As filed with the Securities and Exchange Commission on August 11, 1998
Registration No. 333-10519
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
Post Effective Amendment No. 2 to
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------------------
OBJECTSOFT CORPORATION
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
Delaware 7373 22-3091075
<S> <C> <C>
(State of other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
---------------------------
Continental Plaza III, 433 Hackensack Avenue, Hackensack, New
Jersey 07601 (201) 343-9100
(Address and telephone number of principal executive offices)
---------------------------
Continental Plaza III, 433 Hackensack Avenue, Hackensack,
New Jersey 07601
(Address of principal place of business or intended principal place of business)
---------------------------
David E.Y. Sarna, Chairman
ObjectSoft Corporation
Continental Plaza III, 433 Hackensack Avenue, Hackensack, New
Jersey 07601 (201) 343-9100
(Name, address and telephone number of agent for service)
---------------------------
Copies to:
Melvin Weinberg, Esq.
Parker Chapin Flattau & Klimpl, LLP
New York, New York 10036
Tel: (212) 704-6000
Fax: (212) 704-6288
---------------------------
Approximate Date of Commencement of Proposed Sale to the Public: As
soon as practicable after the effective date of this registration statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
------------
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ____________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ____________
If delivery of the prospectus is expected to be made pursuant to Rule
343, check the following box.
- --------------------------------------------------------------------------------
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
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<PAGE>
EXPLANATORY NOTE
This Registration Statement covers the registration of (i) up to
1,366,050 shares of Common Stock, $.0001 par value ("Common Stock"), of
ObjectSoft Corporation, a Delaware corporation (the "Company"), and 1,366,050
redeemable Class A Warrants ("Class A Warrants"), for sale by the Company in a
public offering and (ii) an additional 867,980 shares of Common Stock and
412,500 Class A Warrants (collectively, the "Selling Securityholders
Securities"), all for resale by the holders thereof or of certain outstanding
warrants (the "Selling Securityholders") from time to time.
The complete Prospectus relating to the offering by the Company follows
immediately after this Explanatory Note. Following the Prospectus for the
offering by the Company are pages of the Prospectus relating solely to the
Selling Securityholders Securities, including alternative front and back cover
pages and sections entitled "Concurrent Public Offering," "Plan of
Distribution," and "Selling Securityholders" to be used in lieu of the section
entitled "Concurrent Registration of Common Stock" in the Prospectus relating to
the offering by the Company. Certain sections of the Prospectus for the offering
by the Company, such as "Use of Proceeds" will not be used in the Prospectus
relating to the Selling Securityholders Securities.
-2-
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
DATED AUGUST 11, 1998
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, until November 12, 2001. 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 August 6, 1998, the closing sales price for the Common
Stock and the Class A Warrants were $1.51 and $.17, 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 9.
------------------------
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
867,980 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 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") originally granted to Renaissance
Financial Securities Corporation (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 Placement
Agent's Warrant was subsequently assigned to two of the Underwriter's executive
officers. The Company understands that the Underwriter has ceased operating and
has given up its NASDAQ license. The Selling Securityholders 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 Securityholders Securities, but will
receive the proceeds of the exercise, if any, of the various warrants pursuant
to which certain of the Selling Securityholders Securities are issuable. See
"Certain Transactions" and "Concurrent Offering."
<TABLE>
<CAPTION>
Price to Warrant Underwriting Discounts Proceeds to
holders(1) and Commissions(2) Company(3)
<S> <C> <C> <C>
Per Share........................... $6.50 $.325 $6.175
Total (4)........................... $8,879,325 $443,966.25 $8,435,358.75
======================================== ==================== ========================== =============================
</TABLE>
(continued on following page)
The date of this Prospectus is August 11, 1998
-1-
<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) Assumes payment of a five percent warrant solicitation fee. 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 $19,000; and (ii) any warrant
solicitation fee. Does not include additional proceeds to be received
by the Company upon the exercise by the Underwriter's assignees of the
Unit Purchase Options.
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<PAGE>
----------------------
TABLE OF CONTENTS
----------------------
Page
Prospectus Summary...................................................... 4
Risk Factors............................................................ 9
Use of Proceeds......................................................... 21
Dividend Policy......................................................... 22
Capitalization.......................................................... 23
Selected Financial Data................................................. 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 26
Glossary................................................................ 30
Business................................................................ 32
Management.............................................................. 50
Principal Stockholders.................................................. 59
Certain Transactions.................................................... 61
Description of Securities............................................... 61
Shares Eligible for Future Sale......................................... 65
Concurrent Offering..................................................... 66
Legal Matters........................................................... 66
Experts................................................................. 66
Additional Information.................................................. 66
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 furnished its stockholders with annual reports containing
audited financial statements on or about June 15, 1998.
ObjectSoft(TM), SmartStreet(TM), SmartSign(TM), OLEBroker(TM),
CafeOLE(TM) and HeartBeat(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>
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 is currently engaged in the business of providing
transaction-based and advertising- supported services through interactive public
access terminals (IPATs or kiosks), and the Internet. Its IPATs may be sold to
others, or held for operating income, which is derived from advertising fees and
transactional revenue. An IPAT is a machine deployed in areas with high
pedestrian traffic, and that permits the general public to obtain information or
to purchase goods and services. At a minimum, an IPAT contains a computer, a
computer monitor and a touch screen. It may also contain a keyboard, page
printer, receipt printer, credit card reader, communications devices, a second
processor, an upper monitor, a ticket printer, illuminated signs, or
combinations of these devices. The IPATs use standard, off-the-shelf operating
systems and proprietary software to control and manage the IPAT functions.
ObjectSoft's new SmartSign kiosk is only 7 1/2" deep, and incorporates
illuminated advertising signs, a touch screen, receipt printer, page printer and
credit card reader. Proprietary software, built on a Microsoft platform,
provides kiosk control and monitoring functions, including HeartBeat(TM)
continuous kiosk monitoring software. Revenues are derived from conventional and
electronic advertising, electronic commerce transactions on company-owned kiosks
and outright sale of SmartSigns. The kiosks will be located in high density
pedestrian traffic areas. Kiosk users are able to obtain information, to obtain
documents and to transact certain business without the necessity of interacting
directly with City employees or appearing personally at certain City offices.
In early 1996, as part of its Kiosk Demonstration Project, the City of
New York entered into an agreement with the Company (the "City Agreement") to
develop public kiosks to be located in City offices and other public locations
in an effort to expedite transactions with the City. Under the City Agreement,
the City agreed to lease the first five kiosks, and the Company may deploy
additional kiosks throughout the New York City area at its own risk and expense,
subject to City approval of the kiosk locations. Two additional kiosks were
installed later, the first at the Museum of Science and the second, the first
installation of the Company's new SmartSign(TM), was installed in May 1998 at
the Harlem Heights Historical Society on the grounds of Columbia University's
Audubon Center. The initial term of the City Agreement is one year, which may be
extended by the City for a period of up to 24 months. Any extension or renewal
of the City Agreement will be contingent upon the City's evaluation of the Kiosk
Demonstration Project as a whole and of the Company's kiosks. Based on the
successful evaluation, the City has contracted to extend the contract for
eighteen months, through the end of its 1999 fiscal year. Pursuant to the City
Agreement, the Company has developed kiosks through which members of the public
can obtain certain information from, and are able to transact certain business
with, the Buildings Department and the Department of Health, as well as
information about City government and elected officials and general information
about transportation and attractions in New York.
The kiosks are configured to permit the Company to offer additional
services provided either by the Company or third parties and to sell advertising
on such kiosks. Under the City Agreement, a portion of the revenue, if any,
derived from such services and advertising is shared with the City. The Company
will seek to
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<PAGE>
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 entered
into an agreement with the City of San Francisco to provide its SmartSign kiosks
in a demonstration project, and the company has sold (through outright sale) a
total of ten kiosks to King County, Washington for use in Ferry terminals in and
around Seattle.
After its inception in 1990, the Company's activities consisted
initially of consulting, writing, training and custom software development for
various corporate and government clients, including Microsoft, for which it
produced technical papers and provided consulting services. In performance of
these activities, the Company developed skills in rapid application development
and a base of courseware and reusable software objects to which it retains
title. In 1995, the Company decided to direct these skills and its expanding
body of reusable software objects toward the development of services through
which it can derive revenue on a "per transaction" basis. It developed and
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. OLEBroker(TM) was discontinued in 1997. In connection with the
development of OLEBroker(TM), the Company developed significant additional
software objects, which it then used in the development of technology for the
kiosk and Internet service delivery programs. The Company anticipates that the
kiosk and Internet service delivery programs will constitute the most
significant part of its business, and it does not, as a general rule continue to
engage in consulting activities.
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" which in New York is 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. In San
Francisco, Mayor Willie Brown is featured on the attract loop. 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, as extended, requires the Company to pay to
the City 50% of advertising and third party service revenues from the first five
IPATs and no revenues shall be paid to the City 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.
In connection with the development of the kiosks and the deployment and
operation of the first five kiosks, the City agreed to pay to the Company an
aggregate of $661,080. All amounts due under this contract have been received.
In addition, the City has elected to extend the Agreement through the end of
June 30, 1999 although the monthly revenue that Object Soft receives has been
reduced to $9,750 to reflect that amount previously paid and which covered a
substantial portion of the Company's equipment costs. Subsequently, the Company
added two IPATs in New York, one at the Museum of Science and one at the Audubon
Technology Center of Columbia University. The Company receives no revenue from
the City of New York from these IPATs.
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<PAGE>
However, the IPAT located in the Audubon Center has attracted advertisers, and
currently generates about $3,000 in revenue per month. This IPAT is the first of
the Company's new SmartSigns. The Company began deriving revenues from
advertising in May 1998 from contracts signed in March 1998. The Company may
also receive transaction fees in connection with the use of the kiosks by the
public to obtain documents or certain other services, although so far,
transaction revenues have been minimal. The amount of future transaction and
advertising revenues, if any, will depend on user and advertiser acceptance of
the IPATs. On June 24, 1998, the Company entered the San Francisco market with
an IPAT located in the Castro Station of the San Francisco Metro, and it is
expected to begin generating revenue in August 1998.
In New York City for the seventeen months ended December 31, 1997, the
Company's IPATs were used a total of 220,141 times (an average of 12,965 per
month) and 75,948 times (an average of 12,658 per month) during the six months
ended June 30, 1998. Usage in San Francisco for the period June 22, 1998 through
July 17, 1998 was 40,977 times (1,465 per day, approximately equal to about
1,226 users.) The amount of future transaction and advertising revenues, if any,
will depend on user and advertiser acceptance of the kiosks.
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 during the next year. The
first of these additional IPATs was installed in July 1997 in the Museum of
Science in Queens. The second was installed at the Harlem Heights Historical
Society in May 1998.
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 ten
IPATs providing information regarding ferry service. In March 1998 the Company
concluded an agreement with the City of San Francisco to provide a trial of its
SmartSign kiosks in San Francisco. The initial trial will be in the MUNI station
located in the Castro district. Additional trials can be arranged by mutual
agreement.
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,
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<PAGE>
Microsoft. The next conference is scheduled for September 2, 1998. Additionally,
in March 1998, Microsoft entered into an agreement with the Company to advertise
on its SmartSigns IPATs.
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.
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, until November 12,
2001. The Class A Warrants may be
redeemed by the Company, 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.................. 867,980 shares of common Stock and
412,500 Class A Warrants
(collectively, the "Selling
Securityholders Securities"), all
for resale by the holders thereof
or of certain outstanding warrants
(the "Selling Securityholders")
from time to time.
Common Stock Outstanding
prior to Offering (1)....................... 4,564,898 shares
Common Stock to be Outstanding after
the Offering (1)............................ 4,564,898 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".
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<PAGE>
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 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 issuable upon
exercise of a warrant issued to Win Capital Corporation; (x) 250,000
shares issuable upon exercise of a warrant issued to AJC Equities; (xi)
37,500 shares issuable upon exercise of a warrant issued to Infusion
Capital Partners, LLC; (xii) 750,000 shares reserved for issuance under
the Company's 1996 Stock Option Plan as amended, options for 425,000
shares of which have been granted; (xiii) 57,000 shares issuable upon
exercise of warrants A and warrants B (the "Warrants A and B") issued
in connection with the a Private Equity Line of Credit Agreement (the
"Financing Agreement") entered into by the Company on May 13, 1998 and
(xiv) an indeterminate number of shares of Common Stock issuable upon
conversion of the Series C Preferred Stock (the "Series C Stock") and
the put options (the "Put Options") issuable in connection with the
Financing Agreement. See 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>
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; Historical and Potential Operating Losses;
Accumulated Deficit
The Company, which 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 substantial operating losses. The Company has incurred, and will
continue to incur, significant costs in connection with the development of its
IPATs 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 March 31, 1998, the Company had an accumulated deficit of $5,395,641. The
Company expects to report a loss for the three months and the six months ended
June 30, 1998.
Future Capital Needs; Uncertainty of Additional Financing
The Company's current policy is generally 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 Company has
entered into the Financing Agreement which contemplates various tranches of
equity financing which will raise proceeds, among other things, to cover a
portion of the development, marketing and expenses of additional IPATs, there
can be no assurance that all transactions contemplated by the Financing
Agreement such as the closing of the Series C Preferred Stock offering or the
Company's exercise of the Put Options will occur. In the event that all
transactions contemplated by the Financing Agreement do not occur, the Company
will be required to raise funds from other sources.
The Company may need to raise additional funds through public or
private debt or equity financing 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 additional
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. See "Risk Factors -- Dilution; Impact
of Sale of Common Stock Upon Conversion of Stock and the Exercise of the Put
Options and Warrants."
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 and could require the Company to curtail materially,
suspend or cease operations.
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Recent Change of Operating Focus
Beginning in mid-1994, the Company changed its focus from consulting
and training services to transactional, fee-based and advertising-supported
products and services. In September 1995, the Company introduced OLEBroker(TM),
a fee-based website on the Internet. OLEBroker(TM) was discontinued in 1997. The
Company's SmartStreet(TM) IPATs were introduced in July 1996. 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. Although the Company anticipates that it will begin to recognize
greater revenues from the SmartStreet(TM) IPATs during 1998, it cannot predict
the actual timing or amount of such revenues. 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.
Dilution; Impact of Sale of Common Stock Upon Conversion of Series C Preferred
Stock and the Exercise of the Put Options and Warrants
The purchasers of the Shares offered hereby will experience immediate
and substantial dilution in the net tangible value of their shares of Common
Stock in the event of the conversion of the Series C Stock and the exercise of
the Put Options and the Warrants A and B issuable pursuant to the Financing
Agreement. Specifically, the Series C Stock is convertible into Common Stock,
and the Company may exercise the Put Options resulting in the issuance of Common
Stock, at discounts from future market prices of the Common Stock, which could
result in substantial dilution to existing holders of Common Stock. The sale of
such Common Stock acquired at a discount could have a negative impact on the
trading price of the Common Stock and could increase the volatility in the
trading price of the Common Stock. Moreover, if the trading price of the Common
Stock were to decrease significantly, the issuance of the Shares could
conceivably effect a change of control of the Company.
In addition, the Company has agreed to reserve and keep available at
all times, free of preemptive rights, shares of Common Stock for the purpose of
enabling the Company to satisfy any obligation to issue the shares underlying
the Series C Preferred Stock, the Put Options and Warrants A and B; such number
of shares of Common Stock to be reserved shall be calculated based upon the
minimum purchase price therefor under the terms of the Financing Agreement,
Warrants A and B.
Dependence on New Untested Product
In early 1996, as part of its IPAT Demonstration Project, the Company
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. The City Agreement was extended through the end of the City's 1999
fiscal year (June 30, 1999). 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 current extended City Agreement requires the
Company to pay to the City 50% of advertising and third party service revenues
from the first five IPATs.
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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 first such additional agreement was entered into on March 11,
1998 with the City of San Francisco. The first IPAT under this agreement was
installed in June 1998. 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. The Company also supplied ten IPATs to King County, Washington. To
be profitable, the Company must significantly increase the number of IPATs
placed in the City and other locations.
The Company anticipates that revenues from the IPATs will be provided
by leasing fees paid by the service providers, such as the City, by advertising
fees paid by company's advertising on the IPATs 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, Seattle,
Washington, its ability to market such services to other potential customers
will be highly dependent on the continued success and acceptance of the New York
City and San Francisco 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.
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 the City and elsewhere, 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.
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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 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 internet IPAT business competes with numerous
companies, including IBM, North Communications, Golden Screens and ATCOM/INFO.
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, 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 the 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 29 companies competed for the
contracts with the City, many of which can be expected to compete aggressively
in other competitive situations.
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.
In San Francisco, the Company may be required to make the IPATs accessible to
blind persons. The Company is currently attempting to develop a program to make
its IPATs accessible to blind persons, with the aid and cooperation of various
organizations for the blind.
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
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to date has been and may continue to be protracted. Even following contract
award, significant delays in contract implementation are possible.
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
supports the Company in marketing its public assess and services and has
informally agreed to exhibit the Company's IPATs in Microsoft displays at
various trade shows. It has also issued public statements that included
favorable references relating to the Company's products. Additionally, Microsoft
currently advertises on IPATs in the City. There is no assurance that Microsoft
will continue to support the Company's products, continue the Company's
participation in the Developer Days program, continue to advertise on the
Company's IPATs 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.
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.
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 and PSI. 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.
Dependence on the Internet
Sales of the Company's Internet-related products and services,
including its public access IPATs, 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.
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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 operates only public IPATs, pursuant to
the agreement with the City which have been available for public use for a short
period of time. Additionally the Company supplied ten IPAT's to Kings County,
Seattle Washington and one IPAT to the City of San Francisco. The City's
decision 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 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 the City or elsewhere.
The Company historically has derived a significant portion of its
revenues from a relatively limited number of customers. During the three months
ended March 31, 1998, the City accounted for 100% of the Company's revenues
pursuant to the City Agreement. During 1997, one customer accounted for
approximately 84% of the Company's revenues, and during 1996, two customers
accounted for approximately 71% of revenues. The Company provided consulting and
related services, and more recently, services related to the development of
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.
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.
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
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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.
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. The
Company entered into employment agreements with each of Messrs. Sarna and
Febish, which terminate on December 31, 2001. 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.
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.
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 three patents or
patent applications pending. There can be no assurance that such patents
applications will be allowed or even if such applications are allowed 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 through its IPATs. 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.
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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.
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 and PSI 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
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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, in Kings County, Seattle, Washington since June 1997 and in San
Francisco since June 1998 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.
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 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
have been instituted. 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 by the Company. While the Company carries insurance, it may not be
adequate to compensate the Company in the
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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 32% 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 or convertible securities 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 could under
certain circumstances 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. On the other hand, the conversion rights which
may be exercised pursuant to the Financing Agreement could conceivably effect a
change of control of the Company if the trading price of the Common Stock were
to decrease significantly.
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.
Shares Eligible for Future Sale; Registration Rights
As of August 6, 1998, the Company had 4,564,898 outstanding shares of
Common Stock. A substantial portion of the shares of Common Stock currently
issued and outstanding which are not registered 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
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.
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 or in connection with the Financing Agreement) in the
public market following this offering, or the
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<PAGE>
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
Apart for rights, options and warrants which may be exercised pursuant
to the Financing Agreement, the Company has outstanding options and warrants to
purchase an aggregate of 4,044,387 shares of Common Stock. The sale of 867,980
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.
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."
Adverse Effect of Redemption of Class A Warrants
The Company has the right to redeem the Class A Warrants 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; Exercise of Class A
Warrants
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."
