As filed with the Securities and Exchange Commission on September 5, 1996
Registration No. 333-07727
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Allegiant Technologies Inc.
(Name of small business issuer as specified in its charter)
Washington 7372 98-0138706
(State or other jurisdiction of (Primary standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
9740 Scranton Place, Suite 300, San Diego, California
92121, (619) 587-0500 (Address and telephone
number of principal executive offices)
9740 Scranton Place, Suite 300, San Diego, California
92121, (619) 587-0500 (Address of principal place of
business or intended principal place of business)
Joel B. Staadecker, Allegiant Technologies, Inc.
9470 Scranton Place, Suite 300, San Diego, California 92121, (619) 587-0500
(Name, address and telephone number of agent for service)
Copies to:
DAVID R. WILSON
Foster Pepper & Shefelman
1111 Third Avenue, Suite 3400
Seattle, Washington 98101
Approximate Date of Proposed Sale to the Public: From time to time after
the effective date of this registration statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Preliminary Prospectus
ALLEGIANT TECHNOLOGIES INC.
2,130,469 Shares
Common Stock
This prospectus relates to 2,130,469 shares (the "Shares") of common stock,
$.01 par value (the "Common Stock"), of Allegiant Technologies, Inc., a
Washington corporation (the "Company"). The Shares are outstanding shares of
Common Stock, or will be outstanding shares of Common Stock acquired upon
exercise of warrants or the conversion of convertible debt securities, owned by
the persons named in this Prospectus under the caption "Selling Stockholders."
The Shares were acquired by the Selling Stockholders in various transactions,
all of which were exempt from the registration provisions of the Securities Act
of 1933, as amended (the "1933 Act"), including sales of the Shares in private
placements by the Company, issuance of the Shares as compensation, the exercise
of warrants by certain of the Selling Stockholders and the conversion of
convertible debt instruments held by certain of the Selling Stockholders.
See "Risk Factors" beginning on page 5 hereof for a discussion of certain
factors which should be considered by prospective investors.
The Selling Stockholders may from time to time sell the Shares on the OTC
Bulletin Board, on the Vancouver Stock Exchange, on any other national
securities exchange or automated quotation system on which the Common Stock may
be listed or traded, in negotiated transactions or otherwise, at prices then
prevailing or related to the then current market price or at negotiated prices.
The Shares may be sold directly or through brokers or dealers. See "Plan of
Distribution."
The Company will receive no part of the proceeds of any sales made
hereunder. See "Use of Proceeds." All expenses of registration incurred in
connection with this offering are being borne by the Company, but all selling
and other expenses incurred by the Selling Stockholders will be borne by the
Selling Stockholders. See "Selling Stockholders."
The Selling Stockholders and any broker-dealers participating in the
distribution of the Shares may be deemed to be "underwriters" within the meaning
of the 1933 Act, and any commissions or discounts given to any such
broker-dealer may be regarded as underwriting commissions or discounts under the
1933 Act.
The Shares have not been registered for sale by the Selling Stockholders
under the securities laws of any state as of the date of this Prospectus.
Brokers or dealers effecting transactions in the Shares should confirm the
registration thereof under the securities laws of the States in which
transactions occur or the existence of any exemption from registration.
The Common Stock is traded on the OTC Bulletin Board under the symbol
"ALGT" and on the Vancouver Stock Exchange under the symbol "AGH.U" On August
30, 1996, the closing bid and asked prices of the Common Stock as reported on
the OTC Bulletin Board were $1.00 and $1.50, respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 1996
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. All dollar amounts in this Prospectus are stated
in the lawful currency of the United States unless otherwise indicated.
The Company
Allegiant Technologies Inc. ("Allegiant" or the "Company") designs,
develops and markets multimedia, Internet, and application development software
authoring tools used to create interactive, multimedia communication, education,
entertainment, presentation and information management applications ("Multimedia
Applications"). The Company's proprietary technology, "SuperCard," comprises a
set of sophisticated software authoring tools which enable professional
Multimedia Application developers to combine text, images, graphics, video,
animation, and sound into a wide variety of application software. The primary
applications for SuperCard include corporate training and performance support,
entertainment, multimedia presentations, education, interactive information
kiosks and data base front-ends for information systems applications. The
Company's products are designed for relative ease of use and are based on a
high-level scripting language, "SuperTalk," which does not require knowledge of
an independent programming language. Currently, SuperCard runs only on computers
compatible with the Macintosh operating system. The Company has announced a
version of SuperCard that will run on the Microsoft Windows operating system,
and presently intends to ship a runtime player (which allows SuperCard projects
to run on a Windows-based computer) by the end of 1996.
SuperCard is used by numerous corporations and higher education
institutions to develop a variety of application software. Examples of these
applications include Boeing Company's development of the prototype for its
computer-based training of pilots and mechanics for its 777 commercial jet
airplane, Harvard and Yale University Medical Schools' development of medical
training applications, Mercedes- Benz' development of performance support
applications which deliver schematics and other graphically rich data to the
point of manufacture and Toyota's development of interactive marketing
presentation applications, including an interactive electronic brochure for the
Toyota Tercel.
The company's strategy is to expand the availability and accessibility of
its SuperCard core technology by developing software products that (i) create
Multimedia Applications that run on both Macintosh and Windows operating
environments; (ii) create Multimedia Applications that run over the Internet on
the World Wide Web (the "Web"), and (iii) enable non-professional developers to
create custom Multimedia Applications, thereby expanding the user base for the
company's products. The Company has recently announced its strategy for
authoring and delivering Multimedia Applications on the Internet and Web, which
initially consists of three products: Marionet, Roadster and Xenon. These
products are designed to run on Macintosh and Windows operating environments.
Marionet allows Multimedia and Internet Application developers to create
completely custom applications that access and manage information across the
Internet. Roadster, which is plug-in player for Web browsers such as Netscape's
Navigator, enables SuperCard Multimedia Applications to run interactively across
the Web. In order to establish the Company's products as a standard for
deployment of Multimedia Applications on the Web, the Company intends to make
Roadster available free of charge to users. Xenon is intended to be a Multimedia
Application development tool, based on SuperCard technology, that will permit
businesses and organizations to build interactive Multimedia Applications for
the Web. The Macintosh version of Marionet began shipping in January 1996.
Windows and Macintosh beta versions of Roadster
3
<PAGE>
are presently scheduled to be released during the second half of 1996. An
enhanced version of Marionet for Macintosh and Windows is presently scheduled to
be shipped in the second half of 1996. A version of Xenon for Macintosh and
Windows is presently scheduled to be shipped in the first half of 1997.
The Company believes that demand for authoring tools for Multimedia
Applications and the connectivity software which allows the use of Multimedia
Applications on the Web will be driven by the following factors: (i) the ability
of interactive media to enhance the quality and impact of communication,
education and entertainment; (ii) the availability of multimedia-capable
computer systems at affordable prices to consumers; (iii) the growth and
acceptance of the Web as a channel of communication and commerce; and (iv) the
needs of educators, corporate trainers and developers and other non-professional
application developers for powerful and easy-to-use tools to create and utilize
Multimedia Applications and distribute these applications across the Web.
The Company's principal executive offices are located at 9740 Scranton
Road, Suite 300, San Diego, California 92121 and its telephone number is (619)
587-0500. The Company was incorporated in Washington in December, 1993. The
address of the Company's home page on the Web is www.allegiant.com.
Prior to this offering, the Company was not required to file reports with
the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended (the "1934 Act"). Upon the effective date of the registration
statement of which this Prospectus is a part, the Company will be required to
file reports under the 1934 Act. The Company furnishes annual reports to its
shareholders which include audited financial statements reported on by its
independent auditors and quarterly reports containing unaudited condensed
financial information for the first three quarters of each fiscal year. The
Company also furnishes such other reports from time to time as it may determine
or as may be required by law.
SuperCard is a federally registered trademark of the Company. Trademark
registrations are pending for Allegiant, Marionet and Roadster. Xenon is a
Company codename for a product in development. his Prospectus also contains
names and marks of other companies.
4
<PAGE>
<TABLE>
Summary Financial Data
Six Months
<CAPTION> From Inception to Year Ended Ended June 30
December 31, 1994 December 31, 1995 1995 1996
<S> <C> <C> <C> <C>
Statement of Operations Data
Net Revenue...................... $ 818,153 $2,227,582 $1,244,351 $909,796
Gross Profits.................... $ 647,961 $1,581,035 $ 917,994 $716,586
Operating Loss................... $(628,037) $(1,066,158) $(236,992) $(1,302,790)
Net Loss......................... $(626,698) $(1,057,366) $(237,052) $(1,331,697)
Net Loss per Share............... $ (0.25) $ (0.24) $ (0.04) $ (0.17)
Weighted average common and
common equivalent shares......... 2,535,397 4,372,592 5,634,000 7,692,295
December 31, 1995 June 30, 1996
Balance Sheet Data
Working Capital.................. $ 557,420 $ 902,304
Total Assets..................... $1,638,391 $1,830,261
Long-Term Debt................... $ 470,034 $492,798
Stockholders' Equity............. $ 790,757 $1,030,404
</TABLE>
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the Shares offered hereby. A purchase of the Shares
offered hereby is speculative in nature and involves a high degree of risk. No
purchase of the Shares should be made by any person who is not in a position to
lose the entire amount of such investment.
Limited Operating History; Historical Operating Losses; Variability of
Results of Operations
The Company is subject to risks associated with early stage companies,
including start-up losses, uncertainty of revenues, profitability and the need
for additional funding. The Company has a limited history of operations and no
history of profitability. The Company has incurred cumulative losses of
$3,015,761 from the date of incorporation on December 28, 1993 to June 30, 1996.
There can be no assurance that product sales will either continue at historical
rates or increase, that the Company will achieve profitable operations, or that
new products introduced by the Company will achieve market acceptance. The
Company's results of operations vary significantly depending on the timing of
product introductions and enhancements by the Company and its competitors,
changes in pricing, execution of technology licensing agreements and the volume
and timing of orders received during the quarter, which are difficult to
forecast. Customers generally order on an as-needed basis, and the Company
normally ships products within one week after receipt of an order. Accordingly,
the Company has historically operated with minimal backlog. A significant
portion of the Company's expenses are relatively fixed and planned expenditures
are based on sales forecasts. As a result of the foregoing and other factors,
the Company anticipates that it may experience material and adverse fluctuations
in results of operations on a quarterly or annual basis. Therefore, the Company
believes that period to period comparisons of its revenues and results of
operations are not necessarily meaningful and that such comparisons cannot be
relied upon as indicators of future performance. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Emerging Multimedia and Internet Markets
The market for multimedia and Internet authoring tools is emerging and is
dependent on the demand for Multimedia Applications, which is difficult to
predict with any assurance. The demand for Multimedia and Internet Applications
is dependent on a number of variables, including the installed base of
multimedia-capable personal computers, the number of computer users with access
to the Internet and the Web, the widespread availability of digital media and
the number of professional application developers capable of creating high
quality applications that achieve market acceptance. To date, the demand for
multimedia authoring tools has been limited to a relatively small number of
professional application developers of Multimedia Applications. Unless and until
the installed base of multimedia-capable personal computers and the number of
titles with wide market acceptance increase the market demand for Multimedia
Applications, the demand for multimedia authoring tools will be limited. Even if
there is an increase in demand for Multimedia Applications, the demand for
multimedia authoring tools is not expected to increase at the same rate. There
can be no assurance that the market for Multimedia Applications or authoring
tools will develop at the rate contemplated by the Company or that the demand
for multimedia authoring tools will grow at a rate sufficient to support the
Company's business plan.
See "Business."
Product and Platform Concentration
Substantially all of the revenues of the Company from its inception to date are
from the sale or license of SuperCard. The Company expects that its revenues
will continue to be dependent upon SuperCard and that competition for SuperCard
will intensify in the future. A decline in the sales of SuperCard, as a result
of competition, technological change or other factors, would have a material
adverse effect on the Company's results
6
<PAGE>
of operations. Currently, SuperCard is only fully-functional on the Macintosh
computer. Although the Company plans to release a version of SuperCard for the
Windows operating system, a decline in the sales rate of a multimedia-capable
Macintosh computers could have a material adverse effect on the Company's
results of operations. Until the Company releases a version of SuperCard for the
Windows operating system, the future of SuperCard and its economic viability
will be tied to the perception of software developers regarding the utility of
developing software for Macintosh and other Apple computers. In 1995, Apple
announced restructuring plans to place increased emphasis on customer needs and
to expand its presence in the home, education and business markets. In addition,
Apple announced that it would license its operating system to third party
vendors in an attempt to increase the installed base of Macintosh-compatible
computers. As reported by Apple in its public filings with the Securities and
Exchange Commission, unit sales for the MacIntosh computer declined 16% in the
third quarter of 1996 compared to the same period in the prior year. At the end
of the third quarter of 1996, Apple's share of the U.S. and worldwide personal
computer markets had declined to 5.3% and 7.4%, respectively, from 7.4% and
10.6%, respectively, at the end of same period in the prior year. A nearly
simultaneous release is planned for SuperCard Version 3.0 on the Macintosh and a
runtime player for Windows during the fourth quarter of 1996. SuperCard 3.0 is
designed to deliver a new interface with support for plug-in tools, "smart"
objects, drag-and-drop editing and automated scripting for simple to moderately
difficult tasks, enhanced extensibility to allow SuperCard developers greater
flexibility in adding functionality they require, and a common file format on
both platforms to facilitate delivery on both platforms. See
"Business--Products."
Rapid Technological Change
The emerging multimedia and Internet markets and the personal computer industry
in general are characterized by rapidly changing technology, resulting in short
product life cycles and rapid price declines. The Company must continuously
update its existing and planned products to keep them current with changing
technologies and must develop new products to take advantage of new technologies
that could render the Company's existing products obsolete. The Company's future
prospects are highly dependent on its ability to increase the functionality of
its products in a timely manner and to develop new products that address new
technologies and achieve market acceptance. There can be no assurance that the
Company will be successful in these efforts. If the Company were unable to
develop and introduce such products in a timely manner, due to resource
constraints or technological or other reasons, this inability could have a
material adverse effect on the Company's results of operations. In particular,
the introduction of new products, such as the Company's planned Windows-based
version of SuperCard, and its Roadster and Xenon products, is subject to the
inherent risk of development delays. The Company has experienced product
development delays in the past, and such delays may occur in the future. In
addition, due to the uncertainties associated with the Company's emerging
market, there can be no assurance that the Company will be able to forecast
product demand accurately or to respond in a timely manner to changing
technologies and customer requirements. See "Business--Product Development
Plans."
Competition
The market for the Company's products is highly competitive and is
characterized by pressures to reduce prices, incorporate new features and
accelerate the release of new product versions. A number of companies currently
offer products that compete directly or indirectly with one or more of the
Company's products. Certain of the Company's competitors or potential
competitors have significantly greater financial, management, technical and
marketing resources than the Company. In the event that price competition
significantly increases, competitive pressures could cause the Company to reduce
the prices of its products, which would adversely affect the Company's results
of operations. A variety of other potential actions by the Company's
competitors, including increased promotion and accelerated introduction of new
or enhanced products, could have a material adverse effect on the Company's
results of operations. There can be no assurance that the Company will be able
to compete successfully in the future. In addition, the Company's products
compete to a certain extent with
7
<PAGE>
multimedia authoring tools developed and used internally by developers of
Multimedia Applications. The Company's growth will depend in part on its ability
to persuade such potential customers to replace or augment their in house tools
with the Company's products. There can be no assurance that the Company will be
able to do so. See "Business--Competition."
Future Capital Needs and Uncertainty of Additional Funding
The Company has expended, and will continue to expend in the future,
substantial funds to complete the research and development, manufacturing and
marketing of its products. Based on its current staffing level and product
development schedule, the Company anticipates that its working capital and funds
anticipated to be derived from operations should be adequate to satisfy its
capital and operating requirements through October 31, 1996. This estimate is
based upon the assumptions that sales remain at present levels and that the
number of personnel remains unchanged. The Company anticipates that it will seek
additional funding through public or private sales of its securities, including
equity securities. Adequate funds, whether through financial markets or
collaborative or other arrangements with corporate partners or from other
sources may not be available when needed or on terms acceptable to the Company.
In the event that the Company is not able to obtain additional funding on a
timely basis, the Company may be required to scale back or eliminate certain or
all of its development, manufacturing or marketing programs or to license third
parties to commercialize products or technologies that the Company would
otherwise seek to develop, manufacture or market itself, any of which could have
a material adverse effect on the Company's results of operations in order to
satisfy its capital and operating requirements into early 1997. However, there
can be no assurance that the Company will have sufficient working capital to
satisfy the Company's capital needs beyond October 31, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Reliance on Third Party Resellers
A substantial majority of the Company's revenues is derived from the sale of
its products through third parties. Accordingly, the Company is dependent on the
continued viability and financial stability of these resellers. The Company is
particularly dependent on the resellers who generally offer products of several
different companies, including in some cases products that are competitive with
the Company's products. There can be no assurance that the Company's resellers
will continue to purchase the Company's products or provide them with adequate
levels of support. The loss of, or a significant reduction in sale volume to, a
number of the Company's resellers could have a material adverse effect on the
Company's results of operations. See "Business--Sales, Marketing and
Distribution."
The Company grants its distributors limited rights under a stock balancing
policy to return unsold inventories of the Company's products in exchange for an
equal amount of new purchases. The Company expects that the rate of new product
introductions by the Company and other participants in the multimedia software
tools market segment will increase, which could lead to an increased return rate
of the Company's products. Although the Company provides allowances that are
adequate, and have been adequate in the past, there can be no assurance that
product returns will not exceed such allowances in the future. In addition, the
Company provides price protection to its distributors. Although the Company
accrues for such price protection in its allowance for product returns, and such
accruals have been adequate in the past, a decrease in the price of the
Company's products could have a material adverse effect on the Company's results
of operations.
Dependence on Key Personnel
The Company has a small core management and development team and the
unexpected loss of any of these individuals would have a material adverse effect
on the Company's business and results of operations. Each of the key executives
of the Company, including Mr. Staadecker (President, Chief Executive Officer and
Director)
8
<PAGE>
and Mr. Henigson (Vice President, Marketing), has an employment contract with
the Company which contains a non-competition covenant in the event of voluntary
termination. The enforceability and scope of these employment agreements are
subject to judicial interpretation and therefore, may not be enforceable as
written. At present, there is no key-man insurance in place for any members of
the Company. See "Management."
Management of Growth
The Company's business has grown rapidly in recent periods. The growth of the
Company's business has placed, and if sustained will continue to place, a
substantial burden on its managerial, operational, financial and information
systems. In particular, the growth of the Company's business has required and,
if sustained, will continue to require the employment of additional software and
development engineers, the number of which could be substantial. There can be no
assurance that the Company will be able to hire engineers and other employees
with the necessary qualifications. The future success of the Company also
depends upon its ability to attract and retain highly skilled managerial, sales,
marketing and operations personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will be successful in attracting
and retaining such personnel. There can be no assurance that the Company's
management will be able to manage future expansions, if any, successfully, or
that its management, personnel or systems will be adequate to support the
Company's operations or will be implemented in a cost-effective or timely
manner. The Company's success depends to a significant extent on the ability of
its executive officers and other members of senior management to respond to
these challenges effectively. The Company's inability to manage growth
effectively could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Management."
