<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 SEPTEMBER 10, 1996
1,100,000 Shares
[LOGO]
YOUNG MINDS, INCORPORATED
COMMON STOCK
------------------
Of the 1,100,000 shares of Common Stock (the "Common Stock") offered hereby,
725,000 shares are being sold by Young Minds, Incorporated (the "Company") and
375,000 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
165,000 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.
MERIDIAN CAPITAL GROUP, INC.
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 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 superior innovation, quality and
product reliability it has emerged as a recognized industry 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 the following six product lines based on
its proprietary technology:
CD STUDIO: Networkable CD-Recordable solution for UNIX and Windows NT.
MPS: High-volume CD-Recordable Mass Production System solution
for enterprise-wide data archival and distribution.
ULTRACAPACITY: Complete CD-ROM mass storage jukebox solutions.
ULTRASTUDIO: CD-ROM mass storage jukebox solutions with integrated CD-
Recording.
AUTOCDR: CD-Recordable solution for Novell networks.
SIMPLICD: CD-Recordable software for Windows.
In addition, the Company is addressing the increased need for data security
technology with new product developments.
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. . . . . 375,000 shares
Common Stock to be outstanding after the offering . . . . 3,999,442 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) 2,047,462 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants at a weighted average exercise price of
approximately $0.82 per share, (ii) 165,000 additional shares of Common Stock
issuable upon exercise of the Underwriters' over-allotment option, and (iii)
110,000 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 ENDED
YEAR ENDED DECEMBER 31, ENDED JUNE 30, SEPTEMBER 30,
-----------------------------------------------------------------------------
1992(1) 1993 1994 1995(2) 1996(2) 1995(3) 1996(3)
------- ---- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales $1,928 $4,656 $7,647 $7,052 $6,702
Gross profit 1,130 2,705 4,631 3,777 3,569
Income (loss) from operations (721) (1,040) 1,121 255 (133)
Net income (loss) (811) (1,853) 102 (699) (760)
Net income (loss) per share $(0.31) $(0.60) $0.02 $(0.17) $(0.16)
Weighted average common stock outstanding 2,586,714 3,100,868 4,359,196 4,197,480 4,709,147
Actual common stock outstanding (4) 5,241,000 1,899,899 1,905,230 3,095,230 3,302,374
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: DECEMBER JUNE 30, 1996
31, 1995 ACTUAL AS ADJUSTED(5)
------------ ------ --------------
<S> <C> <C> <C>
Working capital (deficiency) $(3,526) $(2,774) 2,730
Total assets 3,669 3,431 8,372
Total liabilities 6,084 5,889 3,486
Shareholders' equity (deficit) (2,415) (2,459) 4,862
Short term debt 1,917 661 142
Long term debt (less current portion) 1,380 2,112 243
Total debt 2,697 2,773 385
</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 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 4,481,230 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 have not been audited.
(4) Does not include the effect of any options/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 June 30, 1996, the Company
had a negative working capital of approximately $2.8 million and a shareholders'
deficiency of approximately $2.5 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. There can be no assurance that the Company will be able to
achieve profitability and, if achieved, that profitability will be sustained.
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.
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. See "Management."
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 mediums 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 timely 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, and Smart
Storage. Although the Company believes that it currently has a competitive
advantage with respect to these competitors from a technological and
4
<PAGE>
cost 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 $11.26 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."
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 a majority of the shares of the Company's common stock on a
fully diluted basis. Accordingly, they will continue to have the ability to
determine the outcome of elections of the Company's directors and other matters
presented to a vote of shareholders.