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<PAGE>
NASDAQ Maintenance Requirements; Possible Delisting of Securities from NASDAQ,
Penny Stock Regulations
The Board of Governors of the National Association of Securities
Dealers, Inc. has established certain standards for the continued listing of a
security on the Nasdaq SmallCap Market(TM) ("NASDAQ"). The maintenance standards
for continued listing of the Company's Common Stock on NASDAQ require, among
other things, that the minimum bid price of its Common Stock is at least $1.00.
As of August 6, 1998, the closing bid price of the Company's Common Stock was
$1.51. Although the Company is currently in compliance with the listing
requirements, there can be no assurance that the Company will satisfy the
requirements for maintaining a listing on NASDAQ in the future. If the Company's
securities were excluded from NASDAQ, it may adversely affect the prices of such
securities and the ability of holders to sell them. In the event that the
Company's securities are not listed on NASDAQ, trading would be conducted in the
"pink sheets" or through the National Association of Securities Dealers, Inc.
Electronic Bulletin Board. In the absence of the Common Stock being quoted on
Nasdaq, trading in the Common Stock would be covered by Rule 15g-9 promulgated
under the Securities Exchange Act of 1934 for non-Nasdaq and non-exchange listed
securities. Under such rule, broker/dealers who recommend such securities to
persons other than established customers and accredited investors must make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities are
exempt from this rule if the market price is at least $5.00 per share.
The Commission adopted regulations that generally define a penny stock
to be any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. Unless an exception is available, the regulations
require the delivery, prior to any transaction involving a penny stock, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith. If the Company's Common Stock were subject to the regulations on
penny stocks, the market liquidity for the Common Stock would be severely
affected by limiting the ability of broker/dealers to sell the Common Stock and
the ability of purchasers in this offering to sell their securities in the
secondary market. There is no assurance that trading in the Company's securities
will not be subject to these or other regulations in the future which would
adversely affect the market for such securities.
Year 2000 Issues
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four digit entries to
distinguish the twenty-first century dates from the twentieth century dates. The
Company uses software and related technologies that will be affected by the
"Year 2000 problem." The Company began the process of identifying the changes
required to their computer programs and hardware during 1996. The Company
believes that all of its major programs and hardware are Year 2000 compliant.
The Company believes that it will not incur any significant costs between now
and January 1, 2000 to resolve Year 2000 issues. However, there can be no
assurance that other companies' computer systems and applications on which the
Company's operations rely will be timely converted, or that any such failure to
convert by another company would not have a material adverse effect on the
Company's systems and operations. Furthermore, there can be no assurance that
the software that the Company uses which has been designed to be Year 2000
compliant contains all necessary date code changes.
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<PAGE>
Possible Negative Effect of Anti-Takeover Provisions, Staggered Board and
Provisions Relating to Stockholder Actions
Certain provisions of Delaware law and the Company's Certificate of
Incorporation, as amended, and its Amended and Restated Bylaws could make it
more difficult for a third party to acquire, and could discourage a third party
from attempting to acquire, control of the Company. Certain of these provisions
allow the Company to issue Preferred Stock with rights senior to those of the
Common Stock without any further vote or action by 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. Except for the issuance of the Series C Preferred Stock under the
terms of the Financing Agreement, the Company has no current plans to issue any
additional Preferred Stock. See "Description of Securities - 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 a
possible payment of a warrant solicitation fee of five percent and deduction of
expenses of this offering, will be approximately $19,000. 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.
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<PAGE>
DIVIDEND POLICY
Other than distributions made prior to 1993, when the Company was a
closely-held "S corporation," the Company has never declared or paid cash
dividends on its Common Stock. The Company currently anticipates that it will
retain all available funds for use in the operation of its business, and
therefore does not anticipate paying any cash dividends on the Common Stock in
the foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998:
<TABLE>
<CAPTION>
Pro forma
Actual Assuming Issuance
(Unaudited) of 482,222 shares
March 31,1998 as of March 31, 1998
------------- --------------------
<S> <C> <C>
Preferred stock, $.0001 par value;
5,000,000 shares authorized; no shares
issued and outstanding
Common stock, $.0001 par value;
20,000,000 authorized; 4,082,676 shares issued and
outstanding actual $ 408
4,564,898 shares issued and
outstanding pro forma (1) $ 456
Additional Paid in Capital 6,942,862 7,777,814
Accumulated deficit (5,395,641) (5,395,641)
---------- ----------
Total stockholders' equity $ 1,547,629 $ 2,382,629
============ ============
</TABLE>
(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) up to 375,000 shares of Common Stock issuable upon exercise of
the Over-allotment Option and the Class A Warrants underlying the
Over-allotment Option, (iii) 175,000 shares of Common Stock issuable
upon the exercise of the Underwriter's Unit Purchase Option and the
Class A Warrants issuable upon the exercise thereof, (iv) 2,185,337
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 and (v) an indeterminate number of shares of
Common Stock issuable upon conversion of the Series C Stock and the
Put Options issued in connection with the Financing Agreement. See
"Management," "Certain Transactions," "Description of Securities" and
"Underwriting."
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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(TM) 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
1997
1st Quarter $5.75 $5.00
2nd Quarter $6.375 $5.00
3rd Quarter $5.50 $4.00
4th Quarter $5.25 $2.875
1998
1st Quarter $3.31 $2.188
2nd Quarter $3.031 $1.969
Class A Warrants
1997
1st Quarter $1.438 $0.75
2nd Quarter $1.50 $1.00
3rd Quarter $1.218 $0.938
4th Quarter $1.218 $0.50
1998
1st Quarter $0.75 $0.188
2nd Quarter $0.656 $0.25
As of July 31, 1998, 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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<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below as at December 31, 1997 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, 1997, and for each of the years in the two-year period 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 three month periods
ended March 31, 1998 and 1997 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 three month period ended March 31, 1998 may not be
indicative of results expected for the year ending December 31, 1998.
<TABLE>
Three Months Ended March 31, Year Ended December 31,
Statement of Operations Data: 1998 1997 1997 1996
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Development and Training $15,166 $47,529 266,853 290,680
Rental Income 29,125 90,270 364,314 150,450
--------- --------- --------- ---------
Total Revenues 44,291 137,799 631,167 441,130
--------- -------- --------- ---------
Expenses:
Cost of Service:
Development and training 49,430 88,527 346,767 290,225
Rentals 133,926 130,935 426,755 206,956
Research and development 147,340 98,615 613,000 92,693
General and administrative 468,812 424,753 1,766,333 762,115
--------- --------- --------- ----------
Total expenses 799,508 742,830 3,152,855 1,351,989
--------- --------- --------- ---------
Loss from operations (755,217) (605,031) (2,521,688) (910,859)
---------- --------- ---------- ----------
Other income (expense):
Realized and unrealized gain (loss)
on marketable securities (1,846) - 137,927 -
Interest and dividend income 34,371 36,126 126,562 -
Interest expense (2,927) (3,720) (12,673) (329,836)
Loss on uncollectible loan (Note O) - - (250,000) -
---------- ------------ --------- -----------
Total other income (expense) 29,598 32,406 1,816 (329,836)
--------- -------- ---------- --------
Net (Loss) ($725,619) ($572,625) (2,519,872) (1,240,695)
============ =========== ========== ==========
Basic and Diluted Net (Loss)
Per share ($0.18) ($0.14) ($0.62) ($0.49)
============ =========== ========== ==========
Weighted Average Number of
Shares Outstanding 4,082,676 4,036,110 4,066,994 2,595,904
============ =========== ========== ==========
</TABLE>
Balance Sheet Data: March 31, 1998 December 31, 1997
-------------- -----------------
Working capital $1,074,965 $1,770,987
Total assets 1,849,147 2,723,551
Accumulated deficit (5,395,641) (4,670,022)
Total stockholders' equity 1,547,629 2,273,248
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the notes thereto included elsewhere in this Prospectus.
Special Note Regarding Forward-Looking Statements
A number of statements contained in this Prospectus are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that involve risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in the applicable statements.
These risks and uncertainties include but are not limited to: historical and
potential future operating losses; uncertainty of additional financing; limited
operating history; accumulated deficit; recent establishment of new business
divisions; recent change of operating focus; dependence on new untested product;
uncertainty of product development; vulnerability to technological factors; the
uncertainty of market acceptance of the Company's products; competition;
possible difficulty in complying with government contract requirements;
dependence on certain third parties and on the Internet; limited customer base
risk of potential manufacturing difficulties; risk of requirements to comply
with government regulations; potential liability for information and content
disseminated throughout the network; dependence on key personnel and proprietary
technology; risk of system failure, security risks and liability risks; the
Company's vulnerability to rapid industry change and technological obsolescence;
the limited nature of its product life; the unproven status of the Company's
products in widespread commercial use, including the risks that the Company's
current and future products may contain errors that would be difficult and
costly to detect and correct; uncertainties with respect to the Company's
business strategy; general economic conditions, and other risks described in
this Prospectus. See "Risk Factors."
Overview
The Company provides IPAT and Internet-based services. Beginning in
mid-1994, the Company changed its focus from consulting and training services to
transactional, fee-based and advertising-supported products and services. The
Company has sustained net losses in each of the last two fiscal years with a net
loss of $1,240,695 in 1996 and a net loss of $2,519,872 in 1997. The Company's
SmartStreet(TM) IPATs were introduced in July 1996. The Company has not
recognized any significant income to date from the SmartStreet(TM) IPAT rentals.
Although the Company anticipates that it will begin to recognize greater
revenues from the SmartStreet(TM) IPATs during 1998, it cannot predict the
actual timing or amount of such revenues.
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues increased by $190,037 or 43% to $631,167 for the fiscal year
ended December 31, 1997 over net revenues of $441,130 for the fiscal year ended
December 31, 1996. Development and training revenue decreased by $23,827 to
$266,853 from $290,680 or 8%. Rental income increased by $213,864 or 142% to
$364,314 from $150,450. The Company's decreased revenues from 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
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<PAGE>
revenues represented approximately 58% of 1997 revenues and training and custom
development represented approximately 42% of 1997 net revenues.
Costs of services for development and training increased by $56,542 to
$346,767 in 1997 from $290,225 in 1996, and cost of services for rentals
increased by $219,799 to $426,755 in 1997 from $206,956 in 1996 due to higher
personnel expenses and kiosk expenses.
Research and development expenses for the year ended December 31, 1997
increased by $520,307 to $613,000 compared to $92,693 for the year ended
December 31, 1996, due to the expenses development costs for the SmartStreet(TM)
operations.
General and administrative expenses for the year ended December 31,
1997 increased by $1,004,218 to $1,766,333 compared to $762,115 for the year
ended December 31, 1996, due principally to increases in salaries and personnel
related expenses, professional fees and insurance for directors and officers.
Other income increased by $331,652 to income of $1,816 for the year
ended December 31, 1997 compared to expense of $329,836 for the year ended
December 31, 1996, due principally to interest on the bridge notes financing
which was repaid in 1996, and investment income earned from investments of cash
that resulted from the public offering. The above was offset by a loss on a loan
receivable to InteractiVision, Inc. in the amount of $250,000 (See below
Liquidity and Capital Resources).
Net loss increased by $1,279,177 to a net loss of $2,519,872 for the
fiscal year ended December 31, 1997 over net loss of $1,240,695 for the fiscal
year ended December 31, 1996. 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 the loss on the uncollectible loan
receivable.
At December 31, 1997, the Company had federal net operating loss carry
forwards of approximately $4,800,000. 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 K of Notes to Financial Statements.
Three Months ended March 31, 1998, Compared with Three Months ended March 31,
1997
The results of operations for the three months ended March 31, 1998 are
not necessarily indicative of the results that may be expected for any other
interim period or for the fiscal year ending December 31, 1998.
Net revenues decreased by $93,508 or 68% to $44,921 for the three
months ended March 31, 1998 over net revenues of $137,799 for the three months
ended March 31, 1997. Development and training revenue decreased by $32,363 or
68% to $15,166 from $47,529. Rental income decreased by $61,145 or 68% to
$29,125 from $90,270. The Company's decreased revenues from development and
training resulted from redirection of the Company's resources to transactional
fee-based products and services. The decease in rental income was due to the
completion of the original contract with the City, and an extension with the
City which resulted in a reduction in the rental of five kiosks from $30,090 to
$9,700 per month, through June 30, 1999, which will be used to recover the
incremental costs associated with providing services for the extended period.
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<PAGE>
Cost of services for development and training decreased by $39,097 or
44% to $49,430 for the three months ended March 31, 1998 from $88,527 for the
three months ended March 31, 1997, due to the redirection of the Company's
resources to transactional fee-based products. Cost of services of rentals
increased by $2,991 or 2% to $133,926 for the three months ended March 31, 1998
from $130,935 for the three months ended March 31, 1997, due to normal increases
in expenses.
Research and development expenses increased by $48,725 or 49% to
$147,340 for the three months ended March 31, 1998 from $98,615 for the three
months ended March 31, 1997, due to an increase in personnel devoted to research
and development in connection with the Company's expansion into San Francisco.
General and administrative expenses increased by $44,059 or 10% to
$468,812 for the three months ended March 31, 1998 from $424,753 for the three
months ended March 31, 1997, due principally to increases in personnel expenses.
Other income decreased by $2,808 or 9% to $29,598 for the three months
ended March 31, 1998, from $32,406 for the three months ended March 31, 1997,
due to lower investments offset by higher return on current investments.
The net loss increased by $152,994 or 27% to $725,619 for the three
months ended March 31, 1998 from $572,625 for the three months ended March 31,
1997, due to lower revenues due to the renegotiating of the New York City
contracts and an increase in research and development expenses.
Liquidity and Capital Resources
The Company provides IPAT and Internet-based services. Beginning in
mid-1994, the Company changed its focus from consulting and training services to
transactional, fee-based and advertising-supported products and services. The
Company's SmartStreet(TM) IPATs were introduced in July 1996. The Company has
not recognized any significant income to date from the SmartStreet(TM) IPAT
rentals. Although the Company anticipates that it will begin to recognize
greater revenues from the SmartStreet(TM) IPATs during 1998, it cannot predict
the actual timing or amount of such revenues.
The Company has sustained net losses in each of the last two fiscal
years with a net loss of $1,240,695 in 1996 and a net loss of $2,519,872 in
1997. For the three months ended March 31, 1998, the Company incurred a net loss
of $725,619. The accumulated deficit increased to $5,395,641 as the Company
continues to incur operating losses as expenses exceed revenue. The Company
expects to report losses for the three months and six months ended June 30,
1998. To date, the Company has installed seven IPATs in the City of New York and
thirteen IPATs in other locations. The Company will continue to incur
substantial losses unless and until it significantly increases the number of
IPATs placed in the City of New York and other locations. The Company had
working capital of $1,074,965 as of March 31, 1998 as compared to $1,770,987 as
of December 31, 1997, or a decrease of $696,022. Capitalized expenditures and
capitalized software amounted to $48,369.
On May 13, 1998 (the "Subscription Date"), the Company entered into the
Financing Agreement with several investors (the "Investors") which provides for
a commitment to fund up to $7,100,000 to the Company. On the Subscription Date
the Investors purchased 444,444 shares of the Company's Common Stock (the
"Initial Shares") and received Warrants to purchase an aggregate of 18,000
shares of Common Stock for $900,000. In connection with the Financing Agreement,
the Company issued to the Placement Agent 37,778 shares of Common stock and a
Warrant A to purchase an additional 9,000 shares. The Financing Agreement also
provides, subject to the fulfillment of various conditions, for the Investors to
purchase 6% Series C Convertible Preferred Stock for $1,200,000. The shares are
to be issued in two parts within 120 days after the registration of the Initial
Shares. In addition, the Company may from time to time, subject to the
fulfillment of various conditions, offer the Investors to purchase additional
common Stock at 85% of the Market Price as defined in the Financing Agreement,
which could potentially produce proceeds of up to $5,000,000.
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<PAGE>
The Company's management believes that the combination of cash on hand
and operating cash flow will provide sufficient liquidity to meet the Company's
cash flow requirements at least until June 30, 1999.
The Company is actively seeking to expand its presence to New York City
and also provide IPATs to other municipalities, states and government agencies
and to organizations in the private sector. The Company is also working on a
version of its SmartSign(TM) IPATs that can be sold to retail stores, and which
the Company believes has the potential to be sold to certain national chains.
The Company began deriving revenues from advertising in May 1998 from contracts
signed March 1998, and the Company is endeavoring to increase that revenue base.
In addition, the Company will seek to derive transaction fees in connection with
the use of kiosks by the public to obtain documents or certain other services,
although, so far, transaction revenues have been minimal. The amount of future
transaction and advertising revenues, if any, will depend on user and advertiser
acceptance of the IPATs.
The Company anticipates that its working capital requirements and its
operating expenses will significantly increase should the Company expand
production and sales of IPATs. The timing of increases of expenses, and the
amount of the working capital consumed by operations, marketing and roll-out
expenses, will impact the magnitude and timing of the Company's cash
requirements. To meet any additional working capital needs, the Company intends
to use funds from operations and to complete additional financings. Although the
Company's management believes that additional funding arrangements are
available, the execution of any such arrangements will depend on timing, market
conditions and available terms. However, there can be no assurance that the
Company can or will obtain sufficient funds from closing additional financing on
terms acceptable to the Company.
The rate of inflation was insignificant during the quarter ended March
31, 1998. The Company continually reviews its costs in relation to the pricing
of its products and services.
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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 World-Wide 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.
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INTRANET - An organization's private network of its local area networks that
utilizes Internet data formats and communications protocols and that may use the
Internet's facilities as the backbone for network communications.
LOCAL AREA NETWORK (LAN) - A group of one or more computers connected together
within a localized environment for the purpose of sharing data and networked
resources such as printers, modems or servers.
MICROSOFT WINDOWS - Computer operating systems providing graphical user
interfaces and, in the case of Windows NT, that is optimized for use as a
network server.
OLE - Microsoft's component architecture which competes with OpenDoc and CORBA.
See "Business - Industry Background - Reusable Software Components."
PRIME NUMBERS - numbers divisible only by themselves and one (1).
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 is in the business of providing information and
transaction-based services using proprietary software and off-the-shelf,
reusable software components based on Microsoft's ActiveX(TM) (formerly OLE)
component technology. The Company's strategy is initially to provide information
and services through public access kiosks, known as SmartStreet(TM), over
private networks known as Intranets. The kiosks will be located in high density
pedestrian traffic areas. Kiosk users are able to obtain information and
documents and transact certain business without the necessity of interacting
directly with City employees or appearing personally at certain City offices.
In early 1996, as part of its Kiosk Demonstration Project, the City of
New York entered into an agreement with the Company (the "City Agreement") to
develop public kiosks to be located in City offices and other public locations
in an effort to expedite transactions with the City. Under the City Agreement,
the City agreed to lease the first five kiosks, and the Company may deploy
additional kiosks throughout the New York City area at its own risk and expense,
subject to City approval of kiosk locations. The first five IPATs were deployed
in the City in June 1996, a sixth IPAT has installed in August, 1997 and a seven
was installed in March 1998. The initial term of the City Agreement was extended
through the end of the City 1997 fiscal year (June 30, 1997). Pursuant to the
City Agreement, the Company has developed kiosks through which members of the
public can obtain certain information from, and transact certain business with,
the Buildings Department and the Department of Health, as well as information
about City government and elected officials and general information about
transportation and attractions in New York.
The kiosks are configured to permit the Company to offer additional
services provided either by the Company or third parties and to sell advertising
on such kiosks. The current extended City Agreement requires the Company to pay
to the City 50% of advertising and third party service revenues from the first
five IPATs. 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 first such additional agreement was entered into on March 11,
1998 with the City of San Francisco. The first IPAT under this agreement was
installed in June 1998. 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. The Company also supplied ten IPATs to King County, Washington. To
be profitable, the Company must significantly increase the number of IPATs
placed in the City and other locations.
