<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 29, 1996
REGISTRATION NO. 333-11713
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------------------
YOUNG MINDS, INCORPORATED
(Name of small business issuer in its charter)
CALIFORNIA 7371 33-0351148
---------- ---- ----------
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
1906 ORANGE TREE LANE, SUITE 220
REDLANDS, CA 92374
(909) 335-5780
(Address and telephone number of principal executive offices)
1906 ORANGE TREE LANE, SUITE 220
REDLANDS, CA 92374
(Address of principal place of business or intended principal place of business)
DAVID H. COTE, PRESIDENT
YOUNG MINDS, INCORPORATED
1906 ORANGE TREE LANE, SUITE 220
REDLANDS, CA 92374
(Name, address and telephone number of agent for service)
COPIES TO:
EDWARD T. SWANSON, ESQ. CHARLES SNOW, ESQ.
Swanson & Meepos, LLP Snow Becker Krauss P.C.
100 Wilshire Boulevard, Suite 200 605 Third Avenue
Santa Monica, California 90401-1113 New York, New York 10158-0125
Phone: (310) 576-4841 Phone:(212) 687-3860
--------------------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. / /
<PAGE>
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Title of each class of securities Proposed maximum aggregate Amount of registration fee
to be registered offering price*
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<S> <C> <C>
Common Stock (no par value) $ 16,445,000 $ 5,671**
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- ------------------------------------------------------------------------------------------------------
</TABLE>
*Estimated for the purpose of calculating the registration fee in accordance
with Rule 457(o).
**Previously paid.
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.
<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.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 29, 1996
1,150,000 Shares
[LOGO]
YOUNG MINDS, INCORPORATED
COMMON STOCK
------------------
Of the 1,150,000 shares of Common Stock (the "Common Stock") offered hereby,
725,000 shares are being sold by Young Minds, Incorporated (the "Company") and
425,000 shares are being sold by certain shareholders of the Company (the
"Selling Shareholders"). See "Principal and Selling Shareholders." The Company
will not receive any proceeds from the sale of shares by the Selling
Shareholders. Prior to this offering, there has been no public market for the
Common Stock, and there can be no assurance that such a public market will
develop or be sustained after the public offering. See "Underwriting" for
information relating to the factors considered in determining the initial public
offering price. It is currently estimated that the initial public offering price
per share of Common Stock will be between $11.00 and $13.00.
The Company has applied for inclusion of the Common Stock for quotation on
the Nasdaq National Market under the symbol "YMCD," subject to official notice
of issuance.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" (COMMENCING ON PAGE 6 HEREOF) AND
"DILUTION."
------------------------
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.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS TO SELLING
PUBLIC AND COMMISSIONS COMPANY (1) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
Total (2)............... $ $ $ $
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $249,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
172,500 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent the option is exercised, the Underwriters will offer
the additional shares at the Price to Public shown above. If the option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Sharpe Capital, Inc., New York, New York, on or about , 1996.
SHARPE CAPITAL, INC.
The date of this Prospectus is , 1996
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a registration statement on Form SB-2 under the Securities
Act with respect to the Common Stock being offered by this Prospectus. This
Prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules filed therewith. For
further information about the Company and the securities offered by this
Prospectus, reference is made to the registration statement and to the
financial statements, schedules and exhibits filed as a part of it.
Statements contained in this Prospectus about the contents of any contract or
any other documents are not necessarily complete, and in each instance,
reference is made to the copy of the contract or document filed as an exhibit
to the registration statement, each such statement being qualified in all
respects by such reference.
A copy of the registration statement may be inspected by anyone without
charge and may be obtained at prescribed rates at the Commission at the
Public Reference Section of the Commission, maintained by the Commission at
its principal office located at 450 Fifth Street, N.W. Washington, D.C.
20549, the New York Regional Office located at Seven World Trade Center, New
York, New York 10048, and the Chicago Regional Office located at Northwestern
Atrium Center, 500 West Madison Street, Suite, 1400, Chicago, Illinois 60661.
Such material may also be accessed electronically by means of the
Commission's home page on the Internet at http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements certified by its independent auditors
and quarterly reports for the first three quarters of each fiscal year
containing unaudited financial information.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS, INCLUDING
THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Young Minds, Incorporated (the "Company"), designs, develops, markets and
sells a comprehensive line of software products, embedded controllers, and
related services for creating, storing and accessing Compact Disc - Read Only
Memory ("CD-ROM") discs on computer workstations and networks. The Company
focuses on the development of state-of-the-art software bundled with advanced
Compact Disc-Recordable drives ("CD-R") and read-only CD-ROM "jukeboxes" to
facilitate the rapid transfer of high volumes of information in a variety of
computing environments. The Company believes that it has achieved a
strategic advantage by introducing sophisticated, platform neutral, industry
compliant (ISO 9660) software solutions for the mass storage industry.
The Company's strategy is to serve the markets for CD-ROM Jukeboxes and
CD Recorders through its proprietary (but unpatented) software technology.
The Company's products have been developed to operate on a broad range of
widely used computer platforms. The Company believes that its platform
neutrality is unique in the industry, enabling the Company to introduce new
products quickly in contrast to most other companies which must develop a
separate driver for each hardware-operating system combination.
The Company was awarded the "Kodak Integration Excellence" Award (July
15, 1996), the Imaging Magazine "Product of the Year for 1995" Award (January
1996), and the PC Magazine "Editor's Choice" Award (May 17, 1994). In
addition, the Company was named as one of the 500 fastest growing
technology-based companies in the United States for 1996 (August 1996) and
recognized as a member of the 1996 Southern California Technology Fast 50
(July 8, 1996). The Company believes that, based on its reputation for
innovation, quality and product reliability, as reflected by certain of the
awards it has received and by its role in helping to establish industry
standards, the Company has emerged as a recognized leader in establishing the
CD-R industry as well as introducing its CD-R technology to a wide range of
hardware and operating system combinations. The Company participated with Sun
Microsystems, Hewlett-Packard, and Digital Equipment Corporation to establish
the Rock Ridge Protocols, now accepted as the industry standard. Based on
these initiatives, the Company believes that it is well positioned to
maintain a leadership role and to actively participate in the ongoing
development of industry standards that will continue to impact the method of
storage and retrieval of large volumes of information within this rapidly
evolving market.
To date the Company has released six product lines based on its
proprietary technology. These product lines are set forth below, and the
approximate percentage of the Company's net sales during the first nine
months of calendar 1996 from each such line is indicated in parenthesis:
CD STUDIO: Networkable CD-Recordable solution for UNIX and Windows NT
(45%).
MPS: High-volume CD-Recordable Mass Production System solution
for enterprise-wide data archival and distribution (30%).
ULTRACAPACITY: Complete CD-ROM mass storage jukebox solutions (8%).
SIMPLICD: CD-Recordable software for Windows (5%).
ULTRASTUDIO: CD-ROM mass storage jukebox solutions with integrated CD-
Recording (1%).
AUTOCDR: CD-Recordable solution for Novell networks (1%).
In addition, the Company is seeking to address the increased need for
data security technology by incorporating certain third party encryption
technology into the Company's existing products as well as by seeking to
develop certain physical access security products.
The Company was organized and incorporated in California in 1989. Its
principal executive offices are located at 1906 Orange Tree Lane, Suite 220,
Redlands, California 92374, and its telephone number is (909) 335-1350.
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Common Stock offered by the Company . . . . . . . . . . . 725,000 shares
Common Stock offered by the Selling Shareholders. . . . . 425,000 shares
Common Stock to be outstanding after the offering . . . . 3,999,441 shares (1)
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . To repay short-term indebtedness of
approximately $2.8 million, with the remainder
to be used for research and development, capital
expenditures, marketing and working capital.
See "Use of Proceeds."
Proposed Nasdaq symbol. . . . . . . . . . . . . . . . . . YMCD________________
</TABLE>
- ---------------------
(1) Excludes (i) 2,114,002 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants at a weighted average exercise price of
approximately $0.85 per share, (ii) 172,500 additional shares of Common Stock
issuable upon exercise of the Underwriters' over-allotment option, and (iii)
115,000 additional shares issuable upon exercise of warrants granted to the
Underwriters. See "Underwriting."
<TABLE>
<CAPTION>
SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED SEPTEMBER 30,
-------------------------------------------- JUNE 30, ----------------------
1992(1) 1993 1994 1995 (2) 1996 (2) 1995 (3) 1996(3)
-------- -------- -------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales. . . . . . . . . . . . . $1,928 $4,656 $7,647 $7,052 $6,702 $1,626 $3,099
Gross profit . . . . . . . . . . . 1,130 2,705 4,631 3,777 3,569 831 1,849
Income (loss) from operations. . . (721) (1,040) 1,121 255 (133) (61) 672
Net income (loss). . . . . . . . . (811) (1,853) 102 (699) (760) (322) 683
Net income (loss) per share. . . . $(0.31) $(0.59) $0.02 $(0.16) $(0.16) $(0.07) $0.12
Weighted average common
stock outstanding. . . . . . . . 2,647,341 3,161,885 4,437,603 4,258,497 4,770,164 4,531,247 5,794,066
Actual common stock
outstanding(4) . . . . . . . . . 847,850 1,899,899 1,905,230 3,095,230 3,303,374 2,795,230 3,274,441
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996(3)
DECEMBER JUNE -------------------------
BALANCE SHEET DATA: 31, 1995 30, 1996 ACTUAL AS ADJUSTED(5)
-------- -------- ------ --------------
(unaudited)
<S> <C> <C> <C> <C>
Working capital (deficiency) . . . . . . . . $(3,526) $(2,774) $(2,163) $3,299
Total assets . . . . . . . . . . . . . . . . 3,073 3,035 3,865 8,716
Short term debt. . . . . . . . . . . . . . . 721 265 290 158
Long term debt (less current portion). . . . 1,380 2,112 2,062 223
Total debt . . . . . . . . . . . . . . . . . 2,101 2,377 2,352 381
Total liabilities. . . . . . . . . . . . . . 5,488 5,493 5,660 3,191
Shareholders' equity (deficit) . . . . . . . (2,415) (2,459) (1,795) 5,525
</TABLE>
- ---------------------
(1) The summary financial and operating data presented above in respect to the
fiscal year ended December 31, 1992 were derived from financial statements
audited by other independent certified public accountants.
(2) During 1996, the Company changed its fiscal year end for financial
reporting purposes to end June 30 from its former December 31 year
end. Accordingly, the summary financial and operating data includes financial
results for the fiscal year ended June 30, 1996 as well as the fiscal year ended
December 31, 1995. Thus, the results of operations for the six months ended
December 31, 1995 are included in both years. Net sales, gross profit, net loss,
net loss per share, and weighted average common stock outstanding for the six
month period ended December 31, 1995 were $3,648,412; $1,777,230; $(440,057);
$(0.10); and 4,542,247 shares, respectively.
(3) The summary financial and operating data presented above in respect to the
three month periods ended September 30, 1995 and 1996 and selected data and
balance sheet data are unaudited.
(4) Does not include the effect of any options or warrants or SAB 83 stock, and
therefore represents only the actual outstanding stock at the end of the fiscal
year.
(5) As adjusted to reflect the sale of 725,000 shares of Common Stock by the
Company in connection with this offering and the application of the net proceeds
therefrom, assuming an initial public offering price of $12 per share. See Use
of Proceeds.
2
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
IN EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY.
PAST OPERATING LOSSES; ACCUMULATED DEFICIT. At September 30, 1996, the
Company had a negative working capital of approximately $2.2 million and a
shareholders' deficiency of approximately $1.8 million. The Company
sustained net losses of $698,917 and $760,341 for the fiscal years ended
December 31, 1995 and June 30, 1996, respectively while for the quarter ended
September 30, 1996 the Company achieved net profit of $683,327. There can be
no assurance that the Company will be able to maintain profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements, the related notes thereto and other
financial information included herein.
RISKS RELATING TO EVOLVING TECHNOLOGY AND MARKET. The data storage
industry is characterized by evolving technology and industry standards.
The Company's product offerings are sold in various configurations to meet
the needs of the Company's customers. The Company is in the process of
developing additional products and intends to introduce such new products
during the next fiscal year, although no assurance can be given that the
Company will be successful in developing any new products. The Company's
success will depend, in part, on its ability to maintain and enhance its
existing products and broaden its product offerings by developing and
introducing new products that keep pace with the technological developments
in a cost effective manner, respond to evolving customer preferences and
requirements, and achieve market acceptance. Lack of market acceptance for
the Company's existing or new products, or the Company's failure to achieve
technological advantage over its competition while also remaining price
competitive, would materially adversely affect the Company's results of
operations and financial condition. There can be no assurance that the
Company's products, even if successfully developed, will achieve timely
market acceptance. Moreover, the introduction of products embodying new
technology and the emergence of new industry standards could render the
Company's existing products obsolete and unmarketable. See "Business."
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's future success will
depend in large part on its proprietary technology. The Company relies
principally upon copyright, trade secret, and contract law to protect its
proprietary technology. There can be no assurance that such measures are
adequate to protect the Company's proprietary technology. The Company has not
applied for and does not currently hold any patents, but may apply for patent
protection in the future.
The status of United States patent protection in the software industry is
not well defined and will evolve as the United States Patent and Trademark
Office grants additional patents. Patents may be issued which relate to
fundamental technologies incorporated in the Company's products. Since patent
applications in the United States are not publicly disclosed until the patent is
issued, applications may have been filed which, if issued as patents, would
relate to the Company's products. In addition, because the Company has not
applied for any patents, the
3
<PAGE>
Company has never conducted a comprehensive patent search relating to the
technology used in its products. Accordingly, there may be issued patents which
relate to the Company's products. There can be no assurance that third parties
will not assert infringement claims against the Company in the future or that
such claims will not be successful. The Company could incur substantial costs
in defending itself and its customers against any such claims. Parties making
such claims may be able to obtain injunctive or other equitable relief which
could effectively block the Company's ability to sell its products in the United
States and abroad, and could result in an award of substantial damages. In the
event of a claim of infringement, the Company and its customers may be required
to obtain one or more licenses from third parties. There can be no assurance
that the Company or its customers could obtain necessary licenses from third
parties at a reasonable cost or at all. Defense of any lawsuit or failure to
obtain any such required license would have a material adverse effect on the
Company's results and operations.
DEPENDENCE ON KEY PERSONNEL. The Company's future success will depend in
large part on the continued service of many of its technical, marketing, sales
and management personnel and on its ability to continue to attract, motivate,
and retain highly qualified employees. The Company's employees may voluntarily
terminate their employment with the Company at any time. Competition for such
employees is intense, and the process of locating technical, marketing, sales,
and management personnel with the combination of skills and attributes required
to execute the Company's strategy is often lengthy. The Company believes that
it will need to hire additional technical personnel in order to enhance its
existing products and to develop new products. If the Company is unable to hire
additional technical personnel, the development of new products and enhancements
would likely be delayed. The loss of the services of these and other key
personnel, particularly Messrs. Young, Cote, and Hornbeck, or the inability to
attract new personnel, could have a material adverse effect upon the Company's
results of operations and research and development efforts. The Company
will consider obtaining key-man life insurance on certain of its key
personnel, but no final decision has been made. See "Management."
NO ASSURANCE OF FUTURE PROFITABILITY. The Company's ability to finance
its operations and to maintain profitable operations will depend upon a
variety of factors, including among others its ability to continually develop
and market products that can be manufactured, distributed and sold on a
profitable basis. Market acceptance of new products generally requires
substantial time and effort. There can be no assurance that the Company's new
products will achieve significant market acceptance, that the products will
compete effectively against alternative storage media or that the Company
will derive sufficient revenues to achieve and sustain profitability.
COMPETITION. The mass storage market in which the Company operates is
characterized by well established conventional storage methods. The principal
elements of the competition in the Company's markets include product features
and performance, price, quality and reliability, brand awareness, compatibility
with open systems, and level of customer service. The Company is and will be
competing with established companies which have greater financial, technical,
manufacturing, marketing, and research and development resources, as well as
greater product acceptance and experience. Accordingly, there is no assurance
that the Company will be able to compete successfully.
CD-R and CD-ROM mass storage devices, including systems sold by the
Company, currently account for only a small portion of the overall market for
mass data storage, distribution, and recording devices. If competition from
well-established industry participants with competing or improved versions of
existing technologies delays or reverses the adoption of CD-ROM mass storage
devices or CD-R devices or if competitive products are perceived by customers to
offer higher performance or to be more cost effective than the Company's
products, the Company's results of operations would be materially adversely
affected.
The Company believes its use of a platform neutral architecture is an
important competitive element. The Company also believes that the number of
competitors offering similar platform neutrality will grow over the next
several years. The Company anticipates that a significant force of such
competition will be from existing competitors as well as new market entrants.
Due to the potentially greater sales, marketing, product development and
financial resources of the Company's competitors, the Company anticipates
that the competition from these competitors will intensify in the future. In
order to effectively compete against these competitors, the Company will need
to grow and attain sufficient size to have the resources to develop new
products in response to evolving technology and customer demands and to sell
products through a broad distribution channel in competition with these other
existing potential competitors. No assurance can be given that the Company
will be able to grow sufficiently to enable it to compete effectively in this
marketplace.
The Company's competitors include Adaptec, Meridian Data, Smart Storage,
and Elektroson. Adaptec sells CD-R devices for desktop computers in Windows
and Windows 95 only, at a lower price than the Company's products; Meridian
sells networked CD-R products for Novell and Windows NT only, at prices
generally comparable to the Company's products; Smart Storage sells jukebox
management software and resells CD-R software for the Unix and Novell
markets, at a price slightly less than the Company's products; and Elektroson
provides products for desktop Windows and Unix markets, at a lower price
than the Company's products. Although the Company believes that it currently
has a competitive advantage with respect to these competitors from a
technological
4
<PAGE>
standpoint, including platform neutrality, there can be no assurance that the
Company will be able to maintain its competitive advantage or that these
existing competitors, or new competitors, will not develop competitive
products utilizing platform neutrality and with favorable pricing.
Moreover, the Company currently has little or no proprietary barriers to
entry that could keep a competitor from developing similar products and
technology or selling competing products in the Company's markets.
DILUTION. Purchasers in this offering will incur an immediate and
substantial dilution of $11.10 per share in the net tangible book value of their
shares, assuming that the initial offering price of the Common Stock is $12.00
per share and that the Underwriters' over-allotment option is not exercised.
The exercise of existing and/or future warrants and options may have an
additional dilutive effect on the interests of the investors in this offering.
See "Dilution."
RISKS RELATING TO MANAGEMENT OF GROWTH. The Company expects to achieve
significant growth in the near future. This growth will make significant
demands on the Company's management, resources and operations. To manage its
growth effectively, the Company intends to expand its operational, financial,
sales and marketing systems and to hire and train new employees. There can
be no assurance that the Company will be able to identify, hire, train and
retain qualified individuals, and such failure could have a material adverse
effect on the Company's results of operations and financial condition.
In addition, the Company plans to increase its operating expenses following
consummation of the offering contemplated hereby in order to increase its
research and development, increase sales and marketing operations, develop new
distribution channels and broaden its customer support capabilities. See "Use
of Proceeds." There can be no assurance that such internal expansion will be
successfully implemented, that the cost of such expansion will not exceed the
revenues generated or that the Company's sales and marketing organization will
be able to successfully compete against the sales and marketing organizations of
the Company's current or potential competitors. If the Company is unable to
effectively manage its internal expansion, the Company's results of operations
and financial condition could be materially adversely affected. Moreover, the
foregoing expenses will, by necessity, be incurred prior to any potential
positive impact on revenues. If such expenses are not subsequently followed by
sufficient increased revenues, the Company's operating result and financial
condition could be materially adversely affected.
POSSIBLE NEED FOR ADDITIONAL FUNDS. There can be no assurance that the
Company will not require additional financing after completion of this offering
to fund its future growth. Any additional required financing may not be
available on satisfactory terms to the Company, if at all. Future equity
financings may result in dilution to the holders of the Company's Common Stock.
See "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and "Dilution."
ARBITRARY DETERMINATION OF OFFERING PRICE. The offering price for the
shares of Common Stock offered hereby has been arbitrarily determined by the
Company and the Underwriters, and the price bears no relationship to the
Company's assets, earnings, book value or other such criteria of value. See
"Dilution" and "Business."
RECENT PRIVATE SALE OF SECURITIES. Between December 1995 and March 1996,
the Company sold 92 units, each unit consisting of one $20,000 note, 5,000
shares of Common Stock and 5,000 warrants (with an exercise price of $1 per
share), for $25,000 per unit.