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 3,999,442 shares of Common Stock to
be outstanding after the offering (assuming that the Underwriters' over-
allotment option is not exercised), the 1,100,000 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
1,772,282 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 747,981 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
($9,042,600) 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 June
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 $ 242,500 $110,000
Due to factor 396,008 0
Current portion of capital lease obligations (3) 22,154 22,154
------ ------
Total short-term debt 660,662 142,154
Long-term debt
Notes payable, less current portion 1,913,000 243,000
Notes payable to related parties, less current portion 198,609 0
------- -
Total long-term debt 2,111,609 243,000
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, 3,303,374 shares (historical) and
4,028,374 shares (4) (as adjusted) issued and 1,965,140 9,285,140
outstanding (5);
Additional paid-in capital 290,338 290,338
Shareholders notes receivable (406,620) (406,620)
Accumulated deficit (4,307,368) (4,307,368)
----------- -----------
Total stockholders equity (deficiency) $(2,458,510) 4,861,490
----------- ---------
Total capitalization 82,247 5,246,644
------ ---------
------ ---------
</TABLE>
- -------------------
(1) Does not reflect the issuance of up to 165,000 additional shares subject to
the Underwriters' over-allotment 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) Does not reflect the cancellation, subsequent to June 30, 1996, of 28,932
shares as part of a settlement with the Company.
(5) Excludes (i) 2,047,462 shares of Common Stock issuable upon exercise of
options or warrants outstanding at June 30, 1996, and (ii) 110,000 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 June 30, 1996 was
$(4,353,254), or $(1.32) per share. The net tangible deficit comprises
shareholders' deficiency of $(2,458,510), less software development costs of
$1,714,444 and deferred loan costs of $180,300. 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 June 30, 1996 would have been $2,966,746,
or $0.74 per share, representing an immediate increase in the net tangible book
value of $2.06 per share to existing shareholders and an immediate dilution of
$11.26 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---------- $(1.32)
Increase per share attributable to new investors------- 2.06
Net tangible book value per share after the offering--------- 0.74
-----
Dilution per share to new investors-------------------------- $11.26
The table below summarizes the difference, at June 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) 3,303,374 82.0% $ 1,965,140 18.4% $ 0.59
New investors 725,000 18.0% 8,700,000 81.6% 12.00
------- ----- ---------- ------
Total 4,028,374(2) 100.0% $ 10,665,140 100.0%
</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 2,928,374 shares, or
73% 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
1,100,000 shares, or 27% of the total number of shares of Common Stock to be
outstanding after this offering. See "Principal and Selling Shareholders."
(2) Does not reflect the cancellation, subsequent to June 30, 1996, of 28,932
shares as part of a settlement with the Company.
The foregoing tables assume no exercise of any outstanding stock options or
warrants or the Underwriters' over-allotment option. As of June 30, 1996, there
were outstanding options and warrants to purchase 2,047,462 shares of Common
Stock at a weighted average exercise price of approximately $0.82 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 statement
of operations data for the three months ended September 30, 1995 and 1996 have
not been audited. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Three Months Ended
Year Ended December 31, Ended June 30, September 30,
-------------------------------------------------- -------------- ------------------
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
Cost of goods 798 1,951 3,016 3,275 3,133
--- ----- ----- ----- -----
Gross profit 1,130 2,705 4,631 3,777 3,569
----- ----- ----- ----- -----
Operating costs and expenses
Research and development 181 597 437 365 403
Selling, general and administrative 1,670 3,148 3,073 3,157 3,299
----- ----- ----- ----- -----
Total operating expense 1,851 3,745 3,510 3,522 3,702
----- ----- ----- ----- -----
Income (loss) from operations (721) (1,040) 1,121 255 (133)
Other income (expense) 17 (654) (409) (207) 81
Interest expense (107) (158) (610) (747) (808)
----- ----- ----- ----- -----
Income (loss) before income taxes (811) (1,852) 102 (699) (860)
Income tax benefit 0 1 0 0 100
- - - - ---
Net income (loss) (811) (1,853) 102 (699) (760)
----- ------ --- ----- -----
Net income (loss) per share $(0.31) $(0.60) $0.02 $(0.17) (0.16)
Weighted average 2,586,714 3,100,868 4,359,196 4,197,480 4,709,147
common stock outstanding
Actual common stock outstanding (3) 3,241,000 1,899,899 1,905,230 3,095,230 3,303,374
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30, 1996
------------------------------------------ ----------------
1992 1993 1994 1995 ACTUAL AS ADJUSTED (1)
------------------------------------------ ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency) $(1,374) $(3,039) $(3,670) $(3,526) $(2,774) $2,730
Total assets 1,059 1,431 3,563 3,669 3,431 8,372
Short term debt 713 866 1,918 1,317 661 142
Long term debt (less current portion) 93 47 31 1,380 2,112 243
Total debt 806 913 1,949 2,697 2,773 385
Total liabilities 1,846 3,500 5,512 6,084 5,889 3,486
Shareholders equity (deficit) (786) (2,069) (1,949) (2,415) (2,459) 4,862
</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 4,481,230 shares, respectively.
