SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO _______
Commission File Number 1-10751
OBJECTSOFT CORPORATION
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(Name of small business issue in its charter)
Delaware 22-3091075
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Continental Plaza III, 433 Hackensack Avenue, Hackensack, New Jersey 07601
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (201) 343-9100
Securities registered under Section 12(b) of the Exchange Act: None
Title of each class: None
Name of each exchange on which registered:
Securities registered under Section 12(g) of the Exchange Act:
Title of Each Class: Common Stock
Redeemable Class A Warrants
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenue for the fiscal year ended December 31, 1998 was $160,465.
At March 23, 1999, the aggregate market value of the Common Stock held by
non-affiliates was $12,440,176 (corresponding to 5,237,969 shares).
At March 23, 1999, 6,912,469 shares of Common Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the issuer's Definitive Proxy
Statement for the 1999 Annual Meeting of Stockholders of the Company are
incorporated by reference into Part III hereof.
Transitional Small Business Disclosure Format (check one): Yes No X
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PART I
Item 1. Description of Business
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General
ObjectSoft Corporation ("ObjectSoft" or the "Company") was incorporated
in Delaware in January 1996 and is the surviving corporation of a merger on
January 31, 1996 between it and its predecessor, ObjectSoft Corporation, a New
Jersey corporation incorporated in December 1990.
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.objectsoft.net.
The Company is currently engaged in the business of providing retail
kiosks that offer transaction-based and advertising-supported services through
interactive public access terminals (IPATs or kiosks) as well as the Internet.
These kiosks utilize a foundation developed during projects with the Cities of
New York and San Francisco that support many retail businesses with a minimum of
adaptation. The kiosk can easily change its personality (i.e., "look and feel")
in three ways:
o Change the appearance of the enclosure
o Change the on-screen graphics
o Change the database supporting what is being retailed
The Company's IPATs are primarily held for operating income which is
derived from rental and advertising fees and transactional revenue, but may be
sold outright to some customers. This approach allows the Company control over
the look and operation of its kiosks. A customer can recognize the brand name
and develop an expectation for how the kiosk will operate. In addition, the
Company can control the content to ensure that it is being kept up-to-date. An
IPAT is a machine deployed in areas with high pedestrian traffic or within a
retail outlet 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 one or more of the
following devices: keyboard, page printer, receipt printer, credit card reader,
video camera, signature pad, 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.
The Company's newest product is FastTake(R), which the Company
introduced in October 1998 at the East Coast Video Show and began shipping in
March 1999. FastTake(R) is initially
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targeted for the video industry. It permits users to search a database for a
favorite actor or director, or by a portion of the movie name. The user can then
access facts about the movie title, a plot summary, the names of its major
actors and directors, still pictures from the movie (photographs) and a preview
of the video (known as a trailer). For the video store owner, FastTake(R) has
three main purposes:
o Provide the consumer with an easy way to locate "Catalog Titles"
(i.e., older films). The consumer does not normally require a
kiosk to find the latest video titles which are heavily marketed;
FastTake(R) assists consumers find older titles that are no longer
marketed.
o Generate revenue through a three-way "barter." Studios provide the
Company with barter product, typically Catalog Titles with a value
of approximately $100 per title per kiosk, based on manufacturer's
suggested retail price (MSRP). This product would be placed on or
near the kiosk. This increases the chances that a consumer will
see the title and want to buy or rent it.
o Support direct product sales. Advertisers can sell additional
products through the kiosk, such as candy, popcorn, soda and toys
that are related to video sales. FastTake(R) also offers a
facility that allows consumers to sign-up on the kiosk for
drawings and prizes.
In a future release of FastTake(R), the Company expects to add an
electronic commerce feature that will enable the purchase or rental of chosen
videos. FastTake(R) uses databases compiled by and licensed from Video Pipeline,
Inc. and film trailers licensed from Screenplay, Inc. As of March 25, 1999, 30
units were manufactured and an additional 70 units were ordered for delivery in
the near future.
Most retailers require a 90-120 day trial period to determine how
successfully FastTake(R) operates in their stores. At the conclusion of such
trial period, they can determine whether or not they wish to expand into
additional stores.
The Company's FastTake(R) public access terminals are dependent on
agreements with sales distributors, video stores and studios to provide
advertising support. To date, only one distributor agreement has been signed
(with Plaza Entertainment) and agreements have been signed with four studios and
six video outlets representing 23 initial locations. Several additional outlets
are expected to sign similar agreements shortly. As of March 26, 1999, a total
of four FastTake(R) kiosks have been installed.
Although the Company anticipates that it will begin to recognize
greater revenues from FastTake(R) during 1999, it cannot predict the actual
timing or amount of such revenues. In addition, most of the units being placed
are for trial periods of six months or less and there can be no assurance that
when the Company installs these products, they will prove to be effective and
continue to be in
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demand. The Company also relies on installation and maintenance services for the
FastTake(R) terminals provided by International Business Machines (IBM). These
contracts could be canceled on short notice. If such contracts were canceled by
IBM, this could have a negative affect on the Company's sales as well as on the
quality of service which the Company could provide to the Company's customers.
FastTake(R) revenues are expected to be generated from several sources,
as follows:
o Monthly rental fees.
o Studio barter product which lower retailers' effective monthly
rental cost. Barter can become an additional source of income for
both the Company and the retailers as the number of titles
contributed by the studios exceeds the monthly rental cost of the
unit (approximately 8 titles). Currently, the Company is providing
six studio titles per kiosk during the trial period.
o Advertising and sponsorship capabilities, both in poster form on
the sides of the enclosure and through on-screen opportunities.
o In-store promotions, including give-away and buy popcorn and a
movie and get a discount type offers.
In early 1996, as part of its IPAT Demonstration Project, the City of
New York (the "City") entered into an agreement with the Company 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"). Under the
City Agreement, the City agreed to lease the first five IPATs, and the Company
may deploy additional IPATs throughout the City area at its own risk and
expense, subject to City approval of IPAT locations. The first five IPATs were
deployed in the City in July 1996. A sixth IPAT was installed in August 1997 and
discontinued in January 1999. A seventh was installed in March 1998 and all
IPATs providing City services for information, whether operated by the Company
or other suppliers, carry the City's CityAccess(TM) logo. Pursuant to the City
Agreement, the Company has developed applications for use on IPATs These
applications allow the public access to the records of the Department of
Buildings, certain Department of Health services, including copies (for a fee)
of birth certificates, death certificates and dog licenses. They can also obtain
public health information, register for certain courses offered by the
Department of Health, and locate information on City government, as well as
information about museums, tourist attractions, shopping and similar matters
without a fee. The City Agreement has been extended through the end of the 1999
fiscal year of the City (June 30, 1999), and the City has advised the Company of
its intention to extend the City Agreement through the end of calendar year
1999. During this time frame the City intends to issue a request for proposals
and to award a long-term contract to one or more vendors. This development
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led to a general purpose Kiosk Operating system that could easily be used in new
kiosk applications such as the FastTake project.