CONTROL BY EXISTING MANAGEMENT. Following the offering, the present
executive officers and directors of the Company and their affiliates will
beneficially own approximately 40% of the Company's common stock (assuming
the Underwriters' over-allotment option is not exercised). Accordingly, they
may have the ability to determine the outcome of elections of the Company's
directors and other matters presented to a vote of shareholders.
THREATENED LITIGATION. The Company has been sued by Irving Ayash and his
company. ANON, Inc. (collectively "Ayash") purportedly pursuant to two
alleged contracts between Ayash and the Company under which Ayash promised,
among other things, to procure financing for the Company in exchange for
certain commissions and stock warrants. Ayash is seeking approximately
$50,000 plus 100,000 warrants to pursue the Company's stock at 0.40 per
share. The Company believes that Ayash's claims are completely without merit
and intends to vigorously defend the suit. There can be no assurance,
however, that the Company will prevail in the litigation.
The Company has been advised by a former lender that the lender is entitled
to a significant unspecified number of warrants to purchase Common Stock
because the Company was late in repaying the loan, even though the loan
document does not provide any such penalty in the event of late repayment.
See "Business - Litigation".
POTENTIAL ISSUANCE OF PREFERRED STOCK. The Board of Directors has the
authority to issue up to 5,000,000 shares of Preferred Stock and to determine
the preferences, limitations and relative rights of shares of Preferred Stock
and to fix the number of shares constituting any series and the designation of
such series, without any further vote or action by the Company's shareholders.
The Preferred Stock could be issued with voting, liquidation, dividend and other
rights superior to the rights of the Common Stock. The Board of Directors has
no present intention to issue Preferred Stock. The potential issuance of
Preferred Stock may delay or prevent a change in control of the Company,
discourage bids for the Common Stock at a premium over the market price, and
adversely affect the market price and the voting and other rights of the holders
of the Common Stock.
5
<PAGE>
DIVIDENDS NOT LIKELY. There can be no assurance that the proposed
operations of the Company will result in sufficient revenues to enable the
Company to operate at profitable levels or to generate a positive cash flow.
For the foreseeable future it is anticipated that any earnings which may be
generated from operations of the Company will be used to finance the growth of
the Company and that cash dividends will not be paid to shareholders.
ABSENCE OF PUBLIC MARKET. Prior to this offering, there has been no public
market for the Common Stock. There can be no assurance that an active trading
market will develop after the completion of this offering or, if developed, that
it will be sustained. There can be no assurance that the market price of the
Common Stock will not decline below the initial offering price. The securities
of many emerging growth companies have experienced price and volume
fluctuations which are, at times, unrelated or disproportionate to the operating
performance of such companies. These conditions may have a material adverse
effect on the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE RESALE. Sales of the Company's Common Stock in
the public market following this offering could adversely affect the market
price of the Company's Common Stock. Of the 3,999,441 shares of Common Stock to
be outstanding after the offering (assuming that the Underwriters' over-
allotment option is not exercised), the 1,150,000 shares sold in this offering
will be available for resale without restriction under the Securities Act,
unless such shares are held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act. In addition, approximately
1,813,441 shares will be eligible for immediate resale in the public market
without restriction pursuant to Rule 144, after the expiration of the 90-day
period after the date of this Prospectus. The executive officers and directors
of the Company (who in the aggregate hold approximately 747,980 shares eligible
for resale under Rule 144) have agreed, subject to certain exceptions, not to
sell or otherwise dispose of any of their shares for a period of 18 months after
the effective date of the Registration Statement. Sales of Common Stock in the
public market, or the availability of such shares for sale, could adversely
affect the market price of the Common Stock. See "Shares Eligible for Future
Resale."
6
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 725,000 shares of
Common Stock offered by the Company hereby are estimated to be $7,320,000
($9,120,900 if the Underwriters' over-allotment option is exercised in full) at
an assumed initial public offering price of $12 per share and after deducting
underwriting discounts and commissions and estimated offering expenses. The
Company will receive none of the proceeds from the sale of the shares being
offered hereunder by the Selling Shareholders.
The primary purposes of this offering are to create a public market for the
Company's Common Stock, to facilitate future access to public markets and to
obtain additional equity capital. The Company estimates that it will use
approximately $2,800,000 of the net proceeds for the repayment of outstanding
indebtedness, including approximately $1,900,000 in principal and accrued
interest on certain notes due in December 1997, and the balance for
miscellaneous short-term obligations. In addition, the Company presently
intends to use approximately $1,500,000 for research and development, $2,000,000
for marketing, $700,000 for capital expenditures, and the balance for general
working capital. A portion of the net proceeds may also be used for the
acquisition of businesses, products and technologies that are complementary to
those of the Company. The Company, however, has no present plans, agreements or
commitments and is not currently in any negotiations with respect to any such
acquisition.
The Company has not determined the exact amounts it plans to expend on
each of such uses or the timing of such expenditures. The amounts actually
expended for each such use, if any, are at the discretion of the Company and may
vary depending upon a number of factors, including future revenue growth, the
amount of cash generated by the Company's operations, and changing competitive
conditions. Pending their use as set forth above, the net proceeds of this
offering will be invested in U.S. government securities and other short-term
investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings to finance the growth and development of
its business and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results and current and
anticipated cash needs.
7
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996 and as adjusted to give effect to the sale of 725,000 shares
of Common Stock by the Company and the application of the net proceeds as
described in "Use of Proceeds." The financial data in the following table
should be read in conjunction with the Company's Financial Statements and notes
thereto and other financial information contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Historical As Adjusted (1) (2)
---------- -------------------
<S> <C> <C>
Short term debt:
Notes payable, current portion. . . . . . . . . . . . . $272,500 $140,000
Current portion of capital lease obligations (3). . . . 17,658 17,658
----------- ----------
Total short-term debt. . . . . . . . . . . . . . . . 290,158 157,658
Long-term debt
Notes payable, less current portion . . . . . . . . . . 1,863,000 223,000
Notes payable to related parties,
less current portion . . . . . . . . . . . . . . . . 198,609 0
----------- ----------
Total long-term debt . . . . . . . . . . . . . . . . 2,061,609 223,000
Shareholders' equity (deficiency)
Preferred Stock, no par value, 5,000,000 shares
authorized, none of which are issued and
outstanding
Common Stock, no par value,
15,000,000 shares authorized, 3,274,441
shares (historical) and 3,999,441 shares
(as adjusted) issued and outstanding (4). . . . . 1,944,140 9,264,140
Additional paid-in capital. . . . . . . . . . . . . . . 291,855 291,855
Shareholders notes receivable . . . . . . . . . . . . . (406,620) (406,620)
Accumulated deficit . . . . . . . . . . . . . . . . . . (3,624,041) (3,624,041)
----------- ----------
Total shareholders' equity (deficiency). . . . . . . $(1,794,666) $5,525,334
----------- ----------
Total capitalization. . . . . . . . . . . . . . . $ 557,101 $5,905,992
----------- ----------
----------- ----------
</TABLE>
_____________________________
(1) Does not reflect the issuance of up to 172,500 additional shares subject to
the Underwriters' overallotment option or the proceeds of the sale
thereof.
(2) As adjusted to give effect to the receipt of net proceeds from the sale by
the Company of 725,000 shares of Common Stock pursuant to this offering,
after deducting underwriting discounts and estimated expenses payable by
the Company, and the application of the estimated net proceeds therefrom.
See "Use of Proceeds." An initial offering price of $12.00 per share is
assumed.
(3) See Note 8 to Financial Statements for additional information concerning
capital lease obligations.
(4) Excludes (i) 2,114,002 shares of Common Stock issuable upon exercise of
options or warrants outstanding at September 30, 1996, and (ii) 115,000
shares of Common Stock reserved for issuance upon the exercise of the
Underwriters' warrants. See "Underwriting."
8
<PAGE>
DILUTION
The net tangible book value (deficit) of the Company at September 30,
1996 was $(3,729,495), or $(1.14) per share. The net tangible deficit
comprises shareholders' deficiency of $(1,894,666), less software development
costs of $1,784,829 and deferred loan costs of $150,000. After giving effect
to the sale of 725,000 shares of Common Stock offered by the Company hereby
(after deducting underwriting discounts and commissions and estimated
offering expenses) and application of the net proceeds therefrom as set forth
in "Use of Proceeds," and assuming an initial offering price of $12.00 per
share, the net tangible book value of the Company at September 30, 1996 would
have been $3,590,505, or $0.90 per share, representing an immediate increase
in the net tangible book value of $2.04 per share to existing shareholders
and an immediate dilution of $11.10 per share to new investors purchasing
shares in this offering. The following table illustrates the resulting per
share dilution with respect to the shares of common Stock offered hereby:
Assumed initial public offering price per share------------- $12.00
Net tangible book value per share at June 30, 1996---------- $(1.14)
Increase per share attributable to new investors------- 2.04
------
Net tangible book value per share after the offering-------- 0.90
-----
Dilution per share to new investors------------------------- $11.10
======
The table below summarizes the difference, at September 30, 1996, between
the existing shareholders and the new investors with respect to the number of
shares purchased from the Company, the total consideration paid and the
average price per share paid (before deducting underwriting discounts and
commissions and estimated offering expense payable by the Company), assuming
an initial public offering price of $12 per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price
---------------- ------------------- Per Share(1)
-------------
Number Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1) 3,274,441 81.9% $ 1,944,140 18.3% $ 0.59
New investors 725,000 18.1% 8,700,000 81.7% 12.00
--------- ----- ---------- ------
Total 3,999,441 100.0% $ 10,644,140 100.0%
</TABLE>
- -----------------------
(1) The sale by the Selling Shareholders in this offering will cause the number
of shares held by existing shareholders to be reduced to 2,849,441 shares, or
71% of the total number of shares of Common Stock to be outstanding after this
offering, and will increase the number of shares held by new investors to
1,150,000 shares, or 29% of the total number of shares of Common Stock to be
outstanding after this offering. See "Principal and Selling Shareholders."
The foregoing tables assume no exercise of any outstanding stock options or
warrants or the Underwriters' over-allotment option. As of September 30, 1996,
there were outstanding options and warrants to purchase 2,114,002 shares of
Common Stock at a weighted average exercise price of approximately $0.85 per
share. See "Underwriting" for information concerning the Underwriters'
over-allotment option. To the extent that the outstanding options, warrants
or any options granted in the future are exercised, there will be further
dilution to new investors.
9
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Financial Statements and the Notes thereto included elsewhere herein. The
financial statement data as of and for the fiscal years ended December 31, 1994
and 1995 and June 30, 1996 are derived from the audited Financial Statements
included elsewhere in this Prospectus and should be read in conjunction with
those Financial Statements and the Notes thereto. The statement of operations
data with respect to the fiscal year ended December 31, 1993 are derived from
audited financial statements not included in this Prospectus. The statement of
operations data with respect to the fiscal year ended December 31, 1992 are
derived from audited financial statements not included in this Prospectus which
were audited by other independent certified public accountants. The financial
data as of September 30, 1996 and for the three month periods ended September,
1995 and 1996 are derived from unaudited financial statements that, in the
opinion of management, reflect all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the financial position
and results of operations for these periods. Operating results for the three
month period ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the entire fiscal year ending June 30, 1997.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR
ENDED THREE MONTHS
YEAR ENDED DECEMBER 31, JUNE 30, ENDED SEPTEMBER 30,
-------------------------------------------- ---------- -------------------
(UNAUDITED)
1992 1993 1994 1995(1) 1996(1) 1995 1996
---- ---- ---- ------ ------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales. . . . . . . . . . . . . . . $1,928 $4,656 $7,647 $7,052 $6,702 $1,626 $3,099
Cost of goods. . . . . . . . . . . . . 798 1,951 3,016 3,275 3,133 795 1,250
------ ------ ------ ------ ------ ------ ------
Gross profit . . . . . . . . . . . . 1,130 2,705 4,631 3,777 3,569 831 1,849
------ ------ ------ ------ ------ ------ ------
Operating costs and expenses
Research and development . . . . . . 181 597 437 365 403 88 132
Selling, general and administrative. 1,670 3,148 3,073 3,157 3,299 804 1,045
------ ------ ------ ------ ------ ------ ------
Total operating expense . . . . . 1,851 3,745 3,510 3,522 3,702 892 1,177
------ ------ ------ ------ ------ ------ ------
Income (loss) from operations. . . . . (721) (1,040) 1,121 255 (133) (61) 672
Other income (expense) . . . . . . . . 17 (654) (409) (207) 81 (54) (85)
Interest expense . . . . . . . . . . . (107) (158) (610) (747) (808) (207) (174)
------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes. . . (811) (1,852) 102 (699) (860) (322) 583
Income tax benefit . . . . . . . . . . 0 1 0 0 100 0 100
------ ------ ------ ------ ------ ------ ------
Net income (loss). . . . . . . . . . . (811) (1,853) 102 (699) (760) (322) 683
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
Net income (loss) per share. . . . . . $(0.31) $(0.59) $0.02 $(0.16) $(0.16) $(0.07) $0.12
Weighted average common stock
outstanding . . . . . . . . . . . . 2,647,341 3,161,885 4,437,603 4,258,497 4,770,164 4,531,247 5,794,066
Actual common stock outstanding(2) . . 847,850 1,899,899 1,905,230 3,095,230 3,303,374 2,795,230 3,274,441
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30, 1996
--------------------------------------------- AT JUNE -----------------------
BALANCE SHEET DATA: 1992 1993 1994 1995 30, 1996 ACTUAL AS ADJUSTED(3)
---- ---- ---- ---- ---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital (deficiency) . . . . . $(1,374) $(3,039) $(3,670) $(3,526) $(2,774) $(2,163) $3,299
Total assets . . . . . . . . . . . . . 1,059 1,431 2,809 3,073 3,035 3,865 8,716
Short term debt. . . . . . . . . . . . 713 866 1,163 921 265 290 158
Long term debt (less current portion). 93 47 31 1,380 2,112 2,062 223
Total debt . . . . . . . . . . . . . . 806 913 1,194 2,101 2,377 2,352 381
Total liabilities. . . . . . . . . . . 1,846 3,500 4,757 5,488 5,493 5,660 3,191
Shareholders' equity (deficit) . . . . (786) (2,069) (1,949) (2,415) (2,459) (1,795) 5,525
</TABLE>
(1) During 1996, the Company changed its fiscal year end for financial reporting
purposes to end June 30 from its former December 31 year end. Accordingly, the
summary financial and operating data includes financial results for the fiscal
year ended June 30, 1996 as well as the fiscal year ended December 31, 1995.
Thus, the results of operations for the six months ended December 31, 1995 are
included in both years. Net sales, gross profit, net loss, net loss per shares,
and weighted average common stock outstanding for the six month period ended
December 31, 1995 were $3,648,412; $1,777,230; $(440,057); $(0.10); and
4,542,247 shares, respectively.
(2) Does not include the effect of any options or warrants or SAB 83 stock, and
therefore represents only the actual outstanding stock at the end of the fiscal
year.
(3) As adjusted to reflect the sale of 725,000 shares of Common Stock by the
Company in connection with this offering and the application of the net proceeds
therefrom, assuming an initial public offering price of $12 per share. See "Use
of Proceeds."
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the financial condition and
results of operations of the Company for the fiscal years ended December 31,
1994 and 1995 and June 30, 1996 and for the three month periods ended September
30, 1995 and 1996. The following should be read in connection with the
financial statements and related notes appearing elsewhere herein. Certain
statements set forth herein are forward-looking and involve risks and
uncertainties. For information regarding potential factors that could have a
material adverse effect on the Company's business, operating results and
financial condition, refer to the "Risk Factors" section.
GENERAL OVERVIEW
The Company was formed in 1989 to exploit the juncture between the CD-ROM
industry, which was experiencing substantial revenue growth, and the development
of server technology, based at that time on the UNIX operating system. The
Company developed a core technology wrapped around CD technology, with the focus
being on high end, highly reliable solutions for CD access and CD recording. In
1993, the Company completed development of CD Studio, which not only achieved
significant sales for the Company but also received critical acclaim. The
Company has developed five additional products based on its core technology, and
has been the recipient of several awards in recent years.
Since its inception, the Company has suffered from chronic
undercapitalization. Although revenues increased dramatically each year from
1989 through 1994, increasing from approximately $39,000 in 1989 to over $7
million in 1994, the Company incurred losses in every year other than 1994 due
primarily to the substantial costs of developing products, the small size of the
Company relative to such costs, the costs related to discontinuing its
publishing operations, and the significant cost of borrowing money. The Company
has attempted to address its undercapitalization by borrowing money from various
related and unrelated third parties, which has had a substantial adverse effect
on its profitability. Interest expense represented 8.0%, 10.6% and 12.1% of net
sales for the years ended December 31, 1994, December 31, 1995 and June 30,
1996, respectively, and 12.7% and 5.6% of net sales for the three month periods
ended September 30, 1995 and 1996, respectively. Such interest expense exceeded
the Company's losses for each of the years ended December 31, 1995 and June 30,
1996. A significant amount of this interest expense has arisen as a result of
the Company's factoring agreement. The weighted average annual interest rates
from the Company's factoring activities were 59%, 38% and 43% for the years
ended December 31, 1994, December 31, 1995 and June 30, 1996, and 56% and 68%
for the quarters ended September 30, 1995 and 1996. Upon successful completion
of this offering, it is management's intention to replace this factoring
agreement with a line of credit containing more favorable borrowing terms, which
would significantly reduce the Company's interest expense in future periods.
Despite earning a modest profit in 1994, the Company incurred a substantial
loss during 1995, due in part to the departure in early 1995 of the Vice
President of Sales and approximately 50% of the sales force. The former Vice
President and three other former employees of the Company formed a business
which unsuccessfully attempted to compete with the Company. The Company's
business was substantially disrupted as a result. This disruption was
exacerbated by the lack of capital available to the Company at that time. As a
result of this lack of equity funding, the Company was forced to seek working
capital through an arrangement with a factor.
In early 1996, management began a substantial realignment and
reorganization of the Company, providing new focus on the expansion of sales and
marketing and the addition of a Vice President for research and development.
The results of such realignment and reorganization have begun to take effect
during the first quarter of fiscal 1997. No assurance can be given, however, as
to the amount of any net income, or, if net income is realized, whether
profitability can be sustained.
As a result of the operating losses incurred through September 30, 1996 in
connection with the development of the Company and its current product
achievements, the Company has federal net operating loss carryforwards of
approximately $2,975,000 as of September 30, 1996, which can be utilized to
offset future income. The net operating loss carryforwards expire at various
dates through 2011.
The CD-Recordable industry is in a rapid growth phase and there are supply
shortages from time to time, due to the inability of component vendors to
provide components as quickly as requested (generally, any delay would
11
<PAGE>
be less than one month). Rapid pricing changes and shortages of third party
hardware have slowed down Company shipments to customers. The Company believes
that CD-Recordable and Jukebox hardware are increasingly becoming commodity
items and that it will be extremely difficult to continue to create a
significant competitive advantage by reselling these items. Moreover, Company
sales may be affected by the economic conditions in the small computer industry
which may suffer from cyclical depressed business conditions.
The Company, through numerous Value Added Resellers ("VARs"), sells, and
anticipates that it will continue to sell, a significant amount of products to
the Federal Government and its agencies. The following table sets forth
information related to the Company's net sales to the Federal Government and its
agencies during the periods indicated:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------- ------------------
1994 1995 1996 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales to the Federal Government
and its agencies . . . . . . . . $2,175 $2,055 $1,635 $888 $1,601
Number of Federal Government
agencies serviced. . . . . . . . 51 51 57 23 16
Number of VARs making such sales 15 37 25 14 12
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------ ---------- ------------------
1994 1995 1996 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 39.4% 46.4% 46.8% 48.9% 40.3%
---- ---- ---- ---- ----
Gross profit 60.6% 53.6% 53.2% 51.1% 59.7%
Research and development 5.7% 5.2% 6.0% 5.4% 4.3%
Selling, general and administrative 40.2% 44.8% 49.2% 49.4% 33.7%
---- ---- ---- ---- ----
Income (loss) from operations 14.7% 3.6% (2.0)% (3.8)% 21.7%
Interest (8.0)% (10.6)% (12.1)% (12.7)% (5.6)%
Other income (expense) (5.4)% (2.9)% 1.3% (3.3)% 2.7%
---- ---- ---- ---- ----
Income (loss) before income taxes 1.3% (9.9)% (12.8)% (19.8)% 18.8%
Taxes benefit/(tax) 0.0% 0.0% 1.5% 0.0% 3.2%
---- ---- ---- ---- ----
Net income (loss) 1.3% (9.9)% (11.3)% (19.8)% 22.0%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
During 1996, the Company changed its fiscal year for financial reporting
purposes to end June 30 from its former December 31 year end. Thus, this
Prospectus includes financial results for the fiscal year ended June 30, 1996 as
well as the fiscal year ended December 31, 1995. Accordingly, the results of
operations for the six month period ended December 31, 1995 are included in both
years.