(2) 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."
(3) Does not include the effect of any options/warrants or SAB 83 stock, and
therefore represents only the actual outstanding stock at the end of the fiscal
year.
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. 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. Such interest expense exceeded the Company's losses for
each of the years ended December 31, 1995 and June 30, 1996.
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.
Based on the number of units shipped during July and August 1996 and the
amount of backlog at August 31, 1996, the Company believes that net sales will
be significantly greater for the three months ending September 30, 1996 compared
to the three months ended September 30, 1994 and 1995 and to the three months
ended June 30, 1996 and that the Company will realize net income for such
quarter. 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 June 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 $3,488,000 as of June 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. 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
11
<PAGE>
reselling these items. Moreover, Company sales mau be affected by the economic
conditions in the small computer industry which may suffer from cyclical
depressed business conditions.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of net sales for the periods indicated:
YEARS ENDED DECEMBER 31,YEAR ENDED
JUNE 30,
1994 1995 1996
------- ------- -------
Net Sales 100.0% 100.0% 100.0%
Cost of sales 39.4% 46.4% 46.8%
------ ------ ------
Gross profit 60.6% 53.6% 53.2%
Research and development 5.7% 5.2% 6.0%
Selling, general and administrative 40.2% 44.8% 49.2%
------ ------ ------
Income (loss) from operations 14.7% 3.6% -2.0%
Interest -8.0% -10.6% -12.1%
Other income (expense) -5.4% -2.9% 1.3%
----- ----- ----
Income (loss) before income taxes 1.3% -9.9% -12.8%
Taxes benefit/(tax) 0.0% 0.0% 1.5%
---- ---- ----
Net income (loss) 1.3% -9.9% -11.3%
---- ----- ------
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.
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. Total unit sales for Company products were virtually unchaged and the
weighted average unit price decreased by 5.4%. These decreases were caused
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.
GROSS PROFIT
The 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.
The Company was able to keep its gross margin percentage 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. 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 is due to the decrease in net sales.
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 expense increased by $37,637, or 10%, to
$402,560
12
<PAGE>
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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses have 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. This modest increase 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. 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.
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. 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.
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
13
<PAGE>
increasing its product line during these years by adding SIMPLICD and
ULTRACAPACITY in 1994 and adding/developing MPS and ULTRASTUDIO in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses have 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.
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.
OTHER EXPENSE
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
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 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 $1,348,000 of net deferred tax assets, which
consist primarily of federal and state net operating losses, as of June 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, management believes that it is more likely than not
that $100,000 of the net deferred tax
14
<PAGE>
asset will be realized. 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 June
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 (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 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.
15
<PAGE>
BUSINESS
GENERAL
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 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.
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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."
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<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
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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,
customers perceive a substantial cost advantage to CD-R and CD-ROM jukebox
technology over existing mass storage alternatives. 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 pre-sales support 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.
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<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
and June 30, 1996 was respectively $200,887, $489,209 and $255,406. 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. 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. 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
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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 companies such as Adaptec, Meridian Data,
and Smart Storage.