Limited Protection of Proprietary Technology
The Company regards its software technology as proprietary and attempts to
protect it under copyright, trademark and trade secret laws as well as through
contractual restrictions on disclosure, copying and distribution. The Company
distributes individual copies of its software under a "shrinkwrap" license
agreement containing these restrictions and generally does not obtain signed
license agreements from its end users. Although the enforceability of shrinkwrap
licenses is not well established, the Company is not aware of any third parties
which are making unauthorized use of the Company's proprietary technology. It
may be possible for unauthorized third parties to copy the Company's products or
to reverse engineer or obtain and use information that the Company regards as
proprietary. There can be no assurance that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technologies. In addition, the laws of certain countries in
which the Company's products are or may be distributed do not protect the
Company's products and intellectual rights to the same extent as the laws of the
United States. As the number of software products increases and the
functionality of these products further overlaps, the Company believes that
software will increasingly become the subject of claims that such software
infringes the rights of others. For example, Unisys Corporation has a patent on
certain technology which is widely used in connection with reading and writing
the Graphics Interchange Format ("GIF") files. The Company's products have the
ability to decompress files stored in GIF and may therefore be subject to an
infringement claim from Unisys. To date no third party, including Unisys, has
filed an infringement claim against the Company and there have been no explicit
threats of litigation asserting that the Company's products infringe their
intellectual property rights. If Unisys were to assert a claim against the
Company, the Company believes that alternative technologies are available for
use in the Company's products which could be utilized without requiring
significant modification or expense. There can be no assurance that third
parties will not assert infringement claims against the Company in the future or
that any such assertion will not result in costly litigation or require the
Company to obtain a license to intellectual property rights of third parties. If
the Company were required to so obtain any such licenses, there can be no
assurance that such licenses will be available on reasonable terms, or at all.
See "Business--Proprietary Protection."
9
<PAGE>
Dependence on Third Party for Manufacturing and Shipping
The Company utilizes an independent third party for the manufacture and
shipment of its finished product. The manufacture of the Company's products
consists of duplicating diskettes, pressing CD-ROMs, printing manuals and
packaging and assembling finished products, all of which are performed for the
Company in accordance with the Company's specifications and forecasts. Although
the Company believes there are multiple vendors who can supply the manufacturing
and shipping services it requires and has not experienced material difficulties
or significant delays in the filling of its orders, any significant failure to
manufacture or ship the Company's products on a timely basis could have a
material adverse effect on the Company's results of operations. See
"Business--Manufacturing and Shipping."
Classification of the Common Stock as Penny Stock
In October 1990, Congress enacted the "Penny Stock Reform Act of 1990." "Penny
Stock" is generally any equity security other than a security (a) that is
registered or approved for registration and traded on a national securities
exchange or an equity security for which quotation information is disseminated
by The National Association of Securities Dealers Automated Quotation ("NASDAQ")
System on a real-time basis pursuant to an effective transaction reporting plan,
or which has been authorized or approved for authorization upon notice of
issuance for quotation in the NASDAQ System, (b) that is issued by an investment
company registered under the Investment Company Act of 1940, (c) that is a put
or call option issued by Options Clearing Corporation, (d) that has a price of
five dollars or more or (e) whose issuer has net tangible assets in excess of
$2,000,000, if the issuer has been in continuous operation for at least three
years, or $5,000,000, if the issuer has been in continuous operation for less
than three years and average revenue of at least $6,000,000 for the last three
years. None of the Securities of the Company, including the Common Stock, meets
these criteria. Therefore, the Common Stock is subject to Rules 15g-2 through
15g-9 (the "Penny Stock Rules") under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Penny Stock Rules impose additional reporting,
disclosure and sales practice requirements on brokers and dealers and require
that such brokers and dealers must make a special suitability determination of
each purchaser and must have received the purchaser's written consent to the
transaction prior to the sale. Consequently, the Penny Stock Rules may affect
the ability of brokers and dealers to sell the Common Stock and may affect the
ability of purchasers to sell any of the Shares acquired hereby in the secondary
markets.
So long as the Common Stock is within the definition of "Penny Stock" as
defined in Rule 3a51-1 of the Exchange Act, the Penny Stock Rules will continue
to be applicable to the Common Stock. Unless and until the price per share of
Common Stock is equal to or greater than $5.00, the Common Stock will be subject
to substantial additional risk disclosures and document and information delivery
requirements on the part of brokers and dealers effecting transactions in the
Common Stock. Such additional risk disclosures and document and information
delivery requirements on the part of such brokers and dealers may have an
adverse effect on the market for and/or valuation of the Common Stock.
Control by Existing Stockholders; Anti-Takeover Provisions
The Company's directors, officers and principal (greater than 5%) stockholders,
taken as a group, together with their affiliates, beneficially own in the
aggregate approximately 37.0% of the Company's outstanding Common Stock. Certain
principal stockholders are directors or executive officers of the Company. As a
result of such ownership, these stockholders will be able to control matters
requiring approval by the stockholders of the Company, including the election of
directors. In addition, certain provisions of Washington law and of the
Company's Articles of Incorporation (the "Articles") and Bylaws (the "Bylaws")
could have the effect of making it more difficult or more expensive for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of the Company. The Company is also authorized to issue preferred stock
with rights senior
10
<PAGE>
to the Common Stock, with such rights, preferences and privileges including
voting rights, as the Company's Board of Directors may determine, without the
necessity of shareholder approval. The issuance of preferred stock containing
supermajority or class voting rights may adversely affect the existing rights of
holders of the Common Stock and may discourage third parties from bidding for or
otherwise attempting to acquire the Company. The Company, however, has no
present plans to issue any shares of preferred stock. See "Principal
Stockholders" and "Description of Securities--Antitakeover Provisions."
Limited Prior Market for Common Stock; Possible Volatility of Stock Price
The Common Stock is traded on the Vancouver Stock Exchange and quoted on the
OTC Bulletin Board. However, no assurance can be given that an active public
market will develop or be sustained. Factors such as announcements of the
introduction of new or enhanced products by the Company or its competitors and
quarter- to-quarter variations in the Company's results of operations, as well
as market conditions in the technology and emerging growth company sector, may
have a significant impact on the market price of the Company's shares. Further,
the stock market has experienced extreme volatility that has particularly
affected the market prices of equity securities of many high technology
companies and that often has been unrelated or disproportionate to the operating
performance of such companies. These market fluctuations may adversely affect
the price of the Common Stock.
11
<PAGE>
USE OF PROCEEDS
All of the Shares offered hereby are being offered by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
the Shares. See "Selling Stockholders."
SELLING STOCKHOLDERS
The following table sets forth the number of shares of Common Stock which may
be offered for sale from time to time by the Selling Stockholders. The shares
offered for sale constitute all of the shares of Common Stock known to the
Company to be beneficially owned by the Selling Stockholders. None of the
Selling Stockholders has held any position or office with the Company. Other
than the relationships described below, none of the Selling Stockholders had or
have any material relationship with the Company.
<TABLE>
<CAPTION> Shares Owned and
Selling Stockholder Being Offered
<S> <C>
Geller & Friend Partnership I...................................................................... 575,000
Grandview Partners, L.P............................................................................ 225,000
Ben Murillo........................................................................................ 150,000
Hathaway Partners Investment Limited Partnership................................................... 150,000
Irving B. Harris Revocable Trust DTD 7/31/87....................................................... 144,000
Greenbrae Capital Partners......................................................................... 101,469
Steven Lampe....................................................................................... 90,000
L.H. Friend, Weinress, Frankson & Presson, Inc.(1)................................................. 81,500
Wolfson Equities................................................................................... 75,000
David W. Ruttenberg................................................................................ 67,500
Mickey D. Levy..................................................................................... 67,500
Hilltop Partners, L.P.............................................................................. 56,250
The Gordon Family Trust............................................................................ 45,000
Firebird Overseas Limited.......................................................................... 45,000
Patriot Group, L.P................................................................................. 45,000
Kent Bennett Williams.............................................................................. 37,500
James L. Dritz..................................................................................... 37,500
Catherine E. Williams.............................................................................. 37,500
Jerome Kahn Jr. Revocable Trust DTD 10/16/87....................................................... 36,000
Judy W. Solely..................................................................................... 22,500
Euro Dutch Trust Company........................................................................... 22,500
Hilltop Offshore Limited........................................................................... 18,750
(1) L.H. Friend, Weinress, Frankson & Presson, Inc. acted as placement agent for a private placement of the
Company's common stock and warrants in April 1996.
</TABLE>
Pursuant to the purchase agreements by which certain of the Selling
Stockholders acquired their Shares, the Company agreed to use its best efforts
to file a registration statement for the resale of such Shares and to use its
best efforts to cause such registration statement to be declared effective.
Pursuant to those agreements, the
12
<PAGE>
Company will pay all expenses in connection with the registration and sale of
the Shares, except any selling commissions or discounts allocable to sales of
the Shares, fees and disbursements of counsel and other representatives of the
Selling Stockholders, and any stock transfer taxes payable by reason of any such
sale.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its capital stock
and does not expect to pay cash dividends on its Common Stock in the foreseeable
future. The Company currently intends to retain its earnings, if any, for use in
its business. Any dividends declared in the future will be at the discretion of
the Board of Directors and subject to restrictions that may be imposed by the
Company's lenders.
PRICE RANGE COMMON STOCK
In May 1996, quotation of the Company's Common Stock began on the OTC
Bulletin Board (trading symbol: ALGT). The Common Stock has traded on the
Vancouver Stock Exchange (trading symbol: AGH.U) since May 24, 1995. Prior to
that date, there was no public market for the Company's Common Stock.
The high and low sale prices of the Common Stock on the Vancouver Stock
Exchange for each quarter are as follows:
<TABLE>
<CAPTION> High Low
<S> <C> <C>
Second quarter 1995............................. $1.28 $1.00
Third quarter 1995.............................. $2.00 $ .90
Fourth quarter 1995 ............................ $2.90 $1.55
First quarter 1996 ............................. $3.50 $2.00
Second quarter 1996............................. $2.95 $1.00
</TABLE>
The above prices were converted from Canadian dollars to U.S. dollars at
the average of the daily exchange rates quoted by the Bank of Canada during each
respective calendar quarter.
The high and low bid and ask prices of the Common Stock on the OTC Bulletin
Board for the first quarter of 1996 were $3.63 and $2.00, and for the second
quarter of 1996 were $3.25 and $0.87, respectively. On August 30, 1996, the
last reported bid and ask prices of the Common Stock on the OTC Bulletin Board
were $1.00 and $1.50 per share, respectively.
13
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to and
should be read in conjunction with the financial statements and the notes
thereto included elsewhere herein. The statement of operations data set forth
below with respect to the period ended December 31, 1994 and the year ended
December 31, 1995 and the balance sheet data at December 31, 1994 and 1995 are
derived from, and are qualified by reference to, the audited financial
statements and notes thereto included elsewhere in this Prospectus. The selected
financial data presented below for the six months ended June 30, 1995 and 1996
was derived from the unaudited financial statements and notes thereto included
elsewhere in this Prospectus. In the opinion of management, all unaudited
financial statements include adjustments, consisting only of normal recurring
accruals necessary for a fair presentation of such information for the periods
presented. The results of operations for the six months ended June 30, 1996 are
not necessarily indicative of results to be expected for the year ending
December 31, 1996.
<TABLE>
<CAPTION> From Incorporation on
December 28, 1993 to Year Ended Six Months
December 31, December 31, Ended June 30
1994 1995 1995 1996
----- ------ ---- ----
<S> <C> <C> <C> <C>
Income Statement Data:
Net revenue $ 818,153 $ 2,227,582 $1,244,351 $ 909,796
Cost of revenue 170,192 646,547 326,357 193,210
------------ ------------ ---------- ----------
Gross profit 647,961 1,581,035 917,994 716,586
------------ ------------ ---------- ----------
Expenses
Sales and marketing 441,220 1,045,383 529,166 955,684
Research and development 288,563 607,012 233,018 483,016
General and administrative 454,915 863,535 332,587 512,128
Amortization of purchase of intangibles 91,300 131,263 60,215 68,548
------------ ------------ ---------- -----------
Total operating expenses 1,275,998 2,647,193 1,154,986 2,019,376
----------- ------------ ---------- ----------
Loss from operations (628,037) (1,066,158) (236,992) (1,302,790)
Interest income 1,339 14,966 3,718 8,479
Interest expense --- (6,174) (3,778) (37,386)
-------------- -------------- ------------ ------------
Net loss $ ( 626,698) $ (1,057,366) $ (237,052) $(1,331,697)
============= ============= ============ ============
Loss per share $ ( 0.25) $ ( 0.24) $ (0.04) $ (0.17)
=============== ============== =========== ===========
Shares used in computing per share 2,535,397 4,372,592 5,634,00 7,692,295
amounts ============ =========== ========== ============
</TABLE>
<TABLE>
<CAPTION> December 31,
1994 1995 June 30, 1996
------ ------ -------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital................................ $ 329,523 $ 557,420 $ 902,304
Total assets................................... $ 1,086,819 $ 1,638,391 $ 1,830,261
Long-term debt................................. $ 250,000 $ 470,034 $ 492,798
Total shareholders' equity..................... $ 635,302 $ 790,757 $ 1,030,404
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
This section contains forward-looking statements regarding the Company's
business and financial condition. No assurance can be given that actual results
of operations will not differ materially from the forward-looking statements
contained herein. For a discussion of various factors which may cause actual
results to vary, see "RISK FACTORS" commencing at page 5 hereof.
The Company has a limited history of operations. It was incorporated on
December 28, 1993, acquired SuperCard, together with its customer franchise,
from Aldus Corporation ("Aldus") on February 4, 1994, and released its first
product upgrade in June 1994. The Company has incurred substantial start-up
expenses and planned development and infrastructure expenditures necessary to
position the Company for future growth, which has resulted in cumulative net
losses to June 30, 1996 of $3,015,761. The Company's revenues to date have been
substantially derived from the sale of SuperCard. The sale of Marionet, the
Company's Internet scripting tool and its second product offering, commenced in
January 1996. There can be no assurance that product sales will either continue
at historical rates or increase or achieve profitable operations, or that new
products introduced by the Company will achieve market acceptance. The Company's
historical rate of growth should not be taken as indicative of growth rates that
can be expected in the future.
Substantially all of the revenues of the Company from its inception to date
are from the sale or license of SuperCard. The Company expects that its revenues
will continue to be dependent upon SuperCard and that competition for SuperCard
will intensify in the future. A decline in the sales of SuperCard, as a result
of competition, technological change or other factors, would have a material
adverse effect on the Company's results of operations. Currently, SuperCard is
only fully-functional on the Macintosh computer. Although the Company plans to
release a version of SuperCard for the Windows operating system, a decline in
the sales rate of a multimedia-capable Macintosh computers could have a material
adverse effect on the Company's results of operations. Until the Company
releases a version of SuperCard for the Windows operating system, the future of
SuperCard and its economic viability will be tied to the perception of software
developers regarding the utility of developing software for Macintosh and other
Apple computers. In 1995, Apple announced restructuring plans to place increased
emphasis on customer needs and to expand its presence in the home, education and
business markets. In addition, Apple announced that it would license its
operating system to third party vendors in an attempt to increase the installed
base of Macintosh-compatible computers. As reported by Apple in its public
filings with the Securities and Exchange Commission, unit sales for the
MacIntosh computer declined 16% in the third quarter of 1996 compared to the
same period in the prior year. At the end of the third quarter of 1996, Apple's
share of the U.S. and worldwide personal computer markets had declined to 5.3%
and 7.4%, respectively, from 7.4% and 10.6%, respectively, at the end of same
period in the prior year.
The Company expects to increase expenses primarily in the areas of
marketing and software engineering as part of a strategy to increase market
share, expand the number of markets in which the Company's products are sold and
facilitate new product development. There can be no assurance that the Company's
business strategies will be successful.
To date, the Company expensed all of its software development costs and
amortized purchased intangibles over five years on a straight-line basis. See
Notes to the Financial Statements for a complete description of the Company's
accounting policies.
15
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain operating
data as a percentage of net revenue.
<TABLE>
<CAPTION> From
Incorporation on
December 28, Year Six
1993 to Ended Months Ended
December 31 December 31 June 30,
1994 1995
1995 1996
------------------ --------------- --------------- -----------
<S> <C> <C> <C> <C>
Revenue:
Net product sales 99% 89% 90% 98%
Service fees and royalty income 1 11 10 2
------------------ ---------------- -------------- ------------
Net revenue 100 100 100 100
Cost of revenue 21 29 26 21
------------------ ---------------- -------------- ------------
Gross profit 79 71 74 79
------------------ ---------------- -------------- ------------
Expenses:
Sales and marketing 54 47 43 105
Research and development 35 27 19 53
General and administrative 56 39 27 56
Amortization 11 6 4 8
------------------ ---------------- -------------- ------------
Total operating expenses 156 119 93 222
------------------ ---------------- -------------- ------------
Loss from operations (77) (48) (19) (143)
Net interest income (expense) - 1 - (3)
------------------ ---------------- --------------- ------------
Net loss (77)% (47)% (19)% (146)%
================= =============== ============= ============
</TABLE>
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Net revenue includes revenues from sales of software products and services,
less reserves for anticipated product returns and future vendor support
services. Total net revenues decreased by 27% from $1,244,351 for the six months
ended June 30, 1995 to $909,796 for the six months ended June 30, 1996. The
decrease is due to the following factors: (1) revenues for the first six months
of 1995 include a non-recurring non-refundable advance royalty of $100,000, (2)
net product sales during the first six months of 1995 were from the sale of
SuperCard version 2.0 which was at the beginning of a product upgrade cycle
whereas sales for 1996 were substantially from the sale of version 2.5 which was
at the end of a product upgrade cycle, (3) the announced changes at Apple
Computer negatively impacted purchasing decisions because of the Company's
products current dependence upon the Macintosh operating platform, and (4) the
Company increased its reserves in 1996 for anticipated product returns and
future vendor support services to 10% of gross product revenues from less than
5%, based on its recent historical product return experience. The initial sales
of Marionet, which was introduced in the first quarter of 1996, were slower than
expected. Financing delays prevented the Company from undertaking its planned
marketing program to increase market awareness. The Company has recently
received favorable product reviews from MacUser and InforWorld magazines that
support the Company's belief that Marionet can provide substantial value to the
"Internet" and "Intranet" developer community. The Company is reviewing its
current business model and market emphasis to determine the most expeditious
means to maximize revenues from the sale or license of Marionet technology.
Cost of revenue includes the cost of manuals, diskettes and their
duplication, packaging materials, assembly, paper goods, bundled products, and
shipping as well as royalties and reserves for inventory obsolescence. Cost of
revenue decreased from $326,357 to $193,210 (26% of net revenues to 21%) for the
first six months of 1996
16
<PAGE>
as compared to 1995. The decrease is primarily due to the change in costs
associated with other vendor products that were bundled with SuperCard from time
to time.