The following table sets forth unaudited operating data for each of the
specified quarters for the years ended December 31, 1995 and June 30, 1996, and
for the quarter ended September 30, 1996. This quarterly information has been
prepared on the same basis as the annual financial statements and, in the
opinion of management, contains all normal recurring adjustments necessary to
state fairly the information set forth herein. The unaudited quarterly
financial data presented below has not been subject to a review by BDO Seidman,
LLP, the Company's independent public accountants. The operating results for
any quarter are not necessarily indicative of results for any future period.
See the Financial Statements, the related notes thereto and other financial
information included herein.
12
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------
March June September December March June September
31, 1995 30, 1995 30, 1995 31, 1995 31, 1996 30, 1996 30, 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $1,453,586 $2,194,826 $1,625,971 $1,777,171 $2,125,060 $1,174,035 $3,099,531
Gross Profit 778,678 1,221,255 830,853 946,378 1,140,043 651,445 1,849,436
Net income (before taxes) (271,767) 12,281 (321,952) (117,479) 235,375 (656,285) 583,327
</TABLE>
The table of quarterly condensed operating activity shown above, due to
the Company's relatively constant overhead structure, is principally
fluctuating due to fluctuations in the Company's gross margin percentage and
net sales. The fluctuations in the quarterly gross margin percentage are due
to the differences in the Company's sales mix by quarter. Net sales for the
quarters from January 1995 through March 1996 remained in a range of
approximately $1.5 million to $2.2 million and were affected by the
following: the Company's continuous restructuring of its sales force which
occurred during 1995 and 1996, the Federal budget crisis and military
operations in Bosnia, which essentially halted government order during late
1995 and early 1996, and the quarterly ordering variances of the Company's
customers. During the quarter ended June 30, 1996, the Company completed its
sales force restructuring, which, due to the shifting of resources to this
effort during the quarter, caused sales to significantly decrease during this
quarter. The effects of this restructuring, as well as a significant
increase in sales to the Federal Government and its agencies through the
Company's value added resellers, caused the significant increase in sales
during the quarter ended September 30, 1996.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
NET SALES
Net sales for the quarter ended September 30, 1996 were $3,099,531, an
increase over the corresponding quarter one year prior of $1,473,598, or 90.6%.
Sales by type for the three months ended September 30, 1995 and 1996 are as
follows:
THREE MONTHS ENDED SEPTEMBER 30
-------------------------------
1995 1996
---- ----
Net Sales:
System sales $1,355,149 $2,882,609
Service revenue 270,882 216,922
---------- ----------
Total $1,625,971 $3,099,531
---------- ----------
The increase in system sales was due to an increase in unit sales of
approximately 250%, which was partially offset by a decrease in the weighted
average unit sales price of approximately 30%. This increase in sales volume
was due, in order of magnitude to the Company's ongoing increased investment
in its sales department, an increase in sales to the Federal Government and
its agencies of approximately $713,000, and an increase in demand for the
Company's products caused by a significant reduction in the list price of the
Company's CD Studio product. Service revenue for the three months ended
September 30, 1996 decreased slightly when compared to the same period in
1995 due to decreases in the Company's service contract list price.
GROSS PROFIT
The overall gross profit percentage increased to 59.7% during the three
months ended September 30, 1996, from 51.1% during the three months ended
September 30, 1995. Gross profit percentages by revenue stream for the three
months ended September 30, 1995 and 1996 are as follows:
THREE MONTHS ENDED SEPTEMBER 30
-------------------------------
1995 1996
---- ----
Gross Profit:
System sales 43.3% 57.1%
Service revenue 90.1% 93.8%
13
<PAGE>
The significant increase in system sales gross profit is principally due
to (i) decreases in the average cost of third party supplied hardware of
approximately 69% and (ii) a shift in the company's product mix, away from
selling low margin, third party supplied hardware to selling a higher
percentage of the Company's high margin, internally developed products. The
Company anticipates that it will continue to focus on improving its margins
in this manner in the future. The increase in the service revenue gross
profit percentage was primarily due to the continuously decreasing costs of
repairing units under service contracts.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense consists of salaries and related expenses
incurred in the development and maintenance of the Company's products, less
amounts capitalized related to the development of new products after
technological feasibility has been reached. The Company devotes a substantial
share of its engineering resources towards software development. The Company
capitalizes its new software development and amortizes these costs over a five
year life. Research and development expenses increased by $43,713, or 49%, to
$132,160 for the three months ended September 30, 1996 from $88,447 for the
three months ended September 30, 1995. In addition, the Company capitalized
software development costs of $198,305 and $162,091 during the three months
ended September 30, 1996 and 1995. As such, total research and development
expenditures were $330,465 and $250,538 for the three months ended September 30,
1996 and 1995. The capitalization rate of research and development expenditures
was relatively constant, 70% and 68%, for the three months ended September 30,
1996 and 1995, respectively. This high level of capitalization is due to the
Company continuing to augment its product line during these quarters. Research
and development expenditures and expenses decreased as a percentage of net
sales, from 15% and 5% for the three months ended September 30, 1995, to 11% and
4% for the three months ended September 30, 1996. This decrease is primarily
the result of the lag time that exists in planning and implementing new product
research and development programs and a significant increase in the Company's
net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased by $241,647, or 30%,
from $803,538 for the three months ended September 30, 1995 to $1,045,185 for
the three months ended September 30, 1996. The following table breaks down the
changes in selling versus general and administrative expense:
Three Months Ended Increase
September 30, (Decrease)
---------------------- ----------
1995 1996
---- ----
Selling . . . . . . . . . . . $ 296,707 $ 603,273 $ 306,566
General & Administrative. . . 506,831 441,912 (64,919)
---------- ---------- -----------
Total selling, general and
administrative. . . . . . . $ 803,538 $1,045,185 $ 241,647
General and administrative expense decreased year-to-year by over 13%,
which was primarily caused by a decrease in professional fees of approximately
$49,000. In addition, general and administrative expense decreased as a
percentage of net sales, from 31% to 14% due to the Company not altering its
overhead structure based on the favorable results of one quarter.
Selling expense increased by over $300,000, which was comprised of
increases in salaries of $70,000; sales commissions of $152,000; advertising
expense of $41,000; and trade show expenses of $34,000. These increases are due
to the Company allocating additional resources to its sales department, which
was the principal force driving the increase in net sales during the three
months ended September 30, 1996 as compared to the three months ended September
30, 1995. Selling expense as a percentage of net sales increased slightly to
20% from 18%. This increase is due to the factors discussed above.
INTEREST EXPENSE
Interest expense for the quarter ended September 30, 1996 was $173,978,
compared to $206,661 for the quarter ended September 30, 1995. The decrease in
interest expense of $32,683, or 16%, is primarily due to a
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decrease in the weighted average outstanding advances from the Company's factor
during the quarter ended September 30, 1996 versus the quarter ended September
30, 1995.
OTHER INCOME AND EXPENSE
Other income in the quarter ended September 30, 1996 totaled $85,214 and in
the quarter ended September 30, 1995 the comparable expense was $54,159. The
significant shift is due to the settlement of two lawsuits during the three
months ended September 30, 1996. The Company recognized other income of $95,500
and $21,000 from the reversal of a recorded liability and cancellation of shares
of Common Stock in accordance with the settlement.
COMPARISON OF THE YEARS ENDED JUNE 30, 1996 AND DECEMBER 31, 1995
NET SALES
Net sales for the year ended June 30, 1996 were $6,702,237, a decrease of
$349,317, or 5%, from net sales of $7,051,554 for year ended December 31, 1995.
Sales by type for the years ended December 31, 1995 and June 30, 1996 were as
follows:
Year Ended Year Ended
December 31, June 30,
1995 1996
------------ ----------
Net Sales:
System sales $6,347,827 $5,787,846
Service revenue 703,727 914,391
------------ ----------
Total $7,051,554 $6,702,237
------------ ----------
Total unit sales for Company products were virtually unchanged and the
weighted average unit price decreased by 5.4%. These decreases were caused
in order of magnitude, by lower-end competitors eroding the Company's market
share, the restructuring of the Company's sales force undertaken from
February through June of 1996 and the factors affecting the Federal
Government during the end of 1995 and early 1996. These factors included the
Federal budget crisis at the end of 1995 and the diversion of funds to
support military operations in Bosnia. The Company anticipates that Federal
Government agencies will continue to account for a significant percentage of
Company revenue in the foreseeable future. Accordingly, any reduction,
deferral of spending or significant government budget shifts may adversely
affect the Company's financial condition and results of operations. The
Company experienced a significant increase in service revenue during the year
ended June 30, 1996 compared to the year ended December 31, 1995 due to a
significant number of old and new customers purchasing extended service
contracts on Company products.
GROSS PROFIT
The overall gross profit percentage of 53.2% for the year ended June 30,
1996 was virtually unchanged from 53.6% achieved during the year ended December
31, 1995. Gross profit percentages by revenue type for the years ended December
31, 1995 and June 30, 1996 were as follows:
Year Ended Year Ended
December 31, June 30,
1995 1996
------------ ----------
Gross profit:
System sales 50.2% 47.6%
Service revenue 84.2% 88.7%
The Company was able to keep its gross margin percentage from system sales
relatively stable through a shift in the Company's product mix to products with
higher gross margins, and by negotiating with suppliers to ensure that the
Company was able to decrease its material costs in a similar ratio relative to
decreases the Company was experiencing in unit sales prices of individual
products. The slight increase in the gross profit percentage of service revenue
was due to a decrease in the cost of repairing broken units and a decline in the
percentage of units
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under service contracts requiring repair during the year ended June 30, 1996 as
compared to the year ended December 31, 1995. Gross profit was $3,568,719 for
year ended June 30, 1996 and $3,777,164 for the year ended December 31, 1995.
The decrease was due to the decrease in net sales.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense increased by $37,637, or 10%, to $402,560
for the year ended June 30, 1996 compared to $364,923 for the year ended
December 31, 1995. Total research and development expenditures during the year
ended June 30, 1996 were $1,122,077 compared to $1,083,904 for the year ended
December 31, 1995. Software capitalization for the year ended June 30, 1996 was
approximately $720,000 or 64% of total engineering expenditures and was
virtually the same ($719,000 or 66%) for the year ended December 31, 1995. This
high level of capitalization was due to the Company significantly increasing its
product line during these eighteen months including the development of MPS and
ULTRASTUDIO. Research and development expenditures and expenses increased as a
percentage of net sales, from 15% and 5% for the year ended December 31, 1995 to
17% and 6% for the year ended June 30, 1996. This increase is due primarily to
the decrease in sales experienced between these two years, while research and
development activity remained relatively steady over this eighteen month period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased $142,279, or 5%, for
the year ended June 30, 1996, compared to the year ended December 31, 1995.
Selling, general and administrative expenses were $3,299,405 for the year ended
June 30, 1996, compared to $3,157,126 for the year ended December 31, 1995. In
addition, these expenses increased to 49% of net sales during the year ended
June 30, 1996 as compared to 45% of net sales during the year ended December 31,
1995. This modest increase in dollars and as a percentage of sales reflects an
increase in the number of employees and the compensation per employee of the
sales and marketing staff, as well as increased legal fees related to the
defense and settlement of lawsuits in the first six months of calendar year
1996.
INTEREST EXPENSE
Interest expense increased by $61,654, or 8%, to $808,192 for the year
ended June 30, 1996 from $746,538 for the year ended December 31, 1995. This
increase is primarily due to interest expense incurred on notes payable
financing raised in the Company's private placement conducted from December 1995
through March 1996.
OTHER INCOME AND EXPENSE
The Company had other income of $81,097 for the year ended June 30, 1996 as
opposed to expense of $207,494 for the year ended December 31, 1995. In 1994,
the Company incurred transactional costs for financial consultants under
agreements which were terminated in 1995. In March of 1996, the Company
recovered $50,000 from a settlement of an outstanding legal matter and the
settlement of an outstanding liability for less than its recorded value.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
NET SALES
Net sales for the year ended December 31, 1995 were $7,051,554, a decrease
of $595,498, or 8%, from net sales of $7,647,052 for year ended December 31,
1994. Sales by type for such years were as follows:
Year Ended Year Ended
December 31, December 31,
1994 1995
------------ ------------
Net Sales:
System sales $6,576,773 $6,347,827
Service revenue 1,070,279 703,727
------------ ------------
Total $7,647,052 $7,051,554
------------ ------------
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Total unit sales for Company products declined by 5% and the weighted
average unit price decreased by 3%. These decreases were caused by lower-end
competitors eroding the Company's market share and the departure of the
Company's Vice President of Sales and approximately 50% of the Company's sales
force. The decrease in service revenue during 1995 is due to the Company
significantly reducing the price of its service contracts during the beginning
of 1995, which offset an increase in the number of contracts outstanding.
GROSS PROFIT
The Company's gross profit declined from $4,631,326 for the year ended
December 31, 1994 to $3,777,164 for the year ended December 31, 1995. The gross
profit percentage for the year ended December 31, 1995 declined to 53.6% from
60.6% achieved for the year ended December 31, 1994. Gross profit percentages
by revenue type for the years ended December 31, 1994 and 1995 were as follows:
Year Ended Year Ended
December 31, December 31
1994 1995
------------ ----------
Gross profit:
System sales 55.7% 50.2%
Service revenue 90.3% 84.2%
The decline in gross margin was primarily due to lower-end competitors
eroding the Company's gross margins achieved in selling its internally developed
products, in addition to the Company's market share discussed above, as well as
declining gross margins experienced from sales of third party hardware due to
less favorable pricing offered by these third party manufacturers. The decrease
in the gross profit percentage earned from service revenue during 1995 relative
to 1994 was due to the price reductions implemented by the Company on its
service contracts offsetting decreases in the costs to repair units under these
service contracts.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense decreased by $72,454, or 17%, to $364,923
for the year ended December 31, 1995 from $437,377 for the year ended December
31, 1994. Total research and development expenditures during the year ended
December 31, 1995 were $1,083,904 compared to $1,312,336 for the year ended
December 31, 1994. Software capitalization for the year ended December 31, 1995
was $718,981 and $874,959 for the year ended December 31, 1994. This high level
of capitalization was due to the Company significantly increasing its product
line during these years by adding SIMPLICD and ULTRACAPACITY in 1994 and
adding/developing MPS and ULTRASTUDIO in 1995. Research and development
expenditures and expenses decreased as a percentage of net sales, from 17% and
6% for the year ended December 31, 1994, to 15% and 5% for the year ended
December 31, 1995. This decrease was primarily due to a decrease in cash
available for research during 1995 as compared to 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased by $83,936, or 3%,
for the year ended December 31, 1995 compared to the year ended December 31,
1994. This was due to an increase of $94,000 in marketing and selling salaries
and related benefits. In addition, these expenses increased to 45% of net sales
during the year ended December 31, 1995 as compared to 40% of net sales during
the year ended December 31, 1994. This percentage increase was principally due
to the decrease in net sales over a similar overhead base in 1994 and 1995.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1995 was $746,538 which
represents a $136,696, or 22%, increase over the 1994 amount of $609,842. The
increase in 1995 was due primarily to interest expense incurred on the funds
received during the debt and equity private placement in 1995 and the additional
interest expense incurred related to the payroll taxes payable to the Internal
Revenue Service.
17
<PAGE>
OTHER EXPENSES
Other expenses were $207,494 for the year ended December 31, 1995 as
compared to $408,874 for the year ended December 31, 1994. Other expense
decreased by $201,380, or 49%, during 1995 due to the termination of certain
contracts with financial consultants and reduction in fees for others.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, June 30, 1996, and December 31, 1995, the Company
had negative working capital of approximately $2.2 million, $2.8 million and
$3.5 million and shareholders' deficiency of $1.8 million, $2.5 million and $2.4
million. The funding of the Company's operations and servicing of existing debt
is dependent upon increasing sales of its core products and extending payment
terms on various current liabilities. During the months of March 1996 through
June 1996, the Company hired a new Executive Vice President of Sales, who has
redefined the Company's approach to selling its products in conjunction with
hiring additional sales and marketing personnel to help bolster sales during
fiscal 1997. This redefinition of the Company's selling approach, from its
former regional, territorial approach, includes (1) securing sales agreements
with value added resellers in specific, targeted industries, (2) developing
relationships with targeted personnel in the Company's largest customers to
allow the Company to market its products horizontally and vertically within the
various divisions of these customers, (3) hiring a manager of government sales,
who is currently located in Washington, D.C., with experience in government
sales and moving sales and products through this environment, and (4) hiring a
manager of international sales to promote and sell the Company's products
worldwide. In addition to the above, the Company has established verbal
agreements with significant short-term creditors to allow for the repayment of
debts over periods in excess of one year on an as-needed basis. Based on the
above plans and their ongoing implementation, management believes that the
Company will maintain profitable operations and meet its obligations on a timely
basis.
In order to augment the Company's historically insufficient capital base,
repay certain outstanding debts and provide working capital, the Company
completed a $2,300,000 private placement of debt and equity during the third
quarter of fiscal 1996. The Company sold 92 units in the private placement,
with each unit consisting of one $20,000 note bearing an interest rate of 12%
per annum with all principal and interest due December 31, 1997, 5,000 shares
of Common Stock and 5,000 warrants granted at an exercise price of $1 per
share. All of the principal and interest from these notes are being repaid
with the proceeds of this public offering and 375,000 shares of Common Stock
issued in the private placement are being sold in this public offering.
The Company's principal capital requirements are to fund the expansion of
its internal sales department, increase advertising and marketing, increase
research and development of new products, and the development of worldwide
markets. Since its inception, the Company has been required on an ongoing basis
to finance a portion of its working capital needs. Additionally, developing and
launching new products has increased the working capital requirements of the
Company. The Company has historically satisfied its cash requirements through
unsecured related party and unrelated third party notes payable, and by
factoring purchase orders and accounts receivable. In addition, the Company
completed a private placement in March 1996 which generated net proceeds of
$2,011,250 and improved its working capital position at June 30, 1996. Upon
receipt of the proceeds of this offering, the Company will use a portion to
repay outstanding principal and accrued interest balances owed to its private
placement noteholders, and will no longer need to factor purchase orders and
accounts receivable. The Company also anticipates establishing a working
capital line of credit of approximately $1,000,000 to $3,000,000 upon successful
completion of the offering. The Company is currently in negotiation with two
banks regarding this line of credit; however, there can be no assurance that
the Company will obtain a Commitment from either bank.
The Company's cash balance increased by $93,983 for the three months ended
September 30, 1996 as compared to a decrease of $68,978 for the three months
ended September 30, 1995. During the three months ended September 30, 1996, the
primary factors contributing to cash flow were net income, after eliminating
non-cash activity, of $762,094, an increase in the advances from the factor of
$663,364, and an increase in accounts receivable of $1,274,451. During the
three months ended September 30, 1995, the primary factors contributing to cash
flow were a decrease in accounts receivable of $597,526 and a decrease in
accounts payable and various accrued liabilities of $276,208.
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<PAGE>
The Company experienced an increase in cash of $62,107 for the year ended
June 30, 1996, compared to no change in the Company's cash balance for the year
ended December 31, 1995 and a decrease in cash of $27,514 for the year ended
December 31, 1994. The primary factors contributing to the Company's cash flow
during fiscal 1996 were a decrease in accounts receivable of $717,088, purchases
of property and equipment and expenditures related to the development of
computer software aggregating $853,660 and net proceeds received from the
private placement of $2,011,250.
During the year ended December 31, 1995, the primary factors contributing
to cash flow were a decrease in accounts receivable of $681,063, expenditures
related to the development of computer software aggregating $718,981 and net
proceeds received from the private placement of $818,500.
During the year ended December 31, 1994, the primary factors contributing
to cash flow were net income, after removing non-cash activity, of $350,826,
purchases of property and equipment and expenditures related to the development
of computer software aggregating $974,809 and an increase in the Company's
outstanding payable balance to its factor of $754,806.
The Company has approximately $1,100,000 of net deferred tax assets, which
consist primarily of federal and state net operating losses, as of September 30,
1996. The net operating loss carryforwards expire in various years through
2011. The Tax Reform Act of 1986 contains provisions which limit the federal
net operating loss carryforwards available that can be used in any given year in
the event of certain occurrences, which include significant ownership changes.