Prior to 1996, the Company's activities consisted primarily of
consulting, writing, training and custom software development for various
corporate and government clients, including Microsoft, for which it produced
technical papers and provided consulting services. In performance of these
activities, the Company developed skills in rapid application development and a
base of courseware and reusable software objects to which it retains title. In
1995, the Company decided to direct these skills and its expanding body of
reusable software objects toward the development of services through which it
can derive revenue on a "per transaction" basis. While much of the software has
been improved and continues to form the core of the Company's products, the
courseware is no longer current.
The Company initially developed and operated OLEBroker(TM), an
Internet-based subscription service that allows customers to search its database
of information about software objects, find the information needed and at the
customer's option, purchase needed objects on-line. The Company discontinued
active marketing of OLEBroker at the end of 1996 in order to concentrate on its
IPAT- and Internet-related businesses. However, in connection with the
development of OLEBroker(TM), the Company developed significant additional
software objects, which it then used in the development of technology for the
IPAT and Internet service delivery programs. The Company anticipates that the
IPAT and Internet service delivery programs will constitute the most significant
part of its business. It may continue to engage in consulting activities as
resources permit and may seek to acquire one or more other businesses providing
kiosk-related consulting services. In selecting consulting opportunities, the
Company will focus primarily on assignments in connection with the sale of IPAT
services or that can otherwise enhance its skill base.
In connection with the development of the IPATs and the deployment and
operation of the first five IPATs, the City agreed to pay to the Company an
aggregate of $661,080, of which $361,080 was paid in the form of monthly
payments of $30,090 ($6,018 per IPAT), commencing as of August 1, 1996, and the
balance of $300,000 was payable in partial amounts as certain milestones in the
development, deployment and operation of the IPATs were achieved. All amounts
due under the initial contract were earned through December 31, 1997. The
extension of such contract was valued at $202,650 through June 30, 1999. Through
March 1999, $146,043 was billed under this contract.
Through January 1999, the IPATs in New York City have been used 263,999
times. Revenues from advertising generated a total of $18,122 in 1998.
In August 1997, the Company announced the development and immediate
availability of SmartSign(TM), a modular line of IPATs contained in an enclosure
that is only 7-1/2" in depth, with each module weighing less than 70 pounds,
making the units suitable for regular shipment through UPS and Federal Express.
The modules initially consist of (a) a Pentium class processor unit, (b) an
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active-matrix touch screen, with optional sealed heavy-duty keyboard, and
optional credit card reader, (c) a printer unit with page printer and optional
receipt printer, (d)several light-box advertising modules with optional LCD
display and (e) an optional touch-sensitive light-box. Although a working unit
has been delivered and is operational, there can be no assurances that there
will be any commercial sales of this line. The first IPAT to utilize the
Company's new SmartSign(TM) design was deployed in March, 1998 at the Harlem
Heights Historical Society in the City. All advertising space has been sold for
a minimum of six months beginning April 1998. The amount of future transaction
and advertising revenues, if any, will depend on user and advertiser acceptance
of the IPATs.
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 March 1998. The kiosk in the Museum of Science was de-installed in
January 1999 as it did not generate revenue.
At the time the City Agreement with the Company was executed, the City
also signed similar agreements with two other companies for additional IPATs.
Based on the success of the program to date, the City expects to issue a Request
for Proposals for competitive bidding for additional IPATs throughout the City.
The Company intends to market IPATs to other municipalities, government
agencies and organizations in the future, but intends to direct the majority of
its efforts at 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.
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 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.
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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 September 2,
1998. The Company has also produced technical papers for, and provided
consulting services to, Microsoft. Joint marketing efforts with Microsoft are
continuing. The most recent conference was held in March 1999 and additional
events are scheduled through the summer of 1999.
Research and Development expenditures were $490,558 in 1998 and
$613,000 in 1997 due to the expensed development costs for the SmartStreet(TM)
operations. In addition, during the years ended December 31, 1998 and December
31, 1997, the Company has capitalized additional software development costs
which aggregated $72,027 and $37,909, respectively.
Competition
The Company is subject to competition from different sources for its
different services. The Company's intranet IPAT business competes with numerous
companies, including divisions of 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 19 companies competed
for the contracts with the City, many of which can be expected to compete
aggressively in other competitive situations.
The Company's FastTake(R) business competes with a number of companies,
principally Muze, Inc. and Advanced Communication Design Inc., which have been
in the video field for far longer than the Company. Although the company
believes that FastTake(R) is a competitive product, there can be no assurance
that these or other companies with far greater resources than the Company's
might enter the field and negatively affect the Company's FastTake(R) business
prospects in this market.
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Marketing
The three objectives of the Company's marketing efforts are: (a) to
obtain the rights to place its IPATs in compelling high-density locations; (b)
to attract advertisers based on the number and demographics of "impressions"
that the Company can offer to advertisers; and (c) for FastTake(R) kiosks, to
obtain qualified distributors who will (i) market FastTake(R) to their customers
and (ii) distribute posters and monthly updates to customers and work with
studios and others to obtain advertising. The Company presents exhibits at
national and regional shows sponsored by the Video Software Dealers Association,
among other associations and organizations. 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 also exhibits at major trade
shows where it partners with several of its major vendors. For example, the
Company partnered with Microsoft at the VBIT conferences in San Francisco and
Chicago. The Company expects to continue to participate in similar joint efforts
on an ongoing basis. A telemarketing program has been initiated to target
studios and video stores.
The Company's marketing activities are currently performed by its
executive officers, its Vice President of Sales and Marketing and a small staff.
Proprietary Rights
The Company's success is highly dependent on its proprietary
technology. The Company views its SmartSign(TM) and FastTake(R) housing designs
as well as its software as proprietary, and relies on a combination of patent,
trade secret, copyright and trademark laws, non-disclosure agreements and
contractual provisions to establish and protect its proprietary rights. The
Company has applied to in the United States for the following trademarks:
FastTake(R), SmartStreet(TM), ObjectSoft and SmartSign(TM). In addition, the
Company plans to register certain of these trademarks in principal foreign
jurisdictions. The Company has also retained patent counsel and has filed patent
applications for appropriate hardware and software components of its technology.