As of December 31, 1997, all the Company's IPATs were available to
provide City information and transaction services, but those IPATs did not
provide or carry any paid advertising or third party services. Revenues from
advertising began in May 1998, from contracts signed in March 1998. Advertisers
in New York include Microsoft, Consolidated Edison and Isabella Geriatric
Center. Advertisers in San Francisco include Microsoft, World Gem Showcase and
Plug Busters. To date, the Company has achieved about $3,000 in monthly fees per
IPAT for the IPATs initially installed in New York and San Francisco.
After its inception in 1990, the Company's activities consisted
initially of consulting, writing, training and custom software development for
various corporate and government clients, including Microsoft, for which it
produced technical papers and provided consulting services. In performance of
these activities, the Company developed skills in rapid application development
and a base of courseware and reusable software objects to
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which it retains title. In 1995, the Company decided to direct these skills and
its expanding body of reusable software objects toward the development of
services through which it can derive revenue on a "per transaction" basis. It
developed and operated OLEBroker(TM), an Internet-based subscription service
that allowed 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. At this time, the Company does not generally accept
consulting assignments, and its consulting revenue is incidental to the
generation of rental and advertising income.
Industry Background
Internet Development
In recent years, computers have become increasingly interconnected
through local area networks, wide area networks, and a technology for linking
computers together known as the Internet Protocol (IP), as well as through
various proprietary services. Increasingly, desktop personal computers (PCS)
communicate with larger, shared servers using an arrangement known as
client/server technology, as well as with other PCS on a peer to peer basis. The
Internet, in particular, has experienced explosive growth in recent years as a
means for computers to communicate with each other. While in its initial years,
the Internet was used primarily for the transmission of electronic mail and for
the dissemination of information, a technology called the World Wide Web ("WWW"
or "Web"), a graphical approach to seeking and providing information, has proven
to be very popular, and more than 40,000 websites operate to support Web
browsers.
Recently, CommerceNet, through Nielsen Media Research, conducted the
Internet Demographics Survey, which the companies say is the first
population-projectable survey regarding Internet usage. Among the survey's
findings were these: there is a sizable base of Internet users--some 24 million
people--in the United States and Canada; users of the World Wide Web are
potentially ideal targets for business applications since they were found
typically to be more educated and to have higher incomes than the rest of the
population; and some 2.5 million people have already made purchases using the
Web. The study found that users access the Internet fairly frequently, with 31%
accessing it at least once a day. In addition, Internet users spend an average
of five hours and 28 minutes online per week. The CommerceNet study has been
criticized by some as unrepresentative, in that it over-represents highly
educated individuals and under-represents individuals with less than a high
school education. However, the critics generally acknowledge that even if the
sample is skewed, the overall conclusions, if not their magnitude, are valid.
Leading developers of Web browser software include Netscape, NCSA
Mosaic and Microsoft. Leading developers of software for web servers include
Netscape, O'Reilly and Purveyor. In 1996, Microsoft released an Internet server,
called Internet Information Server, that it subsequently included as part of
Release 4.0 of its NT operating system package.
Internet technology has been enhanced in various ways to permit
conventional applications to interact with users having access to an Internet
connection and a web browser, to effect purchases and other transactions over
the Internet. Such commercial use typically requires custom programming, and
special techniques to provide for an acceptable level of security, given that
the Internet is inherently an insecure network. Visa and MasterCard have
announced standards to support the secure approval of credit card transactions
over the Internet. These standards were developed jointly with Microsoft and
Netscape. Separately, Netscape and VeriFone Inc. announced plans to develop
software to support this standard with Netscape's commerce server software.
DigiCash, N.A., CyberCash, Inc., and First Virtual Holdings have implemented
their own Internet payment systems. The ability to accept payments easily over
the Internet opens up many possibilities; for example, users
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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.
Recently, 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-company communication can take place by
combining Intranets and the Internet. A new capability, called point-to-point
tunneling protocol (PPTP), makes it feasible for secure business processes to
operate over the Internet. In this connection, according to Microsoft, over 1.2
million people use the Microsoft Office family of web authoring tools.
Kiosk Technology
Kiosks or 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. Kiosks have traditionally used conventional or proprietary technology. In
contrast, the Company's Kiosks technology combines the advantages of Internet
and Intranet technology.
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Reusable Software Components
The Company's software is built using reusable sofware components.
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. The Company's
software supports the ActiveX(TM) standard.
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 AGREEMENT, 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 AGREEMENT.
ObjectSoft Strategy
Since its founding in 1990, the Company has been active in the field of
rapid application development (RAD). It was an early user of OLE as well as RAD
languages such as Visual Basic. Initially, the Company directed its efforts to,
and derived its revenues principally from, consulting, writing, training and
custom development for clients that included large corporations in the computer,
consulting, banking, manufacturing, cosmetics and apparel industries, among
others, as well as government agencies.
In performance of its consulting and related activities, the Company
developed a base of courseware and software objects to which it retains title.
In 1995, the Company made a strategic decision to leverage its skills in rapid
application development and its expanding body of reusable software objects
toward the development of services through which it can derive revenue on a "per
transaction" basis. In connection with its development of the OLEBroker(TM)
program, the Company developed significant additional software objects which it
then used in the development of technology for the kiosk and Internet service
delivery programs.
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The Company's strategy is to focus on development and marketing of the
kiosk and Internet service delivery products. In this regard, it will seek to
enter into strategic alliances with, and provide Intranet and/or Internet
software to, entities that have a need to provide information and documents
contained in proprietary databases to, or conduct a large volume transactions of
transactions with, the general public or specific, but large, audiences in an
expeditious, widely and easily accessible manner. Such entities include
municipalities, other government entities and agencies and large public and
private entities such as publishers, trade and business associations and others.
The Company will seek to develop alliances with software and hardware
manufacturers whose products may be used in or integrated with the software
being developed and marketed by the Company. The Company intends to retain an
ownership interest in the objects it develops in support of such projects.
Wherever possible, the Company also intends to contract, as it has with the
City, to own and operate the services itself.
In addition, the Company will seek to structure its arrangements with
customers to permit it to offer related and unrelated information and services,
particularly to kiosk users who might not otherwise have access to the Internet.
This could include commercial and public service advertising and potentially the
ability to make purchases and conduct other transactions through the Internet.
There can be no assurance that the Company will be able to fully
implement its strategic objectives or that it will be able to successfully
market its kiosk and Internet based transaction services.
Products and Services
Smartstreet And Smartsign(TM) Kiosk Services
The Company makes transactional services available via public access
kiosks that combine the advantages of Internet and Intranet technology. Like an
Intranet, the communication between the kiosk and its servers is accomplished
over private, secure lines. Like an Internet, it enables an organization to
interact with the general public, not just its own employees and customers. The
Company anticipates that revenues from the kiosks will be provided by leasing
fees paid by the service providers, such as the City, and by usage fees paid by
consumers who obtain services through the kiosks.
On January 11, 1996, the Company entered into an agreement with the
City to provide a minimum of five kiosks to transact municipal services as part
of the City's Kiosk Demonstration Project. Services to be provided from these
kiosks include access to the records of the Department of Buildings, certain
Department of Health services, including obtaining copies (for a fee) of birth
certificates, death certificates and dog licenses, obtaining public health
information, and registering for certain courses offered by the Department of
Health. Information on City government, directional information and information
about New York City's events, museums, tourist attractions, shopping and similar
matters is provided without fee. Kiosks are located in the Department of Health
building at 125 Worth Street in Manhattan, in the Bronx Borough Hall, in the
Municipal Buildings of Brooklyn, and Queens, and in the Staten Island (St.
George) terminus of the Staten Island Ferry. All kiosks providing City services
or information, whether operated by the Company or other suppliers, carry the
City's "CityAccess(TM)" logo.
In connection with the development of the kiosks and the deployment and
operation of the first five kiosks, the City agreed to pay to the Company an
aggregate of $661,080. All amount due under this contract have been received. In
addition, the City has elected to extend the Agreement through the end of June
30, 1999 although the monthly revenue that the Company receives has been reduced
to $9,750 to reflect that amount previously paid covered a substantial portion
of the Company's equipment costs. Subsequently, the Company
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added two IPATs in New York, one at the Museum of Science and one at the Audubon
Technology Center of Columbia University. The Company receives no revenue from
the City from these IPATs. However, the IPAT located in the Audubon Center has
attracted advertisers, and currently generates about $3,000 in revenue per
month. This IPAT is the first of the Company's new SmartSigns. On June 24, 1998,
The Company entered the San Francisco market with an IPAT located in the Castro
Station of the San Francisco Metro, and it is expected to begin generating
revenue in July or August of 1998. The Company may also receive transaction fees
in connection with the use of the kiosks by the public to obtain documents or
certain other services, although so far, transaction revenues have been minimal.
The amount of future transaction and advertising revenues, if any, will depend
on user and advertiser acceptance of the kiosks.
The Company has certain other rights under the City Agreement,
including the right to sell advertising and additional services developed by the
Company or third parties. The City Agreement requires the Company to pay to the
City 50% of advertising and third party service revenues from the first five
kiosks and 15% of such revenues from additional kiosks. The Company plans to
exercise these rights and to actively solicit additional service providers and
advertisers.
Pursuant to the City Agreement, the Company has the right to install
additional kiosks in the City, at the Company's risk and expense and subject to
certain conditions including site approval by the City. The City will not be
required to pay additional monthly payments for such kiosks, but it is
anticipated, although there can be no assurance, that use by the public will
generate transaction fees. The Company had commenced evaluating potential sites,
has installed two additional IPATs and will seek to install up to 25 additional
kiosks over the next six to nine months.
At the time the City Agreement with the Company was executed, the City
also signed similar agreements with two other companies for additional kiosks.
The City expects to evaluate its success with this program and, if it deems it
successful, to issue a Request for Proposals for competitive bidding to supply
additional kiosks throughout the City.
The Company intends to market kiosks to other municipalities,
government agencies and organizations in the private sector. In the future, the
Company may seek to make its transactional services available over the Internet
and to make the Internet available from the Company's public kiosks.
There can be no assurance that the Company's initial kiosks will
perform on a commercial basis as anticipated, that the Company will be able to
install and operate additional kiosks pursuant to the City Agreement, that City
will seek to acquire additional kiosks, that the Company will secure a contract
to supply additional kiosks to the City, that it will succeed in marketing its
kiosks to other potential users, or that it will be able to attract additional
service providers or advertisers to kiosks that may be located in New York City
or elsewhere.
Operation of SmartStreet and SmartSign(TM) Kiosks
The Company's goal in designing the SmartStreet(TM) kiosks was to
maximize potential use by developing software that would be inviting and easy to
use. The kiosks are designed so that a potential user is attracted to the kiosk
by digital videos played from the upper monitor. In the City, 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 in San Francisco
features Mayor Willie Brown. The attract loop explains what can be done with the
kiosks and how to use them, and shows people from many walks of life using them
successfully.
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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.
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[GRAPHIC OMITTED]
SmartStreet(TM) IPAT - Opening Screen
The user has several choices on the Opening Screen to begin the
SmartStreet(TM) experience. The user can:
1. Touch the Touch Here to Begin link in the Content Frame, the Home
button in the Toolbar Frame, or the graphic in the Content Frame to
jump to the Home Menu (see Figure 2 below).
2. Touch I'm Finished to take a short survey on his or her experience
on the 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.
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[GRAPHIC OMITTED]
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.
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
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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 4.0
(IE4), and the server is Microsoft's Internet Information Server 3 and 4. By
using IE4 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.
IE4 allows the use of new "light-weight" ActiveX(TM) controls and
supports client-side VB Script and Java. IE4 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)
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.
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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
To market Kiosks successfully, the Company believes it must obtain the
rights to place its IPATs in compelling high-density locations. In addition, the
Company will seek to attract advertisers based on the number and demographics of
"impressions" that the Company can offer to advertisers. To this end, the
Company has commissioned site surveys that 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.
OLEBroker(TM)
The Company's first commercial product for the Internet was
OLEBroker(TM), introduced in November 1995. The Company discontinued OLEBroker
early in 1997, as revenue was insufficient in relation to costs. OLEBroker was
an on-line subscription service for OLE reusable components. This service was
operated on the Internet with the Universal Resource Locator (URL) of
http://www.olebroker.com. The service contained 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 contained white papers, specifications,
standards, training materials, and news articles.
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 dies not currently undertake consulting assignments except
incidentally for the generation of rental and advertising income.
Training Services
The Company has provided training courses in subjects including:
o Client/Server Rapid Application Development
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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. Training
services were discontinued to allow the Company to focus on its core business.
Authoring Services
David E. Y. Sarna and George J. Febish, Co-Chief Executive Officers of
the Company, authored a monthly column, called Paradigm Shift, focussing 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. until the magazine was discontinued early in
1998. 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. Authoring is not
expected to generate significant revenue in the future.
Custom Development and Consulting Services
Custom Development and Consulting Services include the design of OLE
objects, as well as complete multimedia systems. Fees for such services are
negotiated either on the basis of hourly billing rates for the staff assigned or
for fixed fees for specified services.
The Company entered into a contract in 1995 with ACORD Corporation, a
non-profit organization, whose members include property and casualty insurers
and about 40,000 independent agents ("ACORD"). ACORD develops and maintains
communications standards for the property and casualty industry. The Company
assisted ACORD in defining AL4, an OLE-based standard and set of objects for
implementing ACORD forms, which comply with 184 standards set by various
regulatory organizations. Developers from ACORD and the Company are creating and
distributing the reusable ACORD knowledge objects for particular insurance
forms. The standard also describes how ACORD's Independent Software Developers
(ISDs) can incorporate these OLE-based objects into their systems. The Company
does not intend to undertake custom development services in the future.
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
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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 scheduled for
September 2, 1998. Additionally, in March 1998, Microsoft entered into an
agreement with the Company to advertise on its IPATs.
In November 1995, Microsoft and the Company entered into the
Cooperation Agreement with respect to OLEBroker(TM). The Cooperation Agreement
provides that Microsoft will undertake various promotional activities relating
to the Service including the distribution of a subscription offer in copies of
Microsoft's Visual Basic 4.0, Access Development Toolkit, and in a magazine
supplied to purchasers of Microsoft Visual C++. The Company, in turn, will
provide Microsoft with a number of complementary subscriptions and a discounted
price for additional subscriptions. With the discontinuation of OLEBroker, this
agreement was not renewed. The Company is currently negotiating other agreements
with Microsoft, but there can be no assurances that such negotiations will be
successful, or if successful, that they will be profitable. If Microsoft were to
sever its relationships with the Company, the Company's sales and financial
condition could be severely and adversely affected.
Competition
The Company is subject to competition from different sources for its
different services. The Company's Internet IPAT business competes with numerous
companies, including IBM, North Communications, Golden Screens and ATCOM/INFO.
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, 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 the 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 29 companies competed for the
contracts with the City, 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 three months
ended March 31, 1998, the City accounted for 100% of the
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Company's revenues pursuant to the City Agreement. During 1997, one customer
accounted for approximately 84% of the Company's revenues, and during 1996, two
customers accounted for approximately 71% of revenues. The Company provided
consulting and related services, and more recently, services related to the
development of Intranet and IPAT technology, to such customers.
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 has applied for
registrations in the United States for the following trademarks: SmartSign(TM),
Object Soft(TM), In addition, the Company plans to register certain of these
trademarks in principal foreign jurisdictions.
The source code for the Company's proprietary software is protected as
a trade secret. In addition, because the Company does not sell or license its
technology to third parties, but rather delivers services thorough its, its
proprietary software is not disclosed to third parties. Furthermore, the Company
enters into agreements, as appropriate, with employees, consultants and
subcontractors containing provisions relating to confidentiality and the
assignment of inventions and other developments to the Company. However, despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products is difficult, and while the Company is unable to
determine the extent to which piracy of its software products exists, such
piracy can be expected to be a persistent problem, particularly in international
markets and as a result of the growing use of the Internet. In addition, the
laws of some foreign countries either do not protect the Company's proprietary
rights or offer only limited protection for those rights. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technologies or products.
There has been substantial litigation in the software industry
involving intellectual property rights. Although the Company does not believe
that it is infringing the intellectual property rights of others, there can be
no assurance that such claims, if asserted, would not have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, as the Company may acquire or license a portion of the software
included in its products from third parties, its exposure to infringement
actions may increase because the Company must rely upon such third parties for
information as to the origin and ownership of such acquired or licensed
software. Although the Company would intend to obtain representations as to the
origins and ownership of such acquired or licensed software and obtain
indemnification to cover any breach of any such representations, there can be no
assurance that such representations will be accurate or that such
indemnification will provide adequate compensation for any breach of such
representations. In the future, litigation may be necessary to enforce and
protect trade secrets, copyrights and other intellectual property rights of the
Company. The Company may also be subject to litigation to defend against claimed
infringement of the rights of others or to determine the scope and validity of
the intellectual property rights of others. Any such litigation could be costly
and divert management's attention, either of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Adverse determinations in such litigation could result in the loss of the
Company's proprietary rights, subject the Company to significant liabilities,
require the Company to seek licenses from third parties and prevent the Company
from selling its products, any one of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
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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. In San Francisco, the Company may
be required to make the IPATs accessible to blind persons. The Company is
currently attempting to develop a program to make its IPATs accessible to blind
persons, with the aid and cooperation of various organizations for the blind.
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's corporate headquarters are located in Hackensack, New
Jersey, in a leased facility consisting of approximately 4,300 square feet,
which it occupied effective April 1, 1996 under a lease expiring March 31, 2003.
The rent paid by the Company for this office will be approximately $ 70,703 per
annum in 1999 subject to certain increases in subsequent periods. The Company
believes that its new space will be adequate to meet its requirements for the
presently foreseeable future.
Employees
As of July 31, 1998, the Company had 16 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, 5 in operations and
2 in finance and administration.
The Company expects the size of its workforce to remain approximately
the same in 1998, and 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, no other senior personnel have
entered into employment agreements obligating them to remain in the Company's
employ for any specific term; however, substantially all key employees of the
Company are parties to nonsolicitation, confidentiality and noncompetition
agreements with the Company. In addition, independent contractors enter into
confidentiality agreements with the Company.
Legal Proceedings
The Company is not currently involved in any material legal
proceedings.
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Recent Financings
Pursuant to the terms of the Financing Agreement the Investors
purchased the Initial Shares at an initial purchase price of $2.025 per share
("Initial Price"). On the effective date of a registration statement on Form S-3
which was filed with the Securities and Exchange Commission on June 26, 1998
(the "Form S-3"), the Investors will have certain "reset" rights pursuant to
which the Investors will receive cash equal to the average of the five lowest
closing bid prices of the Common Stock of the Company multiplied by the number
of Initial Shares less the Initial Price multiplied by the number of Initial
Shares. The Company also issued to each Investor a Warrant A and B to purchase
an aggregate of 18,000 shares of Common Stock. The Company also issued to
Settondown Capital International Ltd. (the "Placement Agent") 37,778 shares of
Common Stock and a Warrant A to purchase an additional 9,000 shares of Common
Stock.
The Company has certain repurchase rights with regard to the Common
Stock in the event the closing bid price of the Common Stock falls below $1.50
per share. Each of the Investors has agreed that following the acquisition of
any shares of Common Stock pursuant to the Financing Agreement, it will not be
the beneficial owner of more than 4.95% of the outstanding shares of Common
Stock. Each of the Investors has agreed to vote all shares of Common Stock held
by such Investor in favor of the nominees to the Company's board of directors
who are nominated by the Company so long as the Company does not breach the
Financing Agreement.