Sales and marketing expenses include the costs of advertising, promotion,
trade shows and printed collateral materials, salaries and the costs of
contracted services. Total sales and marketing costs increased from $529,166 to
$955,684 (43% of net revenues to 105%) for the first six months of 1995 as
compared to 1996. The increase is due to the following factors: (1) the Company
substantially increased its presence at the MacWorld conference and other trade
shows to properly position the Company within the industry; (2) it increased its
staff levels from 19 employees at the end of the first quarter of 1995 to 29
employees to facilitate planned growth, (3) it commenced a roll out program for
its Windows product which was delayed as a result of financing delays and
technology changes; (4) it incurred approximately $150,000 in introductory
marketing costs associated with the introduction of Marionet. The Company is
reviewing its marketing plans and infrastructure costs in relation to its
current product development plans and its available working capital.
Research and development expenditures consisted of personnel expenses,
costs of independent contractors and supplies required to conduct the Company's
development efforts. Research and development expenditures increased from
$233,018 to $483,016 (19% of net revenues to 54%) for the first six months of
1996 compared to the same period in the prior year. The increase in research and
development costs is directly attributable to the increase in engineering staff
necessary to complete the Company's current product development plan.
General and administrative expenses consist primarily of the costs of the
Company's finance and administrative personnel, including the chief executive
officer. General and administrative expenses increased from $332,587 to $512,128
(27% of net revenues to 56%) for the first six months of 1996 compared to the
same period in the prior year. The increase in general and administrative
expenses is reflective of Company growth and is not attributable to any
particular factor.
Year Ended December 31, 1995 Compared to Period From Incorporation on
December 28, 1993 to December 31, 1994
Total net revenue increased by 172% from $818,153 for the period from
incorporation on December 28, 1993 to December 31, 1994, to $2,227,582 for the
year ended December 31, 1995. Net product sales were $1,980,861 for 1995
compared to $807,007 for 1994. Unit sales increased by 136% from 5,988 during
the period from incorporation on December 28, 1993 to December 31, 1994, to
14,166 during 1995. Service revenue attributable to services were $146,721 for
1995 compared to $11,146 for the period from incorporation on December 28, 1993
to December 31, 1994. Although the Company acquired SuperCard on February 4,
1994, the Company did not release its first product upgrade, Version 1.7 until
June 10, 1994, therefore, substantially all of the sales in 1994 were made
during the seven months ended December 31, 1994. The 1995 net revenue also
included a non-refundable advance royalty of $100,000.
Cost of revenue increased from $170,192 to $646,547 (21% of net revenues to
29%) for fiscal 1995 as compared to the period from incorporation on December
28, 1993 to December 31, 1994. This increase is primarily due to the added costs
of other vendor products that were bundled with SuperCard in connection with
specific and targeted marketing campaigns undertaken at various times during
1995.
Total sales and marketing costs increased from $441,220 to $1,045,383, but
decreased from 54% of net revenues to 47% for fiscal 1995 as compared to the
period from incorporation on December 28, 1993 to December 31, 1994. Although no
assurances can be given, it is expected that total sales and marketing costs as
a percentage of net revenue will decrease as markets are developed and the costs
to establish and maintain sales and marketing departments level off. At the end
of 1995, the Company employed 12 full-time persons in marketing, sales and
customer services and technical support as compared to 4 at the end of 1994.
17
<PAGE>
Total research and development costs increased from $288,563 for the period
from incorporation on December 28, 1993 to December 31, 1994, to $607,012 for
fiscal 1995. The costs in 1994 relate to the development of SuperCard versions
1.7 and 2.0. The costs in 1995 relate to the development of SuperCard version
2.5, a Windows version of SuperCard and Marionet. Only the development of the
Windows version of SuperCard was not completed by the end of 1995. At the end of
1995, the Company employed 13 full-time persons in product and application
engineering as compared to 4 at the end of 1994. The Company expects to make a
greater investment in research and development during the ensuing year in order
to remain competitive. See "Business-Product Development Plans."
Total general and administrative costs increased from $454,915 to $863,535,
but decreased from 56% of net revenues to 39% for fiscal 1995 as compared to the
period from incorporation on December 28, 1993 to December 31, 1994. It is
expected that the Company will hire additional administrative personnel,
including a new chief financial officer, in 1996.
Liquidity and Capital Resources
Since inception, the Company has financed its operations through a
combination of equity and convertible debt placements. As of June 30, 1996 the
Company had cash and cash equivalents of $921,043 and working capital of
$902,304. Based on its current staffing level and product development schedule,
the Company believes that its existing working capital and funds anticipated to
be derived from operations will satisfy the Company's projected working capital
and capital expenditure requirements through October 31, 1996. The Company's
primary future needs for capital are expanded product development, marketing and
selling expenses and working capital to finance inventories and accounts
receivable for sales growth. The Company's working capital requirements may vary
depending upon numerous factors including the progress of the Company's product
development, competitive and technological advances, marketing acceptance of the
Company's products and other factors. The Company anticipates that it will seek
additional funding through public or private sales of securities, including
equity securities. In the event that the Company is not able to obtain
additional funding on a timely basis, the Company may be required to scale back
or eliminate certain or all of its development, manufacturing or marketing
programs or to license third parties to commercialize products or technologies
that the Company would otherwise seek to develop, manufacture or market itself,
so that it will have adequate working capital into early 1997. Such reductions
in staffing and marketing efforts and delays in product development could have a
material adverse effect in the Company's business and results of operations.
18
<PAGE>
BUSINESS
This section contains forward-looking statements regarding the Company's
business and financial condition. No assurance can be given that actual results
of operations will not differ materially from the forward-looking statements
contained herein. For a discussion of various factors which may cause actual
results to vary, see "RISK FACTORS" commencing at page 5 hereof.
General
Allegiant Technologies Inc. designs, develops and markets multimedia,
Internet, and application development software authoring tools used to create
interactive, multimedia communication, education, entertainment, presentation
and information management applications ("Multimedia Applications"). The
Company's proprietary technology, "SuperCard," comprises a set of sophisticated
software authoring tools which enable professional Multimedia Application
developers to combine text, images, graphics, video, animation, and sound into a
wide variety of application software. The primary applications for SuperCard
include corporate training and performance support, entertainment, multimedia
presentations, education, interactive information kiosks and data base
front-ends for information systems applications. The Company's products are
designed for relative ease of use and are based on a high-level scripting
language, "SuperTalk," which does not require knowledge of an independent
programming language. Currently, SuperCard runs only on computers compatible
with the Macintosh operating system. The Company has announced a Windows version
of SuperCard, and intends to ship a runtime player by the end of 1996.
The Company's strategy is to expand the availability and accessibility of
its SuperCard core technology by developing software products which (i) create
multiple platform software applications which can run in both Macintosh and
Windows-based operating environments; (ii) enable the creation, deployment,
access and management of Multimedia Applications on the Web, and (iii) expand
the user base for the Company's products by enabling non-professional developers
and home users to create custom Multimedia Applications. The Company has
recently announced its strategy for authoring and delivering Multimedia
Applications on the Internet and the Web, which initially consists of three
products Marionet, Roadster and Xenon. These products are designed to run on
multiple platforms and operating systems. Marionet allows Multimedia and
Internet Application developers to create completely custom applications that
access and manage information across the Internet. Roadster, designed to run as
a plug-in application to Web browsers, such as Netscape's Navigator, enables
SuperCard Multimedia Applications to run interactively across the Web. In order
to establish the Company's products as the standard for the development of
Multimedia Applications on the Web, the Company intends to make Roadster
available free of charge to users. Xenon is intended as a Multimedia Application
development tool for the Internet based on SuperCard technology which will
permit businesses and organizations to build interactive Multimedia Applications
for Web sites. The Macintosh version of Marionet began shipping in January 1996
and a version intended to run on the Windows operating system is presently
scheduled to be shipped by the end of 1996.
Industry Background
The Company believes that demand for authoring tools for Multimedia
Applications and the connectivity software to allow use of Multimedia
Applications on the Web will be driven by the following factors: (i) the ability
of interactive media to enhance the quality and impact of communication,
education and entertainment; (ii) the availability of multimedia-capable
computer systems at affordable prices to consumers; (iii) the growth and
acceptance of the Web as a channel of communication and commerce; and (iv) the
needs of educators, corporate trainers and developers and other non-professional
developers for powerful and easy-to-use tools to create and utilize Multimedia
Applications and distribute these applications across the Web.
19
<PAGE>
The Impact of Interactive Multimedia
Multimedia Applications and the ability for the users of those applications
to interact are revolutionizing the ways in which people work, learn and
entertain themselves. By combining text, still images, 2D and 3D graphics,
animation, sound and video, Multimedia Applications enable people to interact
with information in a richer, more natural way. In business communications,
multimedia is used to create high-impact presentations, self-running product
demonstrations, interactive information kiosks and desktop videos to enhance
static textual and graphical information. In education, multimedia significantly
enhances the quality and consistency of instruction, increases the motivation to
learn and improves the retention of information. Interactive education and
training applications deliver information on demand, accommodate the individual
learning styles of students and provide them with immediate written, visual and
auditory feedback to reinforce important concepts. In entertainment, interactive
multimedia is adding new dimensions to motion pictures and video games. The
availability of 3D graphics, animation, sound and video for personal computers
has enabled the development of interactive presentations and simulations with
dramatically increased realism and far greater interactivity than was available
with conventional graphical displays. Multimedia has also enabled the creation
of entertainment applications like interactive movies, books, travel guides and
reference works in new categories such as "edutainment" -- applications that
provide educational material in an interactive, entertaining way.
Affordability of Multimedia-Capable Personal Computers
In recent years, rapidly declining prices of microprocessors, semiconductor
memories and CD-ROM drives have dramatically reduced the cost of providing
multimedia capabilities in personal computers. The affordability of these
systems has led to the proliferation of multimedia-capable computers in business
and the home. While prices have declined, new technology advances have increased
the power of personal computers to process the large amounts of data required to
present multimedia information in digital format. These new technologies include
fast microprocessors, high-resolution color displays, audio support, data
compression, CD-ROM drives and high speed networks. In addition, new system
software extensions such as Apple's QuickTime and Microsoft's Video for Windows
further enhance the multimedia capabilities of the hardware by providing, in
software, standard digital media support for the general personal computing
environment.
The Need for Easy-to-Use Multimedia Authoring Tools
New authoring tools are required to create Multimedia Applications on the
desktop and across the Web. Just as authors of printed books use word processing
software and a computer as their tools, "multimedia authors" use a set of
software authoring tools and a computer to create Multimedia Applications.
Before multimedia information can be used, it must be organized, processed and
presented in new ways. Because of the creative and instructional content of this
information, Multimedia Applications are being developed largely by people who
typically do not have sophisticated computer programming expertise. The Company
believes that these developers increasingly require powerful but easy-to-use
authoring tools designed specifically for their needs.
Creative and learning professionals typically use high-end desktop
computers and peripherals and a variety of software tools to create Multimedia
Applications. Because of the need to integrate and precisely synchronize media
elements that have been created by different tools, it is important to the
professional developer that the different tools work well together. Once an
application is authored, Multimedia Application developers desire to have access
to the largest possible installed base for distribution of the finished product.
However, because each delivery platform may have a different operating system,
it is very costly and time-consuming to reauthor the application for each
potential delivery platform. Developers want to be able to author an application
once and then easily translate it for playback on a variety of different
delivery platforms.
20
<PAGE>
Traditional authoring tools have not met the needs of Multimedia
Application developers primarily because they require programming expertise, are
not well integrated with other tools and do not provide for multiple platform
playback capability.
The interest in the Internet has created significant demand from developers
using authoring tools such as SuperCard to incorporate Internet data into their
custom applications and multimedia titles. The extent of this demand is
difficult to gauge, but it appears to be on a scale equivalent to the
broad-scale demand for system level multimedia services such as QuickTime
digital video.
Multimedia authoring tools such as SuperCard provide software developers
with an easy-to-use, object-based scripting language which eliminates the need
for expertise in complex programming languages. This capability makes the
creation of Multimedia Applications available to creative professionals such as
artists, animators, graphic designers, educators and trainers who are not
proficient in computer programming languages.
Growth of the Web
The Company believes that Multimedia Applications and the growth and use of
the Web as a means of disseminating information are revolutionizing the
traditional ways which educational institutions and industry have presented
information. The ability to combine test, graphics, video, sound and animation
into a seamless presentation which can be run and manipulated on a personal
computer allows educators, business training professionals and industrial
performance support systems developers to create customized learning and
training environments which accommodate individual learning styles. In addition,
the ability to retrieve information and images from multiple databases across
the Web makes content available to an audience of users which was largely
unaccessible before the Web.
Much of the recent growth in Internet use by business and individuals has
been a result of the emergence of a network of servers and information available
on the Web. The Web is a client/server system of hyperlinked multimedia
databases introduced in 1992, in which certain computers ("servers") store files
and respond to requests issued by remote computers ("clients") to download
files, thus allowing multiple, geographically dispersed users to view
information stored on a single server. The Web enables users to find, retrieve
and link information on the Internet in a consistent way that makes the
underlying complexities transparent to the user. Currently, the client accesses
the information by way of a Web browser, which enables a user of a Windows-based
or Macintosh personal computer to use the Internet without any understanding of
the complex UNIX operating system on which the Internet is based. Electronic
documents are published on Web servers in a common format described by the
Hypertext Markup Language ("HTML"). The browser can read the HTML documents and
follow hypertext links to retrieve information from other sources. Web client
software can retrieve these documents across the Internet by making requests
using a standard protocol called Hypertext Transfer Protocol ("HTTP").
The HTML format has significant limitations for interactive communication
and when working with Multimedia Applications. The Company believes that its
enabling technology, Roadster, is a solution to this problem.
21
<PAGE>
Company Strategy
The Company's strategy is to leverage its core SuperCard technology to
become a leading supplier of multimedia and Web page authoring tools. This
strategy has the following key elements:
Provide Multiple Platform Products for the Professional and
Corporate Developer. The Company presently offers products which
operate on the Macintosh and Power-Macintosh computers. The
Company has announced a Windows version of SuperCard, and intends
to ship a runtime player by the end of 1996, which will enable
developers to deliver Multimedia Applications on either Macintosh
or Windows-based environments.
Provide Products to Enable the Deployment of Multimedia
Applications on the Web and to Access and Manage Information on
the Internet. The Company's existing Marionet product and its
recently announced Roadster and Xenon products will provide a
family of products that will enable the creation and practical use
of interactive Multimedia Applications on the Web. The Company
intends to develop strategic alliances with developers of Web
browser software and Internet access providers so that its
products are more broadly accepted.
Expand User Base. The Company intends to create new authoring tool
products derived from the core SuperCard technology which will
permit new classes of developers to create custom Multimedia
Applications.
Products
SuperCard
The Company's proprietary technology, "SuperCard," comprises a set of
sophisticated software authoring tools which enable professional Multimedia
Application developers to combine text, images, graphics, video, animation, and
sound into a wide variety of application software. Version 2.5 was released on
August 8, 1995 and was chosen by MacUser Magazine as the winner of its 1995
Editor's Choice Award for Best New Multimedia Authoring Application and by
Macworld Magazine as a World Class Award finalist which honors the "Best of the
Best" Mac products. The suggested retail list price for SuperCard is $595.
Currently, SuperCard runs only on computers compatible with the Macintosh
operating system. The Company's current schedule calls for SuperCard 3.0 for
Macintosh and a Windows-based runtime player to be shipped by the end of 1996.
The SuperCard "technology" consists of a development environment known as
SuperEdit, a run-time editor known as SuperCard, a debugging tool known as
ScriptTracer and a scripting language known as SuperTalk, all of which are
packaged and sold under the trade name "SuperCard." A SuperCard user needs to be
familiar with the Macintosh interface and have a basic knowledge of Macintosh
graphics applications that perform bitmapped editing ("painting") and
vector-editing ("drawing"). SuperCard is based on a high-level scripting
language which does not require knowledge of an independent programming
language. SuperCard offers a rich, object-based visual development environment
coupled with "SuperTalk," the most complete implementation of the industry
standard, fourth-generation programming language commonly known as HyperTalk.
SuperCard's SuperTalk supports the widest range of operating system-level
messages, which means that developers can script more sophisticated levels of
interactivity in their work. This combination of features enables developers to
easily and quickly create Multimedia Applications that in many cases couldn't be
executed in competing authoring tools and which would take more time and more
expensive engineering talent to execute in a conventional programming language.
22
<PAGE>
One of the most common uses for SuperCard is the building of Multimedia
Applications or "titles" such as computer games or CD-ROMs which use more than
one media source (i.e. graphics and sound) to deliver content to users.
Applications that are created, tested and modified with SuperCard are designed
to function as stand-alone multimedia "titles" that do not require SuperCard to
run.
Another common use of SuperCard is the building of computer-based
management information systems for the delivery of information throughout an
organization. SuperCard allows the user to organize and present data including
pictures or full motion video, graphical illustrations, sound and text within an
easy-to-access environment.
SuperCard-based applications have won the 1994 MacUser Magazine Editor's
Choice Award for best new multimedia software (Digital Chisel) and several of
the top awards for the most innovative Multimedia Applications in 1993
(presented by NewMedia Magazine), including the grand prize winner, the
"Animated Dissection of Anatomy for Medicine" (A.D.A.M.) from ADAM Software.
SuperCard has been used by Boeing Company to develop the prototype for its
computer-based training of pilots and mechanics for its 777 aircraft, by Harvard
and Yale University Medical Schools to develop training applications, by
Mercedes-Benz to develop performance support applications which deliver
schematics to the point of manufacture and by Toyota to develop presentation
applications, including an interactive marketing presentation of the Toyota
Tercel.
Based upon sales by the Company, the Company estimates that there are more
than 7,000 active developer/users. As of June 30, 1996, total unit sales since
the introduction of SuperCard in 1989 were approximately 60,000. The table below
sets forth the number of units of SuperCard sold and the revenues attributable
to such sales for each of the last three years:
<TABLE>
<CAPTION> Year Units Sold Sales Revenue
<S> <C> <C>
1995 14,166 $2,227,582
1994 5,988 $807,007
1993* 2,000 $300,000
* Estimated sales by Aldus Corporation. The Company did not acquire the
SuperCard technology until February 1994.
</TABLE>
Marionet
On January 9, 1996, the Company introduced its new Macintosh Internet
scripting kit, Marionet version 1.0 at the Macworld Exposition in San Francisco.
Marionet is a software solution that allows Internet developers to create custom
applications that access and manage information across the Internet. Designed to
work in conjunction with popular authoring tools such as SuperCard, Macromedia's
Director and AppleScript aware productivity applications, Marionet is a
complete, script-level interface to the Internet that runs transparently in the
background as a "faceless" background task. A convenient Control Panel allows
users to set common preferences. Responding to simple, English-like commands
from authoring tools that utilize an External Command (XCMD) interface, such as
the Company's SuperCard, Apple HyperCard and Macromedia Director, or from
productivity applications that support attachable AppleScripts, such as Claris
FileMaker Pro, Microsoft Excel and UserLand Frontier, Marionet offers complete
control over standard Internet protocols and also includes a dramatic new custom
peer-to-peer protocol called "Chat". Marionet uses Apple's Thread Manager to
full advantage for asynchronous operation and can also function synchronously.