There can be no assurances that such applications will be allowed by the Patent
Office, or if allowed will not be successfully challenged.
The source code for the Company's proprietary software is protected as
a trade secret. In addition, because the Company does not sell or license its
technology to third parties, but rather delivers services through its IPATs, its
proprietary software is not disclosed to third parties. Furthermore, the Company
enters into agreements, as appropriate, with employees, consultants and
subcontractors containing provisions relating to confidentiality and the
assignment of inventions and other developments to the Company. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate or that the Company's competitors will not
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independently develop technologies that are substantially equivalent or superior
to the Company's technologies or products.
Customers
To date, the Company has entered into test agreements with customers
including Champagne Video, Entertainment Zone, Giant Eagle, Hollywood
Entertainment, Instant Replay, Movie Gallery, Transworld Entertainment and Video
Room. Studio agreements have been signed with Central Park Media, Full Moon
Entertainment, Plaza Entertainment and Polygram Home Video.
The customer base for the Company's SmartSign(TM) and SmartStreet(TM)
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 year ended
December 31, 1998, the City accounted for 73% of the Company's revenues pursuant
to the City Agreement. During the year ended December 31, 1997, the City
accounted for 84% of the Company's revenues pursuant to the City Agreement.
Government Regulations and Licensing
The Company believes that it has all licenses necessary to operate its
business as currently conducted in New Jersey and New York.
The Company is not currently subject to direct regulation by the
Federal Communications Commission or any other agency, other than regulations
applicable to businesses generally and businesses doing business with
governmental agencies. In connection with its contract with the City and future
contracts, if any, with the City and other municipalities or government
entities, the Company will have to comply with such regulations, including
bidding procedures and record-keeping, audit, insurance, bonding and
anti-discrimination provisions, among others.
Due to the increase in Internet use and publicity, it is possible that
laws and regulations may be adopted with respect to the Internet, including with
respect to privacy, pricing and characteristics of products or services. The
Company cannot predict the impact, if any, that future laws and regulations or
legal or regulatory changes may have on its business.
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Employees
As of March 25, 1999, the Company had 19 employees, 16 of which were
full-time, and all of whom are based in its Hackensack, New Jersey offices.
These include six in product development, four in management and sales, six in
operations and three in finance and administration.
The Company expects the size of its workforce to remain approximately
the same in 1999, 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.
Item 2. Description of Property
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The Company occupies approximately 4,300 square feet of office space in
Hackensack, New Jersey, under a lease with an unaffiliated landlord that expires
on March 31, 2003 and provides for a base rent of $86,557 per annum in 1999,
subject to certain increases in subsequent periods.
Item 3. Legal Proceedings
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There are no material pending legal proceedings to which the Company is
a party or to which any of its properties are subject.
Item 4. Submission of Matters to a Vote of Security Holders
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No matter was submitted to a vote of the Company's security holders,
through the solicitation of proxies or otherwise, during the fourth quarter of
its fiscal year ended December 31, 1998.
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PART II
Item 5. Market For Common Equity and Related Stockholder Matters
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The Company's common stock, par value $.0001 per share (the "Common
Stock") and Redeemable Class A Warrants (the "Class A Warrants") are listed on
the NASDAQ SmallCap Market 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 on the Nasdaq
SmallCap Market.
Quarters Common Stock Class A Warrants
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Ended High Low High Low
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Fiscal Year 1998
Fourth Quarter 7.50 0.375 3.00 0.063
Third Quarter 2.188 1.00 0.375 0.125
Second Quarter 3.250 1.781 0.656 0.0
First Quarter 3.313 2.125 0.750 0.188
Fiscal Year 1997
Fourth Quarter 5.25 2.875 0.53125 0.50
Third Quarter 5.875 3.25 2.75 0.75
Second Quarter 6.375 4.25 1.875 0.875
First Quarter 5.875 4.50 5.50 0.75
As of March 23, 1999, there were 47 holders of record of the Common
Stock and 8 holders of record of the Class A Warrants.
The Company did not pay cash dividends on its Common Stock during the
two years ended December 31, 1998 and the Company does not presently intend to
pay any dividends on its Common Stock.
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Item 6. Management's Discussion and Analysis or Plan of Operation
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The following discussion and analysis provides information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere herein.
Special Note Regarding Forward-Looking Statements
A number of statements contained in this Report 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; operating losses; accumulated deficit; recent establishment
of new business divisions; recent change of operating focus; dependence on new
untested product; risks related to consulting and training services; 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
through 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 and 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 the
Company's Registration Statement on Form S-3 filed with the Securities and
Exchange Commission on February 10, 1999.
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 $2,519,872 in 1997 and a net loss of $2,514,676 in 1998. In September
1995, the Company introduced OLEBroker(TM) , its fee-based website on the
Internet. The Company's SmartStreet(TM) IPATs were introduced in July 1996 and
its FastTake(R) IPATs were introduced in October 1998. The Company has not
recognized any significant income to date from its IPATs. Although the Company
anticipates that it will begin to recognize greater revenues from the
FastTake(R) IPATs during 1999, it cannot predict the actual timing or amount of
such revenues.
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Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues decreased by $470,702 or 75% to $160,465 in 1998 from $631,167
in 1997. Development and training revenue decreased by $223,181 or 84% to
$43,672 in 1998 from $266,853 in 1997. Rental income decreased by $247,521 or
68% to $116,793 in 1998 from $364,314 in 1997. The Company's decreased
development and training revenue resulted from a redirection of the Company's
resources to transactional fee-based products and services. The above decreases
were offset, in part, by an increase in revenues from advertising on the
Company's kiosks. The decrease in rental income was due to the completion of the
original contract with the City of New York, and an extension of the contract
with the City of New York 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 incremented costs associated with providing services for the
extended period.
Costs of services for development and training decreased by $12,264 or
4% to $334,503 in 1998 from $346,767 in 1997, and cost of services for rentals
decreased by $95,168 or 22% to $331,587 in 1998 from $426,755 in 1997. The
decreases were due to the redirection of the Company's resources to
transactional fee-based products, which were offset, in part, by normal
increases in expenses.
Research and development expenses decreased by $122,442 or 20% to
$490,558 in 1998 from $613,000 in 1997, due to the expensed development costs
for the SmartStreetJ operations in 1997. In addition, during the years ended
December 31, 1998 and December 31, 1997, the Company has capitalized additional
software development costs which aggregated $72,027 and $37,909, respectively.