Moreover, the Company has few proprietary barriers to entry that could keep
its competitors or new competitors 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. In any event, the Company
intends 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 received correspondence from an individual claiming to be a
"finder" with respect to unspecified services, demanding fees in an unspecified
amount and warrants to purchase Common Stock of the Company. The Company
believes that such individual did not perform his obligations under the
applicable agreement, and that he fraudulently induced the Company to enter into
the agreement. For these reasons, the Company does not believe itself liable in
this regard in any amount. There can be no assurance, however, that if this
matter is litigated, a court would not hold the Company liable to the
individual.
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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 52 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 serves 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
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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.
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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.
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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. 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. 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, and certain relatives of these
persons have participated in various ways in the issuance of promissory notes
of the Company. As of June 30, 1996, approximately $231,000 was owed to such
persons for unpaid principal and interest.
At various times commencing in 1993 through 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 ten-year term at a per
share price of $0.50. 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.
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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) 606,698 18.5% ___ 606,698 15.2%
David H. Cote (5) 455,588 13.9% ___ 455,588 11.4%
Matthew Hornbeck 550,695 16.8% ___ 550,695 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) 1,612,981 49.3% 1,612,981 40.3%
</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.
26
<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) Does not include an aggregate of 201,924 shares and 161,000 warrants
owned by relatives of Mr. Young, as to which Mr. Young disclaims any
beneficial interest, or warrants to purchase 25,000 shares of Common Stock,
which are not currently exercisable.
(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 3,274,442 shares were issued and outstanding as of August 31, 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.
27
<PAGE>
WARRANTS
The Company has outstanding 2,047,462 warrats ("Warrants") to purchase an
equivalent number of shares of Common Stock at various purchase prices. The
weighted average exercise price is $0.82 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 3,999,442
shares of Common Stock outstanding (assuming that the Underwriters'
over-allotment option is not exercised). Of these shares, the 1,100,000
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 2,899,442 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 1,772,282 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.
Approximately 747,981 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 director (who in the aggregate hold
approximately 1,612,981 Restricted Shares) have agreed not to sell or offer
to sell or otherwise dispose of any shares of Common Stock currently held
by them
28
<PAGE>
for a period of 18 months 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 August 31, l996, options and warrants to purchase an aggregate of
2,047,462 shares of Common Stock were outstanding.
The holders of options and/or warrants to purchase an aggregate of
approximately 2,000,000 shares of Common Stock have the right in certain
circumstances to require the Company to include such shares in a registration
statement filed by the Company. See "Certain Transactions."
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 Meridian Capital Group, Inc.
and 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
------------ ------
Meridian Capital Group, Inc.
Sharpe Capital, Inc.
Total....................
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
29
<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 165,000 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 $110,
warrants (the "Representatives Warrants") to purchase up to 110,000 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. 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. The Company is obliged to
pay the out-of-pocket expenses of such observer and compensation equal to that
paid independent directors, if any.
30
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Swanson & Meepos, 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.
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, references made to the copy of the
contract of 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.