Series C Preferred Stock
Under the Financing Agreement, the Investors agreed to subscribe for up
to $1.2 million in stated value of Series C Preferred Stock and the Company
agreed to issue to the Placement Agent an additional number of shares of Series
C Preferred Stock equal to 4% of the number of shares of Series C Preferred
Stock issued to the Investors. Each share of Series C Preferred Stock shall
accrue dividends at the rate of 6% per annum which are payable in cash or Common
Stock at the option of the Company. Upon each closing of the Series C Preferred
Stock, one-half of the Series C Preferred Stock is convertible into Common Stock
at any time after issuance at the holder's option and the remaining one-half
shall be convertible 30 days thereafter. The Series C Preferred Stock is
convertible into that number of shares of Common Stock as is determined by
dividing the aggregate stated value of the Series C Preferred Stock to be
converted by the lesser of the average closing bid price of the Common Stock as
reported by Bloomberg, LP for the five day trading period preceding the closing
date of the Series C Preferred Stock or the average of the closing bid prices
for the Common Stock five trading days preceding the date of any conversion
notice, multiplied by 85%.
The Put Option
During the period commencing on the effective date of the Form S-3, or
other applicable registration statement, and ending on the second anniversary
thereof (the "Commitment Period") the Company may, from time to time, exercise a
"put" right (the "Put Option") by delivery of a put notice to the Investors
pursuant to which the Investors must purchase the allotted number of shares
indicated therein. The maximum number of shares for which the Company may
deliver a put notice is subject to certain limitations based on the trading
volume of the Company's Common Stock and the trading price of the Common Stock.
The Put Shares may be purchased at a 15% discount off the average of the three
lowest closing bid prices of the Common Stock during the Valuation Period (as
defined in the Financing Agreement). The obligation of the Investors to purchase
shares upon exercise by the Company of a Put Option is subject to limitations
and termination upon occurrence of certain conditions set forth in the Financing
Agreement.
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The Initial Shares, Warrant A and Warrant B were issued, and the Put
Shares, the Warrant A Shares and the Warrant B Shares will be issued, by the
Company in reliance upon the provisions of Section 4(2) and Regulation D of the
Securities Act.
Warrant A
The Warrants A issued to the Investors and the Placement Agent in
connection with the Financing Agreement may be exercised, subject to the terms
and subject to the conditions set forth therein, for a five year period
commencing May 13, 1998, to subscribe for and purchase shares of Common Stock of
the Company at an exercise price of $3.04 per share. The exercise price and the
number of shares for which the Warrant A is exercisable is subject to adjustment
as provided therein, including, but not limited to, anti-dilution provisions
pertaining to the declaration of stock dividends and the merger, consolidation
or liquidation of the Company.
Warrant B
The Warrant B issued to the Investors in connection with the Financing
Agreement may be exercised, for a five year period, subject to the terms and
subject to the conditions set forth therein, at any time on or after November
13, 1998 to subscribe for and purchase shares of Common Stock of the Company at
an exercise price of $3.16 per share. The exercise price and the number of
shares for which the Warrant B is exercisable is subject to adjustment as
provided therein, including, but not limited to, anti-dilution provisions
pertaining to the declaration of stock dividends and the merger, consolidation
or liquidation of the Company.
Placement Shares; Compensation to Placement Agent.
As compensation for services rendered in connection with the Private
Placement, the Company issued to the Placement Agent 37,778 shares of Common
Stock and a Warrant A to purchase 9,000 shares of Common Stock. The Company also
paid to the Placement Agent five (5%) percent of the gross proceeds in
connection with the sale of the Initial Shares. The Company agreed to pay to the
Placement Agreement three (3%) percent of the gross proceeds of the sale of the
Series C Preferred Stock in cash and four (4%) percent of the number of shares
of Series C Preferred Stock sold to Investors. The Company also agreed to pay to
the Placement Agent, following the closing for each Put Option, six (6%) percent
of the gross proceeds for each Put.
Stockholder Approval
Under the rules of the National Association of Securities
Dealers, issuers whose securities are listed on NASDAQ, the exchange on which
the Company's Common Stock is listed, are required to obtain stockholder
approval, prior to the issuance of securities, in the following limited
circumstances, in connection with a transaction other than a public offering
involving: (i) the sale or issuance by the issuer of common stock (or securities
convertible into or exercisable for common stock) at a price less than the
greater of book or market value which together with sales by officers, directors
or substantial stockholders of the company equals 20 percent or more of common
stock or 20 percent or more of the voting power outstanding before the issuance;
or (ii) the sale or issuance by the Company of common stock (or securities
convertible into or exercisable to purchase common stock) equal to 20 percent or
more of the common stock or 20 percent or more of the voting power outstanding
before the issuance for less than the greater of book or market value of the
stock.
On July 9, 1998, at the Company's Annual Meeting of Stockholders, a
majority of the voting power of the issued and outstanding Common Stock of the
Company, present in person or represented by proxy at the
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meeting and entitled to vote at the meeting, voted to approve the issuance of
the Company's securities pursuant to the Financing Agreement.
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MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company are as follows:
Name Age Position
David E. Y. Sarna 1 48 Chairman, Secretary and Director
George J. Febish 1 49 President, Treasurer and Director
Daniel E. Ryan1 2 3 4 50 Director
Gunther L. Less 2 4 67 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. From 1994 to 1997 Mr. Sarna was 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., 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. From 1994 to 1997 Mr. Febish was a
Contributing Editor of Datamation magazine. Prior to co-founding the Company,
Mr. Febish was Executive Vice President and Chief Operating Officer of Image
Business Systems Corporation, a computer software development company, from 1988
to 1990. Prior to joining Image Business Systems Corporation, Mr. Febish was the
Director of Marketing at ISS, a computer software company that developed ISS
Three(TM). Prior to joining ISS, Mr. Febish was the Eastern Regional Sales
Manager for Bool & Babbage. In 1970, Mr. Febish began his professional career
with New York Life Insurance Company. Mr. Febish holds a BS degree from Seton
Hall University. He is the co-author, with Mr. Sarna, of PC Magazine Windows
Rapid Application Development and the author of numerous published articles.
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Daniel E. Ryan has been a director since 1991. Mr. Ryan has been
employed by New York Life Insurance Company since July, 1965 where, since 1981,
he has held the title of Corporate Vice President. Mr. Ryan is the head of the
Service Center Development of New York Life Insurance Company's Information
Systems organization. Mr. Ryan holds an MBA in Computer Science from Baruch
College and a BS/BA in Industrial Management from Manhattan College. Mr. Ryan is
a Certified Systems Professional.
Gunther L. Less has been a director of the Company since December 1996.
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 is the designee 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 Company's 1999 Annual Meeting of Stockholders and the term of
office of Class II Directors expires at the Company's 2000 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.
Non-Employee Director Compensation
Until March 1996, non-employee directors of the Company received no
compensation for attendance at Board meetings or committee meetings of the
Board; however, each non-employee director was 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
(the "1996 Plan") pursuant to which each non-employee director of the Company on
the date the 1996 Plan was approved by Stockholders was granted an option to
purchase 10,000 shares of Common Stock. Thereafter when each non-employee
director first became a director, such individual was granted an option to
purchase 10,000 shares of Common Stock. In addition, immediately following each
Annual Meeting of Stockholders at which directors were elected, each
non-employee director of the Company who was then a director was granted an
option to purchase an additional 5,000 shares of Common Stock (the "Formula
Grants"). At the 1998 Annual Meeting of Stockholders, stockholders voted in
favor of a proposal to amend the 1996 Plan, which proposal included the deletion
of the Formula Grants from the 1996 Plan.
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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 members are Messrs. Ryan and
Less, (iii) an Executive Committee whose members are Messrs. Sarna, Febish and
Ryan, and (iv) a Stock Option Plan Committee whose members are Messrs. Ryan and
Less.
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 1997 (the "Named Executive Officers") for services in all capacities
to the Company during the last three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Other Awards(1) Payouts
Name and Annual Securities All
Principal Compen- Underlying Other
Position Year Salary(2) sation (3) Options/SAR Compensation
- -------- ---- ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
David E.Y. Sarna, Chairman, 1997 $208,000 -- 50,000 --
Secretary and Co-Chief 1996 $208,000 -- 50,000 --
Executive Officer 1995 $200,000 -- -- --
George J. Febish, President, 1997 $208,000 -- 50,000 --
Treasurer and Co-Chief 1996 $208,000 -- 50,000 --
Executive Officer 1995 $200,000 -- -- --
</TABLE>
- ----------------
(1) None of the Named Executive Officers received any Restricted Stock
Awards or LTIP Payouts in 1995, 1996 or 1997.
(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.
(3) As to each individual named, the aggregate amounts of perquisites and
personal benefits not included in the Summary Compensation Table did not
exceed the lesser of either $50,000 or 10% of the total annual salary
and bonus reported for the Named Executive Officer.
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Employment Agreements
The Company 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. On July 9, 1998, the Compensation Committee of the
Board of Directors, as ratified by the Board of Directors, increased the annual
base salary to $215,000. Each of the employment agreements also provides for a
bonus of 5% per annum of the Company's Earnings Before Depreciation, Interest,
Taxes and Amortization. In addition, on an annual basis, the Board of Directors
will consider paying an additional bonus to each of Messrs. Sarna and Febish
that is based upon the increase in the Company's gross revenues, taking into
account any increase in the Company's expenses. The annual base salary under the
current agreements may be increased at the discretion of the Board of Directors.
The agreements provide for (i) a severance payment of the base compensation and
bonus of the prior full fiscal year and payment of all medical, health,
disability and insurance benefits then payable by the Company for the longer of
(a) the remainder of the term of the employment agreement or (b) 12 months, as
well as (ii) the base compensation and bonus accrued to the date of termination,
upon the occurrence of (x) termination by the Company without cause, (y)
termination by the employee for good reason or (z) a change in control of the
Company, if the employee resigns after the occurrence of the such change in
control. Each of the employment agreements limit the severance payments to an
amount that is less than the amount that would cause an excise tax or loss of
deduction under the rules relating to golden parachutes under the Internal
Revenue Code.
Officer Warrants
Each of David E. Y. Sarna and George J. Febish have entered into a
Warrant and Warrant Agreement with the Company. The Warrant and Warrant
Agreements, dated April 15, 1993 (the "Officer Warrants") provides for the right
of each of them to purchase 50,000 shares of Common Stock at an exercise price
per share of $.50 exercisable until April 30, 1998. The Company extended the
exercise date of the Officer Warrants to April 30, 2000 in consideration of
their waiver of the registration rights with respect to the Company's 1996
Public Offering and their agreement to enter into an 18 month lock-up agreement
with the Underwriter. 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
There were no grants of stock options nor stock appreciation rights
("SARs") to the Named Executive Officers during fiscal 1997. There were no stock
option nor SAR exercises during fiscal 1997 and no SARs were outstanding at
December 31, 1997. On July 9, 1998, Messrs. Sarna and Febish were each granted
an option under the 1996 Plan to purchase 50,000 shares of Common Stock at an
exercise price of $1.45 per share. Such options vest as to fifty per cent of the
shares on July 9, 1998 and fifty per cent on July 9, 1999.
On July 9, 1998, the Board of Directors of the Company resolved to
offer to all currently employed employees who had previously been granted stock
options under the 1996 Plan, amendments to their stock option contracts, which
amendments included the repricing of options from an average exercise price of
$4.50 per share of Common Stock to $1.45 per share of Common Stock (the fair
market value of the Common Stock on July 9, 1998) and extending and revising the
vesting period of the options.
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1996 Stock Option Plan
The Company's 1996 Plan was adopted by the Board of Directors on March
15, 1996 and was approved by the Stockholders on September 16, 1996 and July 9,
1998. The number of shares available under the 1996 Plan is 750,000. As of July
31, 1998, no options had been exercised and options to purchase 425,000 shares
held by fourteen optionees were outstanding at a weighted average per share
exercise price of $1.45. Options granted under the 1996 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
1996 Plan. Non-employees and part-time employees may receive only non-qualified
options. Options to purchase an aggregate of 425,000 shares of Common Stock have
been granted to date under the 1996 Plan, including 100,000 options granted to
each of David E. Y. Sarna and George J. Febish, the Company's Co-Chief Executive
Officers .
The 1996 Plan is administered by a committee of the Board of Directors
of not less than two Directors, each of whom must be a "Non-Employee Director"
within the meaning of regulations promulgated by the Securities and Exchange
Commission. The Board of Directors has designated the Stock Option Plan
Committee of the Board consisting of Messrs. Less and Ryan to administer the
1996 Plan. The Stock Option Plan Committee has the authority under the 1996 Plan
to determine the terms of options granted under the 1996 Plan, including, among
other things, the individuals who shall receive options, the times when they
shall receive them, whether an incentive stock option and/or non-qualified
option shall be granted, the number of shares to be subject to each option, and
the date or dates each option shall become exercisable.
The following summary of the 1996 Plan set forth herein is qualified in
its entirety by reference to the text of the 1996 Plan, a copy of which is filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part.
Types of Grants and Awards
The 1996 Plan permits the grant of options which may either be
"incentive stock options" ("ISOs"), within the meaning of Section 422 of the
Code, or "non-qualified stock options" ("NQSOs"), which do not meet the
requirements of Section 422 of the Code.
Eligibility
All employees (including officers) and directors of the Company or its
subsidiaries, consultants and advisors to, the Company or its subsidiaries are
eligible to be granted options under the 1996 Plan. The Company currently has
approximately 18 employees, 15 of which are full-time employees.
Stock Subject to the 1996 Plan
The total number of shares of Common Stock for which options may be
granted under the 1996 Plan may not exceed 750,000, subject to possible
adjustment in the future. Any shares of Common Stock subject to any option which
for any reason expires, is canceled or is terminated unexercised or which ceases
for any reason to be exercised will again become available for granting of
options under the 1996 Plan.
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Administration
The 1996 Plan is administered by a committee of the Board of Directors
of not less than two Directors, each of whom must be a "Non-Employee Director"
within the meaning of regulations promulgated by the Securities and Exchange
Commission. The Board of Directors has designated the Stock Option Plan
Committee of the Board consisting of Messrs. Less and Ryan to administer the
1996 Plan. The Stock Option Plan Committee has the authority under the 1996 Plan
to determine the terms of options granted under the 1996 Plan, including, among
other things, the individuals who shall receive options, the times when they
shall receive them, whether an incentive stock option and/or non-qualified
option shall be granted, the number of shares to be subject to each option, and
the date or dates each option shall become exercisable.
Exercise Price
The exercise price of options granted under the 1996 Plan is determined
by the Stock Option Plan Committee, but in the case of an ISO may not be less
than 100% of the fair market value of the Common Stock on the date the ISO is
granted (110% of such fair market value in the case of ISOs granted to an
optionee who owns or is deemed to own stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company (a "Ten
Percent Stockholder")). The exercise price of the shares of Common Stock under
each Non-Employee Director Option shall be equal to the fair market value of the
Common Stock subject to such option on the date of grant. The exercise price is
payable at the time of exercise of the option in cash or by certified check,
previously acquired shares of Common Stock (valued at their fair market value on
the date of exercise of the option) or a combination thereof, in the discretion
of the Stock Option Plan Committee. The Stock Option Plan Committee may, in its
discretion, permit payment of the exercise price of options by delivery of
properly executed exercise notices, together with a copy of irrevocable
instructions from the optionee to a broker acceptable to the Stock Option Plan
Committee to deliver promptly to the Company the amount of sale or loan proceeds
to pay such exercise. To facilitate the foregoing, the Company may enter into
agreements for coordinated procedures with one or more brokerage firms.
Terms and Conditions
As to options granted to employees and consultants:
(a) Options granted to employees and consultants may be
granted for such terms as is established by the Stock Option Committee, provided
that, the term of each ISO shall be for a period not exceeding ten years from
the date of the grant, and further provided that ISOs granted to a Ten Percent
Stockholder shall be for a period not exceeding five years from the date of
grant, and provided that the maximum number of shares subject to Employee
Options that may be granted to any individual during any calendar year under the
1996 Plan shall not exceed 50,000 shares and further, provided, that the
aggregate market value (deter mined at the time the option is granted) of the
shares of Common Stock for which any eligible employee may be granted ISOs under
the Plan or any other plan of the Company, or of a Parent or a Subsidiary of the
Company, which are exercisable for the first time by such optionee during any
calendar year shall not exceed $100,000.
(b) If an employee or consultant optionee's relationship with
the Company is terminated for any reason other than "disability" or death, the
option may be exercised at any time within three months thereafter to the extent
exercisable on the date of termination. However, in the event such relationship
is terminated either (a) for cause, or (b) without the consent of the Company,
such option shall terminate immediately.
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(c) In the event of the death of an optionee while an employee
of, or consultant or advisor to the Company, within three months after the
termination of such relationship (unless such termination was for cause or
without the consent of the Company) or within one year following the termination
of such relationship by reason of the optionee's "disability", the option may be
exercised, to the extent exercisable on the date of his death, by the optionee's
legal representatives at any time within one year after death, but not
thereafter and in no event after the date the option would otherwise have
expired.
(d) An option may not be transferred other than by will or the
laws of descent and distribution and may be exercised during the lifetime of the
optionee only by the optionee or by the optionee's legal representatives.
(e) The foregoing notwithstanding, in no case may options be
exercised later than the expiration date specified in the grant.
As to options granted to Non-Employee Directors:
(a) The Non-Employee Director Option shall not be affected by
the optionee ceasing to be a director of the Company or becoming an employee of
the Company, any of its Subsidiaries or a Parent; provided, however, that if he
is terminated for cause, such option shall terminate immediately.
(b) The term of a Non-Employee Director Option shall not be
affected by the death or disability of the optionee. If an optionee holding a
Non-Employee Director Option dies during the term of such option, the option may
be exercised at any time during its term by his/her legal representative.
(c) An option may not be transferred other than by will or the
laws of descent and distribution and may be exercised during a holder's lifetime
only by the holder or by his/her or legal representative. Except to the extent
provided above, options may not be assigned, transferred, pledged, hypothecated
or disposed of in any way (whether by operation of law or otherwise) and shall
not be subject to execution, attachment or similar process, and any such
attempted assignment, transfer, pledge, hypothecation or disposition shall be
null and void ab initio and of no force or effect.
(d) The foregoing notwithstanding, in no case may options be
exercised later than the expiration date specified in the grant.
SEP
The Company established in 1990 a simplified employee pension plan (the
"SEP Plan") covering all qualified employees. Pursuant to the SEP Plan,
employees could 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
Plan. In April 1997, the Company discontinued the SEP Plan. The SEP Plan was
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
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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
Section 145 ("Section 145") of the General Corporation Law of the State
of Delaware ("DGCL") provides, in general, that a corporation incorporated under
the laws of the State of Delaware, such as the registrant, may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than a
derivative action by or in the right of the corporation) by reason of the fact
that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. In the case of a
derivative action, a Delaware corporation may indemnify any such person against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or any other court in which such action was brought determines such
person is fairly and reasonably entitled to indemnity for such expenses.
The Ninth Article of the Company's Certificate of Incorporation, as
amended provides that the Company shall indemnify all persons whom the Company
shall have power to indemnify under Section to the fullest extent permitted by
such Section. In addition, Article Eighth of the Company's Certificate of
Incorporation provides, in general, that no director of the Company shall be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DECL. (which provides
that, under certain circumstances, directors may be jointly and severally liable
for willful or negligent violations of the DECL. provisions regarding the
payment of dividends or stock repurchases or redemptions), or (iv) for any
transaction from which the director derived an improper personal benefit.
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The Company maintains primary and excess directors and officers
liability policies in an aggregate amount of $5,000,000 per policy year.
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 July 31, 1998, 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 Executive
Officer named in the Summary Compensation Table herein titled "Executive
Compensation" and (iv) all directors and executive officers of the Company as a
group.