Approximately $44,000 of the costs capitalized in 1998, relate to the
development of FastTake(R).
General and administrative expenses increased by $163,922 or 9% to
$1,930,255 in 1998 from $1,766,333 in 1997, due principally to increases in
advertising and marketing expenses.
Other income increased by $49,952 to $51,768 in 1998 from $1,816 in
1997, Investment income, in 1998, was lower than in 1997 due to the utilization
of cash and investments to fund operations. Additionally, during 1997, other
income was reduced as a result of the $250,000 provision for loss on a loan
receivable.
The Company has entered into an agreement to sell certain New Jersey
net operating losses and research and development credits, which resulted in the
Company recognizing in 1998 an income tax benefit of $360,000.
13
<PAGE>
Net loss decreased by $5,202 to a net loss of $2,514,670 in 1998 from a
net loss of $2,519,872 in 1997. This was due to lower revenues due to the
renegotiation of the New York City contract, offset by lower expenses related to
lower revenues and partly offset by the income tax benefit in 1998 and a
provision for loan receivable in 1997.
At December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $7,346,000. A valuation allowance aggregating
$2,806,000 has been recorded as a result of uncertainties regarding the
realization of substantially all of the assets due to the lack of earnings
history of the Company. See Note I of Notes to Financial Statements.
Liquidity and Capital Resources
As of December 31, 1998, cash and cash equivalents were $982,006 as
compared with $209,455 at December 31, 1997. The increase is due primarily to
the sale of 719,444 shares of Common Stock in a private placement, the sale of
12,480 shares of Series C convertible preferred stock, which was subsequently
converted to common stock, and the sale of 10,500 shares of Series D convertible
preferred stock. This was offset by the Company's reported losses for the year
ended December 31, 1998 of $2,514,670. The Company will continue to incur
substantial operating losses until it significantly increases the number of
IPATs placed in the City and other locations, realizes increased revenues from
advertising and realizes revenues from its FastTake(R) business. The Company had
working capital of $932,854 at December 31, 1998 as compared to $1,330,987 at
December 31, 1997, a decrease of 30%.
The Company expects to fund the deployment of additional FastTake(R)
and other kiosks, and make kiosk related acquisitions, from available working
capital and from funds that will be derived from future operating revenues.
However, there can be no assurance that future revenues will be generated in
sufficient amounts or that additional funds will not be required for the
expansion of operations. The Company intends to lease equipment whenever
possible on acceptable terms. The Company has a commitment letter from a leasing
company for a $1,000,000 facility for kiosk leasing. No amounts have been drawn
down on this commitment as of March 23, 1999. This commitment is subject to a
number of contingencies and there can be no assurance that any leases will be
consummated under this commitment.
The Company raised $970,000 in connection with a private financing of
Series D Preferred Stock consummated in December 1998 and $1,800,000 (net of
expenses) in connection with a private financing of Series E Preferred Stock
consummated on March 17, 1999. The Company intends to meet its long-term
liquidity needs through available cash and cash flow as well as through
additional financing from outside sources. On February 19, 1999, the Company
entered into a letter of intent with a New York Stock Exchange member firm for a
proposed underwritten secondary public offering of up to $20 million of Common
Stock. The proposed public offering would be made only
14
<PAGE>
by means of a prospectus. However, no assurance can be given that the Company
will be successful in consummating such an offering or raising any 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. If the Company is not successful in raising additional funds, it
might be forced to curtail the scope of its operations.
Year 2000
General
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 effected 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.
Third Parties
The Company has also initiated formal communications with significant
suppliers and other key third parties to determine the extent to which the
Company is vulnerable to those third parties' failure to resolve their own Year
2000 compliance issues. There can be no assurance that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company's results of operations.
Risk Assessment/Contingency Planning
At this time, the Company believes its most reasonable likely worst
case scenario would include (i) a key material vendor or service provider
experiencing problems with delivery of materials, components or services; or
(ii) the failure of infrastructure services provided by government agencies and
other third parties (e.g., electricity, telephone, transportation, Internet
services, etc.). As noted above, the Company is evaluating the Year 2000
compliance status of its key third-party vendors to
15
<PAGE>
identify potential risks for contingency planning purposes. The Company
anticipates that appropriate contingency plans will be prepared throughout 1999
as determined to be necessary.
Inflation and Seasonality
The rate of inflation was insignificant during the year ended December
31, 1998. In the past, the effects of inflation on personnel costs have been
offset by the Company's ability to increase its charges for services rendered.
The Company anticipates that it will be able to continue to do so in the near
future. The Company continually reviews its costs in relation to the pricing of
its products and services.
The Company's business is not seasonal.
Item 7. Financial Statements
--------------------
The financial statements of the Company required by this item are set
forth at end of this Form 10-KSB at pages F-1 through F-14.
Item 8. Changes in and Disagreements with Accountants on Accounting
--------------------------------------------------------------
and Financial Disclosure
------------------------
None.
16
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
--------------------------------------------------------------
Compliance with Section 16 (a) of the Exchange Act
--------------------------------------------------
The information required by this item is incorporated by reference from
the Company's Definitive Proxy Statement under the captions
"Management--Executive Officers and Directors" and "--Section 16(a) Beneficial
Ownership Reporting Compliance."
Item 10. Executive Compensation
----------------------
The information required by this item is incorporated by reference from
the Company's Definitive Proxy Statement under the captions
"Management--Directors' Compensation" and "Executive Compensation."
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The information required by this item is incorporated by reference from
the Company's Definitive Proxy Statement under the caption "Security Ownership."
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
The information required by this item is incorporated by reference from
the Company's Definitive Proxy Statement under the caption "Certain
Relationships and Related Transactions."