31
<PAGE>
YOUNG MINDS, INCORPORATED
CONTENTS
==============================================================================
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>
YOUNG MINDS, INCORPORATED
BALANCE SHEETS
==============================================================================
DECEMBER 31, JUNE 30,
1995 1996
- ------------------------------------------------------------------------------
ASSETS (NOTE 5)
CURRENT ASSETS
Cash and cash equivalents $ - $ 120,567
Accounts receivable, net of allowance for
doubtful accounts of $5,000 and
$5,000 (Note 4) 819,820 597,410
Inventories (Note 3) 147,350 182,316
Prepaid expenses and other 15,908 3,419
Deferred income taxes (Note 12) - 100,000
Receivable from private placement (Note 10) 195,750 -
- ------------------------------------------------------------------------------
Total current assets 1,178,828 1,003,712
PROPERTY AND EQUIPMENT,
net (Note 2) 427,858 453,349
SOFTWARE DEVELOPMENT COSTS, net of accumu-
lated amortization of $688,246 and $920,605 1,594,856 1,714,444
DEFERRED LOAN COSTS, net of accumulated
amortization of $0 and $90,700 (Note 10) 185,200 180,300
OTHER ASSETS 282,583 78,826
- ------------------------------------------------------------------------------
Total assets $3,669,325 $3,430,631
==============================================================================
F-3
<PAGE>
YOUNG MINDS, INCORPORATED
BALANCE SHEETS
==============================================================================
DECEMBER 31, JUNE 30,
1995 1996
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Checks issued against future deposits $ 87,080 $ -
Accounts payable 1,709,979 1,602,340
Due to factor (Note 4) 596,459 396,008
Accrued expenses 284,395 304,511
Accrued interest 285,594 232,350
Accrued vacation 156,960 290,035
Payroll taxes payable (Note 5) 511,535 329,526
Deferred revenue 351,685 358,108
Notes payable to related parties, current portion
(Note 6) 196,195 -
Notes payable, current portion (Note 7) 500,617 242,500
Obligations under capital leases, current portion
(Note 8) 23,984 22,154
- -------------------------------------------------------------------------------
Total current liabilities 4,704,483 3,777,532
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
NOTES PAYABLE TO RELATED PARTIES, less current
portion (Notes 6 and 10) 220,000 198,609
- -------------------------------------------------------------------------------
Total liabilities 6,084,269 5,889,141
- -------------------------------------------------------------------------------
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; 3,051,230 and 3,303,374 shares
issued and outstanding at December 31, 1995
and June 30, 1996 (Note 10) 1,733,340 1,965,140
Additional paid-in capital 287,038 290,338
Accumulated deficit (3,987,084) (4,307,368)
Shareholders notes receivable (Note 11) (448,238) (406,620)
- -------------------------------------------------------------------------------
Total stockholders' deficiency (2,414,944) (2,458,510)
- -------------------------------------------------------------------------------
Total liabilities and stockholders' deficiency $3,669,325 $3,430,631
===============================================================================
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
------------------------ JUNE 30,
1994 1995 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $7,647,052 $7,051,554 $6,702,237
COST OF SALES 3,015,726 3,274,390 3,133,518
- --------------------------------------------------------------------------------------
GROSS PROFIT 4,631,326 3,777,164 3,568,719
OPERATING COSTS AND EXPENSES
Research and development 437,377 364,923 402,560
Selling, general and administrative 3,073,190 3,157,126 3,299,405
- --------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 1,120,759 255,115 (133,246)
INTEREST EXPENSE (609,842) (746,538) (808,192)
OTHER INCOME (EXPENSE)(NOTE 15) (408,874) (207,494) 81,097
- --------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 102,043 (698,917) (860,341)
INCOME TAX BENEFIT - - 100,000
- --------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 102,043 $ (698,917) $ (760,341)
======================================================================================
NET INCOME (LOSS) PER SHARE $ 0.02 $ (0.17) $ (0.16)
======================================================================================
WEIGHED AVERAGE COMMON
STOCK OUTSTANDING 4,359,196 4,197,480 4,709,147
======================================================================================
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)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-6
<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, 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)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<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, 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)
=======================================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES, NOTES TO FINANCIAL STATEMENTS.