Based upon the expected results of management's plans as discussed in Note 1 of
the Financial Statements and detailed within the Company's fiscal 1997 budgets,
management believes that it is more likely than not that $200,000 of the net
deferred tax asset will be realized. In order for the Company to realize this
$200,000 asset, the Company must generate future taxable income of approximately
$550,000 based on current enacted income tax rates. Due to management not being
able to conclude that it is more likely than not that the remaining deferred tax
assets will be realized, a valuation allowance has been recorded on these
remaining assets as of September 30, 1996.
The Company anticipates that the net proceeds from this offering, together
with cash flows generated by operations, should be adequate to meet operating
and capital needs for the next 18 months. However, see "Risk Factors - Possible
Need for Additional Funds."
NEW ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), issued by the Financial Accounting
Standards Board (FASB), is effective for specific transactions entered into
after December 15, 1995, while the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard established fair value method of accounting for
stock-based compensation plans and for transactions in which an entity acquires
goods or services from non-employees in exchange for equity instruments. At the
present time, the Company has not determined if it will change its accounting
policy for stock-based compensation or only provide the required financial
disclosures. As such, the impact on the Company's financial position and
results of operations is unknown.
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 125), issued by the Financial Accounting Standards Board (FASB), is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive applications are not permitted. The new
standard provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. The Company does not
expect adoption to have a material effect on its financial position or results
of operations.
19
<PAGE>
BUSINESS
GENERAL
Young Minds, Inc. (the "Company"), designs, develops, markets and sells a
comprehensive line of software products, embedded controllers, and related
services for creating, storing and accessing CD-ROM discs on computer
workstations and networks. The Company focuses on the development of
state-of-the-art software bundled with advanced recordable compact disc
("CD-R") drives and read-only compact disc ("CD-ROM") accessible storage
facilities for multiple discs (jukeboxes). These products facilitate the
rapid transfer of high volumes of information in a variety of computing
environments. The Company believes that it has achieved a strategic
advantage by introducing sophisticated, platform neutral, industry compliant
(ISO 9660) software solutions for mass storage.
The Company was recently awarded the "Kodak Integration Excellence" Award
(July 15, 1996), the Imaging Magazine "Product of the Year for 1995"
(January, 1996) Award, and "PC Magazine Editor's Choice" Award (May 17,
1994). In addition, the Company was selected as one of the 500 fastest
growing technology-based companies in the United States for 1996 (August
1996) and recognized as a member of the 1996 Southern California Technology
Fast 50 (July 8, 1996). The Company believes that, based on its reputation
for superior innovation, quality and product reliability, it has emerged as a
recognized leader in establishing the CD-R industry. The Company introduced
CD-R technology to a wide range of hardware and operating system
combinations. The Company participated with Sun Microsystems,
Hewlett-Packard, and Digital Equipment to establish the Rock Ridge Protocols,
now accepted as the industry standard. Based on these initiatives, the
Company believes that it is well positioned to maintain a leadership role
and actively participate in the ongoing development of industry standards.
The Company believes that this leadership will continue to impact the method
of storage and retrieval of large volumes of information within this rapidly
evolving market.
Philips Corporation has estimated that the market for CD-R technology will
increase from 200,000 units in 1995, to 2,000,000 in 1996 and 5,500,000 in
1997. These CD-R units are used in such key vertical markets as Government
Logistics, Banking, Medical Imaging and Engineering/Aerospace. To date the
Company has established itself as an innovator and early entrant in two key
market segments:
1. THE RAPIDLY GROWING CLIENT-SERVER MARKET WITH INDUSTRY-LEADING CD
RECORDABLE AND CD-ROM JUKEBOX SOFTWARE AND EMBEDDED SOLUTIONS BASED AT THE
SERVER AND FOCUSED ON MASS STORAGE SOLUTIONS
2. THE NETWORKED CD-ROM JUKEBOX AND AUTOMATED RECORDABLE DRIVE SUBSYSTEMS
MARKET WITH PRICE COMPETITIVE SOFTWARE SOLUTIONS.
INDUSTRY OVERVIEW
The Company believes that the CD Recorder is an output device equal in
importance to the laser printer. Documents "printed" on CD-R disks provide as
durable a record as documents printed on paper.
Most corporate information is currently stored on magnetic media, such as
hard disks, floppy disks and magnetic tape. Unlike CD-ROMs, magnetic media
is limited in usefulness by its fundamental properties. Magnetic Media is
mutable and therefore unsuitable for storing information with historical,
legal or other enduring significance. Secondly, tape, the most commonly used
archival medium, is particularly unsuitable for long term storage because it
deteriorates rapidly, resulting in a loss of reliability in as few as three
years.
Compared with CD-ROM, the cost of storing information on current random
access adaptations of magnetic media is relatively expensive. The cost per
megabyte of CD-R media is approximately three cents and falling rapidly,
compared with the cost of hard disk media which is currently approximated to be
$0.25 per megabyte. This cost differential is expected to widen further due to
the rapidly evolving technology surrounding CD-ROM density. In addition, other
direct and indirect expenses, such as periodic backups, increase the real cost
of hard disk data storage substantially.
The computing environment is becoming more reliant on complex local-area
networks ("LANs"), wide-area networks ("WANs") and the Internet. The increasing
connectivity of computing environments points to the need for increasingly
powerful, cost-effective data servers with attributes which are not available on
existing hard disk file servers in use today.
20
<PAGE>
More complex and data intensive forms of information are now being stored
and accessed across networks and occupying an increasingly large share of the
data storage capacity. These newer forms of data, such as video, audio and
complex images, require far greater storage capacity. This development has
resulted in increasing employment of CD-ROM jukeboxes for data storage and
retrieval.
THE MARKET OPPORTUNITY
These market dynamics require a standardized, inexpensive, compact, durable
and reliable method for mass storage and output. Accordingly, the demand for
CD-R and mass storage CD-ROM jukeboxes is in a rapid growth phase.
Among the industries with a current need for storing large amounts of
critical information are the following:
1) Banking - Check image management and credit card
transactions.
2) Medical Imaging - Storing results of MRI, CAT scans and
other non-invasive procedures.
3) Government - Data, document and logistics management.
4) Engineering/Aerospace- Storage of historical design and
engineering change documentation, and
manual production.
5) Telecommunications - Account management (bills and records)
for large-volume customers.
COMPANY BUSINESS STRATEGY
The Company's strategy is to serve the markets for CD-ROM Jukeboxes and CD
Recorders through its proprietary software and embedded controller technology.
The Company's products have been developed to operate on a broad range of widely
used computer platforms. The Company believes that its platform neutrality is
unique in the industry, using a combination of highly portable software and
platform independent intelligent controller technology. This approach enables
the Company to introduce new products quickly, in contrast to most other
companies, who must develop a separate driver for each hardware-operating system
combination.
As a significant worldwide supplier of CD-ROM recording and mass storage
capabilities for networks and single-users, the Company will continue to
implement the following business strategies:
THIRD PARTY DISTRIBUTION CHANNEL RELATIONSHIPS WITH VERTICAL MARKET FOCUS.
Through the Company's focus on the Vertical Markets described above, the Company
is expanding Reseller relationships in order to better serve the growing market
for high value automated CD-R systems.
PLATFORM NEUTRALITY (OPEN ARCHITECTURE) AND EXPANSION CAPABILITY. The
Company's product offerings are designed for seamless integration between the
hardware and operating systems (UNIX, Windows 95, Windows NT and OS/2)
eliminating the costly requirement for driver generation. The Company believes
that this flexibility and open architecture is critical to broad market
penetration.
TECHNOLOGICAL ADVANTAGE AND CLEAR UPGRADE PATH. The Company's strategy is
to continue to develop new software and systems incorporating the latest
developments in software, systems and networking technology. Additionally, the
ability of the Company's technical leadership to design each product generation
anticipating and geared to supporting the next three to four generations of data
storage technology is critical. The Company's history, heretofore, in terms of
the successful introduction of state-of-the-art products, as well as its
involvement in the definition of industry standards, demonstrates the importance
of a clear design path/philosophy.
PRODUCT-TO-MARKET TIME ADVANTAGE. In the fast paced computer industry, the
window of opportunity for launching new products and capturing a new market can
be measured in months, not years. The Company intends to leverage its core
technology in order to expand product offerings and increase market penetration.
See "Use of Proceeds."
21
<PAGE>
CUSTOMER SERVICE FOCUS. The Company believes that superior technical
support is its most significant resource for achieving customer satisfaction and
loyalty. The Company has three qualified senior support engineers and expects
to hire several more over the next year as the customer base expands.
INDUSTRY STANDARDS-LEADERSHIP ROLE. To date the Company has worked with
such major companies as Sony, Toshiba, Kodak, IBM, Sun Microsystems and
Hewlett-Packard in establishing industry standards. Andrew J .Young, a
Company Founder (see Key Personnel) is recognized as an industry leader and
continues to actively participate in defining the evolving standards.
PRODUCTS
To date the Company has released the following six product lines based on
its proprietary technology. All are based on reusable code design and are
marketed as follows:
CD STUDIO provides a cost effective method for desktop recording on CD-R
discs. The Company is the dominant supplier of CD-R product to the Unix market
and was awarded the "Product of the Year for 1995" by Imaging Magazine for CD
STUDIO. CD STUDIO operates with substantially all of the leading CD writers
including those from Philips, Yamaha, Kodak and Sony, and across all major
versions of the Unix operating system. Versions are also available for Windows
NT and OS/2. CD STUDIO works with a multitude of solutions provided by company
resellers. CD STUDIO is used in applications requiring a cost effective means
to rapidly produce a limited quantity of CD's, typically for archival or backup
applications, and custom or beta publishing.
MPS provides automated, high volume production of unique CD-R images. MPS
utilizes and expands on the support for high-end CD writers, autoloaders and
disc label printers offered by Young Minds' CD STUDIO product while delivering
greatly enhanced performance. This design allows networked users to fully
utilize the capabilities of current, high speed automated CD writer equipment.
It will also support High Speed automated DVD recorders when they become
available. MPS recently received the "Kodak Integration Excellence" Award.
ULTRACAPACITY is the Company's CD-ROM storage and retrieval system. It
enables network users to access up to 1,300 GB of information (1.3 trillion
letters or digits), centrally stored in a single CD-ROM jukebox. ULTRACAPACITY
offers the ability to expand support to multiple jukeboxes from a single server.
It is platform neutral and can support a wide range of client/server computing
environments. ULTRACAPACITY can be sold as part of a bundle that includes a
jukebox or as stand alone software.
ULTRASTUDIO combines the capabilities of CD-R and jukebox management to
allow integrated CD recording within a jukebox. ULTRASTUDIO enables a single
server to simultaneously record new CD-R discs and allow network users to access
existing recorded discs. As soon as a new disc is recorded it can be made
immediately available for user access.
SIMPLICD is the Windows version of the Company's CD-R software. SIMPLICD
links directly to Windows file-management utilities enabling desktop users to
assemble data and to store it on CD-R discs by importing files and directories,
or by using drag and drop techniques from within the Windows file manager. In
1994, SIMPLICD received the PC Magazine Editors Choice Award for Windows PC CD-R
premastering.
AUTOCDR is an automated, high volume, network-based CD-R production system
that permits multiple network users to record CD-R discs. Conceptually, AUTOCDR
is similar to a network print server in that AUTOCDR software polls the network
seeking CD-R write commands and places a prepared job in the CD-R recording
queue. The AUTOCDR system uses automated CD-R systems that hold up to 75 blank
CDs with recorder speeds up to 6X. This is roughly the output equivalent of up
to 20,000 pages of data per minute.
In addition, the Company is addressing the increased need for data security
technology. The Company has recognized the applications of CD-R and CD-ROM
jukebox technology to this area and has products currently under development
intended to address this need.
PRODUCT DISTRIBUTION
Historically, the Company has relied on its own direct sales force for the
distribution of its products. This strategy has been utilized for two reasons:
1) the products are complex and sales success has depended on the level
22
<PAGE>
of training and sophistication of its sales representatives; and 2), the Company
desired to maintain direct contact with its customer base which is comprised
predominantly of Fortune 500 companies and government agencies.
Additionally, within the last 24 months, the Company has been increasing
the distribution of its products through strategic relationships with VARs such
as Unisys, IACorp and BTG. By expanding the role of its sales force to include
the support of its resellers, the Company has been able to fully participate in
the rapidly expanding market.
MARKETING AND SALES
The Company's current marketing strategy is to focus on its target vertical
markets and the management of major accounts. Its primary market targets are:
banking - check image management and credit card transactions; medical imaging -
storing results of MRI and CAT scans and other non-invasive procedures;
government - data, document and logistics management; engineering/aerospace -
storage of historical design and engineering change documentation, and manual
production; and telecommunications - account management (bills and records) for
large volume customers.
The Company promotes its products through direct sales, direct mail,
exhibiting at trade shows, participating in conferences, and industry-wide
publicity.
The Company consults with its Resellers to assist in identifying potential
enhancements and new products. The Company also focuses on additional methods to
promote its products, including product refinement, new product introduction and
competitive pricing, all with the goal of increasing the distribution of the
Company's products. Following the completion of this offering, the Company
intends to commence more significant marketing activities, including targeted
trade advertising and public relations. See "Use of Proceeds."
The objective of the Company's marketing strategy is to position the
Company as the dominant leader in state-of-the-art mass storage technology.
The Company believes that, for the next seven to ten years or more, the
state-of-the-art in mass storage will be CD-ROM, DVD-ROM, optical WORM
(write-once-read-many) and magneto-optical media. The Company plans to lead
the expansion of the CD and DVD storage markets by attempting to capture some
areas currently held by optical disc and tape library markets as well as
providing systems to replace microfilm and paper outputs for complex
documents.
During the early stage of a product life cycle, it is the Company's goal
to price its products to value rather than cost. In the current environment,
it is the Company's belief that its customers perceive a substantial cost
advantage to CD-R and CD-ROM jukebox technology over existing mass storage
alternatives due in substantial part to the significantly reduced space
required to store large volumes of documents. As CD-R and CD-ROM jukeboxes
become more prevalent and approach a commodity status, the Company will be
forced to move towards competitive pricing, which may have an adverse effect
on Gross Margins. The Company therefore intends to upgrade products regularly
and to introduce a steady stream of new, innovative products, again pricing
to value as the market allows.
The Company's marketing and sales staff currently consists of 21
individuals reporting directly to the Executive VP Sales and Marketing.
Commissions for sales representatives are established by a product and product
category basis. The Company intends to increase its sales force by
approximately one-third during fiscal year 1997, through external recruitment
and the training and promotion of its employees.
The sales staff is augmented by ten sales engineering and sales support
personnel. The Company's technical support staff currently consists of three
people responsible for telephonic and field support. The Company intends to
increase its technical support staff consistent with customer support
requirements. See "Use of Proceeds."
MANUFACTURING
The Company's manufacturing consists of light assembly of off-the-shelf
components to produce its proprietary embedded controller for both CD STUDIO,
MPS, and ULTRASTUDIO products. The Company purchases supplies from third party
manufacturers. The Company believes that it would not be materially adversely
affected by the loss of any of its suppliers, all of which could be replaced,
and that such loss would not negatively impair the results of its operations.
The Company employs three assemblers and intends to add two additional
assemblers during Fiscal Year 1997.
23
<PAGE>
QUALITY CONTROL
The Company performs full functionality testing on all third party system
components. Additionally, the Company performs extensive burn in and quality
control on all internally assembled products. This addresses standards for
conformity, consistency and functionality. Prior to shipping, the Company
performs a completeness inspection of all shipments.
BACKLOG
The Company's approximate backlog at December 31, 1994, December 31,
1995, June 30, 1996 and September 30, 1996 was respectively $200,887,
$489,209, $255,406 and $299,433. No end-user of the Company accounts for
more than 5% of its sales revenues (although two resellers have accounted for
more than this percent of sales revenues) and the Company believes that the
loss of any single customer would not have a material adverse effect on the
results of its operations.
RESEARCH AND DEVELOPMENT
Eleven employees work in research and development of software products.
The Company utilizes object oriented architecture in its research and
development activities. Under this approach, researchers and developers utilize
previously created programming modules, thereby eliminating the time and expense
of rewriting large numbers of lines of programming code. The current development
effort is focused on expanding the breadth and depth of the Company's core
technologies as well as the development of new products. The Company expended
approximately $1,312,000, $1,084,000 and $1,122,000 (of which $874,959, $718,981
and $719,517 was capitalized), respectively, during its fiscal years ended
December 31, 1994, December 31,1995 and June 30, 1996 on research and
development. These amounts constituted respectively 17.1%, 15.3% and 16.7% of
the Company's gross revenues during such fiscal years. For the quarter ended
September 30, 1996, the Company expended approximately $330,000 (of which
$198,305 was capitalized) on research and development, which constituted
10.7% of the Company's gross revenues for such quarter. The Company intends to
use a portion of the net proceeds from this offering to intensify its research
and development program. See "Use of Proceeds."
INTELLECTUAL PROPERTY
The Company relies primarily on a combination of nondisclosure
agreements, copyright law and trade secret law to protect its intellectual
property. The Company holds no patents and believes that its competitive
position is not materially dependent upon patent protection due to the fact
that most software is not considered patentable today as well as that the
time required to obtain a patent, can be longer than the anticipated product
life for the Company's products. However, the Company constantly evaluates
new technological opportunities for patentability and may in the future seek
patents when that is the appropriate form of protection. In most cases, the
Company distributes its products under shrink-wrap software license
agreements. This allows end-users to use the Company products and contains
various provisions to protect the Company's underlying technology.
Shrink-wrap licenses, which are not signed by the end-user, may be
unenforceable in certain jurisdictions. The Company also requires its
employees and other parties with access to its confidential information to
execute agreements prohibiting the unauthorized use or disclosure of the
Company's technology. Despite these precautions, it is possible for a third
party to misappropriate the Company's technology or to independently develop
similar technology.
The Company intends to make all appropriate filings and registrations, and
take all other actions necessary, to obtain and protect all trademarks,
copyrights, tradenames and all other intellectual property rights relating to
the Company's products. Management believes that no single copyright, patent or
technology license is material to the Company's business.
The Company believes that, due to the rapid pace of technological
innovation in the CD-ROM industry, the Company's ability to establish and
maintain a position of technological leadership in the CD-ROM industry is more
dependent upon the skills of its development personnel than upon the legal
protection afforded its existing technology.
COMPETITION
The market for the Company's products is highly competitive and the Company
expects this competition to increase as CD-R drives and CD-ROM jukeboxes become
more universally applied. The principal elements of the competition in the
Company's markets include product features, performance, price, quality,
reliability, brand awareness, platform neutrality and level of customer service.
The Company's competitors, as well as certain potential competitors, may be more
established, benefit from greater name recognition, have significantly greater
24
<PAGE>
financial, technological, production and marketing resources, and have more
extensive distribution networks than the Company.
The Company believes that its platform neutrality is an important
competitive element. The Company also believes that the number of competitors
incorporating platform neutrality into their product offerings will grow over
the next several years. The Company anticipates that a significant source of
such future competition may be from existing competitors that are attempting to
develop a product offering similar platform neutrality. The sales, marketing,
product development and financial resources of the Company's competitors are
becoming greater. As a result, the Company anticipates that the efforts of and
competition from these competitors will intensify in the future. In order to
overcome the effect of these competitors on the market, the Company will need
to attain sufficient size and to have the resources to timely develop new
products in response to evolving technology and customer demands. The Company
believes it will need to sell products through a broad distribution channel in
competition with these existing and potential competitors. No assurance can be
given that the Company will be able to grow sufficiently to enable it to compete
effectively in this marketplace.
The Company's competitors include Adaptec, Meridian Data, Smart Storage
and Elektroson. Adaptec sells CD-R devices for desktop computers in Windows
and Windows 95 only, at a lower price than the Company's products; Meridian
sells networked CD-R products for Novell and Windows NT only, at prices
generally comparable to the Company's products; Smart Storage sells jukebox
management software and resells CD-R software for the Unix and Novell
markets, at a price slightly less than the Company's products; and
Elektroson provides products for desktop Windows and Unix markets, at a lower
price than the Company's products. Although the Company believes that it
currently has a competitive advantage with respect to these competitors from
a technological standpoint, including platform neutrality, there can be no
assurance that the Company will be able to maintain its competitive advantage
or that these existing competitors, or new competitors, will not develop
competitive products utilizing platform neutrality and with favorable
pricing. Moreover, the Company currently has little or no proprietary
barriers to entry that could keep a competitor from developing similar
products and technology or selling competing products in the Company's
markets.
PERSONNEL
The Company currently employs 54 full-time employees, consisting of the
following: 7 in management, administration and finance, 12 in operations, 21 in
sales and marketing, 3 in customer support, and 11 in research and development.