Item 13. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
2.1 * Certificate of Ownership and Merger of ObjectSoft Corporation
(a New Jersey corporation) into the Company
2.2 * Plan of Merger of ObjectSoft Corporation (a New Jersey
corporation) into the Company
3.1(a) * Certificate of Incorporation of the Company
3.1(b) x Amendment to Certificate of Incorporation of the Company
3.2(a) * By-laws of the Company
3.2(b) x Amended and Restated By-laws of the Company
4.1 * Form of Representative's Unit Purchase Option Agreement
4.2 * Specimen Certificate of the Company's Common Stock
4.3 * Form of Class A Warrant Agreement, including form of Class A
Warrant
4.4 o Amended and Restated 6% Series D Convertible Preferred Stock
Subscription Agreement, dated as of December 30, 1998
4.5 o Certificate of Designation of Series D Preferred Stock
4.6 o Amended Certificate of Designation of Series D Preferred Stock
17
<PAGE>
4.7 o Form of Investor's Warrant for December 1998 financing
4.8 o Registration Rights Agreement dated as of December 30, 1998
4.9 [] 6% Series E Convertible Preferred Stock Subscription
Agreement dated as of March 17, 1999
4.10 [] Certificate of Designation of Series E Preferred Stock
4.11 [] Amended Certificate of Designation of Series E Preferred Stock
4.12 [] Form of Investors' Warrant for March 1999 financing
4.13 [] Registration Rights Agreement dated as of March 17, 1999
10.1+ * Employment Agreement dated as of July 1, 1996 between the
Company and
David E. Y. Sarna
10.2+ * Employment Agreement dated as of July 1, 1996 between the Company
and George J. Febish
10.3+ * 1996 Stock Option Plan
10.4 * Form of Bridge Loan Promissory Note
10.5 * Form of Bridge Loan Warrant
10.6 * Form of Warrant Agreement with placement agent for Bridge Loan
Offering
10.7 * Form of Subscription Agreement and Investment
Representation of Investor with
each of the investors in the July 1996 Offering.
10.8 * Form of July 1996 Warrant Agreement
10.9 * Form of Warrant Agreement with placement agent for July 1996
Offering
10.10 * Agreement, dated January 11, 1996, as amended, with
the City of New York
(Department of Information Technology and Telecommunications)
10.11 * Cooperation Agreement with Microsoft Corporation, dated November
7, 1995
10.12 * Agreement with ACORD Corporation dated July 5,1995
10.13 * Form of Investor Warrant
10.14+ * Form of Officer Warrant
10.15 * Cyndel Warrant
10.16 ** Promissory Note between David E.Y. Sarna and the Company, dated
January 2, 1997
10.17 ** Security Agreement between David E. Y. Sarna and the Company,
dated March 18, 1998
27.1 Financial Data Schedule
b. Reports on Form 8-K
The Company filed a Current Report on Form 8-K on January 15, 1999 in
connection with the Company entering into that certain Amended and Restated 6%
Series D Convertible Preferred Stock Subscription Agreement dated December 30,
1998 by and among the Company and certain investors.
- ---------------------
* Denotes Exhibits incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration No. 333-10519).
18
<PAGE>
** Denotes Exhibits incorporated by reference to the Company's Annual
Report on Form 10- KSB for the fiscal year ended December 31, 1997.
+ Management contract or compensatory plan or arrangement.
x Denotes Exhibits incorporated by reference to the Company's Annual
Report on Form 10- KSB for the fiscal year ended December 31, 1996.
o Denotes Exhibits incorporated by reference to the Company's Current
Report on Form 8-K filed on January 15, 1999.
[] Denotes Exhibits incorporated by reference to the Company's
Current Report on Form 8-K filed on March 23, 1999.
19
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March 25, 1999 OBJECTSOFT CORPORATION
By: /s/ David E. Y. Sarna
------------------------------
David E. Y. Sarna, Chairman
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dated indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ David E. Y. Sarna Chairman, Co-Chief Executive Officer, March 25, 1999
- ----------------------------------
David E. Y. Sarna Secretary and Director (Principal
Executive Officer, Principal Financial
Officer and Principal Accounting
Officer)
/s/ George J. Febish President, Co-Chief Executive Officer, March 25, 1999
- ----------------------------------
George J. Febish Treasurer and Director (Principal
Executive Officer)
/s/ Daniel E. Ryan Director March 25, 1999
- -----------------------------------
Daniel E. Ryan
/s/ Michael A. Burak Director March 25, 1999
---------------------------------
Michael A. Burak
</TABLE>
20
<PAGE>
OBJECTSOFT CORPORATION
Contents Page
- -------- ----
Financial Statements
Independent auditors' report F-1
Balance sheet as of December 31, 1998 F-2
Statements of operations for the years ended
December 31, 1998 and 1997 F-3
Statements of changes in stockholders' equity
for the years ended December 31, 1998 and 1997 F-4
Statements of cash flows for the years ended
December 31, 1998 and 1997 F-5
Notes to financial statements F-6
<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, 1998 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, 1998. 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, 1998 and the results of its operations and cash flows for each of
the years in the two-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Richard A. Eisner & Company, LLP
Florham Park, New Jersey
February 20, 1999
With regard to Note A[1]
March 19, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
OBJECTSOFT CORPORATION
Balance Sheet
December 31, 1998
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 982,006
Accounts receivable, less allowance for doubtful accounts of $75,000 77,440
Prepaid expenses and other current assets 195,367
Deferred tax asset 360,000
-------------------
Total current assets 1,614,813
Furniture and equipment, at cost, net of accumulated depreciation 666,994
Capitalized software 58,790
Note receivable - officer/shareholder 440,000
Other assets 156,510
-------------------
$ 2,937,107
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 15,494
Current portion of obligations under capital lease 21,268
Accounts payable 522,383
Accrued expenses 118,401
Other liabilities 4,413
-------------------
Total current liabilities 681,959
Long-term debt 12,816
Obligations under capital lease 48,621
Total liabilities 743,396
Commitments
STOCKHOLDERS' EQUITY
6% non-voting convertible preferred stock, $100 par, authorized 20,000 shares;
issued
and outstanding 10,500 shares 1,050,000
Common stock, $.0001 par, authorized 20,000,000 shares, issued and outstanding
6,850,769 shares 685
Additional paid-in capital 8,327,718
Accumulated deficit (7,184,692)
------------------
Total stockholders' equity 2,193,711
$ 2,937,107
</TABLE>
See notes to financial statements
F-2
<PAGE>
<TABLE>
<CAPTION>
OBJECTSOFT CORPORATION
Statements of Operations
Year Ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Revenues:
Development and training $ 43,672 $ 266,853
Rental income 116,793 364,314
------------- -------------
Total revenues 160,465 631,167
------------- -------------
Expenses:
Cost of services:
Development and training 334,503 346,767
Rentals 331,587 426,755
Research and development 490,558 613,000
General and administrative 1,930,255 1,766,333
------------ -------------
Total expenses 3,086,903 3,152,855
------------ -------------
Loss from operations (2,926,438) (2,521,688)
------------ ------------