Amount and
Name and Nature of
Address of Beneficial Percent of
Beneficial Owner(1) Owner(2) Class(3)
- ------------------- ------------ ----------
David E. Y. Sarna (4) (5) 597,000 12.80%
George J. Febish (4) (6) 907,500 19.45
Melvin Weinberg, Esq. (7) 300,000 6.57
c/o Parker Chapin Flattau &
Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Daniel E. Ryan (8) 25,000 *
Gunther L. Less (8) 25,000 *
All officers and directors as 1,554,500 32.29
a group (4 persons) (3)(9)
* 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 immediately
exercisable options to purchase 50,000 shares of Common Stock granted
under the Company's 1996 Plan.
Footnote explanations continue on the following page.
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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) 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.
(8) Includes, for each of Messrs. Ryan and Less, immediately exercisable
stock options to purchase 25,000 shares of Common Stock granted under
the Company's 1996 Plan.
(9) Includes 130,000 shares of Common Stock which certain of the current
Executive Officers and Directors have a right to acquire pursuant to
presently exercisable stock options and 100,000 shares of Common Stock
which certain of the current Executive Officers and Directors have a
right to acquire pursuant to presently exercisable warrants.
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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.
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."
Loan to Officer
On January 2, 1997 the Company extended to Mr. Sarna a loan in the
amount of $440,000 (the "Loan"). The Loan was approved by the Board of the
Directors of the Company, with Mr. Sarna abstaining. Subsequently, the Board of
Directors on two separate occassions, with Mr. Sarna abstaining, unanimously
agreed to extend the maturity date of the Loan from November 30, 1997 to March
31, 1998 and from March 31, 1998 to December 31, 1998. Mr. Sarna utilized the
funds 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 Public Offering,
in an open market transaction. In March 1998, Mr. Sarna executed a Security
Agreement in favor of the Company in which he pledged as collateral for the Loan
certain contract rights to receive an option to acquire certain marketable
securities.
DESCRIPTION OF SECURITIES
The Company is authorized to issue up to 20,000,000 shares of Common
Stock, par value $.0001 per share and up to 5,000,000 shares of Preferred Stock,
par value $.0001 per share.
Units
Each Unit consists of one share of Common Stock and one Class A
Warrant. The Units are immediately detachable and separately transferable upon
issuance.
Common Stock
Holders of shares of Common Stock are entitled to one vote per share
on all matters that are submitted to the stockholders for their approval and
have no cumulative voting rights. Subject to the prior rights of Preferred
Stock, the holders of Common Stock are entitled to receive dividends, if any, as
may be declared by the Board of Directors from funds legally available therefor,
from time to time. Upon liquidation or dissolution of the Company, the remainder
of the assets of the Company will be distributed ratably among the holders of
Common Stock, after the payment of all liabilities and the holders of any
Preferred Stock. The Common Stock has no preemptive or other subscription rights
and there are no conversion or sinking fund provisions with respect to such
shares. All of the outstanding shares of Common Stock are, and the shares
issuable upon exercise of Class A Warrants will be, upon payment of the exercise
price, fully paid and nonassessable. As of July 31, 1998, there were 4,564,898
shares of Common Stock outstanding.
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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, until November 12, 2001.
The Class A Warrants are redeemable by the Company at a price of $.10 per Class
A Warrant 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
GNOSTIC, 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.
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.
In the Underwriting Agreement, the Company agreed to pay the
Underwriter a fee of 5% of the exercise price of each Class A Warrant exercised
until the expiration of the exercise period of the Class A Warrants, 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
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. The Company understands that the
Underwriter has ceased operating and has given up its NASD license. It is
therefore unclear as to whether, in the Underwriting Agreement, any such warrant
solicitation fee will be paid.
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Other Warrants and Options
Officer/Stockholder Warrants
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 Securities and Exchange Commission 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 Officer
Warrants was extended to April 30, 2000. The resale of the shares issuable upon
the exercise of 43,333 of the Officer Warrants has been registered in the
Selling Securityholder Prospectus. See "Concurrent Offering."
Private Placement Warrants
The Company has outstanding 412,500 Bridge Warrants and July 1996
Warrants to purchase 200,204 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
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<PAGE>
thereof, has been registered for sale in the Selling Securityholder Prospectus.
See "Description of Securities - Registration Rights" and "Concurrent Offering."
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. 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
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<PAGE>
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.
The Company's Certificate of Incorporation, as amended, provides that
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 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 provides 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, 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 may 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
As of August 6, 1998, the Company had 4,564,898 outstanding shares of
Common Stock. A substantial portion of the shares of Common Stock currently
issued and outstanding which are not so registered 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
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.
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 or in connection with the Financing Agreement) 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.
-65-
<PAGE>
See " Risk Factors -- Dilution; Impact of Sale of Common Stock upon Conversion
of Series C Preferred Stock and Exercise of the Put Options and Warrants."
Sales of substantial amounts of Common Stock pursuant to Rule 144
could subsequently adversely affect the market prices of the Common Stock
offered hereby. As of the date of this Prospectus, the majority 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 867,980 shares
of Common Stock and 412,500 Class A Warrants that are outstanding or issuable
upon the exercise of currently exercisable warrants. 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. 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 867,980 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 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, 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.
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, 1997 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
-66-
<PAGE>
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.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS..............................................F-2
BALANCE SHEET - AS AT DECEMBER 31, 1997.....................................F-3
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND DECEMBER 31, 1996.....................................F-4
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY) FOR THE YEARS ENDED
DECEMBER 31, 1997 AND DECEMBER 31, 1996.....................................F-5
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND DECEMBER 31, 1996.....................................F-6
NOTES TO FINANCIAL STATEMENTS...............................................F-7
CONDENSED BALANCE SHEETS - AS AT MARCH 31, 1998 AND
DECEMBER 31, 1997..........................................................F-17
CONDENSED STATEMENTS OF OPERATIONS - THREE MONTHS
ENDED MARCH 31, 1998 AND 1997..............................................F-18
CONDENSED STATEMENTS OF CASH FLOWS - THREE MONTHS
ENDED MARCH 31, 1998 AND 1997..............................................F-19
NOTES TO CONDENSED FINANCIAL STATEMENTS....................................F-20
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
ObjectSoft Corporation
Hackensack, New Jersey
We have audited the accompanying balance sheet of ObjectSoft Corporation as of
December 31, 1997 and the related statements of operations, changes in
stockholders' equity and cash flows for each of the years in the two-year period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of ObjectSoft Corporation as of
December 31, 1997 and the results of its operations and cash flows for each of
the years in the two-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Richard A. Eisner & Company, LLP
- ---------------------------------------
/s/ Richard A. Eisner & Company, LLP
Florham Park, New Jersey
February 20, 1998
F-2
<PAGE>
OBJECTSOFT CORPORATION
Balance Sheet
December 31, 1997
ASSETS
Current assets:
Cash and cash equivalents (Note A[9]) $ 209,455
Marketable securities (Note A[2]) 915,938
Accounts receivable 364,859
Prepaid expenses and other current assets 235,150
Note receivable officer/shareholder (Note B) 440,000
Note receivable other 25,000
-----------
Total current assets 2,190,402
Furniture and equipment, at cost, net of accumulated
depreciation (Notes A[3], C and G) 384,071
Capitalized software (Notes A[6] and D) 78,231
Other assets 70,847
-----------
TOTAL $ 2,723,551
===========
LIABILITIES
Current liabilities:
Current portion of long-term debt (Note G) $ 8,686
Current portion of obligations under
capital lease (Note F) 27,348
Accounts payable 296,658
Accrued expenses (Note H) 84,560
Other liabilities 2,163
-------------
Total current liabilities 419,415
Long-term debt (Note G) 5,413
Obligations under capital lease (Note F) 25,475
Total liabilities 450,303
Commitments and contingency (Note N)
STOCKHOLDERS' EQUITY ( Notes E and I)
Common stock, $.0001 par, authorized
20,000,000 shares, issued and outstanding
4,082,676 shares 408
Additional paid-in capital 6,942,862
Accumulated deficit (4,670,022)
-----------
Total stockholders' equity 2,273,248
TOTAL $ 2,723,551
============
See notes to financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
OBJECTSOFT CORPORATION
Statements of Operations
Years Ended December 31, 1997 and 1996
Year Ended December 31,
1997 1996
<S> <C> <C>
Revenues (Note M):
Development and training $ 266,853 $ 290,680
Rental income (Note N[1]) 364,314 150,450
------------- -------------
Total revenues 631,167 441,130
------------- -------------
Expenses:
Cost of services:
Development and training 346,767 290,225
Rentals 426,755 206,956
Research and development 613,000 92,693
General and administrative 1,766,333 762,115
------------ -------------
Total expenses 3,152,855 1,351,989
------------ ------------
Loss from operations (2,521,688) (910,859)
---------- --------
Other income (expense):
Realized and unrealized gain on marketable securities 137,927
Interest and dividend income 126,562
Interest expense (12,673) (329,836)
Loss on uncollectible loan (Note O) (250,000)
--------
Total other income (expense) 1,816
Net (loss) $(2,519,872) $(1,240,695)
=========== ===========
Basic and diluted net loss per share ($0.62) ($0.49)
=========== ===========
</TABLE>
* Reclassified to conform to current years presentation.
See notes to financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
OBJECTSOFT CORPORATION
Statements of Changes in Stockholders' Equity
Years Ended December 31, 1997 and 1996
Common Additional
Stock Paid-in
Shares Amount Capital (Deficit) Total
------ ------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 2,293,000 $229 $278,331 ($877,404) ($598,844)
Warrants issued in connection 123,525 123,525
with bridge loan, net of costs
(Note E)
Compensatory warrant granted 16,000 16,000
(Note I[2])
Preferred stock dividends declared (32,051) (32,051)
Units issued, net of costs (Note 1,639,051 164 6,279,771 6,279,935
I[1])
Exercise of warrants 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
Exercise of warrants and 60,000 6 59,994 60,000
nonemployee option
Compensatory warrant granted 4,000 4,000
(Note I[2])
Net loss (2,519,872) (2,519,872)
---------- -------- ---------- ------------ -----------
4,082,676 $408 $6,942,862 ($4,670,022) $2,273,248
========= ======== ========== ============ ===========
</TABLE>
See notes to financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
OBJECTSOFT CORPORATION
Statements of Cash Flows
Years Ended December 31, 1997 and 1996
Year Ended December 31,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (2,519,872) $ (1,240,695)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation and amortization 330,393 174,699
Amortization of discount on note payable 268,525
(Recovery) for doubtful accounts (16,200)
Warrant issued for services rendered 4,000 16,000
Loss on uncollectible loan 250,000
Unrealized gain on marketable securities (65,938)
Changes in:
Marketable securities (850,000)
Accounts receivable (358,959) 82,902
Prepaid expenses and other current assets (54,687) (153,884)
Other assets 59,627 (94,875)
Accounts payable 176,444 (1,005)
Accrued expenses (17,312) 7,617
Accrued officer compensation (391,687)
Other liabilities (7,622) 8,169
-------------- ---------------
Net cash (used in) operating activities (3,053,926) (1,340,434)
-------------- ---------------
Cash flow from investing activities:
Increase in bank overdraft 62,907
Loan receivable (Note O) (250,000)
Capital expenditures (92,486) (419,096)
Capitalized software (37,909) (137,904)
Note receivable officer/shareholder (637,000)
Repayment of note receivable officer/shareholder 197,000
Note receivable other (25,000)
-------------
Net cash (used in) investing activities (782,488) (557,000)
------------- -------------
Cash flow from financing activities:
Proceeds from issuance of warrants - bridge units 123,525
Proceeds from note payable 981,475
Repayment of note payable (3,403) (1,250,000)
Proceeds from issuance of common stock and warrants 6,279,935
Dividends (32,051)
Proceeds from exercise of warrants and nonemployee 60,000 181,250
options
Principal payments on obligations under capital leases (50,086) (27,431)
Redemption of preferred stock (383,906)
Net cash provided by financing activities 6,511 5,872,797
------------- --------------
Net increase (decrease) in cash and cash equivalents (3,829,903) 3,975,363
Cash and cash equivalents, beginning of period 4,039,358 63,995
------------- --------------
Cash and cash equivalents, end of period $ 209,455 $ 4,039,358
============= ==============
Supplemental disclosures of cash flow
Cash paid during the period interest expense: $ 12,673 $ 3,502
============= ==============
</TABLE>
See notes to financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
OBJECTSOFT CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] The Company:
The Company is currently engaged in the business of providing
transaction based and advertising supported services over the Internet
and through public access kiosks. Its Kiosks may be sold to others or
held for operating income.
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern, however, the Company
sustained substantial operating losses through December 31, 1997. The
Company has retained an underwriter to assist it with a possible
minimum of $1,500,000 and a maximum of $2,000,000 in a private offering
of securities and an additional possible $2,000,000 private offering of
securities if certain conditions are met. However, no assurance can be
given that the Company will be successful in raising additional
capital. Further, there can be no assurance, assuming the Company
successfully raises additional funds, that the Company will achieve
profitability or positive cash flows.
[2] Marketable securities:
The Company's marketable securities. primarily equity securities, are
bought and held principally for the purpose of selling them in the near
term and are classified as trading securities. Trading securities are
recorded at fair value on the balance sheet in current assets, with the
change in fair value during the period reported in earnings.
[3] Furniture and equipment:
Furniture and 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).
[4] 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
(see Note K).
F-7
<PAGE>
[5] 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.
[6] 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.
[7] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
[8] 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 granted to employees
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 I[2] to
the financial statements for further information.
F-8
<PAGE>
[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.
[10] Per Share data:
The per share data has been computed on the basis of the loss for the
year divided by the weighted average number of shares of common stock
outstanding. The per share data for 1996 has been restated in
conformity with Statement of Financial Accounting Standards No.
128 "Earnings Per Share".
NOTE B - NOTE RECEIVABLE OFFICER/SHAREHOLDER
The note receivable is due from the Chairman of the Company's Board of
Directors and is collateralized by contract rights to receive an option
convertible into marketable securities. It was initially due November
1997 and was extended to May 1998 and bears interest at 8 percent per
annum.
Also, during 1997, the Company loaned the Chairman of the Board an
additional $197,000 which was repaid with interest at 8 percent per
annum.
NOTE C - FURNITURE AND EQUIPMENT
As of December 31, 1997, furniture and equipment consists of:
Kiosks $437,036
Furniture and other equipment 277,154
714,190
Accumulated depreciation 330,119
$384,071
Depreciation expense aggregated $202,597 and $83,587 for the years ended
December 31, 1997 and 1996, respectively. In 1997 and 1996, included in
furniture and other equipment are assets under capital leases with costs of
$60,393 and $49,094, respectively. Accumulated depreciation on these assets as
of December 31, 1997 and 1996 aggregated $28,076 and $23,316, respectively.
Depreciation expense is depreciation expense on equipment under capital lease
which aggregated$8,417 and $14,920, for the years ended December 31, 1997 and
1996, respectively.
During 1997 and 1996, the Company acquired equipment under capital lease
aggregating $18,834 and $98,906, respectively.
F-9
<PAGE>
NOTE D - CAPITALIZED SOFTWARE
During the years ended December 31, 1997 and 1996, the Company capitalized
software development costs which aggregated $37,909 and $137,904, respectively.
Amortization of capitalized software costs aggregated $127,796 and $78,392 for
the years ended December 31, 1997 and December 31, 1996, respectively.
Additionally amortization of capitalized courseware costs aggregated $12,720 for
the year ended December 31, 1996.
NOTE E - FINANCING
In 1996, prior to the initial public offering of its common stock ("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 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. As a result of the IPO, 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. The IPO securities consist of one share of
common stock and a warrant to purchase a share of common stock at $6.50.
NOTE F - OBLIGATIONS UNDER CAPITAL LEASE
Minimum future lease payments under capital leases expiring through 2002, as of
December 31, 1997 are as follows:
Year Ending
December 31, Amount
1998 $ 33,722
1999 10,576
2000 10,576
2001 7,689
2002 4,580
--------
67,143
Less amount representing interest 14,320
Present value of net minimum lease payments 52,823
Less present value of net minimum lease
payments due within one year 27,348
$ 25,475
F-10
<PAGE>
NOTE G - LONG-TERM DEBT
Long-term debt consists of a note payable, collateralized by equipment, which is
due in monthly installments of $797 including principal and interest at 8.65%
per annum. The note matures in July 1999. The contractual principal payments due
in 1998 and 1999 are $8,686 and $5,413, respectively.
NOTE H - ACCRUED EXPENSES
Accrued expenses as of December 31, 1997 are as follows:
Accrued rents $ 40,560
Accrued legal fees 20,000
Other 24,000
------
$ 84,560
NOTE I - STOCKHOLDERS' EQUITY
[1] 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 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.
[2] Stock options and warrants:
The Company has warrants outstanding, expiring in April 1998, to
purchase 143,333 shares of common stock at an exercise price of $0.50.
In 1996, warrants to purchase 90,625 shares of common stock at an
exercise price of $2.00 were exercised and 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. During 1997, the
remaining options were exercised.
F-11
<PAGE>
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 vested
ratably over a ten month period ending March 1997 and was exercisable
through May 2001. During 1997 and 1996, the Company recognized expense
of $4,000 and $16,000, respectively. This warrant was exercised in
1997.
In connection with the redemption of preferred stock in 1996, the
Company issued a warrant to purchase 20,000 shares of common stock at
an exercise price of $7.00. The warrant expires November 1999. The
Company maintains a stock option ("Plan") which 250,000 shares of
common stock are reserved for issuance upon exercise of either
incentive or nonincentive stock options which may be granted from time
to time by the Board of Directors to employees and others.
The Company 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 1997 and 1996 net loss 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
(2) the 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 1997 would have been approximately $2.7 million
or $(0.67) per share and the net loss in 1996 would have been
approximately $1.4 million or $(0.54) per share.
The fair value of each option granted in 1997 and 1996 has been
estimated on the date of grant using the Black-Scholes options pricing
model with the following assumption: no dividends yield, expected
volatility of 40% and 0%, risk free interest rates of 5.36% and 6.37%,
respectively, and expected lives of approximately four and half years
for the 1997 options and five years for the 1996 options. The fair
value of options granted during 1997 and 1996 were $2.18 and $1.20 per
share, respectively.
As of December 31, 1997, 2,863,554 shares were reserved for issuance of
shares for outstanding warrants and options.
F-12
<PAGE>
The following summarizes stock option transactions under the 1996 Stock Option
Plan:
Year Ended December 31,
-----------------------------------------------------------------------
1997 1996
----------------------------------- ----------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding options at the beginning of year 145,000 $3.43
Options granted 110,000 4.64 145,000 $3.43
Options expired or canceled (5,000) 3.50
Outstanding options at the end of year 250,000 $3.96 145,000 $3.43
======= ===== ======= =====
</TABLE>
The following table summarizes information about the 1996 Stock Option Plan's
options outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
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
---------- ----------- ------------------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$2.50 to $5.25 250,000 4.50 $3.96 186,672 $3.79
</TABLE>
F-13
<PAGE>
NOTE J - EARNINGS PER SHARE
The following is the reconciliation of the net loss, net loss available to
common stockholders and weighted average number of shares.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------
1997 1996
-------------------------------------------- --------------------------------------------
Per Per
Loss Shares Share Loss Shares Share
-------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net loss (2,519,872) ($1,240,695)
Less preferred stock 32,05
------------
dividends 1
Net loss available to ($2,519,872) 4,066,994 ($0.62) ($1,272,746) 2,595,904 ($0.49)
common stockholders
</TABLE>
NOTE K - INCOME TAXES
The significant components of the Company's deferred tax assets and liabilities
as of December 31, 1997 is as follows:
Accrual to cash adjustment $ 133,000
Capitalized software (24,000)
Net operating losses carryforward 2,064,000
Research and development credits 83,000
Marketable securities (27,000)
Valuation allowance (2,229,000)
-----------
Net deferred tax asset $ 0
-----------
During the years ended December 31, 1997 and 1996 there were no provisions for
income taxes, however, the benefit for deferred taxes before change in valuation
allowances aggregated $1,437,000 and $481,000, respectively, which were fully
offset by valuation allowances.