In addition, the Company employs three part-time employees, 2 in research and
development and 1 in operations. None of the Company's employees are
represented by a labor union and the Company believes that its employee
relations are satisfactory.
PROPERTY AND EQUIPMENT
The Company occupies an aggregate of approximately 15,000 square feet of
office and operations space in three adjacent modern office and light
industrial buildings in an office park in Redlands, California. The
Company's occupancy is on a month-to-month basis and provides for a monthly
gross rental of $14,000. There is considerable available space in this park
and in the immediately surrounding area and the Company believes that it will
be able to continue its present occupancy under its present terms on an
indefinite basis, although there can be no assurance that this will be the
case. The Company has begun to explore alternative business space, both in
the area of its present space and in other locations in California, for the
purpose of consolidating its administrative and operating activities in a
single facility and to accommodate its anticipated growth.
The Company both owns and borrows its equipment, in approximately equal
amounts. The loans of equipment are normally made by manufacturers or customers
in conjunction with software requirements being handled by the Company. The
equipment, both owned and borrowed, includes operating system and application
software, computers, computer printers, testing equipment, CD-R and CD-ROM
drives, scanners, jukeboxes, telecommunications and networking equipment, and
other peripheral computer equipment.
The Company considers both its real estate facilities and its equipment as
currently satisfactory for its needs.
LEGAL PROCEEDINGS
The Company has been sued by Irving Ayash and his company, ANON, Inc.
(collectively, "Ayash") purportedly pursuant to two alleged contracts between
Ayash and the Company under which Ayash promised, among other things, to
procure financing for the Company in exchange for certain commissions and
stock warrants. Ayash is seeking approximately $50,000 plus 100,000 warrants
to purchase the Company's stock at 0.40 per share. The Company believes that
Ayash's claims are completely without merit and intends to vigorously defend
the suit. There can be no assurance, however, that the Company will prevail
in the litigation.
The Company has been advised by a former lender, Cove Capital Corp.
("Cove"), that Cove is entitled to a significant unspecified number of
warrants to purchase Common Stock because the Company was late in repaying
the loan, even though the loan document does not provide any such penalty in
the event of late repayment. The Company believes that the claims are
completely without merit and intends to vigorously defend any litigation
instituted by Cove. There can be no assurance, however, that the Company
will prevail in any litigation.
25
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the executive
officers, directors and key employees of the Company.
Name Age Position
---- --- --------
Andrew J. Young 37 Chairman of the Board of Directors,
Secretary and Treasurer
David H. Cote 53 President, Chief Executive Officer and
Director
Matthew Hornbeck 29 Executive Vice President
Gerald Quealy 49 Executive Vice President, Sales and Marketing
and Director
Patrick Fisher 42 Vice President, Development and Operations
All directors hold office until the next annual meeting of shareholders and
until their successors have been elected and qualified. Officers serve at the
discretion of the Board of Directors. No family relationship exists between
any director or executive officer of the Company. The Board of Directors
intends to elect two persons who are not affiliates of the Company as directors,
who will be members of the Compensation Committee and the Audit Committee. No
decisions have been made at this time as to who will be elected. The Company
also is searching at this time for a chief financial and accounting officer.
The following is a brief description of the business experience of each
director and executive of the Company during the past five years.
Andrew J. Young has been the Company's Chairman of the Board of Directors
since its formation in 1989 and is a founder of the Company. From the formation
of the Company in 1989 until September 1995, Mr. Young also was President of the
Company, and has served as a director of the Company since its formation. He is
primarily responsible for maintaining Company contacts with software and
hardware developers and initiating Company research and development. Mr. Young
also served on the executive committee of the Institute of Electrical and
Electronic Engineers (IEEE) Standards Committee on Optical Disc and Multimedia
Platforms. He is a prominent figure in the CD-R industry. He is the
principal author of the Rock Ridge Interchange Protocol, the de facto format
standard for Unix CD-ROM publications. From 1984 to 1989, Mr. Young was an
Assistant Professor of Mathematics at Glendale Community College. He obtained
an M.A. in Mathematics from the University of California, San Diego and a B.S.
in Mathematics from the University of California, Irvine.
David H. Cote has been the Chief Executive Officer of the Company for more
than the past five years and President since September 1995, and also is a
founder of the Company. He has served as an executive officer and a director of
the Company since its formation in 1989. Until August 1994, Mr. Cote was the
Chief Financial Officer of the Company. He provides leadership and direction to
the Company's diverse team of managerial and technical staff, including
planning, product research and development, marketing, sales campaigns,
production planning and control.
Matthew Hornbeck, also a founder of the Company, has been an executive
officer since 1989 and currently serves as Executive Vice President of the
Company. Mr. Hornbeck is directly responsible for new product research. In this
capacity he developed the initial code for CD STUDIO, the Company's flagship
product, and continues to provide technical guidance on the development of new
versions of CD STUDIO and ULTRASTUDIO. Mr. Hornbeck obtained a B.S. in
Computer Science from the University of California at Riverside.
Gerald Quealy has served as Executive Vice President, Sales for the Company
since February 1996, and was elected to the Board of Directors of the Company in
August 1996. Mr. Quealy brings 18 years of
26
<PAGE>
management experience in high technology to his position. From March 1995 to
November 1995, he was Regional Sales Manager of Equifax Check Services, which
provided check guarantee service to merchants, and from August 1993 until March
1995 he was National Sales Manager of Data Rentals & Sales (a division of
Electro Rent Corp.). Prior thereto, he was National Sales/Marketing Manager
from November 1992 to August 1993 for Atoll Holdings, Inc., which markets high
technology "niche" products to the food market, payroll processing and digital
imaging industries. Mr. Quealy also served as Vice President,
Marketing/Production, for G&S Industries, Inc. (costume jewelry and pre-printed
apparel) from October 1988 to November 1992. Mr. Quealy holds an Associate of
Arts, Liberal Arts degree from Iowa Central University and was an honor graduate
of the U.S. Army Military Instructor School.
Patrick Fisher has been Vice President, Development and Operations since
August 1996. From May 1995 to February 1996 Mr. Fisher was a Senior Systems
Engineer with RF Microsystems, which provided engineering support to the U.S.
Air Force in developmental and initial operational testing and from July 1995 to
January 1996 he operated Acumenics Research & Technology, Incorporated, which
provided engineering reports to the U.S. Air Force in support of litigation.
From June 1993 to July 1995 he was Chief of Engineering, Litigation Support
Team, U.S. Air Force and from September 1991 to June 1993 he was Space Systems
Engineering Manager, U.S. Air Force, where he was responsible for acquisition,
development and installation for three satellite communications systems. Mr.
Fisher received a Masters of Business Administration degree from Golden State
University in 1992 and a Bachelor of Science degree in electrical and electronic
engineering from California State University, Sacrament.
The Company's directors currently do not receive any cash compensation for
service on the Board of Directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at Board and
committee meetings.
EXECUTIVE REMUNERATION
The following table sets forth the compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during the twelve
months ended June 30, 1996 by the Company's Chief Executive Officer and the
Company's other most highly compensated executive officers whose total annual
salary and bonus exceeded $100,000 during such fiscal year (the "Named
Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER ANNUAL
--------------------------- ----- ----- COMPENSATION (1) (2)
--------------------
<S> <C> <C> <C>
David H. Cote
President and Chief Executive Officer $107,608 $5,500 $8 652 (3)
Andrew J. Young
Chairman of the Board, Secretary and
Treasurer 99,108 5,500 8,652 (3)
Matthew Hornbeck
Executive Vice President 99,108 5,500 8,654 (3)
</TABLE>
- --------------------
(1) Does not include dollar value of perquisites and other personal benefits
furnished to the Named Officers, including premiums for health insurance, life
insurance and other personal benefits provided to such individuals in connection
with their employment. The value of such benefits and other compensation to
such individuals did not exceed the lesser of $50,000 or 10% of such officers'
cash compensation.
(2) There were no grants of stock options, stock appreciation rights, or stock
options granted in tandem with stock appreciation rights made by the Company
during the twelve months ended June 30, 1996 to the Named Officers, and there
were no exercises by any of the Named Officers of any stock options, stock
appreciation rights or stock options granted in tandem with stock appreciation
rights during the twelve months ended June 30, 1996.
(3) Represents the price paid by the Company to purchase 200 hours of accrued
and unused personal time off from each of the Named Officers.
27
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Young,
Cote and Hornbeck providing for three-year terms of employment. Under the
agreement with Mr. Cote, he will receive an annual salary of $150,000, plus
annual increases, which increases may not be less than 10% of the preceding
year's salary, and such incentive compensation as the Board of Directors
determines. Under the agreements with Messrs. Young and Hornbeck, each of
them will receive an annual salary of $120,000, plus annual increases, which
increases may not be less than 10% of the preceding year's salary, and such
incentive compensation, which may not be less than $30,000 for the fiscal
year ending June 30, 1997 if the Company is profitable for such year, as the
Board of Directors determines. Such officers will also be entitled to such
other benefits, including medical, insurance and death and disability
benefits, as are available to executive officers of the Company generally, as
well as automobile expense allowances and reasonable expense allowances.
Messrs. Young, Cote and Hornbeck currently receive five weeks per year
of personal time off ("PTO"), which can be used for either illness or
vacation. Unused PTO can be accrued by these officers. During the twelve
months ended June 30, 1996, the Company purchased 200 hours of accrued PTO
from each of these persons. See "Management - Executive Compensation." As
of the date of this Prospectus, Messrs. Young, Cote and Hornbeck had
approximately 900, 1,100 and 1,200 hours of accrued PTO, respectively.
As part of the terms of the employment of Gerald Quealy by the Company
in February 1996, the Company issued to Mr. Quealy warrants to purchase
30,000 shares of Common Stock at an exercise price of $1.00 per share. One
third of the warrants vest after 12 months of employment, one third vest
after 18 months of employment, and the balance vest after 24 months of
employment. The warrants are exercisable for five years.
STOCK OPTION AND STOCK PURCHASE PLANS
As of the date of this Prospectus, the Company's Board of Directors had
not adopted any stock option, stock purchase or similar plans. However, it
is anticipated that the Board will consider the adoption of one or more such
plans during fiscal 1997. Shareholder approval may be sought for any plan
adopted by the Board, but is not required.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation limit the liability of the
Company's directors for monetary damages to the fullest extent permitted
under California law. The Articles authorize the Company to indemnify its
agents in excess of the indemnification otherwise permitted by Section 317 of
the California General Corporation Law, subject only to the applicable limits
set forth in Section 204 of the California General Corporation Law with
respect to actions for breach of duty to the corporation and its
shareholders. The Company's Bylaws provide that the Company shall indemnify
Company agents to the fullest extent permitted by law.
28
<PAGE>
CERTAIN TRANSACTIONS
On April 18, 1995, the Company made loans, evidenced by promissory
notes, to three officers of the Company, Andrew J. Young, David H. Cote and
Matthew Hornbeck. Each loan was in the principal amount of $62,500 and was
for a ten-year term bearing interest at the annual rate of 7.53%, with
principal and interest due at maturity. The proceeds were used by each of the
officers to purchase 250,000 shares of Common Stock at a purchase price of
$0.25 per share. Each loan is secured by a pledge of 250,000 shares of
Common Stock of the Company.
On May 31, 1995, the Company made a loan of $3,750, evidenced by a
promissory note, to Genene G. Miller, an employee of the Company and the wife
of David H. Cote. The proceeds were used by Ms. Miller to purchase 75,000
shares of Common Stock at a purchase price of $0.05 per share. The note
bears interest at the annual rate of 7.53%, with the principal and accrued
interest due on May 31, 2005. The loan is secured by the 75,000 shares of
Common Stock.
On December 28, 1995, the Company made loans, evidenced by promissory
notes to three officers of the Company, Andrew J. Young, David H. Cote and
Matthew Hornbeck, in the principal amount of $120,000, $60,000 and $90,000,
respectively. The loans are for a ten-year term, bearing interest at the
annual rate of 7.53%, with principal and interest due at maturity. The
proceeds were used by each of the officers to purchase shares of Common Stock
at a purchase price of $3.00 per share. Each loan is secured by a pledge of
the purchased shares.
Certain of the officers of the Company (Mr. David H. Cote, Mr. Andrew J.
Young and Matthew Hornbeck), and certain relatives of these persons (Mr.
Cote's wife, a cousin of Mr. Cote's wife, Mr. Young's mother, Mr. Young's
father, and two aunts of Mr. Young), have either loaned money to the Company
or provided a guaranty for the repayment of loans by the Company. As of
September 30, 1996, approximately $ was owed to such persons for unpaid
principal and interest on loans made to the Company.
Between September 1994 and September 1995, Joseph O. Young, the father
of Andrew J. Young, was issued warrants to purchase an aggregate of 127,500
shares of Common Stock for a five-year term at a per share price ranging from
$0.50 to $1.00. At the time of the issuance of the warrants, their exercise
price was significantly higher than the per share book value of the Common
Stock.
Between August 1994 and September 1995, Nancy Young, the mother of
Andrew J. Young, was issued warrants to purchase an aggregate of 18,500
shares of Common Stock for a five-year term at a per share price ranging from
$0.50 to $1.00. At the time of the issuance of the warrants, their exercise
price was significantly higher than the per share book value of the Common
Stock.
Between December 1995 and March 1996, the Company sold 92 units, each
unit consisting of one $20,000 note, 5,000 shares of Common Stock and 5,000
warrants (with an exercise price of $1 per share), for $25,000 per unit. As
part of this sale, the Company issued units in exchange for the cancellation
of indebtedness owed by the Company to five individuals, including five units
to Andrew J. Young, one unit to Genene Miller, the spouse of David H. Cote,
and three units to Nancy Young, the mother of Andrew J.
Young.
After the date of this Prospectus, the Company will not enter into new
transactions with related parties unless such transactions are approved by a
majority of the disinterested directors present at a meeting of the Board of
Directors.
29
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 30, 1996 and as
adjusted to reflect the sale of the shares of Common Stock offered hereby by (i)
each person known by the Company to own beneficially more than 5% of the
outstanding amount of Common Stock, (ii) each director and the Named Executive
Officers of the Company, (iii) all directors and executive officers of the
Company as a group, and (iv) the Selling Shareholders.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Owned
Prior to Offering (2)(3) Shares to After Offering (2)(3)
------------------------ Be Sold ---------------------
Name and Address of Beneficial Owner (1) Number Percent in Offering Number Percent
- ---------------------------------------- ---------- ------- ----------- ------ -------
<S> <C> <C> <C> <C> <C>
Andrew J. Young (4) 618,698 18.8% ___ 618,698 15.4%
David H. Cote (5) 442,588 13.5% ___ 442,588 11.1%
Matthew Hornbeck 550,694 16.8% ___ 550,694 13.8%
Gerald Quealy (6) 0 * ___ 0 *
Patricia Brafford 10,000 * 10,000 0 *
Wade A. Brotherson 5,000 * 5,000 0 *
Antonio Califano 10,000 * 10,000 0 *
Biagio Califano 10,000 * 10,000 0 *
Ming-Schyong Chen 75,000 2.3% 75,000 0 *
DeSantis & Spinelli, Esq. 15,000 * 15,000 0 *
Dr. Anthony G, Dimatteo 5,000 * 5,000 0 *
Richard H. Fagin 5,000 * 5,000 0 *
Jo Anne Kast 5,000 * 5,000 0 *
KPM, Inc. 100,000 3.1% 100,000 0 *
Robert G. Lerch 15,000 * 15,000 0 *
Etienne P. Lizzi 5,000 * 5,000 0 *
Arthur W. Morgan 5,000 * 5,000 0 *
Dr. S. Edwin Noffel 5,000 * 5,000 0 *
Les Rogoff 5,000 * 5,000 0 *
Francesco Romano 25,000 * 25,000 0 *
Kenneth B. Rowan 30,000 * 30,000 0 *
Vincent Santa Maria 5,000 * 5,000 0 *
Randall K. Schick 5,000 * 5,000 0 *
Moses Siedler 5,000 * 5,000 0 *
Robert F. Sullivan 5,000 * 5,000 0 *
John J. Tack 5,000 * 5,000 0 *
Richard J. Tienken 5,000 * 5,000 0 *
Robert J. Vitamante 5,000 * 5,000 0 *
Brian J. Walsh 10,000 * 10,000 0 *
All directors and executive officers
as a group (4 persons) (4)(5)(6) 1,611,980 48.9% 1,611,980 40.1%
</TABLE>
- --------------------------
* Less than one percent.
(1) The address of each of Messrs. Young, Cote, Hornbeck and Quealy is c/o the
Company, 1906 Orange Tree Lane, Suite 220, Redlands, California 92374.
(2) Each person's beneficial ownership is determined by assuming that options
and warrants that are held by such person or entity (but not those held by any
other person or entity) and which are exercisable within 60 days have been
exercised.
30
<PAGE>
(3) Unless otherwise noted, the Company believes that all persons and entities
named in the table have sole voting and investment power with respect to all
shares of stock beneficially owned by them.
(4) Includes 25,000 shares of Common Stock which are the subject of
currently exercisable warrants. Does not include an aggregate of 211,040
shares and 161,000 warrants owned by relatives of Mr. Young, as to which Mr.
Young disclaims any beneficial interest.
(5) Does not include 80,000 shares and 80,000 warrants owned by Mr. Cote's
spouse or 5,232 shares owned by Mr. Cote's adult children, as to which Mr. Cote
disclaims any beneficial interest.
(6) Does not include 30,000 shares of Common Stock which are the subject of
warrants not currently exercisable.
INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to corporation laws of the State of
California, 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 in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company has authorized 15,000,000 shares of Common Stock, no par value,
of which 3,274,441 shares were issued and outstanding as of September 30, 1996.
Holders of Common Stock are entitled to one vote per share on all matters
requiring a vote of shareholders. The holders of Common Stock are entitled to
receive dividends when and as declared by the Board of Directors out of funds
legally available therefor. Upon liquidation or dissolution, each outstanding
share of Common Stock will be entitled to share equally in the assets of the
Company legally available for distribution to shareholders after payment of all
debts and other liabilities. Shares of Common Stock are not redeemable, have no
conversion rights and carry no preemptive or other rights to subscribe to or
purchase additional shares in the event of a subsequent offering. All
outstanding shares of Common Stock are, and the shares offered hereby will be
upon completion of this offering, when issued, fully paid and non-assessable.
CUMULATIVE VOTING
The Company is subject to the California General Corporation Law, which
provides, in connection with the election of directors, that all shareholders
may cumulate votes if any shareholder gives notice, prior to the voting, of an
intention to cumulate votes. Under cumulative voting, a shareholder is entitled
to a number of votes for election of directors equal to the number of shares
held by such shareholder times the number of directors to be elected. Such
votes may be cast all for one nominee, or distributed among two or more
nominees, as the shareholder wishes.
PREFERRED STOCK
Pursuant to the Company's Articles of Incorporation, the Board of Directors
has authority to issue up to 5,000,000 shares of Preferred Stock in one or more
series, with such designations, rights, preferences and voting rights as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without shareholder approval, to issue Preferred
Stock with dividend, liquidation, conversion, voting or other rights that
adversely affect the voting power or other rights of the holders of the
Company's Common Stock. In the event of issuance, the Preferred Stock could be
utilized, under certain circumstances, as a way of discouraging, delaying or
preventing an acquisition or change of control of the Company. The Company does
not currently intend to issue any shares of its Preferred Stock.
31
<PAGE>
WARRANTS
The Company has outstanding 2,114,002 options and warrants ("Warrants") to
purchase an equivalent number of shares of Common Stock at various purchase
prices. The weighted average exercise price is $0.85 per share. The
Warrants expire at various dates. Certain of the Warrants contain provisions
that protect the holders thereof against dilution by adjustment of the
exercise price in certain events and provisions requiring the Company to
include the shares which may be acquired upon exercise of the Warrants in a
registration statement filed under the Securities Act (other than the initial
registration statement filed under the Securities Act by the Company)
permitting resale of such shares.
TRANSFER AGENT AND REGISTRAR
The Company has selected U.S. Stock Transfer Corporation as the transfer
agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE RESALE
Upon completion of the offering, the Company will have a total of
3,999,441 shares of Common Stock outstanding (assuming that the Underwriters'
over-allotment option is not exercised). Of these shares, the 1,150,000
shares of Common Stock offered hereby will be freely tradable without
restriction or registration under the Securities Act by persons other than
"affiliates" of the Company, as defined in the Securities Act, who would be
required to sell such shares under Rule 144 under the Securities Act. The
remaining 2,899,441 shares of Common Stock outstanding will be "restricted
securities" as that term is defined by Rule 144 (the "Restricted Shares").