Other income (expense):
Realized and unrealized gain (loss) on marketable securities (7,041) 137,927
Interest and dividend income 72,891 126,562
Interest expense (14,082) (12,673)
Loss on uncollectible loan (250,000)
------------- -------------
Total other income 51,768 1,816
------------- -------------
Loss before income tax benefit (2,874,670) (2,519,872)
Income tax benefit 360,000
------------- -------------
Net (loss) $(2,514,670) $(2,519,872)
=========== ===========
Basic and diluted net loss per share $ (0.55) $ (0.62)
============ ===========
</TABLE>
See notes to financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
OBJECTSOFT CORPORATION
Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998 and 1997
6% Series C 6% Series D
Non-Voting Non-Voting
Convertible Convertible Additional
Preferred Stock Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Shares Amount Capital (Deficit) Total
----- ------ ------ ------ ------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 4,022,676 $ 402 $6,878,868 $(2,150,150) $4,729,120
Compensatory warrant 4,000 4,000
Exercise of warrants and
nonemployee options 60,000 6 59,994 60,000
Net loss --------- ---------- -------- --------- ------------ ----- ---------- (2,519,872) (2,519,872)
Balance, December 31, 1997 4,082,676 408 6,942,862 (4,670,022) 2,273,248
Common stock, net of costs 719,444 72 336,561 336,633
Issuance of Series C
preferred stock 12,480 $1,248,000 57,778 6 (132,506) 1,115,500
Compensatory warrants
and common stock 50,000 5 12,995 13,000
Conversion of Series C preferred
stock to common stock (12,480) (1,248,000) 1,940,871 194 1,247,806 0
Issuance of Series D
preferred stock 10,500 $1,050,000 (80,000) 970,000
Net loss (2,514,670) (2,514,670)
------------------------------------------------------------------------------------------------
Balance, December 31, 1998 0 $ 0 10,500 $1,050,000 6,850,769 $ 685 $8,327,718 $ (7,184,692) $2,193,711
================================================================================================
</TABLE>
See notes to financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
OBJECTSOFT CORPORATION
Statements of Cash Flows
Year Ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $(2,514,670) $(2,519,872)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization 362,407 330,393
Deferred tax benefit (360,000)
Warrants and common stock issued for services rendered 13,000 4,000
Loss on uncollectible loan 250,000
Provision for uncollectible accounts 75,000
Unrealized (gain) loss on marketable securities 65,938 (65,938)
Changes in:
Marketable securities 850,000 (850,000)
Accounts receivable 212,419 (358,959)
Prepaid expenses and other current assets 39,783 (54,687)
Other assets (85,663) 59,627
Accounts payable 225,725 176,444
Accrued expenses 33,841 (17,312)
Other liabilities 2,250 (7,622)
------------ ------------
Net cash used in operating activities (1,079,970) (3,053,926)
------------ ------------
Cash flow from investing activities:
Increase in bank overdraft 62,907
Loan receivable (250,000)
Capital expenditures (475,811) (92,486)
Capitalized software (72,027) (37,909)
Note receivable - officer/shareholder (637,000)
Repayment of note receivable - officer/shareholder 197,000
Note receivable - other 25,000 (25,000)
------------ ------------
Net cash used in investing activities (522,838) (782,488)
------------ ------------
Cash flow from financing activities:
Repayment of note payable (16,663) (3,403)
Proceeds from issuance of common stock 336,633
Proceeds from exercise of warrants and nonemployee options 60,000
Principal payments on obligations under capital leases (30,111) (50,086)
Proceeds from issuance of preferred stock 2,085,500
------------ -----------
Net cash provided by financing activities 2,375,359 6,511
------------ -----------
Net increase (decrease) in cash and cash equivalents 772,551 (3,829,903)
Cash and cash equivalents, beginning of period 209,455 4,039,358
------------ -----------
Cash and cash equivalents, end of period $ 982,006 $ 209,455
============ ===========
Supplemental disclosures of cash flow
Cash paid for interest $ 11,720 $ 12,673
=========== ===========
</TABLE>
See notes to financial statements
F-5
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company:
ObjectSoft Corporation (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 operated by the Company for operating income.
The Company raised an additional $1,800,000 (net of expenses) in a
private offering of equity securities in March 1999.
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.
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).
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 is recognized
based upon its percentage completion.
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 may
vary in the near term.
Marketable securities
During 1998 and 1997, the Company bought and held marketable equity
securities for the purpose of selling them in the near term and were
classified as trading securities. Changes in fair value of trading
securities during the period are reported in earnings.
F-6
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 H to the
financial statements for further information.
Per share data:
The basic and diluted per share data has been computed on the basis of
the loss for each year divided by the weighted average number of shares
of common stock outstanding. The weighted average shares of common stock
outstanding for the years ended December 31, 1998 and 1997 aggregated
4,548,696 and 4,066,994, respectively.
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.
Recent accounting pronouncement:
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use" ("SOP
98- 1"). SOP 98-1 is effective for financial statements for years
beginning after December 15, 1998. SOP 98-1 provides guidance over
accounting for computer software developed or obtained for internal uses
including the requirements to capitalize specified costs and amortization
of such costs. The Company does not expect the adoption of this standard
to have a material effect on its capitalization policy.
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 further extended to May 31, 1999 and bears interest at 8 percent
per annum.
F-7
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE C - FURNITURE AND EQUIPMENT
As of December 31, 1998, furniture and equipment consists of:
Kiosks $ 961,478
Furniture and other equipment 306,274
------------
1,267,752
Accumulated depreciation 600,758
$ 666,994
============
Depreciation expense aggregated $270,939 and $202,597 for the years ended
December 31, 1998 and 1997, respectively. Included in furniture and other
equipment are assets under capital leases with costs of $157,382. Accumulated
depreciation on these assets aggregated $68,704. Depreciation expense on
equipment under capital lease aggregated $33,389 and $32,041, for the years
ended December 31, 1998 and 1997, respectively.
During 1998 and 1997, the Company acquired equipment under capital lease
aggregating $47,177 and $18,834, respectively.
NOTE D - CAPITALIZED SOFTWARE
During the years ended December 31, 1998 and 1997, the Company capitalized
software development costs which aggregated $72,027 and $37,909, respectively.
Amortization of capitalized software costs aggregated $91,468 and $127,796 for
the years ended December 31, 1998 and December 31, 1997, respectively.