The retail list price of Marionet is $219, but the Company is offering
introductory pricing of $99.
23
<PAGE>
Management believes that the applications for Marionet run from
sophisticated Web page authoring and maintenance tools to personal or
collaborative applications. Management believes that Marionet will enable (i)
CD-ROM titles to be integrated into dynamic Internet access and retrieval, (ii)
software companies to provide automatic software updates or build automatic
e-mail support as an integral part of their applications, (iii) educational
institutions to build Internet browsers that only offer access to selected
Internet sites (e.g. the university system), (iv) trainers to deliver
"distance-learning" applications that are easily and automatically updated from
a central web site and (v) individuals to create multi-player games, collaborate
with family members or develop tools to automatically gather information.
Product Development Plans
The Company's current product development efforts and market strategy
include (i) the completion of SuperCard 3.0, which will permit the creation of
applications for both Windows- and Macintosh-based operating environments; (ii)
the development of a Windows version of Marionet 1.1; and (iii) the development
of Roadster and Xenon, the initial products of a family of Internet authoring
tools based upon SuperCard technologies, that will allow the development of
interactive Web pages.
The product release dates and anticipated shipping schedules of the
products set forth below are based on the Company's current schedule. In the
normal course of its business, the Company may decide to re-order its priorities
and to accelerate development of one product. Due to limitations on the
Company's resources, such a re-ordering of product priorities may cause the
development and shipment of other products to be delayed.
SuperCard
The Company is currently shipping SuperCard version 2.5 for the Macintosh.
New product developments are planned as follows:
SuperCard 3.0. A nearly simultaneous release is planned for SuperCard
Version 3.0 on the Macintosh and a runtime player for Windows during the fourth
quarter of 1996. SuperCard 3.0 is designed to deliver a new interface with
support for plug-in tools, "smart" objects, drag-and-drop editing and automated
scripting for simple to moderately difficult tasks, enhanced extensibility to
allow SuperCard developers greater flexibility in adding functionality they
require, and a common file format on both platforms to facilitate delivery on
both platforms.
Marionet
Marionet 1.1. An enhanced, multiple platform version of Marionet is
intended to be released in 1996, designated Version 1.1. This release will be
the first version of Marionet for Windows-based and Macintosh- based personal
computers, and is designed to deliver enhancements over the current version of
Marionet on the Macintosh. Marionet will include more complete support for the
currently supported Internet protocols, support for additional protocols for a
broader range of host authoring tools.
Roadster
Roadster is a multiple platform plug-in to Web browsers, such as Netscape's
Navigator, that is designed to play SuperCard-based content distributed over the
Web. Roadster is designed to enable Macintosh and Windows-based Web developers
to incorporate dynamic, media-rich SuperCard content directly into a Web page
and give anyone on the Internet access to content developed in SuperCard.
Roadster is derived from SuperCard software technology and will support all of
the SuperTalk language that is appropriate in the Internet
24
<PAGE>
environment. It is designed to bridge the Web application development and
multimedia worlds, just as SuperCard appeals to those same audiences in the
desktop market. Roadster is scheduled to be released in the fourth quarter of
1996. Roadster has several inherent advantages over more complex solutions for
delivering multimedia over the Internet, including:
Roadster is an integrated environment that supports significant application
functionality and numerous media formats. With these capabilities, it is
possible to build rich multimedia experiences for playback entirely within the
single Roadster plug-in. While some individual features of Roadster may be
matched by a single-purpose plug-in, to the Company's knowledge, no other
plug-ins available today offer this level of integration and ease of
development. Approximating this functionality with existing tools would require
a complex combination of HTML scripting, utilization of several other plug-ins
and programming.
Roadster is a distributed environment. A key strength of SuperCard is its
ability to employ and play back external media within an application shell. This
strength enables Roadster to meet the requirements of delivering meaningful
interactive multimedia experiences within the bandwidth limitations of the
Internet. For instance, a Roadster developer can create a simple shell
application that can be downloaded quickly and provide a fast response to the
user. Additional data elements can then be streamed to the user and cached
locally to play back within the shell. In the worst case the data will arrive as
fast as it would in a conventional HTML environment; in many cases the developer
can anticipate and sequence data downloading so that the user never has to
experience wait times. In this way the end user can have a positive experience
with the data almost immediately, bandwidth can be maximized by continuously
downloading data and the developer can exercise great control over the user
experience across a wide range of bandwidths.
Roadster is extensible. While the underlying SuperCard technology is
extensible on the Macintosh and Windows, that capability has been excised from
Roadster as a security measure. An extensible version of Roadster which will
permit a software developer to add capabilities to Roadster is scheduled to be
available during 1997. In addition, a future version of Roadster will include
support for Sun Microsystem's programming language, Java.
Roadster is accessible. The underlying SuperTalk scripting engine is based
on HyperTalk the industry standard for fourth-generation scripting languages.
Out of the box, Roadster's scripting language will be understandable to
literally millions of content and applications developers on both platforms who
have used SuperCard, HyperCard, Director and Toolbook. Roadster will be
available free of charge on the Internet.
Xenon
To further open up access to real-time Multimedia Applications on the Web,
the Company will follow Roadster with a new point-and-click application to
author content for Roadster. Code-named Xenon, this new multiple platform
(Macintosh and Windows) product is being derived from the award-winning
SuperCard software technology.
Xenon will permit development of interactive Web Multimedia Applications
such as electronic catalogs, virtual galleries, presentations, games, corporate
training and educational reference. Despite its sophistication, Xenon is being
designed to eliminate a significant amount of the scripting on the part of the
end user through the use of pre-scripted templates and utilities. Xenon will
permit new classes of developers to build virtually Web sites that will have
more interactivity and multimedia richness and functionality than what is common
of today's Web sites.
25
<PAGE>
Xenon is intended for use by small business, corporate and educational
users who are expected to embrace Xenon as a solution for Web-based interactive
Multimedia Applications. Xenon is scheduled to be released in the second quarter
of 1997.
The Company believes that its future success will depend in large part on
its ability to enhance its existing products and to develop and introduce new
products on a timely basis. New products or enhancements must keep pace with
competitive offerings, adapt to new delivery platforms and emerging industry
standards and provide additional functionality. If the Company were unable, due
to resource constraints or technological or other reasons, to develop and
introduce such products in a timely manner, this inability would have a material
adverse effect on the Company's results of operations. The Company currently has
a number of new product development efforts under way. Any delay in the release
of scheduled product offerings could have a material adverse impact on the
Company's results of operations.
Sales, Marketing and Distribution
The Company generates brand awareness and demand for its products through
public relations activities, advertising, product reviews, competitive upgrade
offerings, and national and local trade shows. The Company also uses direct mail
and support services to introduce and educate customers about new products and
enhancements, and to cross-sell additional products to current customers such as
new products resulting from the Company's development efforts or third-party
products that the Company licenses or co-markets. In addition, the Company uses
multimedia to sell multimedia by distributing a variety of interactive
demonstration materials directly to prospects. The Company has initiated a
direct mail-order campaign with registered users to introduce versions 1.7, 2.0
and 2.5 of SuperCard and version 1.0 of Marionet and will do the same with new
product enhancements and service offerings. The Company allows trial versions of
its products to be downloaded from its Internet home page on the Web so that
prospective purchasers may try the Company's products for specific periods of
time before purchase is required.
The Company distributes its products through multiple distribution
channels, including traditional software distributors, international
distributors, value-added-resellers, educational market distributors, hardware
and software vendors and for certain large customers, direct sales and licenses.
The Company has entered into a non-exclusive cooperative agreement with
MacWarehouse and PC Connection and is pursuing other traditional channels.
SuperCard is generally sold as part of a "studio," which includes a video
editor, animation package, sound editor, texture package and a morphing special
effects package. These additional products are sold under a license agreement
with the owners. The Company pays a total royalty of approximately $45 per
"studio." Certain of these vendors bundle SuperCard with their products and pay
the Company a royalty.
The Company grants its distributors limited rights under a stock balancing
policy to return unsold inventories of the Company's products in exchange for an
equal amount of new purchases. In addition, the Company provides price
protection in its distributors. The Company extends credit terms to its
resellers of 30 days net from the date of invoice (the date of shipment), but
may, under certain circumstances, grant terms of up to 60 days net, at the
discretion of the Company.
Although the Company intends to focus its sales and marketing efforts in
the United States, it has entered into software license, foreign localization
and distribution agreements with distributors in Japan, United Kingdom India,
Italy, Australia, Canada, France, Sweden and Israel, where English versions of
SuperCard had already gained market acceptance. In November and December 1995,
the Company released a Kanji and French version of SuperCard for sale in the
Japanese and French markets, respectively, which historically have been strong
Macintosh markets.
26
<PAGE>
Competition
The markets in which the Company's products are sold are highly competitive
and are characterized by pressure to reduce prices, incorporate new features and
accelerate the release of new product versions. A number of companies, including
Apple, Asymetrix, Macromedia, Microsoft, Oracle and Sun Microsystems, currently
offer products or have products in the planning stages that compete or will
compete directly or indirectly with products and scheduled products of the
Company. These competitors have significantly greater financial, management,
technical and marketing resources than the Company.
The principal aspects of competition in the multimedia authoring tools
market are diverse and thus allow for potentially successful niche marketing
strategies. These principal aspects include product features and quality, price,
ease of use, brand name recognition, reliability and quality of support
services. Management of the Company believes that it can compete favorably with
respect to each of these factors.
Although there are products that provide script-level access to Internet
protocols through a specific interface (such as Visual Basic Extensions, or
VBXs), or that provide pre-built graphical user interface ("GUI") access to the
Internet through a multiple platform object model, (such as OpenDoc), there are
currently, to the Company's knowledge, no other products that provide a common
scripting interface to Internet protocols for popular authoring tools on both
MacOS and Windows platforms. The Company anticipates that as the use of the
Internet increases competitors will develop products that compete directly with
Marionet. This market is characterized by strong competition and significant
price pressure. Moreover, there is a reasonable expectation that system software
vendors, including Microsoft and Apple, will incorporate some degree of
Marionet's current functionality into their respective operating systems in the
foreseeable future.
Manufacture and Shipping
The production of SuperCard and Marionet for sale includes diskette
duplication, component assembly, printing of user manuals and final packaging,
all of which are performed by specialty contractors in accordance with the
Company's specifications and forecasts. There are a number of alternate sources
for these services that could be implemented without delay or any material
adverse effect on the Company's business or results of operation.
Customer Service and Technical Support
The Company's Customer Service and Technical Support Program offers three
levels of technical support during normal business hours intended to build and
foster the skills necessary to become proficient with the SuperCard and Marionet
tool set. Level I basic Technical Support assistance is provided at no charge.
Level II Scripting Support provides assistance with high-level scripting
and script debugging. There is a $35 per incident charge or $299 annual charge
for this service.
The Company's Level III Developer Support provides professional developers
with significant external command development tools (external commands "extend"
SuperCard's built-in capabilities), a private account for use with the Company's
on-line servers, pre-release versions of software in development and priority
service. There is a $495 annual charge for this service. As of March 31, 1996,
the Level III program has approximately 250 members.
27
<PAGE>
Proprietary Protection
The Company's success and ability to compete is dependent in part upon its
proprietary technology. While the Company relies on trademark, trade secret and
copyright law to protect its technology, the Company believes that factors such
as the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are more essential to establishing and maintaining a
technology leadership position. The Company presently has no patents or patent
applications pending. There can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology. The
source code for the Company's proprietary software is protected both as a trade
secret and as a copyrighted work. The Company generally enters into
confidentiality or license agreements with its employees, consultants and
vendors, and generally controls access to and distribution of its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries, and the
global nature of the Internet makes it virtually impossible to control the
ultimate destination of the Company's products. To license its products, the
Company primarily relies on "shrink wrap" licenses that are not signed by the
end-user. However, the enforceability of shrink wrap licenses is not well
established. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult. There can be no
assurance that the steps taken by the Company will prevent misappropriation of
its technology or that such agreements will be enforceable. In addition,
litigation may be necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, operating results or financial condition.
Unisys has announced its intention to require a license agreement for the
use of compression technology associated with the Graphics Interchange Format
("GIF"). Unisys asserts that this popular file format is based on compression
technology patented by Unisys. The Company's products have the ability to
decompress files, including files stored in GIF. Although the Company has not
received notice of Unisys' intention to enforce or license such patent, the
Company believes that certain of its competitors may have received such notice.
The Company does not believe that its products use a technology which violates
Unisys' patents. If Unisys were to assert a claim against the Company, the
Company believes that alternative technologies are available for use in the
Company's products which could be utilized without requiring significant
modification or expense.
Although the Company does not believe that its products infringe the
proprietary rights of any third parties, there can be no assurance that
infringement or invalidity claims (or claims for indemnification resulting from
infringement claims) will not be asserted or prosecuted against the Company or
that any such assertions or prosecutions will not materially adversely affect
the Company's business, financial condition or results of operations.
Irrespective of the validity or the successful assertion of such claims, the
Company could incur significant costs and diversion of resources with respect to
the defense thereof which could have a material adverse effect on the Company's
business, financial condition or results of operations. If any claims or actions
are asserted against the Company, the Company may seek to obtain a license under
a third party's intellectual property rights. There can be no assurance,
however, that under such circumstances, a license would be available on
reasonable terms or at all.
The Company also relies on certain technology which it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's products to perform key functions. There can
be no assurance that these third party technology licenses will continue to be
available to the
28
<PAGE>
Company on commercially reasonable terms. The loss of or inability to maintain
any of these technology licenses could result in delays or reductions in product
shipments until equivalent technology could be identified, licensed and
integrated. Any such delays or reductions in product shipments could materially
adversely affect the Company's business, operating results and financial
condition.
Employees
At May 31, 1996, the Company employed 26 full-time persons, including 11 in
marketing, sales and customer service and technical support, 12 in product
development, product engineering and content development and 3 in
administration. The Company also employs a small number of temporary and
contract employees. None of the Company's employees is represented by a labor
union. The Company is not a party to any collective bargaining agreement or
other similar agreement. The Company has no work stoppages to date. The Company
believes that its relationship with its employees is good.
If the Company's growth continues and if the Company is able to fund such
growth, it is expected that additional employees will be required, primarily in
engineering, sales and customer service and technical support. No assurance can
be given that the Company will be able to locate and hire people with the
requisite experience and skills, or that the Company will have sufficient
working capital to hire all of the additional employees it could optimally
utilize. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
Facilities
The Company operates out of a 10,500 square foot office facility in San
Diego, California. The office premises are leased pursuant to a lease agreement
that expires on October 6, 1998. The base rent is approximately $13,000 per
month. In addition to the base rent, the Company pays its share of the operating
expenses, property tax, and insurance premiums on the building. The Company
believes its facilities are adequate for its current needs and that suitable
additional or substitute space will be available as needed.
Legal Proceedings
The Company is not a party to any material pending legal proceedings.
29
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information concerning the executive
officers and directors of the Company.
<TABLE>
<CAPTION> Name Age Position
<S> <C> <C>
Joel B. Staadecker (1).......................... 49 President, Chief Executive Officer and Director
William D. McCartney............................ 40 Secretary, Chief Financial Officer and Director
Stuart F. Henigson.............................. 45 Vice President, Marketing
David Baron 36................................Vice President, Engineering
Leonard Petersen (1)............................ 41 Director
William C. Appleton............................. 34 Director
Tommy J.H. Lee (1).............................. 32 Director
- --------------------
(1) Member of the Audit Committee
</TABLE>
Mr. Staadecker has been President, Director and Chief Executive Officer of
the Company since January, 1994. Mr. Staadecker was the President of Allegiant
Financial Group Inc., of Seattle, Washington ("AFG"), a financial consulting
firm, from 1991 to 1994. AFG was responsible for organizing the acquisition of
SuperCard by the Company from Aldus. From 1989 to 1991, Mr. Staadecker was the
President and Chief Operating Officer of the Pacific Institute, a worldwide
education and training organization, in Seattle, Washington.
Mr. McCartney has been Chief Financial Officer and a director of the Company
since January, 1994. From 1990 to the present, he has been the President of
Pemcorp Management Inc., which provides corporate finance services to public and
private companies. Mr. McCartney is a chartered accountant in the Province of
British Columbia, Canada and has a bachelors degree in business from Simon
Fraser University.
Mr. Henigson has been the Vice President Marketing of the Company since
January, 1994. Prior to this, Mr. Henigson was a Strategic Marketing Manager at
Aldus Corporation and its predecessor, Silicon Beach Software, from 1988 to
1992, during which time he was responsible for the marketing of several software
products including SuperCard. From 1992 to 1994, he acted as an independent
consultant. Mr. Henigson has eleven years of software industry experience. Mr.
Henigson has a bachelors degree in economics from Whitman College, a masters
degree in economics from Yale University and an M.B.A. in marketing from the
University of California at Los Angeles.
Mr. Baron has been the Vice President of Engineering of the Company on a
full-time basis since May, 1995. Previously, he was the Director of Product
Design at Blyth Software from 1991 to 1995. Mr. Baron is a graduate of
Rensselaer Polytechnic Institute.
Mr. Petersen has been a director of the Company since February, 1994. From
1990 to the present, he has been a senior officer of Pemcorp Management Inc.,
which provides corporate finance services to public and private companies. Mr.
Petersen has been a director of CVD Financial Corporation since May 1995 and of
Logan International Corp. since January 1994. Mr. Petersen is a chartered
accountant in the Province of British Columbia, Canada.
30
<PAGE>
Mr. Appleton is the original creator of SuperCard. He has been a director
of the Company since February, 1994. Mr. Appleton has been self-employed or has
acted as the President of CyberFlix Incorporated, a developer of interactive
multimedia games since 1989.
Mr. Lee is a Software Development Manager for MDSI Mobile Data Solutions
Inc. He has been a director of the Company since February, 1994. From 1988 to
1995 he was a senior software engineer for MacDonald Dettwiler and Associates.
Audit Committee
The Board has established an Audit Committee, which is comprised of Messrs.
Staadecker, Lee and Petersen. The Audit Committee administers the Company's
stock option plan, recommends the selection of the Company's independent
auditors and consults with the independent auditors on the Company's internal
accounting controls.
Executive Compensation
The following table sets forth all compensation awarded to, earned by, or
paid for services to the Company in all capacities during the fiscal year ended
December 31, 1995 to the Company's chief executive officer. No director or
executive officer received total compensation in respect of the 1995 fiscal year
exceeding $100,000.
Summary Compensation Table
<TABLE>
<CAPTION> Annual Compensation
Name and Position Year Salary Other Total
<S> <C> <C> <C> <C>
Joel B. Staadecker
President, C.E.O., Director................ 1995 $60,000 $22,800(1) $82,800
(1) At the request of the Company, Mr. Staadecker relocated from Seattle to San Diego. The Company pays
the certain costs for Mr. Staadecker to maintain his home in Seattle.