The Restricted Shares were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the
Securities Act.
Of the Restricted Shares, approximately 1,813,441 Restricted Shares will be
eligible for sale in the public market pursuant to Rule 144, certain of which
may be sold under Rule 144, beginning 90 days after the date of this Prospectus.
Most of such shares (approximately Restricted Shares) of such shares are
subject to the lock-up agreements described below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least two years (including the holding period of any prior owner except
an affiliate), including persons who may be deemed "affiliates" of the Company,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of one percent of the number of shares of Common
Stock then outstanding (approximately 40,000 shares upon completion of the
offering) or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements, and to the availability of current public
information about the Company. In addition, a person who is not deemed to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
three years (including the holding period of any prior owner except an
affiliate), would be entitled to sell such shares under Rule 144(k) without
regard to the requirements described above. Rule 144 also provides that
affiliates who are selling shares that are not Restricted Shares must
nonetheless comply with the same restrictions applicable to Restricted Shares
with the exception of the holding period requirement. The Securities and
Exchange Commission has recently proposed to reduce the two and three-year
holding periods under Rule 144 to one and two-year holding periods. If adopted,
such amendment will permit earlier resales of shares of Common Stock.
Rule 701 promulgated under the Securities Act provides that shares of
Common Stock acquired pursuant to the exercise of outstanding options or the
grant of Common Stock pursuant to written compensation plans or contract prior
to this offering may be resold by persons other than affiliates, beginning 90
days after the date of this Prospectus, subject only to the manner of sale
provisions of Rule 144, and by affiliates, beginning 90 days after the date of
this Prospectus, subject to all provisions of Rule 144 except its two-year
minimum holding period.
The Company's executive officers and directors (who in the aggregate hold
approximately 1,611,980 Restricted Shares) have agreed not to sell or offer
to sell or otherwise dispose of any shares of Common Stock currently held by
them for a period of 18 months after the date of this Prospectus without the
prior written consent
32
<PAGE>
of Sharpe Capital, Inc. Furthermore, holders of most of the remaining
Restricted Shares (who in the aggregate hold approximately Restricted
Shares) have agreed not to sell or offer to sell or otherwise dispose of any
shares of Common Stock currently held by them for a period of 180 days after
the date of this Prospectus without the prior written consent of Sharpe
Capital, Inc. In addition, the Company has agreed that for a period of 18
months after the date of this Prospectus it will not, without the prior
written consent of Sharpe Capital, Inc., offer, sell or otherwise dispose of
any shares of Common Stock.
As of September 30, 1996, options and warrants to purchase an aggregate
of 2,114,002 shares of Common Stock were outstanding. The holders of
substantially all of such options and/or warrants have the right in certain
circumstances to require the Company to include such shares in a registration
statement filed by the Company.
Prior to the offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See "Risk Factors-Shares Eligible for Future Sale."
UNDERWRITING
The Underwriters named below, represented by Sharpe Capital, Inc., ("the
Representatives"), have severally agreed, subject to the terms contained in
the Purchase Contract, to purchase from the Company the number of shares of
Common Stock indicated below opposite their respective names at the public
offering price less the underwriting discount and commissions set forth on
the cover page of this Prospectus. The Purchase Contract provides that the
obligations of the Underwriters are subject to certain conditions and that
the Underwriters are committed to purchase all of such shares (other than the
Common Stock covered by the over-allotment option as described below), if any
are purchased.
Number of
Underwriters Shares
------------ ------
Sharpe Capital, Inc.
---------
Total............................ 1,150,000
---------
---------
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares to the public at the public offering price set forth
on the cover page of this Prospectus, and to certain dealers at such price less
a concession of not more than $.__ per share, and that the Underwriters an such
dealers may reallow to other dealers, including the Underwriters, a discount not
in excess of $___ per share. After the public
33
<PAGE>
offering, the public offering price and concessions and discounts may be changed
by the Representatives. No change in such terms shall change the amount of
proceeds to be received by the Company as set forth on the cover page of this
Prospectus.
The Company has granted an option to the Underwriters, exercisable in the
discretion of the Representatives for a period of 30 days after the date of this
Prospectus, to purchase up to an additional 172,500 shares of Common Stock, at
the public offering price set forth on the cover page of this Prospectus less
the underwriting discounts and commissions. The Representatives may exercise
this option only to cover over-allotments, if any. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase pro rata from the Company an aggregate percentage of
such additional shares approximately equal to the percentage of shares it was
obligated to purchase from the Company pursuant to the Purchase Contract.
The Representatives have informed the Company that they do not expect any
sales in excess of 5% of the number of shares of Common Stock offered hereby to
be made to discretionary accounts by the Underwriters.
The Company has agreed to pay the Representatives a non-accountable
expense allowance of 3% of the offering proceeds, including any proceeds from
the sale of shares subject to the Underwriter's over-allotment option, if
exercised. The Representatives' expenses in excess of the non-accountable
expense allowance, including its legal expenses, will be borne by the
Representative. To the extent that the expenses of the Representatives are less
than the non-accountable expense allowance, the excess may be deemed to be
compensation to the Representative.
The Purchase Contract provides that the Company and the Selling
Shareholders will indemnify the Underwriters and their controlling persons
against certain liabilities under the Securities Act or will contribute to
payments the Underwriters and their controlling persons may be required to make
in respect thereof. The company and the Selling Shareholders have 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.
The Company has agreed to sell to the Representatives for a total of $115,
warrants (the "Representatives Warrants") to purchase up to 115,000 shares of
Common Stock at an exercise price per share equal to 120 % of the initial public
offering price per share. The Representatives Warrants are exercisable for a
period of four years beginning one year from the date of this Prospectus, and
are not transferable for a period of one year except to officers of the
Representatives or any successor to the Representatives. In addition, the
Company has granted certain rights to the holders of the Representatives
Warrants to register the Common Stock underlying the Representatives Warrants.
The Company and the officers and directors of the Company have agreed not
to sell any shares of Common Stock prior to the expiration of eighteen (18)
months from the date of this Prospectus, without the prior written consent of
Sharpe Capital, Inc. Furthermore, holders of most of the remaining
Restricted Shares (who in the aggregate hold approximately _______________
Restricted Shares) have agreed not to sell or offer to sell or otherwise
dispose of any shares of Common Stock currently held by them for a period of
180 days after the date of this Prospectus without the prior written consent of
Sharpe Capital, Inc. See "Shares Eligible for Future Sale."
Prior to this offering, there has been no market for the Common Stock of
the Company. Accordingly, the initial public offering price has been determined
by negotiations between the Company and the Representatives. Among the factors
considered in determining the initial public offering price were the Company's
results of operations, current financial condition and products, the markets
addressed by the Company's products, the Company's future prospects, the
experience of its management, the general condition of the equity securities
market and the demand for similar securities of companies considered comparable
to the Company.
The foregoing sets forth the material terms and conditions of the Purchase
Contract, but does not purport to be a complete statement of the terms and
conditions thereof, copies of which are on file at the offices of the Company
and the Securities and Exchange Commission, Washington , D.C. See "Additional
Information."
The Company has granted the Representatives of the Underwriters a right of
first refusal for three (3) years from the date of this offering on any
public offering of its shares by the Company and by existing officers and
directors, and the right to appoint a designee as an observer for five (5)
years to meetings of the Board of Directors of the Company. It is presently
anticipated that the observer initially will be Mr. Frank J. Lockwood of
Sharpe Capital, Inc. Mr. Lockwood is the former Chairman of the Corporate
Finance Committee of the NASD. The Company is obliged to pay the
out-of-pocket expenses of such observer and compensation equal to that paid
independent directors, if any.
34
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Swanson & Meepos, LLP, Santa Monica, California.
Certain legal matters related to this offering will be passed upon for the
Underwriters by Snow Becker Krauss P.C., New York, New York.
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such reports given upon the authority of said firm
as experts in auditing and accounting.
35
<PAGE>
YOUNG MINDS, INCORPORATED
INDEX TO FINANCIAL STATEMENTS
==============================================================================
Report of Independent Certified Public
Accountants F-2
Financial statements
Balance sheets F-3 - F-4
Statement of operations F-5
Statement of stockholders' deficiency F-6 - F-8
Statement of cash flows F-9 - F-11
Summary of accounting policies F-12 - F-15
Notes to financial statements F-16 - F-25
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Young Minds, Incorporated
We have audited the accompanying balance sheets of Young
Minds, Incorporated as of December 31, 1995, and June 30,
1996 and the related statements of operations, stockholders'
deficiency and cash flows for each of the years ended
December 31, 1994 and 1995 and June 30, 1996. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Young Minds, Incorporated as of December 31,
1995, and June 30, 1996 and the results of its operations and
its cash flows for each of the years ended December 31, 1994
and 1995, and June 30, 1996, in conformity with generally
accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
August 31, 1996
F-2
<PAGE>
<TABLE>
<CAPTION>
YOUNG MINDS, INCORPORATED
BALANCE SHEETS
================================================================================================
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996
- -------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 5)
CURRENT ASSETS
Cash and cash equivalents $ - $ 120,567 $ 214,550
Receivables:
Due from factor (Note 4) 93,599 30,742 623,137
Other accounts receivable, net of allowance for
doubtful accounts of $5,000, $5,000 and $5,000 129,762 170,660 189,352
Inventories (Note 3) 147,350 182,316 177,428
Prepaid expenses and other 15,908 3,419 30,936
Deferred income taxes (Note 12) - 100,000 200,000
Receivable from private placement (Note 10) 195,750 - -
- -----------------------------------------------------------------------------------------------
Total current assets 582,369 607,704 1,435,403
PROPERTY AND EQUIPMENT,
net (Note 2) 427,858 453,349 427,442
SOFTWARE DEVELOPMENT COSTS, net of accumu-
lated amortization of $688,246, $920,605
and $1,048,525 1,594,856 1,714,444 1,784,829
DEFERRED LOAN COSTS, net of accumulated
amortization of $0, $90,700 and $121,000
(Note 10) 185,200 180,300 150,000
OTHER ASSETS 282,583 78,826 67,233
- -----------------------------------------------------------------------------------------------
Total assets $3,072,866 $3,034,623 $3,864,907
===============================================================================================
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
YOUNG MINDS, INCORPORATED
BALANCE SHEETS
=================================================================================================
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996
- -------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Checks issued against future deposits $ 87,080 $ - $ -
Accounts payable 1,709,979 1,602,340 1,723,815
Accrued expenses 284,395 304,511 429,369
Accrued interest 285,594 232,350 215,809
Accrued vacation 156,960 290,035 298,681
Payroll taxes payable (Note 5) 511,535 329,526 261,505
Deferred revenue 351,685 358,108 378,627
Notes payable to related parties, current portion
(Note 6) 196,195 - -
Notes payable, current portion (Note 7) 500,617 242,500 272,500
Obligations under capital leases, current portion
(Note 8) 23,984 22,154 17,658
- ------------------------------------------------------------------------------------------------
Total current liabilities 4,108,024 3,381,524 3,597,964
OBLIGATIONS UNDER CAPITAL LEASES, less current
portion (Note 8) 6,786 - -
NOTES PAYABLE, less current portion
(Notes 7 and 10) 1,153,000 1,913,000 1,863,000
NOTES PAYABLE TO RELATED PARTIES, less current
portion (Notes 6 and 10) 220,000 198,609 $ 198,609
- -----------------------------------------------------------------------------------------------
Total liabilities 5,487,810 5,493,133 5,659,573
- -----------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' DEFICIENCY
Preferred stock, no par value, 5,000,000 shares
authorized; none issued and outstanding - - -
Common stock, no par value, 15,000,000 shares
authorized; 3,095,230, 3,303,374, and
3,274,441 shares issued and outstanding at
December 31, 1995, June 30, 1996 and
September 30, 1996 (Note 10) 1,733,340 1,965,140 1,944,140
Additional paid-in capital 287,038 290,338 291,855
Accumulated deficit (3,987,084) (4,307,368) (3,624,041)
Shareholders notes receivable (Note 11) (448,238) (406,620) (406,620)
- -----------------------------------------------------------------------------------------------
Total stockholders' deficiency (2,414,944) (2,458,510) (1,794,666)
- -----------------------------------------------------------------------------------------------
Total liabilities and stockholders' deficiency $3,072,866 $3,034,623 $3,864,907
===============================================================================================
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES, NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
<CAPTION>
YOUNG MINDS, INCORPORATED
STATEMENT OF OPERATIONS
===========================================================================================================================
YEARS ENDED DECEMBER 31, YEAR ENDED THREE MONTHS ENDED SEPTEMBER 30,
------------------------ JUNE 30, --------------------------------
1994 1995 1996 1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES
System Sales $6,576,773 $6,347,827 $5,787,846 $1,355,149 $2,882,609
Service Revenue 1,070,279 703,727 914,391 270,822 216,922
- ---------------------------------------------------------------------------------------------------------------------------
NET SALES 7,647,052 7,051,554 6,702,237 1,625,971 3,099,531
COST OF SALES
System Sales $2,912,491 $3,163,490 $3,030,390 $ 768,439 $1,236,581
Service Revenue 103,235 110,900 103,128 26,680 13,515
- ---------------------------------------------------------------------------------------------------------------------------
COST OF SALES 3,015,726 3,274,390 3,133,518 795,119 1,250,096
- ---------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 4,631,326 3,777,164 3,568,719 830,852 1,849,436
OPERATING COSTS AND EXPENSES
Research and development 437,377 364,923 402,560 88,447 132,160
Selling, general and administrative 3,073,190 3,157,126 3,299,405 803,538 1,045,185
- ---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 1,120,759 255,115 (133,246) (61,133) 672,091
INTEREST EXPENSE (609,842) (746,538) (808,192) (206,661) (173,978)
OTHER INCOME (EXPENSE)(NOTE 15) (408,874) (207,494) 81,097 (54,159) 85,214
- ---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 102,043 (698,917) (860,341) (321,953) 583,327
INCOME TAX BENEFIT - - 100,000 - 100,000
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 102,043 $ (698,917) $ (760,341) $ (321,953) $ 683,327
===========================================================================================================================
NET INCOME (LOSS) PER SHARE $ 0.02 $ (0.16) $ (0.16) $ (0.07) $ 0.12
===========================================================================================================================
WEIGHED AVERAGE COMMON
STOCK OUTSTANDING 4,437,603 4,258,497 4,770,164 4,531,247 5,794,066
===========================================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES, NOTES TO FINANCIAL STATEMENTS.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
YOUNG MINDS, INCORPORATED
STATEMENT OF STOCKHOLDERS' DEFICIENCY
============================================================================================================================
COMMON STOCK SHAREHOLDERS
------------------------- ADDITIONAL ACCUMULATED NOTES
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 1,899,899 1,040,390 281,013 (3,390,210) - (2,068,807)
Conversion of trade payables to common
stock 13,446 12,500 - - - 12,500
1:1.028 reverse stock split, January, 1994 (52,115) - - - - -
Issuance of common stock to employees 44,000 5,500 - - - 5,500
Net income - - - 102,043 - 102,043
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 1,905,230 1,058,390 281,013 (3,288,167) - (1,948,764)
Stock purchased with notes
(Note 11) 825,000 191,250 - - (191,250) -
Net loss (January 1, 1995 - June 30, 1995) - - - (258,860) - (258,860)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1995 2,730,230 1,249,640 281,013 (3,547,027) (191,250) (2,207,624)
Issuance of shares in private placement,
net of offering costs (Note 10) 210,000 163,700 -- -- -- 163,700
Stock purchased with notes (Note 11) 90,000 270,000 -- -- (270,000) --
Payment on notes receivable -- -- -- -- 13,012 13,012
Shareholder contribution -- -- 6,025 -- -- 6,025
Stock for services 65,000 50,000 -- -- -- 50,000
Net loss (July 1, 1995 - December 31, 1995) -- -- -- (440,057) -- (440,057)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 3,095,230 1,733,340 287,038 (3,987,084) (448,238) (2,414,944)
Issuance of shares in private placement,
net of offering costs (Note 10) 250,000 237,600 -- -- -- 237,600
Shareholder contributions -- -- 3,300 -- -- 3,300
Repayments of shareholders notes receivable -- -- -- -- 41,618 41,618
Cancellation of shares in conjunction with
lawsuit settlement (41,856) (5,800) -- -- -- (5,800)
Net loss (January 1, 1996 - June 30, 1996) -- -- -- (320,284) -- (320,284)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 3,303,374 $1,965,140 $290,338 $(4,307,368) $(406,620) $(2,458,510)
Shareholder contributions (unaudited) -- -- 1,517 -- -- 1,517
Cancellation of shares in
conjunction with lawsuit
settlement (unaudited) (28,933) (21,000) -- -- -- (21,000)
Net Income (July 1, 1996-
September 30, 1996) (unaudited) -- -- -- 683,327 -- 683,327
- -------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996
(unaudited) 3,274,441 $1,944,140 $291,855 $(3,624,041) $(406,620) $(1,794,666)
===============================================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES, NOTES TO FINANCIAL STATEMENTS.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
YOUNG MINDS, INCORPORATED
STATEMENT OF CASH FLOWS
==============================================================================================================================
INCREASE (DECREASE) IN CASH
THREE MONTHS THREE MONTHS
YEARS ENDED DECEMBER 31, YEAR ENDED ENDED ENDED
------------------------ JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 102,043 $(698,917) $(760,341) $(321,953) $683,327
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation 117,997 150,622 160,044 40,298 41,267
Amortization of capitalized software costs 206,235 361,592 430,217 94,878 127,920
Amortization of deferred loan costs -- -- 90,700 -- 30,300
Interest on capital lease obligations 6,253 4,538 2,740 1,562 280
Nonmonetary exchange included in sales (99,702) (70,582) -- -- --
Stock issued for services 12,500 50,000 -- -- --
Stock compensation expenses 5,500 -- -- -- --
Deferred income taxes -- -- (100,000) -- (100,000)
Gain from cancellation of common stock -- -- -- -- (21,000)
Increase (decrease) from changes in:
Accounts receivable (1,162,583) 681,063 717,088 597,526 (1,274,451)
Inventories (162,295) 41,308 (73,423) 82,401 4,888
Prepaid expenses and other current
assets (99,863) 106,251 9,401 3,720 (27,517)
Other assets 15,347 (464,085) 187,466 (10,977) 11,593
Accounts payable 682,417 (74,387) (231,880) (131,123) 121,475
Accrued liabilities 62,970 234,231 114,384 92,545 116,964
Payroll taxes payable (18,441) (157,203) (219,546) (55,385) (68,021)
Deferred revenue 213,091 (229,828) (250,900) (182,245) 20,519
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities (118,531) (65,397) 75,950 211,247 (332,455)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (99,850) (7,913) (134,143) (7,863) (15,360)
Capitalized software development costs (874,959) (718,981) (719,517) (162,091) (198,305)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (974,809) (726,894) (853,660) (169,954) (213,665)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
YOUNG MINDS, INCORPORATED
STATEMENT OF CASH FLOWS
==============================================================================================================================
INCREASE (DECREASE) IN CASH THREE MONTHS THREE MONTHS
YEARS ENDED DECEMBER 31, YEAR ENDED ENDED ENDED
------------------------ JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable
to related parties 109,500 225,000 -- -- --
Payments on notes payable to related
parties (10,000) (14,132) (411,716) (9,999) --
Proceeds from repayments of
notes receivable from shareholders -- 13,012 54,631 -- --
Net increases (decreases) in advances
from factor 754,806 (158,347) (473,727) (76,689) 663,364
Proceeds from issuance of notes payable 200,000 6,963 -- 674 --
Payments on notes payable (4,376) (135,196) (333,934) (20,253) (20,000)
Payments on obligations under capital
leases (20,359) (20,359) (19,492) (7,100) (4,777)
Checks issued against future deposits 36,255 50,825 -- -- --
Shareholder contribution and other sales
of securities -- 6,025 12,805 3,096 1,517
Net proceeds from private placement (Note 10) -- 818,500 2,011,250 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,065,826 792,291 839,817 (110,271) 640,104
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (27,514) -- 62,107 (68,978) 93,983
CASH AND CASH EQUIVALENTS, at beginning of year 27,514 -- 58,460 58,460 120,567
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end of year $ -- $ -- 120,567 (10,518) 214,550
==============================================================================================================================
CASH PAYMENTS DURING THE PERIOD FOR
INTEREST $ 478,559 $ 636,280 $765,084 $132,382 $95,020
==============================================================================================================================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
During the year ended December 31, 1994, the Company issued common stock in
exchange for services in the amount of $12,500.
During the years ended December 31, 1995 and June 30, 1996, the Company
issued common stock in exchange for services relating to the private
placement in the amount of $50,000.