NOTE E - OBLIGATIONS UNDER CAPITAL LEASE
Minimum future lease payments under capital leases expiring through 2002, as of
December 31, 1998 are as follows:
Year Ending Amount
December 31, ------
------------
1999 $ 33,826
2000 31,408
2001 22,723
2002 4,580
------------
92,537
Less amount representing interest 22,648
------------
Present value of net minimum lease payments 69,889
Due within one year 21,268
Due after one year $ 48,621
============
F-8
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE F - LONG-TERM DEBT
Long-term debt as of December 31, 1998 consists of:
Note payable collateralized by equipment,
interest at 8.65%, principal and interest
of $797, due in monthly installments
through July 1999 $ 5,413
Note payable collateralized by equipment,
interest at 15.44%, principal and interest
of $1,077, due in monthly installments
through January 2001 22,897
--------
28,310
Current portion of long-term debt 15,494
Long-term debt $ 12,816
========
As of December 31, 1998, annual maturities of long-term debt outstanding are as
follows:
Year Ended Amount
December 31, ------
------------
$ 15,494
1999 11,754
2000 1,063
2001
NOTE G - ACCRUED EXPENSES:
Accrued expenses are:
Accrued rents $ 39,401
Accrued legal fees 40,000
Other 39,000
----------
$118,401
==========
NOTE H - STOCKHOLDERS' EQUITY
Preferred stock:
In September 1998, the Company issued 12,000 shares of Series C 6% convertible
preferred stock, warrants to purchase 24,000 shares of common stock at $3.04 per
share ("warrant A") and warrants to purchase 24,000 shares of common stock at
$3.16 per share ("warrant B") for $1,115,500, net of costs. Additionally, the
placement agents received 480 shares of the Series C preferred stock, warrant A
`to purchase 29,000 shares of common stock and 57,778 shares of common stock. In
November 1998, all of the outstanding Series C preferred stock were converted
into 1,940,871 shares of common stock. The warrants expire in May 2003.
F-9
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
In December 1998, the Company issued for $970,000, net of costs, 10,000 shares
of Series D 6% cumulative convertible preferred stock and warrants to purchase
50,000 shares at $2.44 per share expiring December 2003. Additionally, the
placement agent received 500 shares of Series D preferred stock and
aforementioned warrants to purchase 40,000 shares. The preferred stock is
convertible any time after March 1, 1999. The number of shares of common stock
to be issued upon conversion shall be determined by dividing $1,050,000 by the
lesser of (i) 80% of the average closing bids for the Company's common stock for
the five business days ending one day prior to the conversion or (ii) $2.03.
Stock options and warrants:
The Company has warrants outstanding, expiring in April 2000, to purchase
143,333 shares of common stock at an exercise price of $0.50.
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 canceled the option on 50,000
shares. During 1997, the remaining options were exercised.
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, which was exercised in 1997,
vested ratably over a ten month period ending March 1997. During 1997, the
Company recognized expense of $4,000.
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.
In July 1998, the Company repriced all employee stock options to the then
current market value of $1.45. In conjunction with the repricing, the vesting
periods were extended.
In November 1998, the Company issued warrants to purchase 675,000 shares of
common stock at price ranging from $1.00 to $5.00 per share and 50,000 shares of
common stock in exchange for professional services to be performed substantially
over a 24 month period. The estimated fair value of the warrants and stock at
date of issue aggregated $248,000 and is being amortized over 24 months. During
the year ended December 31, 1998, the Company recognized an expense of $13,000.
The Company maintains a stock option plan ("Plan") pursuant to which 750,000
shares of common stock are reserved for issuance upon exercise of either
incentive or non incentive stock options which may be granted from time to time
by the Board of Directors to employees and others. In July 1998, the
stockholders approved increasing the shares reserved under the Plan for 250,000
shares to 750,000 shares.
The Company 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 valuing the options, on 1998 and 1997 net loss is
not necessarily representative of the effects on reported net earnings or 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 of the options at the grant date for awards under the plans
consistent with the methodology prescribed under SFAS No. 123, the Company's pro
forma net loss in 1998 would have been approximately $2.6 million or $(0.57) per
share and the pro forma net loss in 1997 would have been approximately $2.7
million or $(0.67) per share.
F-10
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
Stock options and warrants: (continued)
The fair value of each option granted in 1998 and 1997 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%, risk free interest
rates of 5.50% and 5.36%, respectively, and expected lives of approximately four
and half years for the 1997 options and three years for the 1998 options. The
fair value of options granted during 1998 and 1997 were $0.48 and $2.18 per
share, respectively.
As of December 31, 1998, 4,276,387 shares were reserved for issuance of shares
for outstanding warrants and options.
The following summarizes stock option transactions under the Plan:
Year Ended December 31,
1998 1997
---- ----
Weighted Weighted
Average Average
Exercise Exercise
--------------- ----------------
Shares Price Shares Price
------ ----- ------ -----
Outstanding options at the beginning
of year 250,000 $3.96 145,000 $3.43
Options granted 435,000 1.45 110,000 4.64
Options expired or canceled (293,333) 3.59 (5,000) 3.50
-------- --------
Outstanding options at the end of year 391,667 $1.45 250,000 $3.96
======== ========
The following table summarizes information about the plan's options outstanding
as of December 31, 1998:
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
- --------- ----------- ----------- ------- ----------- ---------
$1.45 391,667 4.5 $1.45 161,389 $1.45
NOTE I - INCOME TAXES
The significant components of the Company's deferred tax assets and liabilities
as of December 31, 1998 is as follows:
Net operating losses carryforward $3,004,000
Accrual to cash adjustment 72,000
Capitalized software (10,000)
Depreciation 25,000
Research and development credits 75,000
Valuation allowance (2,806,000)
----------
Net deferred tax asset $ 60,000
============
F-11
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE I - INCOME TAXES
In accordance with New Jersey statutes, the Company has entered into an
agreement to sell certain New Jersey net operating losses and research and
development credits accordingly, a state income tax benefit and deferred tax
asset has been recognized in 1998. There was no provision for income taxes for
the year ended December 31, 1997.
During the years ended December 31, 1998 and 1997, the benefit for deferred
taxes before change in valuation allowances aggregated $326,000 and $1,437,000,
respectively, which the valuation allowance as of December 31, 1998 and 1997
were $2,411,000 and $2,229,000, respectively and the change in valuation
allowances for the years ended December 31, 1998 and 1997 were $507,000 and
$956,000, respectively.
The difference between the statutory federal income tax rate and the effective
rate for the Company's income tax benefit for each of the years ended December
31, 1998 and 1997, respectively, is summarized as follows:
1998 1997
---- ----
Statutory federal income tax rate 34.0% 34.0%
State income tax benefit, net of federal tax effect 9.5
Increase in valuation allowance (31.4) (41.7)
Research and development credit 2.6
Miscellaneous 2.3 5.1
------ ------
Effective income tax rate 14.4% 0.0%
====== ======
As of December 31, 1998, the Company had a net operating loss carryforward of
$7,346,000 for federal income tax purposes, which expires through 2018.