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
YOUNG MINDS, INCORPORATED
STATEMENT OF CASH FLOWS
=========================================================================================
INCREASE (DECREASE) IN CASH
YEARS ENDED DECEMBER 31, YEAR ENDED
------------------------ JUNE 30,
1994 1995 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 102,043 $(698,917) $(760,341)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation 117,997 150,622 160,044
Amortization of capitalized software costs 206,235 361,592 430,217
Amortization of deferred loan costs -- -- 90,700
Interest on capital lease obligations 6,253 4,538 2,740
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)
Increase (decrease) from changes in:
Accounts receivable (1,162,583) 681,063 717,088
Inventories (162,295) 41,308 (73,423)
Prepaid expenses and other current
assets (99,863) 106,251 9,401
Other assets 15,347 (464,085) 187,466
Accounts payable 682,417 (74,387) (231,880)
Accrued liabilities 62,970 234,231 114,384
Payroll taxes payable (18,441) (157,203) (219,546)
Deferred revenue 213,091 (229,828) (250,900)
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities (118,531) (65,397) 75,950
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (99,850) (7,913) (134,143)
Capitalized software development costs (874,959) (718,981) (719,517)
- -----------------------------------------------------------------------------------------
Net cash used in investing activities (974,809) (726,894) (853,660)
- -----------------------------------------------------------------------------------------
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
YOUNG MINDS, INCORPORATED
STATEMENT OF CASH FLOWS
=========================================================================================
INCREASE (DECREASE) IN CASH
YEARS ENDED DECEMBER 31, YEAR ENDED
------------------------ JUNE 30,
1994 1995 1996
- -----------------------------------------------------------------------------------------
<S> <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)
Proceeds from repayments of
notes receivable from shareholders -- 13,012 54,631
Due to factor 754,806 (158,347) (473,727)
Proceeds from issuance of notes payable 200,000 6,963 --
Payments on notes payable (4,376) (135,196) (333,934)
Payments on obligations under capital
leases (20,359) (20,359) (19,492)
Checks issued against future deposits 36,255 50,825 --
Shareholder contribution and other sales
of securities -- 6,025 12,805
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
- -----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (27,514) -- 62,107
CASH AND CASH EQUIVALENTS, at beginning of year 27,514 -- 58,460
- -----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end of year $ -- $ -- 120,567
=========================================================================================
CASH PAYMENTS DURING THE PERIOD FOR
INTEREST $ 478,559 $ 636,280 $765,084
=========================================================================================
</TABLE>
F-10
<PAGE>
YOUNG MINDS, INCORPORATED
STATEMENT OF CASH FLOWS
================================================================================
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.
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES, NOTES TO FINANCIAL STATEMENTS.
F-11
<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.
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. Concentrations of credit risk with history before
extending credit. The Company reviews a customers credit history before
extending credit.
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.
F-12
<PAGE>
YOUNG MINDS, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
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 and $430,217 was included in cost of sales for the year
ended December 31, 1994 and 1995 and June 30, 1996.
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 certain other conditions have been
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 over the terms of the agreements.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred.
F-13
<PAGE>
YOUNG MINDS, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
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 to factor
approximated fair value as of December 31, 1995 and June 30, 1996, 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-14
<PAGE>
YOUNG MINDS, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
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-15
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
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.
2. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
DECEMBER 31, JUNE 30,
1995 1996
- --------------------------------------------------------------------------------
Computer equipment and purchased software $ 759,592 $ 862,841
Office equipment 57,926 57,926
Vehicles 20,808 20,808
Leasehold improvements 14,197 14,197
- -------------------------------------------------------------------------------
852,523 955,772
Accumulated depreciation (424,665) (502,423)
- -------------------------------------------------------------------------------
$427,858 $ 453,349
===============================================================================
F-16
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
2. PROPERTY AND EQUIPMENT, NET (CONTINUED)
DECEMBER 31, JUNE 30,
1995 1996
- --------------------------------------------------------------------------
Equipment acquired under capital
leases included above:
Computer equipment $ 77,186 $ 77,186
Accumulated depreciation (47,598) (55,315)
- --------------------------------------------------------------------------
$ 29,588 $ 21,871
==========================================================================
3. INVENTORIES
Inventory consists of:
DECEMBER 31, JUNE 30,
1995 1996
- --------------------------------------------------------------------------
Raw Materials $ 72,062 $119,976
Work in process 3,798 18,366
Finished goods 71,490 43,974
- --------------------------------------------------------------------------
$ 147,350 $182,316
==========================================================================
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. At June 30 1996, the Company has
$587,689 of purchase orders and receivables factored with recourse.