During the year ended December 31, 1995, the Company issued 915,000 shares of
common stock to shareholders in exchange for notes receivable in the
aggregate amount of $461,250.
During the year ended June 30, 1996, the Company issued 90,000 shares of
common stock to shareholders in exchange for notes receivable in the
aggregate amount of $270,000.
During the year ended June 30, 1996, the Company cancelled 41,856 shares of
common stock in conjunction with the settlement of a lawsuit.
During the quarter ended September 30, 1996, the Company cancelled 28,933
shares of common stock in conjunction with the settlement of a lawsuit.
(unaudited)
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES, NOTES TO FINANCIAL STATEMENTS.
F-8
<PAGE>
YOUNG MINDS, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
ORGANIZATION
Young Minds, Incorporated (the "Company") was incorporated in the state of
California on March 15, 1989 as an "S" Corporation. The Company changed its
incorporation to that of a "C" Corporation in February, 1993. The Company
develops, manufactures and markets CD-ROM software and hardware products.
In July 1996, the Company changed its year end from December 31 to June 30
for financial reporting purposes (Note 13). The six month period ended
December 31, 1995, is included in the results of operations for the years
ended December 31, 1995 and June 30, 1996.
INTERIM FINANCIAL INFORMATION
The financial data as of September 30, 1996 and for the three month periods
ended September 30, 1995 and 1996 is unaudited but includes all adjustments
(consisting only of normal recurring accruals) that the Company considers
necessary for a fair presentation of the financial position at such date and
the results of operations and cash flows for those periods. Operating results
for the three month period ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the entire fiscal year
ending June 30, 1997.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
short-term investments with an original maturity of three months or less to
be cash equivalents.
CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments and trade
accounts receivable. The Company's cash investments are placed with high
credit quality financial institutions and may exceed the amount of federal
deposit insurance. The Company reviews a customers credit history before
extending credit.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company records its allowance for doubtful accounts based on the greater
of (i) the specific dollar amount of receivables which the Company currently
estimates to be uncollectible or (ii) a minimum general reserve.
INVENTORIES
Inventories consist primarily of computer hardware and are stated at the
lower of cost, "first-in, first-out," or market.
PROPERTY AND EQUIPMENT
Property and equipment, including certain assets under capital leases, are
stated at cost, less accumulated depreciation and amortization. Depreciation
is provided using the straight-line method over estimated useful lives of
five to seven years, or over the lesser of the term of the lease or the
estimated useful life for assets under capital leases.
SOFTWARE DEVELOPMENT COSTS
Software development costs include direct costs
related to certain ongoing software product and products enhancement
projects. Such costs primarily consist of direct salaries and related
benefits, payroll taxes and overhead. Statement of Financial Accounting
Standards No. 86 provides for the capitalization of certain software
development costs once technological feasibility has been established upon
completion of a detail program design. The Company ceases capitalizing such
costs when the product derived from the project is available for general
release to customers. These costs are amortized on a product-by-product
basis at the greater of the amount computed using (a) the ratio of current
revenues for a product to the total of current and anticipated future
revenues or (b) the straight-line method over the remaining estimated
economic life of the product. The current products underlying the balance
of software development costs have estimated economic lives of five years.
The Company evaluates the recoverability of any software development costs
capitalized by comparing the net realizable value, determined pursuant to
management's estimates of future product cash flows, with the unamortized
balance of software development costs. Amortization of $206,235, $361,592,
$430,217, $94,878 and $127,920 was included in cost of sales for the years
ended December 31, 1994 and 1995 and June 30, 1996, and the three months
ended September 30, 1995 and 1996 (UNAUDITED).
F-9
<PAGE>
YOUNG MINDS, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
DEFERRED LOAN COSTS
Deferred loan costs are capitalized and amortized over the life of the
related notes payable, which is two years.
REVENUE RECOGNITION
The Company recognizes revenue from the sales of software upon delivery of
the software to the customer, provided that no significant vendor obligations
remain outstanding and the collection of the resulting receivable is deemed
probable by management. The Company defers the recognition of revenue on
shipments of software until these conditions are met. The Company also has
post customer support ("PCS") agreements bundled with certain systems and
offers renewals to customers on the PCS agreement. The Company recognizes
revenues relating to the PCS portion of bundled systems and PCS agreements on
a straight-line basis over the terms of the agreements.
NONMONETARY EXCHANGES
Nonmonetary exchanges are recorded at the fair value of the asset surrendered
or received, whichever is more clearly evident.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with the Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
SFAS 109 requires a company to recognize deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized
in a company's financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with the Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of" (SFAS No. 121). SFAS 121
establishes guidelines regarding when impairment losses on long-lived assets,
which include plant and equipment, and certain identifiable intangible
assets, should be recognized and how impairment losses should be measured.
Adoption did not have a material effect on its financial position or results
of operations.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and due from factor
approximated fair value as of December 31, 1995, June 30, 1996 and September
30, 1996 (UNAUDITED) because of the relatively short maturity of these
instruments. It is not practicable to estimate the fair value of the related
party notes payable or shareholders notes receivable of the Company due to
their related party nature. The carrying amounts of notes payable
approximate their fair values due to the rates of these notes approximating
the rates for loans with similar terms and maturities.
F-10
<PAGE>
YOUNG MINDS, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES (continued)
================================================================================
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is based upon the weighted average number of common
shares and common stock equivalents outstanding during each period, as
adjusted for the effect of the application of Securities and Exchange
Commission Staff Accounting Bulletin (SAB) No. 83. Pursuant to SAB No. 83,
common stock issued by the Company at a price less than the initial public
offering price during the twelve months immediately preceding the initial
filing of the offering together with common stock options and convertible
debt issued during such period with an exercise price less than the initial
public offering price, are treated as outstanding for all periods presented.
Earnings (loss) per share is computed using a treasury stock method, under
which the number of shares outstanding reflects an assumed use of the
proceeds from the issuance of such shares and from the assumed exercise of
such options and convertible debts, to repurchase shares of the Company's
common stock at the initial public offering price. Except for the provisions
of SAB No. 83 described above, common stock equivalents have been excluded in
all years presented in the Statements of Operations when the effect of their
inclusion would be anti-dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting
Standards Board (FASB) is effective for specific transactions entered into
after December 15, 1995, while the disclosure requirements of SFAS No. 123
are effective for financial statements for fiscal years beginning after
December 15, 1995. The new standard established a fair value method of
accounting for stock-based compensation plans and for transactions in which
an entity acquires goods or services from nonemployees in exchange for equity
instruments. At the present time, the Company has not determined if it will
change its accounting policy for stock based compensation or only provide the
required financial statement disclosures. As such, the impact on the
Company's financial position and results of operations is currently unknown.
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS No. 125) issued by the Financial Accounting Standards
Board (FSAB) is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive applications is not
permitted. The new standard provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. The Company does not expect adoption to have a material effect
on its financial position or results of operations.
F-11
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
================================================================================
1. LIQUIDITY
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. At June 30, 1996, the Company
has negative working capital of approximately $2.8 million and a
stockholders' deficiency of approximately $2.5 million.
The funding of the Company's operations and servicing of existing debt is
dependent upon increasing sales of its core products and extending payment
terms on various current liabilities. During the months of March 1996
through June 1996, the Company hired a new Executive Vice President of
Sales, who has redefined the Company's approach to selling its products in
conjunction with hiring additional sales and marketing personnel to help
bolster sales during fiscal 1997. This redefinition of the Company's
selling approach, from its former regional, territorial approach, includes
(1) securing sales agreements with value added resellers in specific,
targeted industries, (2) developing relationships with targeted personnel
in the Company's largest customers to allow the Company to market its
products horizontally and vertically within the various divisions of these
customers, (3) hiring a manager of government sales, who is currently
located in Washington D.C., with experience in government sales and moving
sales and products through this environment and (4) hiring a manager of
international sales to promote and sell the Company's products worldwide.
In addition to the above, the Company has established verbal agreements
with significant short-term creditors to allow for the repayment of debts
over periods in excess of one year on an as needed basis. Based on the
above plans and their ongoing implementation, management believes that the
Company will return to profitable operations and meet its obligations on a
timely basis. However, there is no assurance that these plans will be
successful.
During the three months ended September 30, 1996 (UNAUDITED), the Company
was able to significantly increase net sales as compared to the quarter
ended September 30, 1995 (UNAUDITED), which resulted in net income of
$683,327 for the three months ended September 30, 1996 (UNAUDITED). In
addition, the Company was able to improve its negative working capital and
stockholders' deficiency positions to $2.2 million and $1.8 million as of
September 30, 1996 (UNAUDITED).
2. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996
- --------------------------------------------------------------------------------
(UNAUDITED)
Computer equipment and
purchased software $ 759,592 $ 862,841 $878,202
Office equipment 57,926 57,926 57,925
Vehicles 20,808 20,808 20,808
Leasehold improvements 14,197 14,197 14,197
- -------------------------------------------------------------------------------
852,523 955,772 971,132
Accumulated depreciation (424,665) (502,423) (543,690)
- -------------------------------------------------------------------------------
$427,858 $ 453,349 $ 427,442
===============================================================================
F-12
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
2. PROPERTY AND EQUIPMENT, NET (CONTINUED)
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996
- --------------------------------------------------------------------------------
(UNAUDITED)
Equipment acquired under capital
leases included above:
Computer equipment $ 77,186 $ 77,186 $ 77,186
Accumulated depreciation (47,598) (55,315) (59,528)
- --------------------------------------------------------------------------------
$ 29,588 $ 21,871 $ 17,658
================================================================================
3. INVENTORIES
Inventory consists of:
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996
- -------------------------------------------------------------------------------
(UNAUDITED)
Raw Materials $ 72,062 $119,976 $115,422
Work in process 3,798 18,366 2,005
Finished goods 71,490 43,974 60,001
- -------------------------------------------------------------------------------
$ 147,350 $182,316 $177,428
===============================================================================
4. DUE TO FACTOR
During 1994, the Company entered into an agreement with a factor whereby
funds are advanced on sales orders and advances of up to 50% of sales
orders and 80% of accounts receivable. The factor charges a fee of 2.5%
every fifteen days on sales orders and 1.25% every fifteen days on
accounts receivable. Upon collection by the factor, the factor deducts
total interest earned and remits the remaining funds, less amounts
previously advanced, to the Company.
The amount due from factor consisted of the following:
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996
- -------------------------------------------------------------------------------
(UNAUDITED)
Factored Receivables $ 690,058 $ 426,750 $ 1,682,509
Advances (596,459) (396,008) (1,059,372)
- -------------------------------------------------------------------------------
$ 93,599 30,472 623,137
===============================================================================
The weighted average advances outstanding under the factoring agreement
were $827,137, $699,918, $542,617, $760,276 and $627,931 for the years
ended December 31, 1994 and 1995, and June 30, 1996, and for the quarters
ended September 30, 1995 and 1996 (UNAUDITED). The weighted average
annual interest rates were 59%, 38% and 43% for the years ended December
31, 1994 and 1995, and June 30, 1996. The weighted average interest
rates for the quarters ended September 30, 1995 and 1996 (UNAUDITED)
were 56% and 68% respectively.
F-13
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
5. PAYROLL TAXES PAYABLE
As of December 31, 1995, June 30, 1996 and September 30, 1996 (UNAUDITED),
the Company owes delinquent payroll taxes of $511,535, $329,526, and
$261,505 to the IRS, which includes interest and penalties. During 1994, the
Company reached an agreement with the IRS, whereby the Company pays $25,000
a month to satisfy its delinquent liabilities. As of June 30, 1996 and
September 30, 1996 (UNAUDITED), the Company was in compliance with the
agreement. In accordance with its general procedure for delinquent taxes
that are to be satisfied under a deferred arrangement, the IRS has filed
formal liens against the assets of the Company.
6. NOTES PAYABLE TO RELATED PARTIES
A summary of notes payable to related parties is as follows:
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996
- ------------------------------------------------------------------------------
(UNAUDITED)
Unsecured notes payable to stockholders,
interest payable at 12% per year, due
December 31, 1997 $ - $180,000 $180,000
Unsecured notes payable to stockholders,
interest payable at 10% per year, due
December 31, 1997, amount was repaid
during June, 1996. 220,000 - -
Unsecured notes payable to stockholders,
interest payable at 12% per annum,
payable on demand, amount was repaid
during March, 1996. 108,695 - -
Unsecured notes payable to a stockholder,
interest payable at 10% per year. The
unpaid principal and accrued interest
on the notes are delinquent and
therefore the notes are payable on
demand, amount was repaid during
March, 1996. 75,000 - -
Unsecured notes payable to a stockholder,
interest payable at 10%, due on demand 12,500 - -
Other - 18,609 18,609
- --------------------------------------------------------------------------------
416,195 198,609 198,609
Less current portion (196,195) - -
- --------------------------------------------------------------------------------
$ 220,000 $198,609 $198,609
================================================================================
F-14
<PAGE>
7. NOTES PAYABLE
A summary of notes payable is as follows:
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996
- --------------------------------------------------------------------------------
(UNAUDITED)
Unsecured notes payable to individuals
and companies, interest payable at
12% per year, due December 31, 1997
(Note 10) $840,000 $1,660,000 $1,660,000
Unsecured note payable to an individual,
with interest at 16% per year. The
unpaid principal and accrued interest
were due on March 4, 1993. The note is
personally guaranteed by two officers of
the Company. Subsequent to year end, the
terms of the note were modified in
conjunction with the settlement of a
lawsuit (Note 9) 163,000 163,000 163,000
Unsecured note payable to an individual,
interest payagle at 16% per year. The
unpaid principal and accrued interest
were due on April 10, 1993. The note is
personally guaranteed by two officers of
the Company. Subsequent to year end,
the terms of the note were modified in
conjunction with the settlement of a
lawsuit (Note 9) 200,000 200,000 200,000
Unsecured note payable to an individual,
with interest at 24% per year. The
principal and accrued interest were due
on September 15, 1993 10,000 5,000 5,000
Unsecured notes payable to individuals,
with interest at 10% to 12% per year.
The unpaid principal and accrued interest
on the notes are delinquent and therefore
the notes are payable on demand 327,500 127,500 107,500
Unsecured note payable to a company with
interest at 10% per year. The principal
and accrued interest were due on
August 3, 1994. The note is personally
guaranteed by an officer of the Company,
amount was repaid during March, 1996. 50,000 - -
Note payable to an individual, noninterest-
bearing, payable from the proceeds of a
software project, due on demand. Amount
was repaid during March, 1996. 55,000 - -
Other 8,117 - -
- -------------------------------------------------------------------------------
1,653,617 2,155,500 2,135,500
Less current portion (500,617) (242,500) (272,500)
- -------------------------------------------------------------------------------
$1,153,000 $1,913,000 $1,863,000
===============================================================================
F-15
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
8. OBLIGATIONS UNDER CAPITAL LEASES
The future minimum lease payments under capitalized equipment leases
together with the present value of the minimum lease payments as of
June 30, 1996 and September 30, 1996 are as follows:
JUNE 30, SEPTEMBER 30,
1996 1996
- -------------------------------------------------------------------------
(UNAUDITED)
Total minimum lease payments $23,534 $18,757
Less amount relating to interest (1,380) (1,099)
- -------------------------------------------------------------------------
Present value of minimum lease
payments under capital leases $22,154 $17,658
=========================================================================
9. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities on a month to month basis. Rent expense
was $166,388, $170,190, $156,265, $36,943 and $35,650 for the years ended
December 31, 1994 and 1995, June 30, 1996, and the three months ended
September 30, 1995 and 1996 (UNAUDITED).
The Company is in a dispute with an individual for amounts representing
additional interest owed, if any, by the company under two promissory
notes payable with aggregate unpaid principal of $363,000 which has been
recorded in the Company's balance sheets at December 31, 1995 and June 30,
1996. Subsequent to year end, the Company and the individual agreed to
settle this lawsuit whereby the Company will repay the $363,000 in
principal in monthly installments beginning on October 15, 1996. No
interest will accrue on these notes until February 1998, at which time the
then outstanding balance will accrue interest at 10% per annum until that
remaining principal is repaid.
The Company is a defendant in one other lawsuit, which is considered to be
in the normal course of business. In the opinion of management, the
outcome of the lawsuit now pending will not materially affect the
operations or the financial position of the Company.
In 1996, the Company entered into three year employment agreements with
three members of management.
10. COMMON STOCK
In December 1995, in conjunction with a private placement of notes
payable and common stock, the Company generated gross proceeds of
$1,050,000. The Company sold 42 units, with each unit consisting of one
$20,000 note, 5,000 shares of common stock and 5,000 warrants granted at
an exercise price of $1 per share which represents the fair market value
of the Company's common stock at that time. Of the gross proceeds,
$840,000 (80%) relates to notes payable and $210,000 (20%) relates to the
sale of 210,000 shares of common stock. Expenses relating to the private
placement amounted to $231,500, of which $185,200 (80%) was recorded as a
deferred loan cost and $46,300 (20%) was offset against the proceeds
allocated to common stock. Although the notes payable and common
F-16
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
10. COMMON STOCK (CONTINUED)
stock were issued during the year ended December 31, 1995, $195,750 of net
proceeds were not received until after year end. Thus, this amount is
shown as a receivable from private placement in the balance sheet at
December 31, 1995 and was collected in the first quarter of 1996.
In the first quarter of 1996, the Company completed this private
placement through the issuance of 50 additional units, generating gross
proceeds of $1,250,000. Expenses related to the private placement in the
first quarter of 1996 amounted to $107,250, of which $85,800 was recorded
as a deferred loan cost and $21,450 was offset against the proceeds of
common stock.
During the year ended December 31, 1995, stock was issued to shareholders
through the issuance of notes receivable to those shareholders. See Note 11.
During the year ended December 31, 1995, the Company issued 65,000 shares
of stock for services in the amount of $50,000, which represents the fair
market value of these services.
COMMON STOCK WARRANTS/OPTIONS SHARES
- ----------------------------------------------------------------
Balance outstanding, January 1, 1994 261,606
Warrants/options granted at $.05 per share 145,000
Warrants/options granted at $1.00 per share 325,500
Warrants/options granted at $1.50 per share 100,000
Warrants/options granted at $2.00 per share 30,000
- ----------------------------------------------------------------
Balance outstanding, December 31, 1994 862,106
Warrants/options exercised at $.05 per share (75,000)
Warrants/options expired at $1.00 per share (290,000)
Warrants/options expired at $1.91 per share (26,161)
Warrants/options expired at $3.82 per share (78,483)
Warrants/options granted at $0.50 per share 690,000
Warrants/options granted at $1.00 per share 210,000
- ----------------------------------------------------------------
Balance outstanding, December 31, 1995 1,292,462
Warrants/options granted at $1.00 per share 815,000
- ----------------------------------------------------------------
Balance outstanding, June 30, 1996 2,107,462
Warrants/options granted at $0.96 per share
(unaudited) 6,540
- ----------------------------------------------------------------
Balance outstanding, September 30, 1996 (unaudited) 2,114,002
================================================================
The above warrants/options to shareholders and vendors at grant date were
for exercise prices at or above the estimated fair market value of the
common stock. All warrants/options are currently exercisable and expire
between one and five years subsequent to June 30, 1996.
F-17
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
========================================================================
11. SHAREHOLDERS NOTES RECEIVABLE
On April 18, 1995, three shareholders entered into note
agreements with the Company for an aggregate amount of
$187,500. The proceeds were used by the shareholders to
purchase 750,000 shares of common stock at fair market value.
The notes bear interest at the rate of 7.53% per year. The
principal and accrued but unpaid interest for each note is due
on April 18, 2005.
On May 31, 1995, one shareholder entered into a note agreement
with the Company for the amount of $3,750. The proceeds were
used by the shareholder, upon exercise of a warrant granted
during 1994, to purchase 75,000 shares of common stock. The
note bears interest at the rate of 7.53% per year. The
principal and accrued but unpaid interest for the note is due
on May 31, 2005.
On December 28, 1995, three shareholders entered into note
agreements with the Company for an aggregate amount of
$270,000. The proceeds were used by the shareholders to
purchase 90,000 shares of common stock. The notes bear
interest at the rate of 7.53% per year. The principal and
accrued but unpaid interest for each note is due on December
31, 2005.