NOTE J - EMPLOYEE BENEFIT PLAN
The Company maintains a noncontributory Employee Savings Plan, in accordance
with the provisions of Section 401(k) of the Internal Revenue Code. Pursuant to
the terms of the plan, participants can defer a portion of their income through
contributions to the Plan.
NOTE K - FINANCIAL INSTRUMENTS, REVENUES AND OTHER MATTERS
1. Cash and cash equivalents:
The Company places its cash and cash equivalents in a commercial bank. At
times, the cash balances exceed federally insured limits.
2. Revenues:
For the years ended December 31, 1998 and 1997, 73 percent and 84 percent
of revenues, respectively, were derived from one customer.
F-12
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE K - FINANCIAL INSTRUMENTS, REVENUES AND OTHER MATTERS
3. Microsoft Corporation:
The Company's software is generally based upon Microsoft Windows
technology. Additionally, it has established a strategic relationship
with Microsoft that management believes is important to its sales,
marketing and support and product development activities. Accordingly,
any change in this relationship or any factor adversely affecting the
demand for, or the use of Microsoft's Windows operating system could have
a negative impact on demand for the Company's products and services.
Additionally, changes to the underlying components of the Windows
operating system would require changes to the Company's products and
could result in the loss of sales if the Company did not implement
changes in a timely manner.
NOTE L - COMMITMENTS
1. Lease income:
The Company leases five kiosks, hardware and software to the City of 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 1998, the Company extended its agreement
with the City of New York through June 1999. Under the terms of this
agreement, the annual rental income is $117,000.
2. Lease:
The Company leases office space and equipment under operating leases with
initial or remaining terms of one year or more through 2003. Minimum
annual rentals are as follows:
Year Ending Amount
December 31, -------
------------
$112,289
1999 117,356
2000 103,544
2001 97,666
2002 24,685
2003 ----------
$455,540
==========
Rent expense approximated $100,023 and $77,900, for the years ended
December 31, 1998 and 1997, respectively.
3. EMPLOYMENT AGREEMENTS
The Company previously entered into employment agreements with two key
executives expiring in December 2001. Under the terms of the agreements,
the aggregate current annual compensation is $215,000 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.
F-13
<PAGE>
OBJECTSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE M - 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.
NOTE N - ADVERTISING COSTS
Advertising costs are charged to operations in the year incurred and aggregated
$40,723 and $40,521 for the years ended December 31, 1998 and 1997,
respectively.
F-14
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ---------- ------------
2.1 * Certificate of Ownership and Merger of ObjectSoft Corporation
(a New Jersey corporation) into the Company
2.2 * Plan of Merger of ObjectSoft Corporation (a New Jersey
corporation) into the Company
3.1(a) * Certificate of Incorporation of the Company
3.1(b) x Amendment to Certificate of Incorporation of the Company
3.2(a) * By-laws of the Company
3.2(b) x Amended and Restated By-laws of the Company
4.1 * Form of Representative's Unit Purchase Option Agreement
4.2 * Specimen Certificate of the Company's Common Stock
4.3 * Form of Class A Warrant Agreement, including form of Class A
Warrant
4.4 o Amended and Restated 6% Series D Convertible Preferred Stock
Subscription Agreement, dated as of December 30, 1998
4.5 o Certificate of Designation of Series D Preferred Stock
4.6 o Amended Certificate of Designation of Series D Preferred Stock
<PAGE>
4.7 o Form of Investor's Warrant for December 1998 financing
4.8 o Registration Rights Agreement dated as of December 30, 1998
4.9 [] 6% Series E Convertible Preferred Stock Subscription
Agreement dated as of March 17, 1999
4.10 [] Certificate of Designation of Series E Preferred Stock
4.11 [] Amended Certificate of Designation of Series E Preferred Stock
4.12 [] Form of Investors' Warrant for March 1999 financing
4.13 [] Registration Rights Agreement dated as of March 17, 1999
10.1+ * Employment Agreement dated as of July 1, 1996 between the
Company and
David E. Y. Sarna
10.2+ * Employment Agreement dated as of July 1, 1996 between the Company
and George J. Febish
10.3+ * 1996 Stock Option Plan
10.4 * Form of Bridge Loan Promissory Note
10.5 * Form of Bridge Loan Warrant
10.6 * Form of Warrant Agreement with placement agent for Bridge Loan
Offering
10.7 * Form of Subscription Agreement and Investment
Representation of Investor with
each of the investors in the July 1996 Offering.
10.8 * Form of July 1996 Warrant Agreement
10.9 * Form of Warrant Agreement with placement agent for July 1996
Offering
10.10 * Agreement, dated January 11, 1996, as amended, with
the City of New York
(Department of Information Technology and Telecommunications)
10.11 * Cooperation Agreement with Microsoft Corporation, dated November
7, 1995
10.12 * Agreement with ACORD Corporation dated July 5,1995
10.13 * Form of Investor Warrant
10.14+ * Form of Officer Warrant
10.15 * Cyndel Warrant
10.16 ** Promissory Note between David E.Y. Sarna and the Company, dated
January 2, 1997
10.17 ** Security Agreement between David E. Y. Sarna and the Company,
dated March 18, 1998
27.1 Financial Data Schedule
- ---------------------
* Denotes Exhibits incorporated by reference to the Company's
Registration Statement on Form SB-2 (Registration No. 333-10519).
** Denotes Exhibits incorporated by reference to the Company's Annual
Report on Form 10- KSB for the fiscal year ended December 31, 1997.
+ Management contract or compensatory plan or arrangement.
x Denotes Exhibits incorporated by reference to the Company's Annual
Report on Form 10- KSB for the fiscal year ended December 31, 1996.
o Denotes Exhibits incorporated by reference to the Company's Current
Report on Form 8-K filed on January 15, 1999.
[] Denotes Exhibits incorporated by reference to the Company's
Current Report on Form 8-K filed on March 23, 1999.
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<NAME> OBJECTSOFT CORPORATION
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-01-1998
<CASH> 982,006
<SECURITIES> 0
<RECEIVABLES> 152,440
<ALLOWANCES> 75,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,614,813
<PP&E> 1,267,752
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<TOTAL-ASSETS> 2,937,107
<CURRENT-LIABILITIES> 681,959
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1,050,000
<COMMON> 685
<OTHER-SE> 8,327,718
<TOTAL-LIABILITY-AND-EQUITY> 2,937,107
<SALES> 160,465
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<INCOME-PRETAX> (2,874,670)
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<INCOME-CONTINUING> (2,514,670)
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