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 years ended
December 31, 1997 and 1996, respectively, is summarized as follows:
1997 1996
---- ----
Statutory federal income tax rate 34.0% 34.0%
Increase in valuation allowance -41.7 -38.8
Research and development credit 2.6 0.9
Miscellaneous 5.1 3.9
Effective income tax 0.0% 0.0%
====== ======
F-14
<PAGE>
As of December 31, 1997, the Company had a net operating loss carryforward of
$4,800,000, which expires through 2001.
NOTE L - EMPLOYEE BENEFIT PLAN
The Company maintains a noncontributory Employee Savings Plan, in
accordance with the provisions of Section 401(k) of the Internal
Revenue Code. Pursuant to the terms of the plan, participants can defer
a portion of their income through contributions to the Plan.
NOTE M - FINANCIAL INSTRUMENTS, REVENUES AND OTHER MATTERS
[1] Revenues:
For the year ended December 31, 1997, 84 percent of revenues were
derived from one customer and for the year ended December 31, 1996, 71
percent of revenues were derived from two customers.
[2] Microsoft Corporation:
The Company's software is generally based upon Microsoft Windows
technology. Additionally, it has established a strategic relationship
with Microsoft that management believes is important to its sales,
marketing and support and product development activities. Accordingly,
any change in this relationship or any factor adversely affecting the
demand for, or the use of Microsoft's Windows operating system could
have a negative impact on demand for the Company's products and
services. Additionally, changes to the underlying components of the
Windows operating system would require changes to the Company's
products and could result in the loss of sales if the Company did not
implement changes in a timely manner.
NOTE N - COMMITMENTS AND CONTINGENCY
[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
lease five kiosks, hardware and software to New York. All rental income
relates to this agreement. Additionally, the Company can earn fees
based upon the number of transactions effectuated in the kiosks.
Effective January 1, 1998, the annual rental income was reduced to
$84,000.
F-15
<PAGE>
[2] Lease:
The Company leases office space and equipment under operating leases with an
initial or remaining term of one year or more through 2003. Minimum annual
rentals are as follows:
Year Ending
December 31, Amount
------------ ------
1998 $77,822
1999 80,494
2000 84,787
2001 89,080
2002 97,666
2003 9,311
--------
$439,160
Rent expense approximated $77,900 and $62,500, for the years ended
December 31, 1997 and 1996, 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.
[4] Litigation
In 1998, litigation commenced against the Company alleging breach of
contract and seeking in excess of $100,000. While the outcome cannot be
determined, management believes that the action is without merit and is
vigorously contesting this matter.
NOTE O - LOSS ON UNCOLLECTIBLE LOAN
During 1997, the Company entered into a letter of intent to acquire
another software company. Concurrently, the Company loaned this company
$250,000. The acquisition has been cancelled and the loan written off
as uncollectible.
F-16
<PAGE>
<TABLE>
<CAPTION>
Objectsoft Corporation
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 112,758 $ 209,455
Marketable securities 332,235 915,938
Accounts receivable 196,864 364,859
Prepaid expenses and other current assets 250,957 235,150
Notes receivable - officer/shareholder 440,000 440,000
Note receivable - other 16,640 25,000
------------- -------------
Total current assets 1,349,454 2,190,402
Equipment, at cost, net of accumulated
depreciation 346,856 384,071
Capitalized software 81,990 78,231
Other assets 70,847 70,847
------------- -------------
TOTAL $1,849,147 $2,723,551
============= =============
LIABILITIES
Current Liabilities:
Current portion of long-term debt $ 8,873 $ 8,686
Current portion of obligations under
capital lease 16,667 27,348
Accounts payable 136,597 296,658
Accrued expenses 106,954 84,560
Other current liabilities 5,398 2,163
-------------- --------------
Total current liabilities 274,489 419,415
------------ ------------
Long-term debt 3,122 5,413
Obligations under capital lease 23,907 25,475
------------- -------------
Total liabilities 301,518 450,303
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value; authorized
20,000,000 shares; issued and outstanding
4,082,676 shares 408 408
Additional paid-in capital 6,942,862 6,942,862
Accumulated deficit (5,395,641) (4,670,022)
--------- ---------
Total stockholders' equity 1,547,629 2,273,248
----------- ------------
TOTAL $ 1,849,147 $ 2,723,551
============ ============
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
Objectsoft Corporation
Condensed Statements of Operations
For the Three Months Ended March 31, 1998 and March 31, 1997
Three Months Ended March 31,
1998 1997*
(Unaudited)
<S> <C> <C>
REVENUES
Development and training $ 15,166 $ 47,529
Rental income 29,125 90,270
------------- -------------
Total revenues 44,291 137,799
------------- ------------
EXPENSES
Cost of Service:
Development and training 49,430 88,527
Rentals 133,926 130,935
Research and development 147,340 98,615
General and administrative 468,812 424,753
------------ ------------
Total expenses 799,508 742,830
------------ ------------
Loss from operations (755,217) (605,031)
------------ ------------
Other income (expense)
Realized and unrealized gain (loss) on
marketable securities (1,846)
Interest and dividend income 34,371 36,126
Interest expense (2,927) (3,720)
Total other income (expense) 29,598 32,406
------------- -------------
NET (LOSS) ($725,619) ($572,625)
----------- -----------
BASIC AND DILUTED NET (LOSS)
PER SHARE ($0.18) ($0.18)
============== ==============
WEIGHTED AVERAGE NUMER OF 4,082,676 4,036,110
============== ==============
SHARES OUTSTANDING
- --------
</TABLE>
* Reclassified to conform to current year's presentation and restated to
properly reflect interest income.
F-18
<PAGE>
<TABLE>
<CAPTION>
Objectsoft Corporation
Condensed Statements of Cash Flows
For the Three Months Ended March 31, 1998 and March 31, 1997
Three Months Ended March 31,
1998 1997
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net (loss) ($ 725,619) ($ 513,965)
Adjustments to reconcile net loss to net
cash (used in) operating activities:
Depreciation and amortization 81,825 78,366
Changes in operating assets and liabilities:
(Increase) decrease in:
Marketable securities 583,703 (2,000,000)
Accounts receivable 167,995 (70,690)
Other current assets (15,807) (98,987)
Note receivable - other 8,360
Other assets 14,898
Increase (decrease) in:
Accounts payable (160,061) 143,102
Accrued expenses and other liabilibities 25,629 (19,757)
------------ ------------
Net cash used in operating activities (33,975) (2,467,033)
------------ ------------
Cash flow from investing activities:
Capital expenditures (23,869) (79,026)
Capitalized software and courseware (24,500) (13,780)
Increase in notes and loan receivable
officer shareholder (637,500)
------------ -----------
Net cash (used in) investing activites (48,369) (730,306)
------------ -----------
Cash flow from financing activities:
Proceeds from exercise of warrants and
issuance of 39,000 shares 39,000
Principal payments on obligations under
capital leases (12,249) (7,635)
Repayment of long-term debt (2,104)
------------
Net cash provided by financing activities (14,353) 31,365
------------ -------------
NET (DECREASE) IN CASH (96,697) (3,165,974)
Cash, beginning of period 209,455 4,039,358
------------ -----------
Cash, end of period $ 112,758 $ 873,384
============ ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Interest expense paid $ 2,927 $ 3,720
============= =============
</TABLE>
F-19
<PAGE>
Objectsoft Corporation
Notes to Condensed Financial Statements
March 31, 1998 (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, 1997) as filed with the Securities and Exchange
Commission.
NOTE B - LOSS PER SHARE
Basic and diluted net loss per share was computed based on the weighted average
number of shares of common stock outstanding during the period.
NOTE C - SUBSEQUENT EVENTS
On May 13, 1998 (the "Subscription Date"), the Company entered into a Private
Equity Line of Credit Agreement (the "Agreement") with several investors (the
"Investors") which provides for a commitment to fund up to $7,100,000 to the
Company. On the Subscription Date the Investors purchased 444,444 shares of the
Company's Common Stock (the "Initial Shares") and received Warrants to purchase
an aggregate of 18,000 shares of Common Stock for $900,000. The agreement also
provides, subject to the fulfillment of various conditions, for the Investors to
purchase 6% Series C Convertible Preferred Stock for $1,200,000. The shares are
to be issued in two parts within 120 days after the registration of the Initial
Shares.
In addition, the Company may from time to time, subject to the fulfillment of
various conditions, offer the Investors to purchase additional common stock at
85% of the Market Price as defined in the agreement, which could potentially
produce proceeds of up to $5,000,000.
On a proforma basis, assuming the Subscription Date were March 31, 1998, and the
Initial Shares were issued as of such date, total stockholders equity would have
been approximately $2,382,600.
F-20
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
DATED AUGUST 11, 1998
ALTERNATE PROSPECTUS
OBJECTSOFT CORPORATION
867,980 Shares of Common Stock and 412,500 Class A
Warrants issuable upon the exercise of Warrants
This Prospectus relates to (i) 867,980 shares of the common stock, par
value $.0001 per share (the "Common Stock"), of ObjectSoft Corporation (the
"Company") and (ii) 412,500 Redeemable Class A Warrant (the "Class A Warrants")
of the Company. Such shares of Common Stock and Class A Warrants are
collectively referred to herein as the "Selling Securityholder Securities," and
the holders of the Selling Securityholder Securities and the warrants
exercisable for certain of the Selling Securityholder Securities are
collectively referred to herein as the "Selling Securityholders." The 412,500
Class A Warrants and 412,500 of the shares of Common Stock are issuable, in the
form of units (the "Units"), each Unit consisting of one share of Common Stock
and one Class A Warrant. The Units are issuable upon the exercise of (1) 375,000
warrants (the "Bridge Warrants") issued to investors in a private placement by
the Company in April through June, 1996 (the "Bridge Loan Offering") and (2)
37,500 warrants issued to Renaissance Financial Securities Corporation ( the
"Underwriter") in its capacity as placement agent of the Bridge Loan Offering
(the "Placement Agent's Warrant"). The Underwriter subsequently assigned the
Placement Agent's Warrant to two of its executive officers. Of the other 455,480
shares of Common Stock to which this Prospectus is related, (1) 184,643 shares
are issued and outstanding and were issued to investors in a private placement
by the Company in July and August 1996 (the "July 1996 Offering"), (2) 182,004
shares are issuable upon the exercise of warrants issued to the investors in the
July 1996 Offering ( the "July 1996 Warrants"), (3) 45,500 shares are issuable
upon the exercise of a warrant (and the July 1996 Warrants issuable upon the
exercise thereof) issued to Win Capital Corporation ("Win Capital") in its
capacity as placement agent of the July 1996 Offering (the "July Placement
Warrant") and (4) 43,333 shares are issuable upon the exercise of warrants
originally issued to a former executive officer of the Company (the "Officer
Warrants"). See "Selling Securityholders" and "Plan of Distribution." See "Plan
of Distribution" and "Concurrent Public Offering."
The shares of Common Stock and Class A Warrants that comprise the Units
are immediately detachable and separately transferable. Each Class A Warrant
entitles the holder thereof to purchase one share of Common Stock at an exercise
price of $6.50 per share, subject to adjustment, until November 11, 2001. The
Class A Warrants are redeemable by the Company at a price of $.10 per Class A
Warrant commencing October 21, 1998, 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. See "Description
of Securities - Class A Warrants."
The Selling Securityholder Securities may be sold from time to time by
the Selling Securityholders or by their transferees. The distribution of the
Selling Securityholder Securities by the Selling Securityholders may be effected
in one or more transactions that may take place on the over-the-counter market,
including ordinary
A-2
<PAGE>
brokers' transactions, privately negotiated transactions or through sales to one
or more dealers for resale of such securities as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by the Selling Securityholders.
The Selling Securityholders, and intermediaries through whom such
securities are sold, may be deemed underwriters within the meaning of the
Securities Act of 1933 (the "Securities Act") with respect to the securities
offered, and any profits realized or commissions received may be deemed
underwriting compensation. The Company has agreed to indemnify the Selling
Securityholders against certain liabilities, including liabilities under the
Securities Act.
The Company will not receive any of the proceeds from the sale of the
Selling Securityholder Securities by the Selling Securityholders. In the event
the Placement Agent's Warrant and all of the Bridge Warrants and the other
warrants exercisable to acquire shares of Common Stock are exercised in full,
the Company will receive gross proceeds of $5,226,685. See "Selling
Securityholders" and "Plan of Distribution."
On the date of this Prospectus, a post effective amendment to a
registration statement under the Securities Act with respect to the offering by
the Company of 1,366,050 shares of Common Stock and 1,366,050 Class A Warrants,
was declared effective by the Securities and Exchange Commission (the
"Commission"). See "Concurrent Public Offering."
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. See
"Risk Factors" immediately following the "Prospectus Summary" section.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is August 11, 1998
A-3
<PAGE>
[ALTERNATE PROSPECTUS PAGE]
----------------------
TABLE OF CONTENTS
----------------------
Page
Prospectus Summary......................................................... 4
Risk Factors............................................................... 9
Use of Proceeds............................................................ 21
Dividend Policy............................................................ 22
Capitalization............................................................. 23
Selected Financial Data.................................................... 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 26
Glossary................................................................... 30
Business................................................................... 32
Management................................................................. 50
Principal Stockholders..................................................... 59
Certain Transactions....................................................... 61
Description of Securities.................................................. 61
Shares Eligible for Future Sale............................................ 65
Selling Securityholders.................................................... A-6
Plan of Distribution....................................................... A-10
Concurrent Public Offering................................................. A-10
Legal Matters.............................................................. 66
Experts.................................................................... 66
Additional Information..................................................... 66
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.
A-4
<PAGE>
ObjectSoft(TM), SmartStreet(TM), SmartSign(TM), OLEBroker(TM), CafeOLE(TM), and
HeartBeat(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").
A-5
<PAGE>
[ALTERNATE PROSPECTUS PAGE]
SELLING SECURITYHOLDERS
Up to an aggregate of 867,980 shares of Common Stock and 412,500 Class
A Warrants may be offered for resale by the Selling Securityholders. The Class A
Warrants and 412,500 shares of Common Stock are issuable in the form of 412,500
immediately separable Units upon the exercise of the Bridge Warrants issued to
investors in the Bridge Loan Offering and the Placement Agent's Warrant. Of the
other 455,480 Selling Securityholder shares of Common Stock, 184,643 shares are
issued and outstanding and were issued to investors in the July 1996 Offering,
182,004 shares are issuable upon the exercise of the July 1996 Warrants, 45,500
shares are issuable upon the exercise of the July Placement Warrant (and the
July 1996 Warrants issuable upon the exercise thereof) and 43,333 shares are
issuable upon exercise of the Officer Warrants.
The following table sets forth certain information with respect to each
Selling Securityholder for whom the Company is registering Selling
Securityholder Securities for resale to the public. The Company will not receive
any of the proceeds from the sale of such securities (except indirectly to the
extent of any warrant exercise price). Renaissance acted as the Underwriter of
the Company's initial public offering in November, 1996. The Company understands
that the Underwriter has ceased operating and has given up its NASD license. In
July 1998, the Company entered into a consulting agreement with Win Capital
Corporation and as part of the consulting fee issued a warrant to Win Capital
Corporatrion to purchase 250,000 shares of Common Stock. Other than as described
with respect to Renaissance and Win Capital Corporation, to the Company's
knowledge, there are no material relationships between any of the Selling
Securityholders and the Company, nor have any such material relationships
existed within the past three years.
Other than Adam J. Cohen and Todd M. Spehler (former executive officers
of Renaissance), who individually own the Unit Purchase Option which was
originally issued to Renaissance, Win Capital Corporation which owns a warrant
to purchase 250,000 shares of Common Stock, and the holders of the Investor
Shares and Officer Warrants, no Selling Securityholder currently owns securities
of the Company other than the Selling Securityholder Securities or warrants
exercisable to purchase Selling Securityholder Securities. Assuming all of the
Selling Securityholder Securities are issued and sold, and based on the
securities of the Company currently owned by the Selling Securityholders, no
Selling Securityholder, with the possible exception of Win Capital Corporation,
will beneficially own 1% or more of the Company's Common Stock.
A-6
<PAGE>
[ALTERNATE PROSPECTUS PAGE]
<TABLE>
<CAPTION>
Maximum Maximum Number of
Number of Class A Warrants
Bridge Offering Shares to be Sold (1) to be sold (1)
--------------- --------------------- ---------------
<S> <C> <C>
Adam J. Cohen 25,000(2) 25,000(2)
Todd M. Spehler 12,500(2) 12,500(2)
Nathan Eisen 7,500 7,500
Richard, Steven and Kenneth Etra 15,000 15,000
William J. Ludwig 15,000 15,000
Joseph W. And Ann G. Schantz 7,500 7,500
Gregg Gallant 7,500 7,500
Mary and Mark Albritton 15,000 15,000
Sydney Katz 7,500 7,500
Louis Falletta 7,500 7,500
Phillip Levien 7,500 7,500
Pamda Retirement Trust 15,000 15,000
Eric W. Larson 15,000 15,000
Herbert M. Reichlin and Diane J. Reichlin (3) 37,500 37,500
Peter S. Morford 7,500 7,500
Robert E. Coomes 7,500 7,500
Gary G. Hammon 7,500 7,500
Sheldon Sisken 7,500 7,500
Abraham David 7,500 7,500
Bay N. Sayegh 7,500 7,500
American Waste Oil Services Corp. 15,000 15,000
Gastro Enterology Associates 30,000 30,000
Servesting Investment Co. 7,500 7,500
Martin Hodas 15,000 15,000
Richard Someck 15,000 15,000
Roger Testa 30,000 30,000
Cyril J. Galagan 15,000 15,000
Jack P. Conlon 15,000 15,000
Joseph Schanne and Theresa Schanne 15,000 15,000
Anthony Quaranta 5,000 15,000
------- -------
Total 412,500 412,500
----- ======= =======
</TABLE>
A-7
<PAGE>
[ALTERNATE PROSPECTUS PAGE]
<TABLE>
<CAPTION>
Maximum Number
of Shares Issuable
on Exercise of
Maximum Number of July 1996 Warrants
July 1996 Offering Shares to Be Sold to be Sold
- ------------------ ------------------- -----------
<S> <C> <C>
Win Capital Corporation (4) 27,300 18,200
Lawrence Dell Aquila 0 2,381
David Barron 10,000 6,667
Louis Chapman and Elaine Chapman 3,000 2,000
Michael Damiani and Beverly Damiani 5,000 3,333
Seymour Fertig 7,143 4,762
Theodore Kaplan & Selma Kaplan 7,500 5,334
Edgar Lindblom 0 6,667
Thomas J. Luisi 9,000 6,000
Donald Markowitz 12,000 8,000
Gary O'Leary 10,000 6,667
PAMCO General Contracting Corp. 5,000 3,334
Pension Solutions 10,000 6,667
Nicholas Ponzio 0 4,762
Jeffrey Reizner 5,000 3,334
Samuel Richman 3,000 2,000
Charles Ruppman 25,000 16,667
Rose Salvato 16,000 10,667
James R. Smith 22,000 14,667
John H. Smith 0 3,333
Stourbridge Investment Ltd. 0 41,429
Suan Investments Inc. 30,000 20,000
Faye Zelmanovicz 5,000 3,333
-------- ---------
Total 211,943 200,204
----- ======= =======
</TABLE>
A-8
<PAGE>
[ALTERNATE PROSPECTUS PAGE]
Officer Warrant Holders Maximum
Number of Shares Owned
Shares to be After the
Sold Offering
Arthur Wein 21,667 0
Arthur Wein and Alice F. Wein, JTWROS - 75,000
------ ------
Total Officer Warrants 43,333 75,000
====== ======
Total Shares Owned After Offering
- ----------
(1) Except as to Renaissance, as described in note (2) below, consists of
Common Stock and Class A Warrants comprising Units issuable upon the
exercise of the Bridge Warrants. See "Certain Transactions - Recent
Financings."