</TABLE>
Directors' Compensation
The Company does not currently compensate its directors under any standard
arrangement, but are reimbursed for their out-of-pocket expenses in serving on
the Board of Directors. Directors were granted incentive stock options during
fiscal 1994.
Pemcorp Management Inc., a management advisory services company controlled
by Mr. McCartney and Mr. Petersen, was paid $30,000 for the year ended December
31, 1995 pursuant to a management services contract.
The Company has entered into indemnification agreements with each of its
directors which provide for indemnification of the directors by the Company to
the fullest extent permitted by Washington law. See "Description of
Securities--Limitation of Liability and Indemnification."
31
<PAGE>
Grants of Stock Options
The following tables set forth information concerning the award of stock
options to Mr. Staadecker during the year ended December 31, 1995 and options
held by him at the end of such year.
Option Grants in the Last Fiscal Year
<TABLE>
<CAPTION> Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise or Base Expiration
Name Granted in Fiscal Year Price ($/Sh) Date
<S> <C> <C> <C> <C>
Joel B. Staadecker........... 165,000 14.4% C$1.40 5/24/00
</TABLE>
<TABLE>
<CAPTION> Number of Unexercised
Securities Underlying Value of Unexercised In-
Shares Options/SARs at FY-End The-Money Options/SARs at
Acquired on Value (#) FY-End ($)
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Joel B. Staadecker..... 0 N/A 165,000/0 $224,000/0
</TABLE>
Employment Contracts
Mr. Staadecker has entered into an employment agreement with the Company
dated February 1, 1995. The term of employment is for two years beginning
February 1, 1995. Mr. Staadecker is paid a monthly aggregate remuneration,
inclusive of salary and direct reimbursement for housing costs, equal to $6,900
per month or such greater amount as is mutually agreed upon from time to time.
Mr. Henigson has entered into an employment agreement with the Company dated
February 1, 1994, as amended on July 1, 1994 having the following material
terms: (1) The term of employment commenced on February 1, 1994 and will
continue for an initial term of four years and thereafter for an indefinite
period; and (2) Mr. Henigson is paid a gross annual salary of $46,000, payable
monthly plus an expense allowance of $2,000 per month and the fringe benefits
that the Company provides from time to time to its other employees performing
comparable services for the Company or such greater amounts as is mutually
agreed upon from time to time. Mr. Henigson or the Company may terminate the
agreement with or without a cause prior to the termination of its four year
term, but if Mr. Henigson terminates without cause, certain percentages of
restricted stock granted to him will be forfeited.
Mr. Baron has entered into an employment agreement with the Company having
the same material terms as Mr. Henigson's employment agreement set out above,
including the right of Mr. Baron or the Company to terminate with or without
cause, except that Mr. Baron commenced his employment with the Company in May,
1995, and is paid a gross annual salary of $100,000 per year.
Stock Option Plan
On May 1, 1995, the Company's stockholders approved the 1995 Stock Option
Plan (the "Plan"). The Plan took effect on January 31, 1995, and was amended on
May 14, 1996. All officers, directors and
32
<PAGE>
employees of the Company or its affiliates are eligible to be granted
options under the Plan. The Company has reserved 2,187,688 shares of Common
Stock for issuance upon the exercise of options granted to participants under
the Plan. As of June 30, 1996, the Company had awarded options to purchase
1,610,000 shares of Common Stock, which are exercisable at prices ranging from
C$1.40 to C$3.66 per share. Of such options, 1,065,833 were exercisable as of
June 30, 1996.
Under the Plan, two types of options to purchase shares of Common Stock may
be granted to employees, consultants and advisors of the Company: (1) options
which qualify as incentive stock options ("Incentive Options") under Section 422
of the Code, and (2) options which do not qualify as incentive stock options
under the Code ("Nonqualified Options"). Both Incentive Options and Nonqualified
Options may be granted to employees. No person can receive options in any
calendar year to purchase more than the number of shares of Common Stock equal
to five percent of the Common Stock outstanding at the time of the grant.
In the event of changes affecting the shares of Common Stock, such as a
subdivision or consolidation of shares, the payment of a share dividend, or
other increase or decrease in the shares of Common Stock effected without
receipt of consideration by the Company, the aggregate number of shares for
which options may be granted, the number of shares covered by each outstanding
option, and the exercise price per share for each option will be proportionately
adjusted.
In general, upon an optionee's termination of employment with the Company
and its affiliates, each option held by such optionee ceases to be exercisable
30 days after the termination date of employment. However, an optionee may
exercise such options any time within twelve months if termination is due to
death. The optionee's personal representative is permitted to exercise only
those options that were exercisable on the date of death.
The Plan is administered by the Board or a committee of the Board duly
appointed for this purpose by the Board and consisting of not less than three
directors. The interpretation and construction of any provision of the Plan
shall be within the discretion of the Board or such committee, whose
determination shall be final and binding. The Board or such committee has the
sole discretion to determine the employees to whom options are to be granted,
the number of shares to be subject to such options and the terms, conditions and
any performance criteria for the options.
The Board of Directors may at any time suspend, amend or terminate the
operation of the Plan. However, to the extent required for compliance with Rule
16b-3 promulgated under Section 16(b) of the Securities Exchange Act of 1934,
Section 422 of the Code or by any applicable law or regulation, the approval of
the Company's shareholders is required for any amendment that would (a)
materially increase the benefits accruing to participants under the Plan, (b)
materially increase the number of shares of Common Stock which may be accrued
under the Plan, or (c) materially modify the requirements as to eligibility for
participation in the Plan.
33
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of Common Stock as of August 30, 1996, by (i) each person
who is known by the Company to beneficially own more than 5% of the outstanding
shares of Common Stock, (ii) each of the Company's directors, (iii) each of the
executive officers named in the Summary Compensation Table and (iv) all current
directors and executive officers as a group. Unless otherwise indicated in the
footnotes to the table, each person or entity has sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned by
such person or entity.
<TABLE>
<CAPTION> Number of Shares Percentage of
Name of Stockholder Beneficially Owned Outstanding Shares(1)
<S> <C> <C>
Joel B. Staadecker
President and Director
9740 Scranton Road
San Diego, CA 92121....................................... 1,310,000(2) 15.8%
William D. McCartney
Chief Financial Officer and Director
1270 - 609 Granville Street
Vancouver, BC
Canada, V7Y 1G6........................................... 775,000(3) 9.4%
Stuart F. Henigson
Vice-President, Marketing
9740 Scranton Road
San Diego, CA 92121....................................... 400,000(4) 4.8%
David Baron
Vice President, Engineering
9740 Scranton Road
San Diego, CA 92121....................................... 150,000(5) 1.8%
Leonard Petersen
Director
1270 - 609 Granville Street
Vancouver, BC
Canada, V7Y 1G6........................................... 775,000(6) 9.4%
William C. Appleton
Director and Product Strategist
4 Market Square
Knoxville, TN
U.S.A 37902............................................... 125,000(7) 1.5%
Tommy J.H. Lee
Director
135-10551 Shellbridge Way
Richmond, BC
Canada, V6X 2W9........................................... 200,000(8) 2.4%
34
<PAGE>
Geller & Friend Partnership I
3333 Michelson Drive, Suite 650
Irvine, CA
U.S.A. 92715-1686........................................ 575,000(9) 7.1%
All directors and executive officers as a group (7
persons)(10). . . . . . . . . . . . . . . 3,735,000 45.1%
- -------------------------
(1) The percentages reflected in this column are based on the assumption
that the respective owner exercises any rights he or it has to purchase
additional shares of Common Stock within sixty days from the date hereof and
excludes all other shares of Common Stock reserved for issuance upon exercise of
outstanding options and warrants or upon conversion of outstanding convertible
debt of the Company.
(2) Includes 350,000 Escrowed Common Shares and 165,000 employee incentive
options.
(3) Includes 350,000 Escrowed Common Shares and 125,000 employee incentive
options. All of the issued shares are held indirectly by companies controlled by
William D. McCartney.
(4) Includes 300,000 Escrowed Common Shares and 100,000 employee incentive
options.
(5) Includes 150,000 employee incentive options.
(6) Leonard Petersen holds 125,000 employee incentive options directly and
650,000 shares, including 350,000 Escrowed Common Shares, indirectly through
Petersen Management Inc., an investment management company controlled by Mr.
Petersen.
(7) Includes 100,000 Escrowed Common Shares and 25,000 employee incentive
options.
(8) Includes 175,000 Escrowed Common Shares and 25,000 employee incentive
options.
(9) Includes a maximum of 250,000 shares to be issued upon the conversion
of a debenture in the amount of $425,000 and a maximum 325,000 shares to be
issued upon the exercise of warrants of which 75,000 are issued and 250,000 are
to be issued upon the conversion of the debenture.
(10) Includes an aggregate of 1,625,000 Escrowed Common Shares and an
aggregate of 715,000 employee incentive options.
</TABLE>
35
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 1994, the Company paid the sum of
$100,000 to Allegiant Financial Group Inc. ("AFG"), the principals of which were
Joel B. Staadecker, William D. McCartney and Leonard Petersen. The amount paid
to AFG is in respect of two matters. It includes two payments of $5,000 ($10,000
in total) for management services rendered during the months of February and
March, 1994. It also includes a consulting fee of $90,000 which was paid in
connection with the acquisition of SuperCard, by the Company from Aldus
Corporation. No fees have been paid to AFG since such time and no fees are
anticipated being paid to AFG in the foreseeable future.
On January 24, 1995, the Company and Mr. William Appleton agreed to
terminate Mr. Appleton's royalty on sales of SuperCard effective January 31,
1995, for consideration of $100,000 which continues to be paid over two years in
equal monthly installments of $4,568, inclusive of interest calculated at nine
percent per annum, to March 1, 1997.
Pemcorp Management Inc., a management advisory services company controlled
by Mr. McCartney and Mr. Petersen, was paid $30,000 for the year ended December
31, 1995 pursuant to a management services contract.
DESCRIPTION OF SECURITIES
The following summary description of the Company's capital stock and of
certain provisions of the Articles and Bylaws are summaries and do not purport
to be complete and are subject to and qualified in their entirety by reference
to the Articles and Bylaws, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part. Reference is made to
such exhibit for a detailed description of the provisions summarized below.
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, $0.01 par value per share and 50,000,000 shares of preferred
stock, $0.01 par value per share (the "Preferred Stock").
As of August 30, 1996, there were 8,107,295 shares of Common Stock held of
record by a total of 61 shareholders (excluding shares issuable upon exercise of
outstanding options and warrants and convertible debentures of the Company) and
no shares of Preferred Stock issued and outstanding.
Common Stock
General. Holders of Common Stock are entitled to one vote per share on all
matters to be voted on by the stockholders. There are no cumulative voting
rights. Accordingly, the holders of a majority of the shares of Common Stock
voting for the election of directors can elect all the directors if they choose
to do so. Subject to dividends received by holders of Preferred Stock, if any,
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available therefor. See "Dividend Policy." In the event of the
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of the
Company's liabilities. Holders of Common Stock have no preemptive rights and the
Common Stock is neither redeemable nor convertible into any other securities.
All of the issued and outstanding common stock is fully paid and nonassessable.
36
<PAGE>
Escrowed Shares. The Company sold a total of 2,000,000 shares to principals
of the Company for $.01 per share in accordance with Local Policy Statement 3-07
of the British Columbia Securities Commission (the "Policy"). These shares are
being held in escrow pursuant to the terms of an Escrow Agreement dated for
reference March 31, 1994 among the Company, Montreal Trust Company, as Escrow
Agent, and the holders of the shares held subject to performance criteria (the
"Escrow Agreement"). The Escrow Agreement is in the form required by the Policy
and provides that the shares must remain in escrow until the Vancouver Stock
Exchange permits them to be released from escrow or requires them to be
cancelled.
The shares may be released from escrow, on a pro rata basis, based upon the
cumulative cash flow of the Company, as evidenced by the Company's annual
audited financial statements. "Cash flow" is defined in the Policy to mean net
income or loss before tax, adjusted for certain add-backs. For each C$0.52 of
cumulative cash flow generated by the Company from its operations, one share may
be released from escrow.
The holders of these shares may not transfer the shares except in accordance
with the Policy and only with the consent of the Superintendent of Brokers or
the Vancouver Stock Exchange, and even in such event the shares must remain in
escrow until the release conditions are satisfied. A holder of such shares has
the right to vote the shares, except on a resolution to cancel the shares, but
has waived the right to receive dividends and to participate in the assets and
property of the Company on a winding-up or dissolution of the Company.
A holder of these shares who ceases to be a principal, as that term is
defined in the Policy, dies or becomes bankrupt, is entitled to retain any such
shares then held by him and is not obligated to transfer or surrender the shares
to the Company or to any other person, subject to separate divestiture
provisions contained in certain management employee agreements.
These shares must be surrendered for cancellation if the Company's shares
are the subject of a cease trade order for two consecutive years and any such
shares not released from escrow ten years from the later of the date of the
issue of the shares and the date of the receipt for the Company's final Offering
Circular must be surrendered for cancellation.
Preferred Stock
Pursuant to the Articles, the Company is authorized to issue shares of
Preferred Stock, which may be issued from time to time in one or more series
upon authorization by the Company's Board of Directors. The Board of Directors,
without further approval of the stockholders, is authorized to fix the dividend
rights and terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, and any other rights, preferences, privileges and
restrictions and applicable to each series of the Preferred Stock. The Preferred
Stock may be issued with voting rights which require the separate approval of
holders of each class of Preferred Stock in order to effect certain major
corporate actions, such as a merger or sales of substantially all of the assets,
or which give the holders of the Preferred Stock the right to separately elect a
specified number of directors. While such provisions provide flexibility in
connection with possible acquisitions and other corporate purposes, they could
adversely affect the voting power of the holders of Common Stock and, under
certain circumstances, make it more difficult for a third party to gain control
of the Company, discourage bids for the Company's Common Stock at a premium to
the prevailing market price or otherwise adversely affect the market price of
the Common Stock. The Company has no present plans to issue any shares of
Preferred Stock.
37
<PAGE>
Warrants
The Company has an outstanding series of warrants to purchase an aggregate
of 489,000 shares of Common Stock. Each warrant entitles the holder to purchase
at any time one share of Common Stock for a period ending April 26, 1998, at an
exercise price of $2.30 per share of Common Stock, subject to adjustment of the
price per share and number of shares issuable upon exercise of such warrants
upon any subdivision, consolidation or reclassification of the Common Stock of
the Company or if any stock dividend upon the Common Stock is declared and paid
by the Company. The warrants do not contain antidilution provisions relating to
issuances or sales of Common Stock at prices below the exercise price or the
then prevailing market price of the Common Stock. The warrants may be exercised
in whole or in part. Commencing on the later of January 26, 1997 or the date a
registration statement relating to the resale of the Shares is declared
effective by the Securities and Exchange Commission, the Company, upon 30 days'
written notice at any time after the last sale price of the Company's Common
Stock as reported on the OTC Bulletin Board or the Nasdaq SmallCap Market (or
such other exchange on which the Company's Common Stock may be traded or quoted)
has been at least 175% of the then effective exercise price of the warrants for
20 consecutive trading days ending within 5 days of the date of such notice, may
demand that the holders exercise all of the warrants prior to the end of the
30-day notice period, after which the warrants will automatically expire (with
the exception of warrants for 81,500 shares to which this call provision does
not apply). Unless exercised or called, the warrants will automatically expire
two years from the date of closing of this Offering.
As of the date hereof, the Company has additional outstanding warrants to
purchase an aggregate of 238,235 shares of Common Stock (excluding warrants
issuable upon conversion of outstanding convertible debentures of the Company).
88,235 of such warrants expire on December 18, 1997 and 150,000 of such warrants
expire on April 25, 1998. Each of such warrants are non-transferable and the
price per share and number of shares issuable upon exercise thereof are subject
to adjustment in the event of any subdivision, consolidation or reclassification
of the Common Stock of the Company or if any stock dividend upon the Common
Stock is declared and paid by the Company. As with the Warrants described above
these other warrants are subject to adjustment of the price per share and number
of shares issuable upon exercise of such warrants upon any subdivision,
consolidation or reclassification of the Common Stock of the Company or if any
stock dividend upon the Common Stock is declared and paid by the Company. These
other warrants do not contain antidilution provisions relating to issuances or
sales of Common Stock at prices below the exercise price or the then prevailing
market price of the Common Stock. These warrants may also be exercised in whole
or in part.
Convertible Debentures
On December 18, 1995, the Company issued Convertible Debentures in an
aggregate amount of $500,000 (the "Debentures") to Geller & Friend Partnership I
("G&F")and Greenbrae Capital Partners L.P. ("Greenbrae"). In addition, the
Company issued warrants to purchase 75,000 shares of Common Stock to G&F and
warrants to purchase 13,235 shares of Common Stock to Greenbrae. The outstanding
principal of the Debentures becomes due and payable on the earlier of (a) any
date after December 18, 1996 if a registration statement with respect to the
underlying shares and shares issuable upon exercise of the underlying warrants
has not been declared effective by the Securities and Exchange Commission (the
"Commission") or the resale of such shares is not otherwise exempt from
registration and the Company is requested to make such repayment, (b) an event
of default that is not cured in accordance with the terms of the Debenture, or
(c) December 18, 1997. If a Registration Statement with respect to the resale of
the underlying shares and shares issuable upon exercise of the underlying
warrants has not been declared effective by the Commission or is not otherwise
exempt from registration prior to June 30, 1996, interest begins to accrue on
the outstanding principal amount of the Debentures at a rate of 8% per annum,
calculated annually, not in advance and payable monthly until the Debenture is
fully converted or paid in full. If such condition has not been satisfied prior
to December 31, 1996, the interest rate becomes 14%
38
<PAGE>
per annum. The Company has granted to G&F and Greenbrae a security interest in
all of the Company's right, title and interest in and to all presently owned and
after acquired personal property, assets and undertakings of the Company, and
all proceeds and renewals of same, which security interest is subordinated to
all principal and interest on all monies borrowed by the Company from
institutional lenders subsequent to December 18, 1995. The terms of the
Debentures require the consent of a majority in value of the Debentures in the
event the Company desires to borrow in excess of $500,000 from any lender or
lenders.
The Debentures are convertible into units of one share of Common Stock and
one warrant entitling the Debenture holder to purchase one share of Common Stock
at any time prior to December 18, 1997 at a price of $1.70 per share if
exercised prior to December 18, 1996 and $1.96 per share if exercised after
December 18, 1996 and prior to December 18, 1997; provided, that any partial
conversion will be permitted only in increments of $75,000, unless the Company
otherwise consents to a lesser amount. Pursuant to the terms of the Debentures,
the Company is required to file a registration statement with respect to the
shares of Common Stock into which the Debentures are convertible and the shares
of Common Stock issuable upon exercise of the underlying warrants (subject to
any underwriter cutbacks or certain other matters affecting the registration of
such shares) and to use its commercially reasonable best efforts to cause such
registration statement to become effective within 120 days following the closing
of this Offering and to keep such registration statement effective for two years
from the closing of this Offering (or such shorter period as may be required to
sell all of such shares). As of the date hereof, 250,000 shares of Common Stock
and warrants to purchase an additional 250,000 shares are issuable to G&F and
44,117 shares of Common Stock and warrants to purchase and additional 44,117
shares are issuable to Greenbrae upon conversion of the Debentures.