12. INCOME TAXES
The Company has approximately $1,249,000, $1,348,000 and $1,100,000 of
net deferred tax assets at December 31, 1995, June 30, 1996 and September
30, 1996 (UNAUDITED). The deferred taxes are primarily a result of a net
operating loss carryforwards of $3,068,000, $3,488,000 and $2,975,000 for
federal income taxes and $1,533,000, $1,743,000 and $1,487,000 for state
income taxes at December 31, 1995, June 30, 1996 and September 30, 1996
(UNAUDITED). The net operating loss carryforwards expire in various
years through 2011. The Tax Reform Act of 1986 contains provisions which
limit the federal net operating loss carryforwards available that can be
used in any given year in the event of certain occurrences, which include
significant ownership changes. The remaining deferred tax differences
are a result of the vacation accrual and differences between accumulated
depreciation for books and tax. At June 30, 1996, based upon the expected
results of management's plans as discussed in Note 1 and detailed within
the Company's fiscal 1997 budgets, management believes that it is more
likely than not that $100,000 of the net deferred tax asset will be
realized. In addition, based upon the results of the Company's Operations
for the three months ended September 30, 1996 (UNAUDITED), management has
increased the balance of its unreserved deferred tax asset to $200,000 as of
September 30, 1996 (UNAUDITED). Due to management not being able to
conclude that it is more likely than not that the remaining deferred tax
assets will be realized, a valuation allowance has been recorded on these
remaining assets as of December 31, 1995, June 30, 1996 and September 30,
1996 (UNAUDITED).
13. CONDENSED FINANCIAL DATA - UNAUDITED
In July 1996, the Company changed its year end from December
31 to June 30 for financial reporting purposes. Unaudited
condensed financial data for the six month period ended
December 31, 1995, which is included in the results of
operations and cash flows for the years ended December 31, 1995,
and June 30, 1996, is as follows:
AMOUNT
- --------------------------------------------------------------------
Net sales $3,648,412
Net loss (440,057)
Loss per share of common stock $ (0.10)
Weighted average number of shares outstanding 4,542,247
Cash flows from operating activities $ (123,763)
Cash flows from investing activities $ (398,464)
Cash flows from financing activities $ 376,687
====================================================================
F-18
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
========================================================================
14. SIGNIFICANT CUSTOMER
During the years ended December 31, 1995 and June 30, 1996,
approximately 12% and 11% of the Company's net sales were made
to one customer. During the year ended June 30, 1996, one
additional customer accounted for 10% of the Company's net
sales. During the three months ended September 30, 1996 (UNAUDITED),
approximately 26%, 13% and 10% of the Company's net sales were
made to three individual customers. The Company did not have
net sales to one customer equal to or in excess of 10% during
the year ended December 31, 1994, and the three months ended
September 30, 1995 (UNAUDITED).
15. OTHER INCOME (EXPENSE)
Other expense for the years ended December 31, 1994 and 1995 primarily
relate to consulting and legal fees incurred in connection with an
unsuccessful initial public offering in 1994, and an unsuccessful private
placement attempt in the first six months of 1995. Other income for the
year ended June 30, 1996 primarily consists of amounts received from the
settlement of a lawsuit and the settlement of an outstanding liability
for less than its recorded value. Other income for the three months ended
September 30, 1996 (UNAUDITED) primarily consists of the settlement of a
lawsuit for an amount less than what had been accrued on the Company's
accounts and the cancellation of shares of stock in conjunction with the
settlement of a different lawsuit.
16. SUBSEQUENT EVENTS
The Company anticipates an initial public offering of its
common stock. Net proceeds of the offering are expected to
repay certain indebtedness and provide additional working
capital.
F-19
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THE FACTS HEREIN SET FORTH SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information.................................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 10
Dividend Policy........................................................... 10
Capitalization............................................................ 11
Dilution.................................................................. 12
Selected Financial Data................................................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 14
Business.................................................................. 23
Management................................................................ 29
Certain Transactions...................................................... 32
Principal and Selling Shareholders........................................ 34
Description of Capital Stock.............................................. 35
Shares Eligible for Future Resale......................................... 36
Underwriting.............................................................. 37
Legal Matters............................................................. 39
Experts................................................................... 39
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1997 (45 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THESE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
1,150,000 SHARES
YOUNG MINDS, INC.
[LOGO]
COMMON STOCK
---------------------
P R O S P E C T U S
---------------------
SHARPE CAPITAL, INC.
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 317 of the California Corporations Code permits a corporation to
grant indemnification to directors, officers and other agents in terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities, including expenses, arising in connection with federal securities
laws, including but not limited to the Securities Act of 1933, as amended.
Pursuant to the Articles of Incorporation, as amended, and the Bylaws of the
Company, the Company is authorized to indemnify its directors, officers and
other agents to the full extent permitted by law and has indemnified its
directors for monetary damages to the full extent permitted by law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
ITEM AMOUNT
---- ------
Registration fee $5,671
Blue Sky fees and expenses* 45,000
Legal fees and expenses (other than Blue Sky)* 75,000
Accounting fees and expenses* 45,000
Printing costs* 45,000
Transfer agent fees* 2,000
Miscellaneous* 31,000
------
Total.............................. $248,671
- ------------------
*Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The numbers for shares shown below have been adjusted, were appropriate, to
reflect two reverse stock splits effected by the Company in December 1993 and
January 1994.
In September 1993, as partial consideration for consulting services to be
performed, the Company granted an option to purchase 78,481 shares at $0.96
per share, with the right to exercise the option for 13,080 shares accruing
every six months. The option grants the holder certain registration rights
with respect the shares which may be acquired upon exercise of options. Such
rights have been waived with respect to this offering. The Company believes
that the offering was exempt from registration under the Securities Act by
reason of Section 4(2) thereof and/or Regulation D under the Securities Act
as a non-public sale of securities due to the absence of a general
solicitation, the general nature and circumstances of the sale, including the
qualifications of the purchasers, and the restrictions on resales of the
securities acquired.
In October 1993, the Company issued 26,160 shares of Common Stock to an
employee of the Company as a bonus in exchange for services rendered. For
purposes of the issuance, such shares were valued at $0.96 per share. The
Company believes that the offering was exempt from registration under the
Securities Act by reason of Section 4(2) thereof and/or Regulation D under the
Securities Act as a non-public sale of securities due to the absence of a
general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on resales
of the securities acquired.
In October 1993, the Company issued options to purchase 39,240 shares of
Common Stock in exchange for legal services to be provided. The options were
exercisable at $0.96 per share. The Company believes that the offering was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature and
circumstances of the sale, including the qualifications of the purchasers, and
the restrictions on resales of the securities acquired.
<PAGE>
In November 1993, the Company entered into a Stock Option Agreement with
two individuals as part of an arrangement pursuant to which such persons lent
$50,000 to the Company. The holders of the options would be entitled to acquire
at a purchase price of $50,000 (i) an amount of securities from the Company
equivalent to that which an investor of $50,000 in the Company's then proposed
bridge financing plan would be able to acquire or (ii) if no bridge financing
transaction had occurred by January 15, 1994, the number of shares of Common
Stock determined by dividing $50,000 by the most recent price at which the
company had sold its Common Stock. If no bridge financing occurred by January
15, 1994, the option would expire on January 31,1994. The options were
exercisable at $.25 per share. The Company believes that the offering was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature and
circumstances of the sale, including the qualifications of the purchasers, and
the restrictions on resales of the securities acquired.
In December 1993, the Company sold a total of 26,160 shares to two
individuals at a price of $1.91 per share. The Company believes that the
offering was exempt from registration under the Securities Act by reason of
Section 4(2) thereof and/or Regulation D under the Securities Act as a
non-public sale of securities due to the absence of a general solicitation,
the general nature and circumstances of the sale, including the
qualifications of the purchasers, and the restrictions on resales of the
securities acquired.
In January 1994, The Company borrowed $75,000 each from two individuals.
The Company also granted each lender an option to purchase 15,000 shares of
Common Stock. The purchase price for the shares would be $1.50 per share, later
amended to $2 per share, subject to adjustment downward if the Company did not
conduct an initial public offering of its Common Stock. In order to comply with
the requirements of the Company's proposed underwriters, Mr. Cote offered, for
no consideration, to donate the shares of Common Stock to be delivered upon
exercise of the option. As a result of the termination of the proposed
underwriting, the Company did not accept his offer. The option terminates on
the date which is three months after the Company has notified the holders that
the Company is prepared to delivered registered shares upon the exercise of such
option. The Company believes that the offering was exempt from registration
under the Securities Act by reason of Section 4(2) thereof and/or Regulation D
under the Securities Act as a non-public sale of securities due to the absence
of a general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on resales
of the securities acquired.
In February 1994, in connection with a loan of $150,000 to the Company, it
granted an option to purchase 100,000 shares of Common Stock at $1.50 per share.
The option must be exercised no later than one year after the Company notifies
the holder that the Company is prepared to deliver registered shares upon the
exercise of the option. The option grants the holder certain registration
rights with respect the shares which may be acquired upon
<PAGE>
exercise of options. The Company believes that the offering was exempt
from registration under the Securities Act by reason of Section 4(2) thereof
and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature
and circumstances of the sale, including the qualifications of the
purchasers, and the restrictions on resales of the securities acquired.
In August 1994, in recognition of extraordinary efforts the Company
granted to four individuals warrants to purchase an aggregate of 175,500
shares of Common Stock at $1 per share and to three individuals warrants to
purchase an aggregate of 145,000 shares of Common Stock at $.05 per share;
and in consideration of services performed, the Company granted to one
individual 15,000 shares of Common Stock valued at $.25 per share. All
warrants expire July 31, 1999. The Company believes that the offering was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature
and circumstances of the sale, including the qualifications of the
purchasers, and the restrictions on resales of the securities acquired.
In January 1995, in exchange for the extension of the term of certain
loans the Company granted to three individuals warrant to purchase an
aggregate of 150,000 shares of common Stock at a price of $1 per share. Such
warrants expire on January 8, 2000. Pursuant to the Company's Stock Bonus
Program, in recognition of achieving Company sales goals, the Company awarded
11 individuals an aggregate of 44,000 shares of Common Stock. The Company
believes that the offering was exempt from registration under the Securities
Act by reason of Section 4(2) thereof and/or Regulation D under the
Securities Act as a non-public sale of securities due to the absence of a
general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on
resales of the securities acquired.
In April 1995, the Company made loans, evidenced by promissory notes, to
three officers of the Company, Andrew J. Young, David H. Cote and Matthew
Hornbeck. Each loan was in the principal amount of $62,500 and was for a
ten-year term bearing interest at the annual rate of 7.53%, with principal
and interest due at maturity. The proceeds were used by each of the officers
to purchase 250,000 shares of Common Stock. Each loan is secured by a
pledge of 250,000 shares of Common Stock of the Company. The Company
believes that the offering was exempt from registration under the Securities
Act by reason of Section 4(2) thereof and/or Regulation D under the
Securities Act as a non-public sale of securities due to the absence of a
general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on
resales of the securities acquired.
In May 1995, the Company made a loan of $3,750, evidenced by a promissory
note, to Genene G. Miller, the wife of David H. Cote. The proceeds were used by
Ms. Miller to purchase 75,000 shares of Common Stock. The note bears interest
at the annual rate of 7.53%, with the principal and accrued interest due on May
31, 2005. The loan is secured by the 75,000 shares of Common Stock. The
Company believes that the offering was exempt from registration under the
Securities Act by reason of Section 4(2) thereof and/or Regulation D under the
Securities Act as a non-public sale of securities due to the absence of a
general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on resales
of the securities acquired.
Between May 1995 and August 1995, in recognition of extraordinary efforts
the Company granted to three individuals warrants to purchase an aggregate of
90,000 shares of Common Stock at $1 per share and to one firm warrants to
purchase 40,000 shares of Common Stock at $.05 per share. All warrants
expire May 5, 2001. The Company believes that the offering was exempt from
registration under the Securities Act by reason of Section 4(2) thereof
and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature
and circumstances of the sale, including the qualifications of the
purchasers, and the restrictions on resales of the securities acquired.
In September 1995, in recognition of extraordinary efforts the Company
granted to five individuals warrants to purchase an aggregate of 245,000 shares
of Common Stock at $.50 per share. The Company believes that the offering was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature and
circumstances of the sale, including the qualifications of the purchasers, and
the restrictions on resales of the securities acquired.
<PAGE>
In September 1995, in exchange for services performed in arranging a
proposed financing for the Company, it granted to an individual 50,000 shares
of Common Stock. The Company believes that the offering was exempt from
registration under the Securities Act by reason of Section 4(2) thereof
and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature
and circumstances of the sale, including the qualifications of the
purchasers, and the restrictions on resales of the securities acquired.
In September 1995, in recognition of valuable services performed for the
Company, it granted to an employee options to purchase 75,000 shares of Common
Stock at a purchase price of $.50 per share. The options expire if unexercised
five years from the date of grant. The Company believes that the offering was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature and
circumstances of the sale, including the qualifications of the purchasers, and
the restrictions on resales of the securities acquired.
In December 1995, the Company issued options to three officers to purchase
an aggregate of 90,000 shares of Common Stock at $3.00 per share. The
options expire if unexercised five years from the date of grant. The options
expire if unexercised five years from the date of grant. The Company
believes that the offering was exempt from registration under the Securities
Act by reason of Section 4(2) thereof and/or Regulation D under the
Securities Act as a non-public sale of securities due to the absence of a
general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on
resales of the securities acquired.
In December 1995, the Company made loans, evidenced by promissory notes to
three officers of the Company, Andrew J. Young, David H. Cote and Matthew
Hornbeck, in the principal amount of $120,000, $60,000 and $90,000,
respectively. The loans are for a ten-year term, bearing interest at the annual
rate of 7.53%, with principal and interest due at maturity.. The proceeds were
used by each of the officers to purchase 40,000 shares, 20,000 shares and 30,000
shares, respectively, of Common Stock at a purchase price of $3.00 per share. At
the time of the transaction, the fair market value of the Common Stock was $1
per share or less. The Company believes that the offering was exempt from
registration under the Securities Act by reason of Section 4(2) thereof and/or
Regulation D under the Securities Act as a non-public sale of securities due to
the absence of a general solicitation, the general nature and circumstances of
the sale, including the qualifications of the purchasers, and the restrictions
on resales of the securities acquired.
In December 1995 and early 1996, the Company sold 92 units, with each unit
consisting of one $20,000 note, 5,000 shares of common stock and 5,000 warrants
granted at an exercise price of $1, for a purchase price of $25,000 per unit.
The units were sold in a private placement to the 25 persons listed in the
Prospectus as Selling Shareholders. The Company believes that the offering was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature and
circumstances of the sale, including the qualifications of the purchasers, and
the restrictions on resales of the securities acquired. The units were sold
principally by Sharpe Capital, Inc. as selling agent for the Company. In
conjunction with the private placement, 425,000 warrants purchase common stock
at an exercise price of $1 per share were earned by the selling agents.
In January 1996, the Company issued warrants to purchase 6,540 shares of
Common Stock to a new employee of the Company in partial consideration for
the employment of the employee. The warrants expire in five years and have an
exercise price of $0.96 per share. The Company believes that the offering was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature
and circumstances of the sale, including the qualifications of the
purchasers, and the restrictions on resales of the securities acquired.
In March 1996, the Company issued warrants to purchase 30,000 shares of
Common Stock to a new employee of the Company in partial consideration for
the employment of the employee. The warrants expire in five years and have an
exercise price of $1.00 per share. The Company believes that the offering was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature
and circumstances of the sale, including the qualifications of the
purchasers, and the restrictions on resales of the securities acquired.
In April 1996, in recognition of valuable services rendered to the Company,
it granted to an individual warrants to purchase 60,000 shares of Common Stock
at a purchase price of $1.00 per share. The warrants expire if unexercised five
years from the date of grant. The Company believes that the offering was exempt
from registration under the Securities Act by reason of Section 4(2) thereof
and/or Regulation D under the Securities Act as a non-public sale of securities
due to the absence of a general solicitation, the general nature and
circumstances of the sale, including the qualifications of the purchasers, and
the restrictions on resales of the securities acquired.
In May 1996, the Company issued warrants to purchase 50,000 shares of
Common Stock to a new consultant of the Company in partial consideration for
the employment of the consultant. The warrants expire in five years and have
an exercise price of $1.00 per share. The Company believes that the offering
was exempt from registration under the Securities Act by reason of Section
4(2) thereof and/or Regulation D under the Securities Act as a non-public
sale of securities due to the absence of a general solicitation, the general
nature and circumstances of the sale, including the qualifications of the
purchasers, and the restrictions on resales of the securities acquired.
<PAGE>
ITEM 27. EXHIBITS.
SEQUENTIALLY
NUMBERED
PAGES UPON WHICH
EXHIBIT DESCRIPTION EXHIBIT APPEARS
------- ----------- ---------------
1. Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation
of the Registrant
3.2 Bylaws of the Registrant
5.1 Opinion of Swanson & Meepos, LLP*
10.1 Employment agreement with Andrew J. Young.
10.2 Employment agreement with David H. Cote.
10.3 Employment agreement with Matthew Hornbeck.
11.1 Computation of Weighted Average Common Stock Outstanding.
21 Subsidiaries of Registrant: None
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Swanson & Meepos, LLP (included in opinion
filed as Exhibit 5.1).*
24.1 Powers of attorney (included on page II-3 hereof).
27. Financial data schedule.
------------------
* To be filed by amendment.
<PAGE>
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes:
(a) To provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriter to permit prompt delivery to each
purchaser.
(b) That insofar as indemnification for liabilities arising under the
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
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 Registrant of expenses incurred or
paid by a director, officer or controlling persons of the Registrant 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 Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) That for determining any liability under the Act, the Registrant
will 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 Registrant under Rule 424(b)(1) or (4) or 497(h)
under the Act as part of this registration statement as of the time the
Securities ad Exchange Commission declared it effective.
(d) That for determining any liability under the Act, each
post-effective amendment that contains a form of prospectus will be treated
as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that time will
be treated as the initial bona fide offering of those securities.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this Amendment
No. 1 to Registration Statement No. 333-11713 to be signed on its behalf by
the undersigned, in the city of Redlands, state of California, on November
29, 1996.
YOUNG MINDS, INC.
By ANDREW J. YOUNG
_______________________
Andrew J. Young,
Chairman of the Board
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement No. 333-11713 was signed by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
ANDREW YOUNG Chairman of the Board and Director November 29, 1996
- ---------------- (Principal Financial Officer and
(Andrew Young) Principal Accounting Officer)
DAVID H. COTE Chief Executive Officer, President November 29, 1996
- ---------------- and Director
(David H. Cote)
GERALD QUEALY Director November 29, 1996
- ----------------
(Gerald Quealy)
<PAGE>
EXHIBIT 11.1
YOUNG MINDS, INCORPORATED
COMPUTATION OF WEIGHTED AVERAGE COMMON STOCK OUTSTANDING
<TABLE>
<CAPTION>
Years Ended Three Months Ended
------------------------------- -----------------------
December 31, June 30, September 30,
---------------- -----------------------
1994 1995 1996 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Weighted Common Stock Outstanding 1,861,230 2,457,480 2,969,147 2,730,230 3,288,910
Common Stock Equivalents per SAB 83
Common shares and warrants issued
subsequent to August 1995 at prices
or exercise prices below the expected
offering price(1) 1,961,540 1,961,540 1,961,540 1,961,540 1,961,540
Assumed buyback of public shares(3) (160,523) (160,523) (160,523) (160,523) (160,523)
--------- --------- --------- --------- ---------
1,801,017 1,801,017 1,801,017 1,801,017 1,801,017
--------- --------- --------- --------- ---------
Common Stock Equivalents per APB 15
Outstanding warrants and options(2) 862,306 752,462
Assumed buyback of public shares(3) (104,340) (48,323)
--------- ---------
757,966 N/A N/A N/A 704,139
--------- ---------
Weighted Average Common Stock
Outstanding - Primary and Fully Dilutive 4,437,603 4,258,497 4,770,164 4,531,247 5,794,066
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ----------------
(1) Amount represents all common stock and options and warrants issued
within one year of the initial filing of the Company's registration
statement at a per share or exercise price per share below the
anticipated public offering price of $12.00 per share.
(2) Amount represents the total amount of common stock equivalents
outstanding as of December 31, 1994 and September 30, 1996, less
equivalents included in the SAB83 Calculation.
(3) Amount represents the repurchase of shares at an assumed purchase price
of $12.00 per share utilizing the proceeds received on the sale of
common stock or exercise of options or warrants.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Shareholders of
Young Minds, Incorporated
We hereby consent to the use in the Prospectus constituting a part of
this Registration Statement on Form SB-2 of our report dated August 31, 1996,
relating to the financial statements of Young Minds, Incorporated which are
contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
BDO SEIDMAN, LLP
Los Angeles, California
November 29, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF YOUNG MINDS, INCORPORATED AS OF AND FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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0
0
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</TABLE>