(2) Consists of Common Stock and Class A Warrants comprising Units issuable
upon the exercise of the Placement Agent's Warrant. Does not include
125,000 shares of Common Stock included in the Units (and issuable upon
the exercise of the Class A Warrants contained in such Units) issuable
upon the exercise of the Underwriter's Unit Purchase Option. In March
1998, the Placement Agent's Warrant and the Underwriter's Unit Purchase
Option were assigned to Adam J. Cohen and Todd M. Spehler,
individually.
(3) A Warrant was originally issued to each of HRIS Associates, Inc.,
Program Advisors Corporation, Program Resource Organization, Inc. and
Association of Independent Employers, Inc. to acquire 15,000 shares of
Common Stock and Class A Warrants, 7,5000 shares of Common Stock and
Class A Warrants, 7,5000 shares of Common Stock and Class A Warrants
and 7,5000 shares of Common Stock and Class A Warrants, respectively.
On December 30, 1997, these Warrants were assigned to Herbert M.
Reichlin and Diane J. Reichlin.
(4) Consists of shares issuable upon the exercise of the July Placement
Warrant and upon the exercise July 1996 Warrants issuable upon such
exercise of the July Placement Warrant. Does not include 222,500 shares
of Common Stock.
A-9
<PAGE>
[ALTERNATE PROSPECTUS PAGE]
PLAN OF DISTRIBUTION
The sale of the Selling Securityholder Securities by the Selling
Securityholders may be effected from time to time in transactions (which may
include block transactions by or for the amount of the Selling Securityholders)
in the over-the-counter market or in negotiated transactions, through the
writing of options on the securities, a combination of such methods of sale or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices prevailing at the time of sale or at negotiated prices.
The Selling Securityholders may effect such transactions by selling
their securities directly to purchasers, through broker-dealers acting as agents
for the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the
over-the-counter market in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders or the purchasers
for whom such broker-dealers may act as agents or to whom they may sell as
principals or otherwise (which compensation as to a particular broker-dealer may
exceed customary commissions).
[Under applicable rules and regulations under the Securities Exchange
Act of 1934 ("Exchange Act"), any person engaged in the distribution of the
Selling Securityholder Warrants may not simultaneously engage in market making
activities with respect to any securities of the Company during the applicable
"cooling-off" period (at least two, and possibly nine, business days) prior to
the commencement of such distribution. Accordingly, in the event that an
underwriter is engaged in a distribution of Selling Securityholder Securities,
it will not be able to make a market in the Company's securities during the
applicable restrictive period. In addition,] each Selling Securityholder
desiring to sell Selling Securityholder Securities will be subject to the
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation, provisions which may limit the timing
of the purchases and sales of shares of the Company's securities by such Selling
Securityholders.
The Selling Securityholders and broker-dealers, if any, acting in
connection with such sale might be deemed to be underwriters within the meaning
of Section 2(11) of the Securities Act and any commission received by them and
any profit on the resale of the securities might be deemed to be underwriting
discounts and commissions under the Securities Act.
CONCURRENT PUBLIC OFFERING
On the date of this Prospectus, a Registration Statement was declared
effective under the Securities Act with respect to an offering by the Company of
1,366,050 shares of Common Stock and 1,366,050 Class A Warrants by the Company.
Renaissance acted as Underwriter of the Company's initial public
offering in November, 1996 and, in connection therewith, was granted an option
(the "Underwriter's Unit Purchase Option") to purchase up to 87,500 Units at an
exercise price equal to 160% of the initial public price of the Units sold in
the Company's initial public offering in November, 1996. The Class A Warrants
included in the Units issuable upon the exercise of the Underwriter's Unit
Purchase Option will not be redeemable by the Company and will be exercisable at
a price an exercise price of $8.00. The Underwriter's Unit Purchase Option was
assigned to two executive officers of the Underwriter.
A-10
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware
(the "DECL.") provides, in general, that a Delaware corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than a
derivative action by or in the right of the corporation ) by reason of the fact
that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. In the case of a
derivative action, a Delaware corporation may indemnify any such person against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudicated to be liable to the corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or any other court in which such action is brought determines such
person is fairly and reasonably entitled to indemnity for such expenses. Article
Ninth of the Company's Certificate of Incorporation and Article VI of the
Company's Amended and Restated Bylaws provide that the Company shall indemnify
all persons whom the Company shall have power to indemnify under such Section to
the fullest extent permitted by such Section. In addition, Article Eighth of the
Company's Certificate of Incorporation provides, in general, that no director of
the Company shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DECL. (which provides that, under certain circumstances, directors may be
jointly and severally liable for willful or negligent violations of the DECL.
provisions regarding the payment of dividends or stock repurchases or
redemptions), or (iv) for any transaction from which the director derived an
improper personal benefit.
Item 25. Other Expenses of Issuance and Distribution.
The expenses of the offering, other than underwriting discounts
and commissions, are as follows:
Securities and Exchange Commission registration fee...... $ 0
NASD filing fee.......................................... 0
Legal fees and expenses*................................. 10,000
Accounting fees and expenses*............................ 5,000
Printing and engraving expenses*......................... 2,000
Miscellaneous*........................................... 2,000
Total............................................... $19,000
=======
- --------------------
* Estimated
II - 1
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
The following sets forth certain information regarding sales of
securities of the Company issued within the past three years, which were not
registered pursuant to the Securities Act of 1933 (the "Securities Act").
On August 22, 1995 the Company granted Benjamin Borneman, a consultant
to the Company, the right to exchange his right to cash payments under his
retainer agreement for an option to acquire up to 100,000 shares of Common Stock
at an exercise price of $1.00 per share and up to 240,000 shares of Common Stock
at an exercise price of $2.00 per share. On September 15, 1995 Mr. Borneman
exercised his right to receive the option for 100,000 shares of Common Stock at
an exercise price of $1.00 per share expiring on the fifth anniversary of the
date of grant. This option is immediately exercisable; however, in May 1996, the
option was canceled as to 50,000 shares in consideration of a cash payment of
$5,000. Mr. Borneman's right to acquire an option for 240,000 shares of Common
Stock expired on December 31, 1995. The options were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act. On
February 20 and March 9, 1997, the Company issued 20,000 and 30,000 shares,
respectively to Mr. Borneman upon his exercise of the option to purchase 50,000
shares of Common Stock and the underlying shares were issued pursuant to Rule
701 under the Act.
On December 29, 1995, the Company issued to Cyndel & Co., Inc.
("Cyndel") 1,250 shares of Preferred Stock to be designated Series B Preferred
Stock in consideration of $100,000 in cash and a promissory note in the amount
of $25,000 due on January 30, 1996. The securities were issued in reliance on
the exemption from registration provided by Section 4(2) of the Securities Act.
On December 28, 1995, the Company issued to Aaron Lehmann 18,000 shares
of Common Stock in consideration of $18,000 in cash. No sales commissions were
paid in connection with such offerings. The securities were issued in reliance
on the exemption from registration provided by Section 4(2) of the Securities
Act.
During the period April through June 1996, the Company sold 12.5 Bridge
Units to accredited investors, each Bridge Unit consisting of a $100,000 7% Note
(the "Bridge Notes") and warrants to purchase 30,000 Units identical to the
Units offered in the Company's initial public offering. The Bridge Notes were
repaid in full in November, 1996. The Bridge Warrants are exercisable at an
exercise price of $3.50 until November, 1999. In connection with the Bridge Loan
Offering, the Company sold to the Underwriter, in its capacity as Placement
Agent of such offering, a warrant (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 exercisable at any time until November 15, 2001. The
securities were issued in reliance on the exemptions from registration provided
by Rule 506 of Regulation D promulgated under the Securities Act and Section
4(2) of the Securities Act.
In July and August 1996, the Company sold , to accredited investors, an
aggregate of 273,001 units (the "July 1996 Units") for an aggregate of $955,504,
or $3.50 per July 1996 Unit. Each July 1996 Unit consists of one share of Common
Stock and a warrant (the "July 1996 Warrants") to purchase two-thirds (2/3) of a
share of Common Stock at an exercise price of $3.00 per 2/3 share (or $4.50 per
share). The July 1996 Warrants are exercisable until November 12, 1999. In
connection with the sale of the July 1996 Units, the placement agent for such
sale, Win Capital Corporation, was granted a warrant to purchase 27,300 July
1996 Units at an exercise price of $4.50 per July 1996 Unit (the "July Placement
Warrant"). The securities were issued in reliance on the
II - 2
<PAGE>
exemptions from registration provided by Rule 506 of Regulation D promulgated
under the Securities Act and Section 4(2) of the Securities Act.
In July 1996, the Company redeemed the 1,250 shares of Series B
Preferred Stock held by Cyndel and in connection therewith, issued to Cyndel
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. The securities were issued
in reliance on the exemption from registration provided by Section 4(2) of the
Securities Act.
On May 7, 1996, the Company issued a warrant to Morton Getman, a
consultant to the Company, for 10,000 shares of Common Stock. The warrants
granted to Mr. Getman vested at the rate of 1,000 per month and have been
exercised at a price of $1.00 per share.
On February 20, 1997 and August 11, 1997, the Company issued 9,000 and
1,000 shares, respectively, to Mr. Getman, upon the exercise of the
above-mentioned warrants.
On May 13, 1998 the Company entered into the Financing Agreement and
pursuant thereto, issued 444,444 shares Common Stock to the Investors and 37,778
shares Common Stock to the Placement Agent. The securities were issued in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act.
II - 3
<PAGE>
Item 27. Exhibits.
The following exhibits are filed as part of this registration
statement:
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
1.1 Form of Underwriting Agreement. (4)
2.1 Certificate of Ownership and Merger of ObjectSoft Corporation (a New Jersey
corporation) into the Company. (1)
2.2 Plan of Merger of ObjectSoft Corporation (a New Jersey corporation) into the
Company. (1)
3.1(a) Certificate of Incorporation of the Company. (1)
3.1(b) Form of Amendment to Certificate of Incorporation of the Company, filed with the
Secretary of State of Delaware. (2)
3.2(a) By-laws of the Company. (1)
3.2(b) Amended and Restated Bylaws of the Company. (2)
4.1 Form of Underwriter's Unit Purchase Option Agreement.
4.2 Specimen Certificate of the Company's Common Stock. (2)
4.3 Form of Class A Warrant Agreement, including form of Class A Warrant. (1)
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP as to the legality of securities
being registered. (3)
10.1 Employment Agreement dated as of July 1, 1996 between the Company and David
E.Y. Sarna. (2)
10.2 Employment Agreement dated as of July 1, 1996 between the Company and
George J. Febish. (2)
10.3(a) 1996 Stock Option Plan. (1)
10.3(b) 1996 Stock Option Plan, as amended. (7)
10.4 Form of Bridge Loan Promissory Note. (1)
10.5 Form of Bridge Loan Warrant. (1)
10.6 Form of Warrant Agreement with placement agent for Bridge Loan Offering. (1)
10.7 Form of Subscription Agreement and Investment Representation of Investor with
each of the investors in the July 1996 Offering. (1)
10.8 Form of July 1996 Warrant Agreement. (1)
10.9 Form of Warrant Agreement with placement agent for July 1996 Offering. (1)
10.10 Agreement, dated January 11, 1996, as amended, with the City of New York
(Department of Information Technology and Telecommunications). (1)
10.11 Cooperation Agreement with Microsoft Corporation, dated November 7, 1995. (2)
10.12 Agreement with ACORD Corporation dated July 5,1995. (2)
10.13 Equity Line of Credit Agreement, dated May 13, 1998. (6)
10.14 Form of Investor Warrant. (2)
10.15 Form of Officer Warrant. (2)
10.17 Cyndel Warrant. (2)
23.1 Consent of Richard A. Eisner & Company, LLP. (7)
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (included in the their opinion
filed as Exhibit 5.1).
24.1 Power of Attorney. (1)
</TABLE>
- ------------------
(1) Filed with initial filing of Registration Statement on Form SB-2.
II - 4
<PAGE>
(2) Filed with Amendment No. 1 to Form SB-2.
(3) Filed with Amendment No. 2 to Form SB-2.
(4) Filed with Amendment No. 3 to Form SB-2.
(5) Filed with Post-Effective Amendment No. 1 to Form SB-2.
(6) Filed with Registration Statement on Form S-3 filed with the Securities
and Exchange Commisssion on June 26, 1998.
(7) Filed herewith.
II - 5
<PAGE>
Item 28. Undertakings.
The Company hereby undertakes that it will:
(1) For determining any liability under the Securities Act of 1933 (the
"Act"), treat the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act as part of this registration statement as of the time the
Commission declared it effective;
(2) For determining any liability under the Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and the offering of such securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the 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 Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or paid by a director,
officer or controlling persons of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
persons in connection with the securities being registered, the Company will,
unless in the opinion of its counsel that the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10 (a) (3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
date of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II - 6
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
II - 7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all of
the requirements of filing on Form SB-2 and authorized this amendment to the
registration statement to be signed on its behalf by the undersigned, in the
City of New York, State of New York, on August 11, 1998.
OBJECTSOFT CORPORATION
By: /s/ David E.Y. Sarna
----------------------------
David E.Y. Sarna
In accordance with the requirements of the Securities Act of 1933, this
amendment to the registration statement was signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ David E. Y. Sarna Chairman of the Board of Directors and August 11, 1998
- --------------------- Secretary (Co-Principal Executive Officer
David E. Y. Sarna and Principal Financial Officer)
* President, Treasurer and Director (Co- August 11, 1998
- --------------------- Principal Executive Officer and Principal
George J. Febish Accounting Officer)
* Director August 11, 1998
- ---------------------
Daniel E. Ryan
* Director August 11, 1998
- ---------------------
Gunther L. Less
*By: /s/ David E.Y. Sarna
------------------------
David E.Y. Sarna, Chairman
Attorney-in-Fact
</TABLE>
1996 STOCK OPTION PLAN
of
OBJECTSOFT CORPORATION
(as amended as of July 9, 1998)
1. PURPOSES OF THE PLAN. This stock option plan (the "Plan")
is designed to provide an incentive to key employees (including directors and
officers who are key employees) and to consultants and advisors and directors
who are not employees of ObjectSoft Corporation, a Delaware corporation (the
"Company"), or its present and future Subsidiaries or a Parent (as each such
term is defined in Paragraph 19), and to offer an additional inducement in
obtaining the services of such persons. The Plan provides for the grant of
"incentive stock options" ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock
options which do not qualify as ISOs ("NQSOs"), but the Company makes no
representation or warranty, express or implied, as to the qualification of any
option as an "incentive stock option" under the Code.
2. STOCK SUBJECT TO THE PLAN. Subject to the provisions of
Paragraph 12, the aggregate number of shares of common stock, $.0001 par value
per share, of the Company ("Common Stock") for which options may be granted
under the Plan shall not exceed 750,000. Such shares of Common Stock may, in the
discretion of the Board of Directors of the Company (the "Board of Directors"),
consist either in whole or in part of authorized but unissued shares of Common
Stock or shares of Common Stock held in the treasury of the Company. Subject to
the provisions of Paragraph 13, any shares of Common Stock subject to an option
which for any reason expires, is canceled or is terminated unexercised or which
ceases for any reason to be exercisable shall again become available for the
granting of options under the Plan. The Company shall at all times during the
term of the Plan reserve and keep available such number of shares of Common
Stock as will be sufficient to satisfy the requirements of the Plan.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered
by a committee of the Board of Directors consisting of not less than two
directors (the "Committee"). During such time as the Company has a class of
equity securities registered under Section 12 of the Securities Exchange Act of
1934, each member of the Committee shall meet the requirements of Rule 16b-3
promulgated under such act (as the same may be in effect and interpreted from
time to time, "Rule 16b-3"). A majority of the members of the Committee shall
constitute a quorum, and the acts of a majority of the members present at any
meeting at which a quorum is present, and any acts approved in writing by all
members without a meeting, shall be the acts of the Committee.
-1-
<PAGE>
Subject to the express provisions of the Plan, the Committee
shall have the authority, in its sole discretion, to determine the key
employees, consultants and directors who shall be granted options; the times
when options shall be granted; whether an Employee Option shall be an ISO or a
NQSO; the number of shares of Common Stock to be subject to each option; the
term of each option; the date each option shall become exercisable; whether an
option shall be exercisable in whole, in part or in installments and, if in
installments, the number of shares of Common Stock to be subject to each
installment, whether the installments shall be cumulative, the date each
installment shall become exercisable and the term of each installment; whether
to accelerate the date of exercise of any option or installment; whether shares
of Common Stock may be issued upon the exercise of an option as partly paid and,
if so, the dates when future installments of the exercise price shall become due
and the amounts of such installments; the exercise price of each option; the
form of payment of the exercise price; whether to restrict the sale or other
disposition of the shares of Common Stock acquired upon the exercise of an
option and, if so, whether to waive any such restriction; whether to subject the
exercise of all or any portion of an option to the fulfillment of contingencies
as specified in the contract referred to in Paragraph 11 (the "Contract"),
including without limitation, contingencies relating to entering into a covenant
not to compete with the Company, any of its Subsidiaries or a Parent (as defined
in Paragraph 19), to financial objectives for the Company, any of its
Subsidiaries or a Parent, a division of any of the foregoing, a product line or
other category, and/or the period of continued employment of the optionee with
the Company, any of its Subsidiaries or a Parent, and to determine whether such
contingencies have been met; whether an optionee is Disabled (as defined in
Paragraph 19); and, the amount, if any, necessary to satisfy the obligation of
the Company, a Subsidiary or a Parent to withhold taxes or other amounts; the
fair market value of a share of Common Stock; to construe the respective
Contracts and the Plan; with the consent of the optionee, to cancel or modify an
option, provided, that the modified provision is permitted to be included in an
option granted under the Plan on the date of the modification, and further,
provided, that in the case of a modification (within the meaning of Section
424(h) of the Code) of an ISO, such option as modified would be permitted to be
granted on the date of such modification under the terms of the Plan; to
prescribe, amend and rescind rules and regulations relating to the Plan; to
approve any provision of the Plan which under Rule 16b-3 requires approval by
the Board of Directors, a committee of Non-Employee Directors or the
stockholders to be exempt (unless otherwise specifically provided herein); and
to make all other determinations necessary or advisable for administering the
Plan. Any controversy or claim arising out of or relating to the Plan, any
option granted under the Plan or any Contract shall be determined unilaterally
by the Committee in its sole discretion. The determinations of the Committee on
the matters referred to in this Paragraph 3 shall be conclusive and binding on
the parties.
No member or former member of the Committee shall be liable
for any action or determination made in good faith with respect to the Plan or
any option granted hereunder. In addition to any other rights of indemnification
they may have as directors or as members or former members of the Committee,
each such member and former member shall be indemnified and held harmless by the
Company from and against any reasonable expenses (including reasonable
attorneys' fees) actually and necessarily incurred in connection with the
defense, of any claim, action, suit, proceeding or appeal (collectively, "Case")
to which he is a party by reason of an action or failure to
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act under or in connection with the Plan or any option granted hereunder, and
against all amounts paid by him in settlement of such Case (provided such
settlement is approved by the Company) or paid in satisfaction of a judgment in
such Case; provided, however, that such member or former member shall not be
entitled to indemnification (a) if he did not within 60 days after the
institution of such Case offer to the Company in writing the opportunity to
handle and defend the Case at its own expense, or (b) to the extend the Case
resulted from his gross negligence or willful misconduct.