Antitakeover Provisions
Statutory Provisions. Washington law contains certain provisions that may
have the effect of delaying, deterring or preventing a change in control of the
Company. Chapter 23B.17 of the Washington Business Corporation Act (the "WBCA")
prohibits, subject to certain exceptions, a merger, sale of assets or
liquidation of the Company involving an "interested shareholder" (defined as a
person who owns beneficially 20% or more of the Company's voting securities)
unless the transaction is determined to be at a "fair price" or otherwise
approved by a majority of the Company's disinterested directors or is approved
by holders of two-thirds of the Company's outstanding voting securities, other
than those held by the interested shareholder. A Washington corporation may, in
its articles of incorporation, exempt itself from coverage of this provision,
but the Company has not done so. In addition, Chapter 23B.19 of the WBCA
prohibits the Company, with certain exceptions, from engaging in certain
significant business transactions with an "acquiring person" (defined as a
person who acquires 10% or more of the Company's voting securities without the
prior approval of the Company's Board of Directors) for a period of five years
after such acquisition. Since the Company's principal executive offices are
located outside Washington State and a majority of the Company's employees are
not residents of Washington State, the protections afforded by Chapter 23B.19
are not presently available. The prohibited transactions include, among others,
a merger with, disposition of assets to, or issuance or redemption of stock to
or from, the acquiring person, or otherwise allowing the acquiring person to
receive any disproportionate benefit as a shareholder. The Company may not
exempt itself from coverage of this statute. If these statutory provisions are
applicable, they may have the effect of delaying, deterring or preventing a
change in control of the Company.
Article Provisions. Under the Company's Articles, the Board of Directors has
the authority to issue up to 50,000,000 shares of Preferred Stock with such
rights and preferences as the Board of Directors may determine. The issuance of
such shares may have the effect of delaying, deterring or preventing a change in
control of the Company. See "-- Preferred Stock."
39
<PAGE>
The Articles do not provide for cumulative voting in the election of
directors. The Articles prohibit stockholders from calling a special meeting of
stockholders. A special meeting of stockholders may be called only by a majority
of the Board of Directors.
Limitation of Liability and Indemnification
Article VI of the Articles limits to the full extent permitted by Washington
law, the personal liability of directors to the Company or its stockholders for
monetary damages for conduct as a director. The Articles and Section 23B.08.320
of the Washington Business Corporation Act do not permit limitations on a
director's liability in circumstances involving intentional misconduct or a
knowing violation of law, illegal corporate distributions, or any transaction
from which the director personally receives a benefit in money, property or
services to which the director is not legally entitled. Article VII of the
Articles provides that the Company shall to the full extent permitted by
Washington law, indemnify and advance or reimburse the reasonable expenses
incurred by any person made a party to a proceeding because that person is or
was a director of the Company. In addition, Section 9.2 of the Bylaws permits
the Company's Board of Directors to indemnify the Company's officers, employees
and agents to the full extent permitted by Washington law. To this end, the
Company has entered into Indemnification Agreements with its directors which
provide contractual indemnification against claims and liabilities arising out
of such person's capacity as a director of the Company, except in instances
where the claim arises solely out of the director receiving a personal profit or
advantage to which the director is not legally entitled, an accounting for
profits for liability under Section 16(b) of the Exchange Act or is based on the
director's knowingly fraudulent, deliberately dishonest or willful misconduct.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Montreal Trust
Company of Canada situated at 510 Burrard St., Vancouver, British Columbia, V6C
3B9.
PLAN OF DISTRIBUTION
The Selling Stockholders may from time to time sell all or a portion of the
Shares Market in the over-the-counter market, on the Vancouver Stock Exchange,
on any other national securities exchange on which the Common Stock is listed or
traded, in negotiated transactions or otherwise, at prices then prevailing or
related to the then current market price or at negotiated prices. The Shares
will not be sold in an underwritten public offering. The Shares may be sold
directly or through brokers or dealers. The methods by which the Shares may be
sold include: (a) a block trade (which may involve crosses) in which the broker
or dealer so engaged will attempt to sell the securities as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
and (d) privately negotiated transactions. In effecting sales, brokers and
dealers engaged by Selling Stockholders may arrange for other brokers or dealers
to participate. Brokers or dealers may receive commissions or discounts from
Selling Stockholders (or, if any such broker-dealer acts as agent for the
purchaser of such shares, from such purchaser) in amounts to be negotiated which
are not expected to exceed those customary in the types of transactions
involved. Broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share, and, to the
extent such broker-dealer is unable to do so acting as agent for a Selling
Stockholder, to purchase as principal any unsold shares at the price required to
fulfill the broker-dealer commitment to such Selling Stockholder. Broker-dealers
who acquire shares as principal may thereafter resell such shares from time to
time in transactions (which may involve crosses and block transactions and sales
to and through other broker-dealers, including transactions of the nature
described above) in the over-the-counter market or otherwise at prices and on
terms then prevailing
40
<PAGE>
at the time of sale, at prices then related to the then-current market price or
in negotiated transactions and, in connection with such resales, may pay to or
receive from the purchasers of such shares commissions as described above.
In connection with the distribution of the Shares, the Selling Stockholders
may enter into hedging transactions with broker-dealers. In connection with such
transactions, broker-dealers may engage in short sales of the Shares in the
course of hedging the positions they assume with the Selling Stockholders. The
Selling Stockholders may also sell the Shares short and redeliver the Shares to
close out the short positions. The Selling Stockholders may also enter into
option or other transactions with broker-dealers which require the delivery to
the broker-dealer of the Shares. The Selling Stockholders may also loan or
pledge the Shares to a broker-dealer and the broker-dealer may sell the Shares
so loaned or upon a default the broker-dealer may effect sales of the pledged
shares. In addition to the foregoing, the Selling Stockholders may enter into,
from time to time, other types of hedging transactions.
The Selling Stockholders and any broker-dealers participating in the
distributions of the Shares may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any profit on the sale of
Shares by the Selling Stockholders and any commissions or discounts given to any
such broker-dealer may be deemed to be underwriting commissions or discounts
under the Securities Act.
The Shares may also be sold pursuant to Rule 144 under the Securities Act
beginning two years after the Shares were issued, provided such date is at least
90 days after the date of this Prospectus.
The Company has filed the Registration Statement, of which this Prospectus
forms a part, with respect to the sale of the Shares. The Company has agreed to
use its best efforts to keep the Registration Statement current and effective
for a period commencing on the effective date of the Registration Statement and
terminating 24 months after the Registration Statement is filed with the
Commission. There can be no assurance that the Selling Stockholders will sell
any or all of the Shares offered hereunder.
Under the Exchange Act and the regulations thereunder, any person engaged in
a distribution of the shares of Common Stock of the Company offered by this
Prospectus may not simultaneously engage market making activities with respect
to the Common Stock of the Company during the applicable "cooling off" periods
prior to the commencement of such distribution. In addition, and without
limiting the foregoing, the Selling Stockholders will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including, without limitation, Rules 10b-6 and 10b-7, which provisions may limit
the timing of purchases and sales of Common Stock by the Selling Stockholders.
The Company will pay all of the expenses incident to the offering and sale
of the Shares, other than commissions, discounts and fees of underwriters,
dealers or agents.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
has been passed upon for the Company by Foster Pepper & Shefelman, Seattle,
Washington.
EXPERTS
The financial statements of Allegiant Technologies Inc. at December 31,
1995, and for the year then ended, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent
41
<PAGE>
auditors, and at December 31, 1994, and for the period from incorporation on
December 28, 1993 to December 31, 1994, by Baker & Company, independent
accountants, as set forth in their respective reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
CHANGE OF ACCOUNTANTS
The Company engaged Ernst & Young LLP on December 31, 1995 as the Company's
independent accountants to report on the Company's financial statements
commencing with the year ended December 31, 1995. Baker & Company acted as the
Company's independent accountants with regard to the year ended December 31,
1994. Baker & Company was dismissed by the Company on December 31, 1995. The
report on the financial statements for such year did not contain an adverse
opinion or disclaimer of opinion, or a modification as to uncertainty, audit
scope, or accounting principles. The decision to change accountants on December
31, 1995 was approved by the Company's Board of Directors. There were no
disagreements with Baker & Company, resolved or unresolved, on any matter of
accounting principles or practices, financial disclosure, or auditing scope or
procedure, which if not resolved to Baker & Company's satisfaction, would have
caused it to make reference to the subject matter of the disagreement(s) in
connection with its report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules to the Registration Statement. For further information with respect to
the Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and scheduled filed as a part of the
Registration Statement. Statements contained in this Prospectus concerning the
contents of any contract or any other document referred to are not necessarily
complete, and reference is made in each instance to the copy of such contract or
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Securities and Exchange Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained from
such office after payment of fees prescribed by the Securities and Exchange
Commission.
42
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Allegiant Technologies, Inc.
We have audited the balance sheet of Allegiant Technologies, Inc. as of December
31, 1995, and the related statements of operations, shareholders' equity, and
cash flows for the year then ended. 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 audit. The financial
statements of Allegiant Technologies, Inc. at December 31, 1994, and for the
period from incorporation on December 28, 1993 to December 31, 1994, were
audited by other auditors whose report, dated January 27, 1995, expressed an
unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the financial position of Allegiant Technologies, Inc.
at December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
43
<PAGE>
February 7, 1996
AUDITORS' REPORT
To the Directors of
Allegiant Technologies Inc.
We have audited the balance sheet of Allegiant Technologies Inc. as at December
31, 1994 and the statements of earnings and deficit, changes in shareholders'
equity and changes in financial position for the period from incorporation on
December 28, 1993 to December 31, 1994. 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 audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as, evaluating the overall
financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1994 and the
results of its operations, changes in shareholders' equity and the changes in
its financial position for the period from incorporation on December 28, 1993 to
December 31, 1994 then ended in accordance with Canadian generally accepted
accounting principles.
/s/ Baker & Company
Chartered Accountants
West Vancouver, Canada
January 27, 1995
44
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
FINANCIAL STATEMENTS
(Expressed in United States Dollars)
DECEMBER 31, 1995
<TABLE>
ALLEGIANT TECHNOLOGIES INC.
BALANCE SHEET
(Expressed in United States Dollars)
AS OF DECEMBER 31
<CAPTION> 1994 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 253,218 $ 616,868
Accounts receivable, net of allowance for doubtful accounts of
$17,131 in 1994 and $15,000 in 1995 197,625 134,276
Inventories 50,950 99,367
Prepaid expenses and deposits 29,247 58,106
------------- ------------
Total current assets 531,040 908,617
Deposits - 15,709
Property and equipment, net (Note 3) 96,184 253,628
Intangible assets, net (Note 4) 406,700 384,187
Deferred costs 52,895 76,250
------------- ------------
Total assets $ 1,086,819 $ 1,638,391
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 173,517 $ 212,380
Accrued liabilities 8,200 33,559
Deferred revenues 19,800 53,798
Current portion of notes payable - 51,460
------------- ------------
Total current liabilities 201,517 351,197
Deferred rent - 26,403
Notes payable, net of current portion (Note 5) 250,000 9,034
Debentures payable (Note 6) - 461,000
------------- ------------
Total liabilities 451,517 847,634
------------- ------------
Commitments (Note 7)
Shareholders' equity:
Capital stock (Note 9)
Authorized
50,000,000 preferred shares, par value $0.01 per share
100,000,000 common shares, par value $0.01 per share
Issued and outstanding
7,042,295 common shares (1994 - 5,634,000) 56,340 70,423
Additional paid-in capital 1,205,660 2,404,398
Accumulated deficit (626,698) (1,684,064)
------------- -----------
Total shareholders' equity 635,302 790,757
------------- -----------
Total liabilities and shareholders' equity $ 1,086,819 $ 1,638,391
============= ===========
See accompanying notes.
</TABLE>
<TABLE>
ALLEGIANT TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS
(Expressed in United States Dollars)
<CAPTION> From
Incorporation on
December 28,
1993 to Year Ended
December 31, December 31,
1994 1995
<S> <C> <C>
NET REVENUE $ 818,153 $ 2,227,582
COST OF REVENUE 170,192 646,547
------------- ------------
GROSS PROFIT 647,961 1,581,035
------------- ------------
EXPENSES
Sales and marketing 441,220 1,045,383
Research and development 288,563 607,012
General and administrative 454,915 863,535
Amortization of purchase of intangibles 91,300 131,263
------------- ------------
Total operating expenses 1,275,998 2,647,193
------------- ------------
Loss from operations (628,037) (1,066,158)
Interest income 1,339 14,966
Interest expense - (6,174)
------------- ------------
Net loss $ (626,698) $ (1,057,366)
============== =============
Loss per share $ (0.25) $ (0.24)
============== =============
Shares used in computing per share amounts 2,535,397 4,372,592
============= ============
See accompanying notes.
</TABLE>
<TABLE>
ALLEGIANT TECHNOLOGIES INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(Expressed in United States Dollars)
<CAPTION> Additional Total
Number Paid-in Accumulated Shareholders'
of Shares Par Value Capital Deficit Equity
<S> <C> <C> <C> <C> <C>
Balances at December 28, 1993 1 $ 1 $ - $ - $ 1
Shares issued - cash 5,639,999 56,339 1,205,660 1,261,999
Net loss (626,698) (626,698)
------------- ------------- ------------- ------------- -----------
Balances at December 31, 1994 5,634,000 56,340 1,205,660 (626,698) 635,302
Shares issued - cash 875,000 8,750 866,250 875,000
- corporate finance fee 64,545 645 63,900 64,545
- exercise of warrants 218,750 2,188 216,562 218,750
- conversion of note payable 250,000 2,500 247,500 250,000
- issuance of warrants - - 39,000 39,000
Offering costs (234,474) (234,474)
Net loss (1,057,366) (1,057,366)
------------- ------------- ------------- ------------- -----------
Balances at December 31, 1995 7,042,295 $ 70,423 $ 2,404,398 $ (1,684,064) $ 790,757
============= ============= ============= ============== ===========
See accompanying notes.
</TABLE>
<TABLE>
ALLEGIANT TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
(Expressed in United States Dollars)
<CAPTION> From
Incorporation on
December 28,
1993 to Year Ended
December 31, December 31,
1994 1995
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (626,698) $ (1,057,366)
Adjustments to reconcile net loss to net cash
used in operating activities
Amortization and depreciation 105,897 168,086
Changes in operating assets and liabilities
Accounts receivable (197,625) 63,349
Inventories (50,950) (48,417)
Prepaid expenses and deposits (29,247) (44,568)
Accounts payable and accrued liabilities 181,717 64,222
Deferred revenues 19,800 33,998
------------- ------------
Net cash used for operating activities (597,106) (820,696)
------------- ------------
INVESTING ACTIVITIES
Purchase of property and equipment (110,781) (194,268)
Purchase of intangible assets (498,000) -
------------- -------------
Net cash used for investing activities (608,781) (194,268)
------------- ------------
FINANCING ACTIVITIES
Proceeds from issuance of capital stock 1,262,000 923,821
Proceeds from notes payable 250,000 -
Payments on notes payable - (39,506)
Proceeds from debentures payable - 500,000
Deferred costs (52,895) (32,104)
Deferred rent - 26,403
------------- ------------
Net cash provided by financing activities 1,459,105 1,378,614
------------- ------------
Increase in cash and cash equivalents 253,218 363,650
Cash and cash equivalents, beginning of period - 253,218
------------- ------------
Cash and cash equivalents, end of period $ 253,218 $ 616,868
============= ============
Supplemental Disclosures of Non-Cash
Investing and Financing Activities
Note payable issued for royalty buy-out $ - $ 100,000
Common shares issued for conversion of note payable - 250,000
Common shares issued for corporate finance fee - 64,545
See accompanying notes.
</TABLE>
ALLEGIANT TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
DECEMBER 31, 1995
1. NATURE OF OPERATIONS
Allegiant Technologies Inc. was incorporated in Washington State, U.S.A. on
December 28, 1993 and was registered to carry on business in the State of
California on March 23, 1994. The Company's principal line of business is
developing, marketing and supporting interactive multimedia development
software.
2. SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories consist primarily of software media, manuals and related
packing materials. Inventories are valued at standard cost, which approximates
the lower of cost, determined on a first-in, first-out basis, or market.
Capital assets
Capital assets are recorded at cost. Depreciation is provided over the
estimated useful lives ranging from three to seven years using the straight-line
method.
Intangible assets
Intangible assets are recorded at cost. Amortization is provided over the
estimated useful lives of five years using the straight-line method. Management
evaluates the future realization of intangible assets quarterly and writes down
any amounts that management deems unlikely to be recorded through future product
sales. To date no write downs have been recorded to intangible assets acquired
from Aldus Corporation.
Deferred costs
Deferred costs will be offset against the proceeds of equity financing
or amortized over the period of debt financing.
Capitalized software costs
Financial accounting standards provide for capitalization of certain
software development costs after technical feasibility of the software is
attained. No such costs were capitalized in 1994 or 1995 because the impact on
the financial statements would not be material.
Advertising costs
Advertising costs are expensed as incurred. Included in sales and marketing
are advertising costs of $135,453 and $376,860 in 1994 and 1995, respectively.
Revenue Recognition
Revenue is derived from product sales and licenses, maintenance contracts
and consulting, training and other services. Revenues from product sales and
licenses are recognized upon shipment of the products. Revenue from software
maintenance contracts is recognized on a straight-line basis over the term of
the contract, generally one year. Revenue from consulting, training and other
services are recognized in the period in which services are performed. To the
extent that an engagement is projected to be completed at a loss, a provision
for the full amount of the loss is provided at that time. The Company may enter
into agreements whereby it licenses products or provides customers the right to
multiple copies. Such agreements generally provide for non-refundable fixed fees
which are recognized at delivery of the product master or the first copy. Per
copy royalties in excess of the fixed minimum amounts and refundable license
fees are recognized as revenue when such amounts are reported to the Company and
no longer refundable. The Company will sell its products throughout the world,
however the most significant geographical area is the United States. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral on domestic sales. The Company maintains an allowance for
potential credit losses. Additionally, the Company maintains an allowance for
anticipated returns on products sold to distributors and direct customers. Two
customers accounted for 13% and 11% of the Company's revenue in 1995.
Foreign currency translation
The Company translates foreign currency transactions and balances using the
temporal method. Under this method, monetary assets and liabilities are
translated at period-end rates whereas non-monetary assets and liabilities are
recorded at rates prevailing at the transaction dates. Revenue and expenses are
translated at the average monthly rate throughout the period. Currency gains and
losses are reflected in the results of operations for the periods and were not
significant.
