Employment agreements:
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) - SUBSEQUENT EVENT:
- ---------------------------
In January 1997, with the approval of the board of directors, the Company
loaned $440,000 to the Company's chairman of the board. The loan which is
unsecured, bears interest at 8% per annum and is due in November 1997. The
chairman of the board used the proceeds for a block purchase of 80,000 shares of
the Company's common stock from the market maker, who was also the underwriter
of the Company's IPO, in an open market transaction.
F-14
<PAGE>
OBJECTSOFT CORPORATION
CONDENSED BALANCE SHEETS -- JUNE 30, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 16,020 $ 4,039,358
Marketable securities .................................... 2,123,982
Accounts receivable ...................................... 201,769 5,900
Notes and loan receivable- officer shareholder ........... 440,000
Loan receivable - InteractiVisions, Inc. ................. 100,000
Prepaid expenses and other current assets ................ 144,074 180,463
----------- -----------
Total current assets ..................................... 3,025,845 4,225,721
Equipment, at cost, net of accumulated depreciation ......... 449,219 457,848
Capitalized software ........................................ 128,134 168,118
Other assets ................................................ 100,685 130,474
----------- -----------
TOTAL ....................................................... $ 3,703,883 $ 4,982,161
=========== ===========
LIABILITIES
Current liabilities
Current portion of obligations under capitalized leases .. $ 46,779 $ 45,740
Accounts payable ......................................... 131,228 57,309
Accrued liabilities ...................................... 87,171 101,872
Other current liabilities ................................ 12,981 9,785
----------- -----------
Total current liabilities ................................... 278,159 214,706
----------- -----------
Obligations under capitalized leases ........................ 14,008 38,335
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock, $.0001 par value; authorized 20,000,000 shares;
issued and outstanding 4,081,676 shares as of June 30,
1997 and 4,022,676 of December 31, 1996 .................. 408 402
Additional paid-in capital .................................. 6,941,862 6,878,868
Accumulated deficit ......................................... (3,530,554) (2,150,150)
----------- -----------
Total stockholders' equity ............................... 3,411,716 4,729,120
----------- -----------
T O T A L ................................................... $ 3,703,883 $ 4,982,161
=========== ===========
</TABLE>
F-15
<PAGE>
OBJECTSOFT CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND THE SIX MONTHS ENDED
JUNE 30, 1997 AND JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30 June 30 June 30 June 30
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Consulting ............... $ 61,872 $ 166,069 $ 109,401 $ 258,000
Development and training . -- 14,556 -- 37,954
Rental income ............ 90,270 -- 180,540 --
Investment income ........ 48,546 -- 84,672 --
----------- ----------- ----------- -----------
Total revenues ............ 200,688 180,625 374,613 295,954
----------- ----------- ----------- -----------
Expenses:
Cost of Services ......... 170,343 138,247 396,481 173,467
Research and development . 188,993 -- 287,608 --
General and administrative 495,883 186,628 913,960 332,413
Interest expense ......... 3,248 90,346 6,968 90,796
Provision for loss on loan
receivable ............. 150,000 -- 150,000 --
----------- ----------- ----------- -----------
Total expenses ............ 1,008,467 415,221 1,755,017 596,676
----------- ----------- ----------- -----------
NET (LOSS) ................... ($ 807,779) ($ 234,596) ($1,380,404) ($ 300,722)
----------- ----------- ----------- -----------
NET (LOSS) PER SHARE ......... ($ 0.20) ($ 0.08) ($ 0.34) ($ 0.11)
=========== =========== =========== ===========
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING ............... 4,065,632 2,800,734 4,050,952 2,800,734
=========== =========== =========== ===========
</TABLE>
F-16
<PAGE>
OBJECTSOFT CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 - (UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) (1,380,404) ($ 300,722)
Adjustments to reconcile net loss to net cash (used in) operating
activities:
Depreciation and amortization 159,665 52,719
Amortization of discount on note payable -- 77,263
Provision for doubtful accounts -- 9,000
Provision for loss on loan receivable 150,000 --
Stock options issued for services rendered 4,000 4,000
Changes in operating assets and liabilities:
(Increase) in accounts receivable (195,869) (137,795)
Decrease in prepaid expenses and other current assets 36,389 14,159
(Increase) decrease in other assets 29,789 (8,961)
Increase in accounts payable 73,919 92,680
(Decrease) in accrued expenses and other liabilities (11,505) (28,914)
(Decrease) in accrued officer compensation -- (200,000)
----------- -----------
Net cash used in operating activities (1,134,016) (426,571)
----------- -----------
Cash flow from investing activities:
Capital expenditures (83,890) (126,258)
Capitalized software and courseware (27,162) (109,684)
Investment in marketable securities (2,123,982) --
Loan receivable Interactivisions, Inc. (250,000) --
Increase in notes receivable officer shareholder (440,000) --
----------- -----------
Net cash (used in) investing activities (2,925,034) (235,942)
----------- -----------
Cash flow from financing activities
Proceeds from note payable -- 981,475
Dividends -- (3,125)
Deferred offering costs -- (74,036)
Proceeds from issuance of warrants -- 123,525
Proceeds from exercise of warrants and issuance of 59,000 shares 59,000 --
Principal payments on obligations under capital leases (23,288) (5,262)
----------- -----------
Net cash provided by financing activities 35,712 1,022,577
----------- -----------
NET INCREASE (DECREASE) IN CASH (4,023,338) 360,064
Cash, beginning of period 4,039,358 63,995
----------- -----------
Cash, end of period $ 16,020 $ 424,059
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest expense paid $ 3,248 $ 1,512
=========== ===========
</TABLE>
F-17
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, the instructions to Form 10-QSB and item 310(b) of
Regulation SB. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included. For further information, refer to the Financial Statements and
footnotes thereto included in the Company's Registration Statement and
Prospectus and Form 10-KSB (for the year ended December 31, 1996) as filed with
the Securities and Exchange Commission.
NOTE B -- LOSS PER SHARE
The loss per share amounts in the statement of operations have been
computed in accordance with a Staff Accounting Bulletin (SAB) of the Securities
and Exchange Commission. According to the SAB, common stock and common warrants
issued are to be treated as common stock equivalents outstanding for all periods
presented if such common stock was issued or such common stock warrants may be
exercised, at a price substantially below the public offering price. Net loss
per share was computed based on the weighted average number of shares of common
stock outstanding during the period and the net loss for the period ending March
31, 1996 was increased by dividends accruing on the cumulative preferred stock.
Prior to November 13, 1996, certain shares of common stock and common stock
equivalents were issued and in accordance with certain rules of the Securities
and Exchange Commission all such shares of common stock and common stock
equivalents were considered outstanding through June 30, 1996. Fully diluted net
loss share is not shown since it would be anti-dilutive.
NOTE C -- NOTES AND LOAN RECEIVABLE OFFICER SHAREHOLDER
In January 1997, with the approval of the board of directors, the Company
loaned $440,000 to the Company's chairman of the board. The loan which is
unsecured, bears interest at 8% per annum and is due in November 1997. The
chairman of the board used the proceeds for a block purchase of 80,000 shares of
the Company's common stock from the market maker, who was also the underwriter
of the Company's IPO, in an open market transaction. In February 1997, the
Company loaned the chairman of the board an additional $197,500 under similar
terms. The latter loan was repaid in June, 1997.
F-18