The weighted average amounts outstanding under the factoring agreement
were $827,137, $699,918 and $542,617 for the years ended December 31,
1994 and 1995, and June 30, 1996. The weighted average annual interest
rates were 59%, 38% and 43% for the years ended December 31, 1994 and
1995, and June 30, 1996.
F-17
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
5. PAYROLL TAXES PAYABLE
As of December 31, 1995 and June 30, 1996, the Company owes delinquent
payroll taxes of $511,535, and $329,526 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, 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,
1995 1996
- ------------------------------------------------------------------------------
Unsecured notes payable to stockholders,
interest payable at 12% per year, due
December 31, 1997 $ - $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 -
F-18
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
6. NOTES PAYABLE TO RELATED PARTIES (Continued)
DECEMBER 31, JUNE 30,
1995 1996
- --------------------------------------------------------------------------------
Unsecured notes payable to a stockholder,
interest payable at 10%, due on demand 12,500 -
Other - 18,609
- --------------------------------------------------------------------------------
416,195 198,609
Less current portion (196,195) -
- --------------------------------------------------------------------------------
$ 220,000 $198,609
================================================================================
7. NOTES PAYABLE
A summary of notes payable is as follows:
DECEMBER 31, JUNE 30,
1995 1996
- --------------------------------------------------------------------------------
Unsecured notes payable to individuals and companies,
interest payable at 12% per year, due December 31,
1997 (Note 10) $840,000 $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
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
F-19
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
7. NOTES PAYABLE (Continued)
DECEMBER 31, JUNE 30,
1995 1996
- -------------------------------------------------------------------------------
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
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
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. 5,000 -
Other 8,117 -
- -------------------------------------------------------------------------------
1,653,617 2,155,500
Less current portion (500,617) (242,500)
- -------------------------------------------------------------------------------
$1,153,000 $1,913,000
===============================================================================
F-20
<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 are as follows:
AMOUNT
- -------------------------------------------------------------------------
Total minimum lease payments $23,534
Less amount relating to interest (1,380)
- -------------------------------------------------------------------------
Present value of minimum lease payments under capital leases $22,154
=========================================================================
9. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities on a month to month basis. Rent expense
was $166,388, $170,190 and $156,265 for the years ended December 31, 1994
and 1995 and June 30, 1996.
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.
F-21
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
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 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.
F-22
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
10. COMMON STOCK (CONTINUED)
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 755,000
- ----------------------------------------------------------------
Balance outstanding, June 30, 1996 2,047,462
================================================================
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-23
<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 and $1,348,000 of
net deferred tax assets at December 31, 1995, and June 30,
1996. The deferred taxes are primarily a result of a net
operating loss carryforwards of $3,068,000 and $3,488,000 for
federal income taxes and $1,533,000 and $1,743,000 for state
income taxes at December 31, 1995, and June 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. The
remaining deferred tax differences are a result of the
vacation accrual and differences between accumulated
depreciation for books and tax. Based upon the expected
results of management's plans as discussed in Note 1,
management believes that it is more likely than not that
$100,000 of the net deferred tax asset will be realized. 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, and June 30, 1996.
F-24
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
========================================================================
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 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 4,481,230
====================================================================
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. The Company did not have net sales to one customer
equal to or in excess of 10% during the year ended December
31, 1994.
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.
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-25
<PAGE>
- -------------------------------------------
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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.
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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.................................................................. 19
Management................................................................ 25
Certain Transactions...................................................... 28
Principal and Selling Shareholders........................................ 28
Description of Capital Stock.............................................. 30
Shares Eligible for Future Resale......................................... 31
Underwriting.............................................................. 32
Legal Matters............................................................. 33
Experts................................................................... 34
Index to Financial Statements............................................. F-1
</TABLE>
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UNTIL , 1996 (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.
1,100,000 SHARES
YOUNG MINDS, INC.
[LOGO]
COMMON STOCK
---------------------
P R O S P E C T U S
---------------------
MERIDIAN CAPITAL GROUP, INC.
SHARPE CAPITAL, INC.
, 1996
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