Reclassifications
Certain amounts in the 1994 financial statements have been reclassified
to conform with the 1995 presentation.
Income taxes
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. ("SFAS") 109, "Accounting for Income Taxes".
New accounting standards
In March 1995, the Financial Accounting Standards Board issued SFAS 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of", effective for fiscal years beginning after December 15, 1995. SFAS
121 requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The Company does not believe, based on
current circumstances, the effect of adoption of SFAS 121 will be material. In
October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation", effective for fiscal years beginning
after December 15, 1995. SFAS 123 establishes the fair value based method of
accounting for stock-based compensation arrangements, under which compensation
cost is determined using the fair value of the stock option at the grant date
and is recognized over the periods in which the related services are rendered.
If the Company were to retain its current intrinsic value based method, as
allowed by SFAS 123, it will be required to disclose the pro forma effect of
adopting the fair value based method. The Company does not plan to adopt the
fair value based method.
United States Generally Accepted Accounting Principles
Accounting under United States and Canadian generally accepted accounting
principles is substantially the same with respect to the accounting principles
used by the Company in the preparation of these financial statements.
<TABLE>
3. CAPITAL ASSETS
1994 1995
<CAPTION> -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Capital assets consist of:
Furniture and fixtures $ 23,801 $ 114,933
Office equipment 16,387 17,416
Computer equipment 70,593 172,699
------------- ------------
110,781 305,048
Accumulated depreciation (14,597) (51,420)
------------- ------------
$ 96,184 $ 253,628
============= ============
</TABLE>
<TABLE>
4. INTANGIBLE ASSETS
1994 1995
<CAPTION>---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Intangible assets consist of:
Acquisition costs of SuperCard $ 498,000 $ 498,000
Royalty buyout - 100,000
------------- ------------
498,000 598,000
Accumulated amortization (91,300) (213,813)
------------- ------------
$ 406,700 $ 384,187
============= ============
</TABLE>
Acquisition costs include product technology and related acquisition costs.
On February 4, 1994 the Company purchased from a non-related party, the rights
to a product sold under the name "SuperCard" and the underlying software
technology for cash and other consideration. Royalty buyout represents a fixed
sum payment for the termination of the royalty interest on SuperCard sales. The
buyout option was negotiated as part of the original acquisition of SuperCard.
<TABLE>
ALLEGIANT TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
DECEMBER 31, 1995
5. NOTES PAYABLE
<CAPTION> 1994 1995
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable to a shareholder of the Company, due on demand on or after
September 30, 1996, without interest and unsecured. The note is
convertible into units at $1.40 Cdn per unit until May 24, 1996 and
$1.61 Cdn until May 24, 1997. Each unit consists of one share and one
share purchase warrant entitling the holder to purchase one share
under the same terms as the conversion of the note. During 1995 the
note payable was converted. $ 250,000 $ -
Note payable on buyout of royalty on SuperCard sales, payable over two
years in equal monthly instalLments commencing March 1, 1995
with interest at 9% per annum. - 60,494
Less: current portion - (51,460)
------------- ------------
Notes payable less current portion $ 250,000 $ 9,034
============= ============
Cash paid in 1995 for interest was $6,174.
</TABLE>
<TABLE>
6. DEBENTURES PAYABLE
<CAPTION> 1994 1995
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
The Company has issued debentures in the aggregate amount of $500,000
which may be converted into Units of the Issuer at a price of $1.70
per Unit until December 18, 1996 and thereafter at $1.96 until
December 18, 1997, at the option of the holder. Each Unit consists of
one common share and one share purchase warrant entitling the holder
to purchase an additional common share at $1.70 until December 18,
1996 and thereafter at $1.96 until December 18, 1997. The debentures,
if not converted into Units, are due on December 18, 1997. The
holders may cause the Company to repay the debentures at any time
after December 18, 1996 provided that a registration statement for
the resale of the shares to be issued upon the exercise of the
debentures and the shares issued upon the exercise of the warrants
that are issued upon the conversion of the debenture (collectively
the "Shares") has not been declared effective by the Securities and
Exchange Commission.
The debentures are secured by a general charge over the assets of the
Company and bear interest at 8% per annum payable monthly commencing
on June 18, 1996. Upon the registration of the Shares for resale the
charge over the assets of the Company will be released and interest
will cease to accrue. $ - $ 500,000
Less discount - 39,000
------------- ------------
</TABLE>
ALLEGIANT TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
DECEMBER 31, 1995
7. COMMITMENTS
Lease
The Company leases office space. Minimum lease payments are as follows:
1996 $ 123,904
1997 147,630
1998 123,377
Rent expense for the years ending December 31, 1994 and 1995 were
$27,306 and $82,549, respectively.
8. INCOME TAXES
Significant components of the Company's deferred tax assets as of
December 31, 1995 are shown below. A valuation allowance has been
recognized to offset the deferred tax assets as realization of such
assets is uncertain.
<TABLE>
<CAPTION> 1994 1995
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 236,000 $ 600,000
Research and development credits 34,000 80,000
Other - net 4,000 52,000
------------- -------------
Total deferred tax assets 274,000 732,000
Valuation allowance for deferred tax assets (274,000) (732,000)
------------- -------------
Net deferred tax assets $ - $ -
============= =============
At December 31, 1995, the Company has federal and California tax net
operating loss carryforwards of approximately $1,500,000. The Company
also has federal and California research credit carryforwards of
approximately $50,000 and $30,000, respectively. The federal tax loss
carryforward and the research credit carryforwards will begin expiring
in 2009 unless previously utilized. The California tax loss carryforward
will begin expiring in 2002 unless previously utilized.
In accordance with certain provisions of the Internal Revenue Code, a
change in ownership of a corporation of greater than 50 percent within a
three-year period will place an annual limitation on the corporation's
ability to utilize its existing tax loss and tax credit carryforwards.
</TABLE>
9. CAPITAL STOCK
Authorized
50,000,000 preferred stock, par value $0.01 per share. The Board of
Directors has the authority to divide the shares into
one or more series and to determine their attributes at
the time of issuance.
100,000,000 common stock, par value $0.01 per share
Included in issued and outstanding shares are 2,000,000 performance
shares to be released from escrow on the basis of 1 share for every
$0.52 Cdn of pre-tax cash earned by the Company. Of the performance
shares, 675,000 shares have further vesting provisions attached to them
in addition to the earn-out provisions. The value of these performance
shares will be charged to expense at the time of their release from
escrow.
The Company has granted directors and employees stock options to
purchase common shares of the Company as follows:
December 31, 1994 -
Granted during 1995 1,530,000
December 31, 1995 1,530,000
=============
The option price varies from $1.40 Cdn to $3.66 Cdn and the option
expiry dates range from May 24, 2000 to December 8, 2000.
At the end of the year 1,015,833 options vested and were available to
exercise. There are available 442,200 options that can be granted under
the stock option plan.
The Company has outstanding share purchase warrants entitling the
holders to purchase a total of 338,235 common shares of the Company as
follows:
<TABLE>
<CAPTION> Number Warrant
of Shares Price Expiry Date
<S> <C> <C>
250,000 $ 1.40 Cdn to May 24, 1996 May 24, 1997
$ 1.61 Cdn from
May 25, 1996
to May 24, 1997
88,235 $ 1.70 to December 18, 1996 December 18, 1997
$ 1.96 from December 19, 1996
------------- to December 18, 1997
338,235
</TABLE>
10. RELATED PARTY TRANSACTIONS
During 1995 the Company paid $Nil (1994 - $90,000) in consulting fees
and $30,000 (1994 - $32,500) in management fees to companies controlled
by certain directors of the Company. The consulting fees were paid in
connection with and were contingent upon the acquisition of SuperCard
and have been included in the acquisition costs capitalized (refer to
Note 4).
ALLEGIANT TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
DECEMBER 31, 1995
11. SEGMENTED INFORMATION
Substantially all the Company's operations, employees and assets are
located in the United States.
A significant portion of the Company's sales are to customers in foreign
countries:
<TABLE>
<CAPTION> 1994 1995
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales by geographical region:
Japan $ 46,100 $ 260,506
Europe 48,990 246,231
Other 16,907 131,856
------------- ------------
Total export sales 111,997 638,593
United States 706,156 1,588,989
------------- ------------
Net sales $ 818,153 $ 2,227,582
============= ============
</TABLE>
ALLEGIANT TECHNOLOGIES INC.
(Expressed in United States Dollars)
FINANCIAL STATEMENTS
(Unaudited - Prepared by Management)
JUNE 30, 1996
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
BALANCE SHEET
(Expressed in United States Dollars)
AS OF JUNE 30
<TABLE>
<CAPTION> 1995 1996
------------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 582,244 $ 921,043
Accounts receivable, net of allowance for doubtful accounts of
$6,914 in 1995 and $25,000 in 1996 216,714 125,615
Inventories 89,778 79,033
Prepaid expenses and deposits 108,715 61,670
------------- ------------
Total current assets 997,451 1,187,361
Deposits - 15,709
Property and equipment, net (Note 3) 140,345 275,302
Intangible assets, net (Note 4) 446,485 321,889
Deferred costs - 30,000
------------- ------------
Total assets $ 1,584,281 $ 1,830,261
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 122,788 $ 161,961
Accrued liabilities 3,982 35,239
Deferred revenues 42,290 52,516
Current portion of notes payable 49,204 35,341
------------- ------------
Total current liabilities 218,264 285,057
Deferred rent - 22,002
Notes payable, net of current portion (Note 5) 285,341 -
Debentures payable (Note 6) - 492,798
------------- ------------
Total liabilities 503,605 799,857
------------- ------------
Commitments (Note 7)
Shareholders' equity:
Capital stock (Note 9)
Authorized
50,000,000 preferred shares, par value $0.01 per share
100,000,000 common shares, par value $0.01 per share
Issued and outstanding
8,107,295 common shares (1995 - 6,573,545) 65,735 81,073
Additional paid-in capital 1,878,691 3,965,092
Accumulated deficit (863,750) (3,015,761)
------------- -----------
Total shareholders' equity 1,080,676 1,030,404
------------- -----------
Total liabilities and shareholders' equity $ 1,584,281 $ 1,830,261
============= ===========
</TABLE>
Unaudited - See accompanying notes.
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS
(Expressed in United States Dollars)
SIX MONTHS ENDED JUNE 30
<TABLE>
<CAPTION> 1995 1996
------------- ---------
<S> <C> <C>
NET REVENUE $ 1,244,351 $ 909,796
COST OF REVENUE 326,357 193,210
------------- ------------
GROSS PROFIT 917,994 716,586
------------- ------------
EXPENSES
Sales and marketing 529,166 955,684
Research and development 233,018 483,016
General and administrative 332,587 512,128
Amortization of purchase of intangibles 60,215 68,548
------------- ------------
Total operating expenses 1,154,986 2,019,376
------------- ------------
Loss from operations
Interest income 3,718 8,479
Interest expense (3,778) (37,386)
------------- ------------
Net loss $ (237,052) $ (1,331,697)
============= ============
Loss per share $ (0.04) $ (0.17)
============= ============
Shares used in computing per share amounts 5,634,000 7,692,295
============= ============
</TABLE>
Unaudited - See accompanying notes.
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(Expressed in United States Dollars)
<TABLE>
<CAPTION> Additional Total
Number Paid-in Accumulated Shareholders'
of Shares Par Value Capital Deficit Equity
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994 5,634,000 $ 56,340 $ 1,205,660 $ (626,698) $ 635,302
Shares issued - cash 875,000 8,750 866,250 875,000
- corporate finance fee 64,545 645 63,900 64,545
Offering costs (257,119) (257,119)
Net loss (237,052) (237,052)
------------- ------------- ------------- ------------- -----------
Balances at June 30, 1995 6,573,545 65,735 1,878,691 (863,750) 1,080,676
Shares issued - exercise of warrants 218,750 2,188 216,562 218,750
- conversion of note payable 250,000 2,500 247,500 250,000
- issuance of warrants - - 39,000 39,000
Offering costs - adjustment 22,645 22,645
Net loss (820,314) (820,314)
------------- ------------- ------------- ------------- -----------
Balances at December 31, 1995 7,042,295 70,423 2,404,398 (1,684,064) 790,757
Shares issued - cash 815,000 8,150 1,621,850
1,630,000
- exercise of warrants 250,000 2,500 247,500 250,000
Offering costs (308,656) (308,656)
Net loss (1,331,697) (1,331,697)
------------- ------------- ------------- ------------- -----------
Balances at June 30, 1996 8,107,295 $ 81,073 $ 3,965,092 $ (3,015,761) $ 1,030,404
============= ============= ============= ============= ===========
</TABLE>
Unaudited - See accompanying notes.
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
(Expressed in United States Dollars)
SIX MONTHS ENDED JUNE 30
<TABLE>
<CAPTION> 1995 1996
------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (237,052) $ (1,331,697)
Adjustments to reconcile net loss to net cash
used in operating activities
Amortization and depreciation 72,315 100,669
Changes in operating assets and liabilities
Accounts receivable (19,089) 8,661
Inventories (38,828) 20,334
Prepaid expenses and deposits (79,468) (3,564)
Accounts payable and accrued liabilities (54,947) (48,739)
Deferred revenues 22,490 (1,282)
------------- ------------
Net cash used for operating activities (334,579) (1,255,618)
------------- ------------
INVESTING ACTIVITIES
Purchase of property and equipment (56,261) (60,045)
Purchase of intangible assets (100,000) -
------------- ------------
Net cash used for investing activities (156,261) (60,045)
------------- ------------
FINANCING ACTIVITIES
Proceeds from issuance of capital stock 939,545 1,880,000
Share offering cost (257,119) (308,656)
Proceeds from notes payable 100,000 -
Payments on notes payable (15,455) (25,153)
Deferred costs 52,895 46,250
Deferred rent - (4,401)
Amortization of debt discount - 31,798
------------- ------------
Net cash provided by financing activities 819,866 1,619,838
------------- ------------
Increase in cash and cash equivalents 329,026 304,175
Cash and cash equivalents, beginning of period 253,218 616,868
------------- ------------
Cash and cash equivalents, end of period $ 582,244 $ 921,043
============= ============
</TABLE>
Unaudited - See accompanying notes.
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
JUNE 30, 1996
1. NATURE OF OPERATIONS
Allegiant Technologies Inc. was incorporated in Washington State, U.S.A. on
December 28, 1993 and was registered to carry on business in the State of
California on March 23, 1994.
The Company's principal line of business is developing, marketing and
supporting interactive multimedia development software.
2. SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories consists primarily of software media, manuals and related
packing materials. Inventories are valued at standard cost, which
approximates the lower of cost, determined on a first-in, first-out
basis, or market.
Capital assets
Capital assets are recorded at cost. Depreciation is provided over the
estimated useful lives ranging from three to seven years using the
straight-line method.
Intangible assets
Intangible assets are recorded at cost. Amortization is provided over
the estimated useful lives of five years using the straight-line method.
Management evaluates the future realization of intangible assets
quarterly and writes down any amounts that management deems unlikely to
be recorded through future product sales. To date no write downs have
been recorded to intangible assets.
Deferred costs
Deferred costs will be offset against the proceeds of equity financing
or amortized over the period of debt financing.
Capitalized software costs
Financial accounting standards provide for capitalization of certain
software development costs after technical feasibility of the software
is attained. No such costs were capitalized in the first or second
quarter of 1995 or 1996 because the impact on the financial statements
would not be material.
Revenue Recognition
Revenue is derived from product sales and licenses, maintenance
contracts and consulting, training and other services. Revenues from
product sales and licenses are recognized upon shipment of the products.
Revenue from software maintenance contracts is recognized on a
straight-line basis over the term of the contract, generally one year.
Revenue from consulting, training and other services are recognized in
the period in which services are performed. To the extent that an
engagement is projected to be completed at a loss, a provision for the
full amount of the loss is provided at that time.
Unaudited.
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
JUNE 30, 1996
2. SIGNIFICANT ACCOUNTING PRINCIPLES (cont'd.....)
Revenue Recognition (cont'd.....)
The Company may enter into agreements whereby it licenses products or
provides customers the right to multiple copies. Such agreements
generally provide for non-refundable fixed fees which are recognized at
delivery of the product master or the first copy. Per copy royalties in
excess of the fixed minimum amounts and refundable license fees are
recognized as revenue when such amounts are reported to the Company and
no longer refundable.
The Company will sell its products throughout the world, however the
most significant geographical area is the United States. The Company
performs ongoing credit evaluations of its customers and generally does
not require collateral on domestic sales. The Company maintains an
allowance for potential credit losses. Additionally, the Company
maintains an allowance for anticipated returns on products sold to
distributors and direct customers.
Foreign currency translation
The Company translates foreign currency transactions and balances using
the temporal method. Under this method, monetary assets and liabilities
are translated at period-end rates whereas non-monetary assets and
liabilities are recorded at rates prevailing at the transaction dates.
Revenue and expenses are translated at the average monthly rate
throughout the period. Currency gains and losses are reflected in the
results of operations for the periods and were not significant.
Reclassifications
Certain amounts in the 1995 financial statements have been reclassified
to conform with the 1996 presentation.
Income taxes
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. ("SFAS") 109, "Accounting for Income Taxes".
New accounting standards
In March 1995, the Financial Accounting Standards Board issued SFAS 121,
"Accounting for Impairment of Long- Lived Assets and for Long-Lived
Assets to be Disposed Of", effective for fiscal years beginning after
December 15, 1995. SFAS 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amount. SFAS 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of. The Company does not believe, based on current
circumstances, the effect of adoption of SFAS 121 will be material.
There was no impact from the adoption of SFAS 121 in 1996.
Unaudited.
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
JUNE 30, 1996
2. SIGNIFICANT ACCOUNTING PRINCIPLES (cont'd.....)
New accounting standards (cont'd.....)
In October 1995, the Financial Accounting Standards Board issued SFAS
123, "Accounting for Stock-Based Compensation", effective for fiscal
years beginning after December 15, 1995. SFAS 123 establishes the fair
value based method of accounting for stock-based compensation
arrangements, under which compensation cost is determined using the fair
value of the stock option at the grant date and is recognized over the
periods in which the related services are rendered. If the Company were
to retain its current intrinsic value based method, as allowed by SFAS
123, it will be required to disclose the pro forma effect of adopting
the fair value based method in its December 31, 1996 financial
statements. The Company does not plan to adopt the fair value based
method.
United States Generally Accepted Accounting Principles
Accounting under United States and Canadian generally accepted
accounting principles is substantially the same with respect to the
accounting principles used by the Company in the preparation of these
financial statements.
3. CAPITAL ASSETS
<TABLE>
<CAPTION> 1995 1996
------------- ----------
<S> <C> <C>
Capital assets consist of:
Furniture and fixtures $ 34,634 $ 154,240
Office equipment 16,387 17,416
Computer equipment 116,021 193,437
------------- ------------
167,042 365,093
Accumulated depreciation (26,697) (89,791)
------------- ------------
$ 140,345 $ 275,302
============= ============
</TABLE>
4. INTANGIBLE ASSETS
<TABLE>
<CAPTION> 1995 1996
------------- ----------
<S> <C> <C>
Intangible assets consist of:
Acquisition costs of software $ 498,000 $ 498,000
Royalty buyout 100,000 100,000
------------- ------------
598,000 598,000
Accumulated amortization (151,515) (276,111)
------------- ------------
$ 446,485 $ 321,889
============= ============
</TABLE>
Unaudited.