4. ELIGIBILITY; GRANTS. The Committee may from time to time,
in its sole discretion, consistent with the purposes of the Plan, grant Employee
Options to key employees (including officers and directors who are key
employees) of, Consultant Options to consultants and advisors to, the Company or
any of its Subsidiaries or a Parent and Non-Employee Director Options to
Non-Employee Directors. Such options granted shall cover such number of shares
of Common Stock as the Committee may determine, in its sole discretion;
provided, however, that the maximum number of shares subject to Employee Options
that may be granted to any individual during any calendar year under the Plan
(the "162(m) Maximum") shall not exceed 50,000 shares; and further, provided,
that the aggregate market value (determined at the time the option is granted in
accordance with Paragraph 5) of the shares of Common Stock for which any
eligible employee may be granted ISOs under the Plan or any other plan of the
Company, or of a Parent or a Subsidiary of the Company, which are exercisable
for the first time by such optionee during any calendar year shall not exceed
$100,000. Such limitation shall be applied by taking ISOs into account in the
order in which they were granted. Any option (or the portion thereof) granted in
excess of such amount shall be treated as a NQSO.
5. EXERCISE PRICE. The exercise price of the shares of Common
Stock under each option shall be determined by the Committee in its sole
discretion; provided, however, that the exercise price of an ISO shall not be
less than the fair market value of the Common Stock subject to such option on
the date of grant; and further, provided, that if, at the time an ISO is
granted, the optionee owns (or is deemed to own under Section 424(d) of the
Code) stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company, of any of its Subsidiaries or of a Parent, the
exercise price of such ISO shall not be less than 110% of the fair market value
of the Common Stock subject to such ISO on the date of grant.
The fair market value of a share of Common Stock on any day
shall be (a) if the principal market for the Common Stock is a national
securities exchange, the average between the high and low sales prices per share
of Common Stock on such day as reported by such exchange or on a composite tape
reflecting transactions on such exchange, (b) if the principal market for the
Common Stock is not a national securities exchange and the Common Stock is
quoted on The Nasdaq Stock Market ("Nasdaq"), and (i) if actual sales price
information is available with respect to the Common Stock, the average between
the high and low sales prices per share of Common Stock on such day on Nasdaq,
or (ii) if such information is not available, the average between the highest
bid and lowest asked prices per share of Common Stock on such day on Nasdaq, or
(c) if the principal market for the Common Stock is not a national securities
exchange and the Common Stock is not quoted on Nasdaq, the average between the
highest bid and lowest asked prices per share of
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Common Stock on such day as reported on the OTC Bulletin Board Service or by
National Quotation Bureau, Incorporated or a comparable service; provided,
however, that if clauses (a), (b) and (c) of this Paragraph are all
inapplicable, or if no trades have been made or no quotes are available for such
day, the fair market value of the Common Stock shall be determined by the Board
by any method consistent with applicable regulations adopted by the Treasury
Department relating to stock options. The determination of the Committee shall
be exclusive in determining the fair market value of the stock.
6. TERM. The term of each option granted pursuant to the Plan
shall be such term as is established by the Committee, in its sole discretion;
provided, however, that the term of each ISO granted pursuant to the Plan shall
be for a period not exceeding ten years from the date of grant thereof; and
further, provided, that if, at the time an ISO is granted, the optionee owns (or
is deemed to own under Section 424(d) of the Code) stock possessing more than
10% of the total combined voting power of all classes of stock of the Company,
of any of its Subsidiaries or of a Parent, the term of the ISO shall be for a
period not exceeding five years from the date of grant. Options shall be subject
to earlier termination as hereinafter provided.
7. EXERCISE. An option (or any part or installment thereof),
to the extent then exercisable, shall be exercised by giving written notice to
the Company at its principal office (at present 50 East Palisade Avenue, Suite
411, Englewood, New Jersey 07631) stating which ISO or NQSO is being exercised,
specifying the number of shares of Common Stock as to which such option is being
exercised and accompanied by payment in full of the aggregate exercise price
therefor (or the amount due on exercise if the Contract with respect to an
Employee Option permits installment payments) (a) in cash or by certified check
or (b) if the applicable Contract permits, with previously acquired shares of
Common Stock having an aggregate fair market value on the date of exercise
(determined in accordance with Paragraph 5) equal to the aggregate exercise
price of all options being exercised, or with any combination of cash, certified
check or shares of Common Stock. The Committee may, in its sole discretion,
permit payment of the exercise price of an option by delivery by the optionee of
a properly executed notice, together with a copy of his irrevocable instructions
to a broker acceptable to the Committee to deliver promptly to the Company the
amount of sale or loan proceeds sufficient to pay such exercise price. In
connection therewith, the Company may enter into agreements for coordinated
procedures with one or more brokerage firms.
A person entitled to receive Common Stock upon the exercise of
an option shall not have the rights of a stockholder with respect to such shares
of Common Stock until the date of issuance of a stock certificate to him for
such shares; provided, however, that until such stock certificate is issued, any
optionee using previously acquired shares of Common Stock in payment of an
option exercise price shall continue to have the rights of a stockholder with
respect to such previously acquired shares.
In no case may a fraction of a share of Common Stock be
purchased or issued under the Plan.
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8. TERMINATION OF RELATIONSHIP. Except as may otherwise be
expressly provided in the applicable Contract, any holder of an Employee Option
or Consultant Option whose relationship with the Company, its Parent and
Subsidiaries as an employee, a consultant or an advisor has terminated for any
reason other than in the case of an individual optionee his death or Disability
(as defined in Paragraph 19) may exercise such option, to the extent exercisable
on the date of such termination, at any time within three months after the date
of termination, but not thereafter and in no event after the date the option
would otherwise have expired; provided, however, that if such relationship is
terminated either (a) for cause, or (b) without the consent of the Company, such
option shall terminate immediately. Except as may otherwise be expressly
provided in the applicable Contract, Employee Options and Consultant Options
granted under the Plan shall not be affected by any change in the status of the
optionee so long as the optionee continues to be an employee of, or a consultant
or an advisor to, the Company, or any of the Subsidiaries or a Parent
(regardless of having changed from one to the other or having been transferred
from one corporation to another).
For the purposes of the Plan, an employment relationship shall
be deemed to exist between an individual and a corporation if, at the time of
the determination, the individual was an employee of such corporation for
purposes of Section 422(a) of the Code. As a result, an individual on military,
sick leave or other bona fide leave of absence shall continue to be considered
an employee for purposes of the Plan during such leave if the period of the
leave does not exceed 90 days, or, if longer, so long as the individual's right
to reemployment with the Company (or a related corporation) is guaranteed either
by statute or by contract. If the period of leave exceeds 90 days and the
individual's right to reemployment is not guaranteed by statute or by contract,
the employment relationship shall be deemed to have terminated on the 91st day
of such leave.
The holder of a Consultant Option whose consulting or advisory
relationship with the Company (and its Parent and Subsidiaries) has terminated
for any reason may exercise such option to the extent exercisable on the date of
such termination, but not thereafter and in no event after the date the option
would otherwise have expired; provided, however, that if such relationship was
terminated either (a) for cause or (b) without the consent of the Company (other
than as a result of the death or Disability of the holder or a key employee of
the holder) the option shall terminate immediately.
The Non-Employee Director Option shall not be affected by the
optionee ceasing to be a director of the Company or becoming an employee of the
Company, any of its Subsidiaries or a Parent; provided, however, that if he is
terminated for cause, such option shall terminate immediately.
Nothing in the Plan or in any option granted under the Plan
shall confer on any optionee any right to continue in the employ of, or as a
consultant or advisor to, the Company, any of its Subsidiaries or a Parent, or
as a director of the Company, or interfere in any way with any right of the
Company, any of its Subsidiaries or a Parent to terminate the optionee's
relationship at any time for any reason whatsoever without liability to the
Company, any of its Subsidiaries or a Parent.
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9. DEATH OR DISABILITY OF AN OPTIONEE. Except as may otherwise
be expressly provided in the applicable Contract, if an optionee dies (a) while
he is an employee of, or consultant or advisor to, the Company, any of its
Subsidiaries or a Parent, (b) within three months after the termination of such
relationship (unless such termination was for cause or without the consent of
the Company) or (c) within one year following the termination of such
relationship by reason of his Disability, his Employee Option or Consultant
Option may be exercised, to the extent exercisable on the date of his death, by
his Legal Representative (as defined in Paragraph 19) at any time within one
year after death, but not thereafter and in no event after the date the option
would otherwise have expired.
Except as may otherwise be expressly provided in the
applicable Contract, any optionee whose relationship as an employee of, or
consultant or advisor to, the Company, its Parent and Subsidiaries has
terminated by reason of such optionee's Disability may exercise his Employee
Option or Consultant Option, to the extent exercisable upon the effective date
of such termination, at any time within one year after such date, but not
thereafter and in no event after the date the option would otherwise have
expired.
The term of a Non-Employee Director Option shall not be
affected by the death or Disability of the optionee. If an optionee holding a
Non-Employee Director Option dies during the term of such option, the option may
be exercised at any time during its term by his Legal Representative.
10. COMPLIANCE WITH SECURITIES LAWS. The Committee may
require, in its sole discretion, as a condition to the exercise of any option
that either (a) a Registration Statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the shares of Common Stock to be
issued upon such exercise shall be effective and current at the time of
exercise, or (b) there is an exemption from registration under the Securities
Act for the issuance of the shares of Common Stock upon such exercise. Nothing
herein shall be construed as requiring the Company to register shares subject to
any option under the Securities Act or to keep any Registration Statement
effective or current.
The Committee may require, in its sole discretion, as a
condition to the exercise of any option that the optionee execute and deliver to
the Company his representations and warranties, in form, substance and scope
satisfactory to the Committee, that (a) the shares of Common Stock to be issued
upon the exercise of the option are being acquired by the optionee for his own
account, for investment only and not with a view to the resale or distribution
thereof, and (b) any subsequent resale or distribution of shares of Common Stock
by such optionee will be made only pursuant to (i) a Registration Statement
under the Securities Act which is effective and current with respect to the
shares of Common Stock being sold, or (ii) a specific exemption from the
registration requirements of the Securities Act, but in claiming such exemption,
the optionee shall prior to any offer of sale or sale of such shares of Common
Stock provide the Company with a favorable written opinion of counsel
satisfactory to the Company, in form, substance and scope satisfactory to the
Company, as to the applicability of such exemption to the proposed sale or
distribution.
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In addition, if at any time the Committee shall determine, in
its sole discretion, that the listing or qualification of the shares of Common
Stock subject to such option on any securities exchange, Nasdaq or under any
applicable law, or the consent or approval of any governmental agency or
regulatory body, is necessary or desirable as a condition to, or in connection
with, the granting of an option or the issue of shares of Common Stock
thereunder, such option may not be exercised in whole or in part unless such
listing, qualification, consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Committee.
11. STOCK OPTION CONTRACTS. Each option shall be evidenced by
an appropriate Contract which shall be duly executed by the Company and the
optionee, and shall contain such terms, provisions and conditions not
inconsistent herewith as may be determined by the Committee.
12. ADJUSTMENTS UPON CHANGES IN COMMON STOCK.
Notwithstanding any other provisions of the Plan, in the event of any change in
the outstanding Common Stock by reason of a stock dividend, recapitalization,
merger in which the Company is the surviving corporation, split-up, combination
or exchange of shares or the like, the aggregate number and kind of shares
subject to the Plan, the aggregate number and kind of shares subject to each
outstanding option and the exercise price thereof shall be appropriately
adjusted by the Board of Directors, whose determination shall be conclusive.
In the event of (a) the liquidation or dissolution of the
Company, or (b) a merger in which the Company is not the surviving corporation
or a consolidation, any outstanding options shall terminate upon the earliest of
any such event, unless other provision is made therefor in the transaction.
13. AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was
adopted by the Board of Directors on March 15, 1996 and amended on March 3,
1998. No ISO may be granted under the Plan after March 14, 2006. The Board of
Directors, without further approval of the Company's stockholders, may at any
time suspend or terminate the Plan, in whole or in part, or amend it from time
to time in such respects as it may deem advisable, including, without
limitation, in order that ISOs granted hereunder meet the requirements for
"incentive stock options" under the Code, to comply with the provisions of Rule
16b-3, Section 162(m) of the Code, or any change in applicable law, regulations,
rulings or interpretations of administrative agencies; provided, however, that
no amendment shall be effective without the requisite prior or subsequent
stockholder approval which would (a) except as contemplated in Paragraph 12,
increase the maximum number of shares of Common Stock for which options may be
granted under the Plan or the 162(m) Maximum, (b) materially increase the
benefits accruing to participants under the Plan, (c) change the eligibility
requirements to receive options hereunder or (d) make any other change which
under applicable law requires approval of the Company's stockholders. No
termination, suspension or amendment of the Plan shall, without the consent of
the holder of an existing and outstanding option affected thereby, adversely
affect his rights under such option. The power of the Committee to
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construe and administer any options granted under the Plan prior to the
termination or suspension of the Plan nevertheless shall continue after such
termination or during such suspension.
14. NON-TRANSFERABILITY OF OPTIONS. No option granted under
the Plan shall be transferable otherwise than by will or the laws of descent and
distribution, and options may be exercised, during the lifetime of the optionee,
only by the optionee or his Legal Representatives. Except to the extent provided
above, options may not be assigned, transferred, pledged, hypothecated or
disposed of in any way (whether by operation of law or otherwise) and shall not
be subject to execution, attachment or similar process, and any such attempted
assignment, transfer, pledge, hypothecation or disposition shall be null and
void ab initio and of no force or effect.
15. WITHHOLDING TAXES. The Company (and/or its Subsidiary or
Parent, as applicable) may withhold (a) cash, (b) subject to any limitations
under Rule 16b-3, shares of Common Stock to be issued with respect thereto
having an aggregate fair market value on the exercise date (determined in
accordance with Paragraph 5), or (c) any combination thereof, in an amount equal
to the amount which the Committee determines is necessary to satisfy the
obligation of the Company, a Subsidiary or a Parent to withhold Federal, state
and local income taxes or other amounts incurred by reason of the grant or
exercise of an option, its disposition, or the disposition of the underlying
shares of Common Stock. Alternatively, the Company may require the holder to pay
to the Company (or to the Subsidiary or Parent) such amount, in cash, promptly
upon demand. The Company shall not be required to issue any shares of Common
Stock pursuant to any such option until all required payments have been made.
Fair market value of the shares of Common Stock shall be determined in
accordance with Paragraph 5.
16. LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such
legend or legends upon the certificates for shares of Common Stock issued upon
exercise of an option under the Plan and may issue such "stop transfer"
instructions to its transfer agent in respect of such shares as it determines,
in its discretion, to be necessary or appropriate to (a) prevent a violation of,
or to perfect an exemption from, the registration requirements of the Securities
Act and any applicable state securities laws, (b) implement the provisions of
the Plan or any agreement between the Company and the optionee with respect to
such shares of Common Stock, or (c) permit the Com pany to determine the
occurrence of a "disqualifying disposition," as described in Section 421(b) of
the Code, of the shares of Common Stock issued or transferred upon the exercise
of an ISO granted under the Plan.
The Company shall pay all issuance taxes with respect to the
issuance of shares of Common Stock upon the exercise of an option granted under
the Plan, as well as all fees and expenses incurred by the Company in connection
with such issuance.
17. USE OF PROCEEDS. The cash proceeds from the sale of shares
of Common Stock pursuant to the exercise of options under the Plan shall be
added to the general funds of the Company and used for such corporate purposes
as the Board of Directors may determine.
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18. SUBSTITUTIONS AND ASSUMPTIONS OF OPTIONS OF CERTAIN
CONSTITUENT CORPORATIONS. Anything in this Plan to the contrary notwithstanding,
the Board of Directors may, without further approval by the stockholders,
substitute new options for prior options of a Constituent Corporation (as
defined in Paragraph 19) or assume the prior options of such Constituent
Corporation.
19. DEFINITIONS. For purposes of the Plan, the following terms
shall be defined as set forth below:
(a) Constituent Corporation. The term "Constituent
Corporation" shall mean any corporation which engages with the Company, any of
its Subsidiaries or a Parent in a transaction to which Section 424(a) of the
Code applies (or would apply if the option assumed or substituted were an ISO),
or any Parent or any Subsidiary of such corporation.
(b) Consultant Option. The term "Consultant Option"
shall mean a NQSO granted pursuant to the Plan to a person who, at the time of
grant, is a consultant to the Company or a Subsidiary of the Company, and at
such time is neither a common law employee of the Company or any of its
Subsidiaries nor a director of the Company.
(c) Disability. The term "Disability" shall mean a
permanent and total disability within the meaning of Section 22(e)(3) of the
Code.
(d) Employee Option. The term "Employee Option" shall
mean an option granted pursuant to the Plan to an individual who, at the time of
grant, is a key employee of the Company or any of its Subsidiaries.
(e) Legal Representative. The term "Legal Repre-
sentative" shall mean the executor, administrator or other person who at the
time is entitled by law to exercise the rights of a deceased or incapacitated
optionee with respect to an option granted under the Plan.
(f) Non-Employee Director. The term "Non-Employee
Director" shall mean a person who is a director of the Company, but is not a
common law employee of the Company, any of its Subsidiaries or a Parent.
(g) Non-Employee Director Option. The term "Non-
Employee Director Option" shall mean a NQSO granted pursuant to the Plan to a
person who, at the time of the grant, is a Non-Employee Director.
(h) Parent. The term "Parent" shall have the same
definition as "parent corporation" in Section 424(e) of the Code.
(i) Subsidiary. The term "Subsidiary" shall have the
same definition as "subsidiary corporation" in Section 424(f) of the Code.
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20. GOVERNING LAW; CONSTRUCTION. The Plan, such options as may
be granted hereunder and all related matters shall be governed by, and construed
in accordance with, the laws of the State of Delaware, without regard to
conflict of law provisions.
Neither the Plan nor any Contract shall be construed or
interpreted with any presumption against the Company by reason of the Company
causing the Plan or Contract to be drafted. Whenever from the context it appears
appropriate, any term stated in either the singular or plural shall include the
singular and plural, and any term stated in the masculine, feminine or neuter
gender shall include the masculine, feminine and neuter.
21. PARTIAL INVALIDITY. The invalidity, illegality or
unenforceability of any provision in the Plan or any Contract shall not affect
the validity, legality or enforceability of any other provision, all of which
shall be valid, legal and enforceable to the fullest extent permitted by
applicable law.
22. STOCKHOLDER APPROVAL. The amendments to the Plan under
Section 2 whereby the number of options which may be granted is increased to
750,000 and to Section 4 by deleting the Non-Employee Director formula grants
shall be subject to approval by a majority of the votes cast at the next duly
held meeting of the Company's stockholders at which a majority of the
outstanding voting shares are present, in person or by proxy, and entitled to
vote. No options granted pursuant to such amendments may be exercised prior to
such approval, provided that the date of grant of any options granted hereunder
shall be determined as if the Plan had not been subject to such approval unless
otherwise specified by the Committee. Notwithstanding the foregoing, if the
amendments to the Plan are not approved by a vote of the stockholders of the
Company on or before March 1, 1999, any options granted thereunder shall
terminate, but the Plan shall continue in full force and effect as it existed
immediately prior to the adoption of such amendments.
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Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this post effective amendment No. 2 to
the registration statement on Form SB-2 of our report dated February 20, 1998 on
the financial statements of ObjectSoft Corporation as at December 31, 1997 and
for each of the two years in the two-year period ended December 31, 1997. We
also consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts."
/s/ Richard A. Eisner & Company, LLP
Richard A. Eisner & Company, LLP
Florham Park, New Jersey
August 11, 1998