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
JUNE 30, 1996
5. NOTES PAYABLE
<TABLE>
<CAPTION> 1995 1996
------------- --------
<S> <C> <C>
Note payable to a shareholder of the Company, due on demand on or after
September 30, 1996, without interest and unsecured. The note is
convertible into units at $1.40 Cdn per unit until May 24, 1996 and
$1.61 Cdn until May 24, 1997. Each unit consists of one share and one
share purchase warrant entitling the holder to purchase one share
under the same terms as the conversion of the note. During
1995 the note payable was converted. $ 250,000 $ -
Note payable on buyout of royalty, payable over two years in equal
monthly installments commencing March 1, 1995 with
interest at 9% per annum. 84,545 35,341
------------- ------------
334,545 35,341
Less: current portion (49,204) (35,341)
------------- -------------
Notes payable less current portion $ 285,341 $ -
============= =============
</TABLE>
6. DEBENTURES PAYABLE
<TABLE>
<CAPTION> 1995 1996
------------- -----------
<S> <C> <C>
TheCompany has issued debentures in the aggregate amount of $500,000
which may be converted into Units of the Issuer at a price of $1.70
per Unit until December 18, 1996 and thereafter at $1.96 until
December 18, 1997, at the option of the holder. Each Unit consists of
one common share and one share purchase warrant entitling the holder
to purchase an additional common share at $1.70 until December 18,
1996 and thereafter at $1.96 until December 18, 1997. The debentures,
if not converted into Units, are due on December 18, 1997. The
holders may cause the Company to repay the debentures at any time
after December 18, 1996 provided that a registration statement for
the resale of the shares to be issued upon the exercise of the
debentures and the shares issued upon the exercise of the warrants
that are issued upon the conversion of the debenture (collectively
the "Shares") has not been declared effective by the Securities and
Exchange Commission.
Thedebentures are secured by a general charge over the assets of the
Company and bear interest at 8% per annum payable monthly commencing
on June 18, 1996. Upon the registration of the Shares for resale the
charge over the assets of the Company will be released and interest
will cease to
accrue. $ - $ 500,000
Less unamortized discount - (7,202)
------------- ------------
$ - $ 492,798
============= ============
</TABLE>
Unaudited.
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
JUNE 30, 1996
7. COMMITMENTS
Lease
The Company leases office space. Minimum lease payments are as follows:
1996 $ 123,904
1997 147,630
1998 123,377
8. INCOME TAXES
A valuation allowance has been recognized to offset the deferred tax
assets resulting from net operating loss carry forwards and research tax
credits as realization of such assets is uncertain.
9. CAPITAL STOCK
Authorized
50,000,000 preferred stock, par value $0.01 per share. The Board of
Directors has the authority to divide the shares into
one or more series and to determine their attributes at
the time of issuance.
100,000,000 common stock, par value $0.01 per share
Included in issued and outstanding shares are 2,000,000 performance
shares to be released from escrow on the basis of 1 share for every
$0.52 Cdn of pre-tax cash earned by the Company. Of the performance
shares, 675,000 shares have further vesting provisions attached to them
in addition to the earn-out provisions. The value of these performance
shares will be charged to expense at the time of their release from
escrow.
The Company has granted directors and employees stock options to
purchase 1,610,000 common shares of the Company.
The option price varies from $1.40 Cdn to $3.66 Cdn and the option
expiry dates range from May 24, 2000 to December 8, 2000.
At March 31, 1996, 1,065,833 options vested and were available to
exercise. There are available 577,688 options that can be granted under
the stock option plan.
The Company has outstanding share purchase warrants entitling the
holders to purchase common shares of the Company as follows:
<TABLE>
<CAPTION> Number Exercise Price Expiry Date
<C> <C> <C>
88,235 $1.70 - $1.96 December 18, 1997
81,500 $2.30 April 25, 1998
150,000 Cdn $3.15 - $3.62 April 25, 1998
</TABLE>
10. RELATED PARTY TRANSACTIONS
During the three months ended June 30, 1996, the Company paid $15,000
(1995 - $15,000) in management fees to a company controlled by certain
directors of the Company.
Unaudited.
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
JUNE 30, 1996
11. SEGMENTED INFORMATION
Substantially all the Company's operations, employees and assets are
located in the United States.
A significant portion of the Company's sales are to customers in foreign
countries:
<TABLE>
<CAPTION> 1995 1996
------------- ------------
<S> <C> <C>
Sales by geographical region:
Japan $ 83,351 $ 104,418
Europe 125,319 155,946
Other 60,687 73,433
------------- ------------
Total export sales 269,357 333,797
United States 974,994 575,999
------------- ------------
Net sales $ 1,244,351 $ 909,796
============= ============
</TABLE>
Unaudited.
<PAGE>
<PAGE>
No 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 other information and
representations must not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances create any implicating that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the registered securities to which it
relates. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful.
<TABLE>
TABLE OF CONTENTS
<CAPTION> Page
<S> <C>
Prospectus Summary..................................................................................................... 2
Risk Factors........................................................................................................... 5
Use of Proceeds........................................................................................................ 11
Selling Stockholders................................................................................................... 11
Dividend Policy........................................................................................................ 12
Price Range Common Stock............................................................................................... 12
Selected Financial Data................................................................................................ 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................................................................................ 14
Business............................................................................................................... 18
Management............................................................................................................. 29
Principal Stockholders................................................................................................. 33
Certain Relationships and Related
Transactions...................................................................................................... 35
Description of Securities.............................................................................................. 35
Plan of Distribution................................................................................................... 39
Legal Matters.......................................................................................................... 40
Experts................................................................................................................ 40
Change of Accountants.................................................................................................. 41
Additional Information................................................................................................. 41
</TABLE>
Until __________, 1996, all dealers effecting transactions in the
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.
2,130,469 SHARES
ALLEGIANT
TECHNOLOGIES INC.
Common Stock
---------------
PROSPECTUS
---------------
---------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 23B.08.320 of the Washington Business Corporation Act (the
"Corporation Act") provides that the personal liability of directors imposed by
Section 23B.08.310 of the Corporation Act may be eliminated by the articles of
incorporation of the corporation, except in the case of acts or omissions
involving certain types of conduct. At Article XI of its Articles of
Incorporation, the Registrant has elected to eliminate the liability of
directors to the Registrant to the extent permitted by law. Thus, a director of
the Registrant is not personally liable to the Registrant or its shareholders
for monetary damages for conduct as a director, except for liability of the
director (i) for acts or omissions that involve intentional misconduct by the
director or a knowing violation of law by the director, (ii) for conduct
violating Section 23B.08.310 of the Corporation Act, or (iii) for any
transaction from which the director will personally receive a benefit in money,
property or services to which the director is not legally entitled.
Section 23B.08.560 of the Corporation Act provides that if authorized by
(i) the articles of incorporation, (ii) a bylaw adopted or ratified by the
shareholders, or (iii) a resolution adopted or ratified, before or after the
event, by the shareholders, a corporation shall have the power to indemnify
directors made party to a proceeding, or obligate itself to advance or reimburse
expenses incurred in a proceeding, without regard to the limitations on
indemnification contained in Sections 23B.08.510 through 23B.08.550 of the
Corporation Act. Article IX of the Registrant's Bylaws (the "Bylaws") authorizes
the Registrant to indemnify its directors (as well as its officers, employees
and agents) against all liability, expenses and losses arising from or in
connection with service for or at the request of, employment by, or other
affiliation with the Registrant. Furthermore, pursuant to Article IX of the
Bylaws the Registrant has the power to pay its directors (as well as its
officers, employees and agents) any expenses incurred in defending any such
proceeding in advance of its final disposition. The Bylaws provide that the
Registrant must provide indemnification, and pay expenses in advance of final
disposition of a proceeding, to its directors to the full extent that the
Registrant is empowered. The Bylaws also provide that the Registrant may, by
action of its Board of Directors from time to time, provide indemnification, and
pay expenses in advance of the final disposition of a proceeding, to its
officers, employees and agents to the full extent the Registrant is empowered or
to any lesser extent which the Board of Directors may determine.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the Common Stock offered hereby.
Securities and Exchange Commission Registration Fee..................$1,240
Printing and Engraving Expenses...................................... 5,000
Legal Fees and Expenses..............................................25,000
Accounting Fees and Expenses.........................................20,000
Miscellaneous Expenses................................................5,000
-------
Total..........................................................$56,240
======
- ------------------
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
The Company was incorporated on December 28, 1993. Since that time and to
the date hereof the Company has issued the following securities:
<TABLE>
<CAPTION> Securities
Date of Issuance Identity Sold Consideration Exemption
<S> <C> <C> <C> <C>
February 4, 1994 Employees/
Director 1,125,000 $ 11,250 Rule 701, Section 4(2)
(9 persons) Shares of
common stock
February 4, 1994 Employees/
Director 875,000 $ 8,750 Regulation S.
(3 persons) Shares of
common stock
February 5, 1994 Employees/
Director 320,000 $ 80,000 Rule 701, Section 4(2).
(1 persons) Shares of
common stock
February 5, 1994 Employees/
Director 400,000 $ 100,000 Regulation S.
(2 persons) Shares of
common stock
February 5, 1994 Investors 1,240,000 $ 310,000 Regulation S.
(2 persons) Shares of
common stock
February 5, 1994 Investor 40,000 $ 10,000 Section 4(2)
(1 persons) Shares of
common stock
March 31, 1994 Employees/
Director 10,000 $ 5,000 Rule 701, Section 4(2).
(1 persons) Shares of
common stock
March 31, 1994 Investors 29,000 $ 14,500 Section 4(2)
(2 persons) Shares of
common stock
March 31, 1994 Investors 605,000 $ 302,500 Regulation S.
(19 persons) Shares of
common stock
April 30, 1994 Investor $250,000 $ 250,000 Regulation S.
(1 person) Convertible note
II-2
<PAGE>
May 31, 1994 Employees/
Director 150,000 $ 50,000 Rule 701, Section 4(2).
(2 persons) Shares of
common stock
May 31, 1994 Employees/
Director 200,000 $ 50,000 Regulation S.
(2 persons) Shares of
common stock
May 31, 1994 Investors 60,000 $ 30,000 Section 4(2)
(2 persons) Shares of
common stock
February 1, 1995 Employees/
Director 400,000 $ 200,000 Rule 701, Section 4(2).
(1 persons) Shares of
common stock
February 1, 1995 Investor 100,000 $ 50,000 Regulation S.
(1 persons) Shares of
common stock
February 1, 1995 Investor 80,000 $ 40,000 Section 4(2)
(1 persons) Shares of
common stock
May 19, 1995 Underwriter 875,000 $ 875,000 (1) Regulation A.
Shares of
common stock
May 19, 1995 Underwriter 64,545 $ 64,545 (1) Regulation A.
Shares of
common stock
July 11, 1995 Underwriter 186,250 $ 186,250 (1) Regulation A.
Shares of
common stock
September 29, 1995 Investor 250,000 $ 250,000 (2) Regulation S.
(1 persons) Shares of
common stock
and
250,000
warrants
November 14, 1995 Underwriter 32,500 $ 32,500 (1) Regulation A.
Shares of
common stock
December 18, 1995 Investor $500,000 $ 500,000 Section 4(2)
(2 persons) convertible debt
and warrants
(588,234 shares)
II-3
<PAGE>
December 18, 1995 Investor Warrants selling Section 4(2)
(2 persons) to purchase commission
88,235 shares
of common stock
March 7, 1996 Investor 250,000 $ 250,000 Regulation S.
(1 person) Shares of
common stock
on exercise
of warrants
April 26, 1996 Investors (3) 815,000 $1,630,000 Section 4(6)
(18 persons) shares of
common stock
and warrants
to purchase
489,000 shares
of common stock
April 26, 1996 Consultant warrants to services Section 4(2)
(1 person) purchase
150,000
shares of
common stock
</TABLE>
(1) Canaccord Capital Corporation of Vancouver, British Columbia acted as
agent (the "Underwriter") for the sale of 875,000 common shares (the "Shares")
of the Company in the Province of British Columbia, Canada. None of the Shares
were issued to residents of the U.S.A. As consideration, the Company paid to the
Underwriter 10% of the proceeds on the sale of the Shares which amounted to
$87,500 and issued 64,545 common shares ("Fee Shares") of the Company. In
addition, the Company granted to the Underwriter warrants (the "Underwriter's
Warrants") entitling the Underwriter to purchase from the Company, for a period
of one year, 218,750 common shares at a purchase price of $1.00 per share
(C$1.40). The Underwriter exercised 186,250 of the Underwriter's Warrants on
July 11, 1995 and the balance on November 14, 1995. The Shares, the Fee Shares
and the shares issued upon the exercise of the Underwriter's Warrants were
qualified for resale under an Offering Circular, prepared in accordance with
Regulation A of the 1993 Act, declared effective by the Securities and Exchange
Commission on March 29, 1995.
(2) These shares were issued upon the conversion of a convertible note that
was issued to one investor who was not a resident of the U.S.A. pursuant to
Regulation S of the Act. Included with the Shares were warrants to purchase an
additional 250,000 common shares of the Company which were exercised on March 7,
1996.
(3) Private placement in which L.H. Friend, Weinress, Frankson & Presson,
Inc. acted as placement agent, for which they received warrants to purchase
81,500 shares of common stock.
II-4
<PAGE>
Item 27. Exhibits.
3.1* Articles of Incorporation of Allegiant Technologies, Inc.
3.2* Bylaws of Allegiant Technologies, Inc.
4.1(a)* Form of Share Purchase Warrant
4.1(b)* Form of Share Purchase Warrant
4.2* Convertible Debenture dated December 18, 1995
4.3* Form of Registration Rights Agreement
5 Opinion of Foster Pepper & Shefelman
10.1* Employment Agreement with Stuart Henigson, as amended
10.2* Employment Agreement with Joel Staadecker
10.3* Employment Agreement with David Baron
10.4* Management Agreement among Allegiant Technologies Inc.,
Pemcorp Management Inc., William McCartney,
and Leonard Petersen
10.5* Incentive Stock Option Plan
10.6* Royalty Termination Agreement with William C. Appleton
10.7* Escrow greement with Montreal Trust Company of Canada
10.8* Form of Indemnity greement
11* Statement re Computation of Per Share Earnings
16* Letter from Baker & Company, Chartered Accountants
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Baker & Company, Chartered Accountants
23.3 Consent of Foster Pepper & Shefelman is included in their opinion
filed on Exhibit 5.
24* Power of Attorney is included on the Signature Page of the
Registration Statement.
27 Financial Data Schedule
* Previously filed.
Item 28. Undertakings.
(a) The undersigned Registrant will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(iii) Include any additional or changed information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-5
<PAGE>
(d) The small business issuer will provide to the underwriter at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise, the small
business issuer 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 small business issuer of
expenses incurred or paid by a director, officer or controlling
person of the small business issuer 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 small business issuer 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 Securities Act and will be governed by
the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets the
requirements for filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned in the City of San Diego, State of
California on September 3, 1996.
ALLEGIANT TECHNOLOGIES INC.
By: /s/ Joel B. Staadecker
Joel B. Staadecker
President
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
/s/ Joel B. Staadecker * September 3, 1996
- ----------------------
Joel B. Staadecker
President and Director
(Chief Executive Officer)
/s/ William D. McCartney * September 3, 1996
- ------------------------
William D. McCartney
Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
/s/ Leonard Petersen * September 3, 1996
Leonard Petersen
Director
William C. Appleton
Director
/s/ Tommy J.H. Lee * September 3, 1996
- ------------------
Tommy J.H. Lee
Director
*By: /s/ Joel D. Staadecker
Joel D. Staadecker
Attorney in Fact
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION> Sequential
Exhibit Number Page Number
<S> <C> <C>
3.1* Articles of Incorporation of Allegiant Technologies, Inc. *
3.2* Bylaws of Allegiant Technologies, Inc. *
4.1(a)* Form of Share Purchase Warrant *
4.1(b)* Form of Share Purchase Warrant
4.2* Convertible Debenture dated December 18, 1995 *
4.3* Form of Registration Rights Agreement
5 Opinion of Foster Pepper & Shefelman *
10.1* Employment Agreement with Stuart Henigson, as amended *
10.2* Employment Agreement with Joel Staadecker *
10.3* Employment Agreement with David Baron *
10.4* Management Agreement among Allegiant Technologies Inc., Pemcorp *
Management Inc., William McCartney, and Leonard Petersen
10.5* Incentive Stock Option Plan *
10.6* Royalty Termination Agreement with William C. Appleton *
10.7* Escrow Agreement with Montreal Trust Company of Canada *
10.8* Form of Indemnity Agreement *
11* Statement re Computation of Per Share Earnings *
16* Letter from Baker & Company, Chartered Accountants *
23.1 Consent of Ernst & Young LLP, Independent Auditors *
23.2 Consent of Baker & Company, Chartered Accountants *
23.3 Consent of Foster Pepper & Shefelman is included in their opinion filed on *
Exhibit 5.
24* Power of Attorney is included on the Signature Page of the Registration *
Statement.
27 Financial Data Schedule *
* Previously filed.
</TABLE>
<PAGE>
September 4, 1996
Board of Directors
Allegiant Technologies Inc.
Suite 300, 9740 Scranton Place
San Diego, CA 92121
Gentlemen:
We have acted as counsel for Allegiant Technologies Inc. (the
"Company"), a Washington corporation, in connection with the (i) sale of 294,117
shares of common stock of the Company, $.01 par value per share ("Common Stock")
issuable upon conversion of certain outstanding debentures of the Company (the
"Conversion Shares"), (ii) sale of a total of 1,021,352 shares of Common Stock
issuable upon the exercise of outstanding share purchase warrants (the "Warrant
Shares"), (iii) the sale of 815,000 shares of Common Stock by existing
stockholders (the "Selling Stockholder Shares") and (iv) the preparation of a
Registration Statement on Form SB-2 (the "Registration Statement") under the
Securities Act of 1933, as amended. We have examined the Registration Statement
and such other documents as we deem necessary for the purpose of this opinion.
Based on the foregoing, we are of the opinion that:
1. Upon proper conversion of the debentures pursuant to their terms,
the Conversion Shares will be duly authorized, validly issued, fully paid and
nonassessable.
2. Upon proper exercise of the share purchase warrants and receipt by
the Company of the consideration from the exercise of the share purchase
warrants, the Warrant Shares will be duly authorized, validly issued, fully paid
and non-assessable.
3. The Selling Stockholder Shares are validly issued, fully paid
and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm in the Prospectus of the
Registration Statement under the caption "Legal Matters."
Very truly yours,
FOSTER PEPPER & SHEFELMAN
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts"
and to the use of our report dated February 7, 1996, in Amendment No. 1 to
the Registration Statement (Form SB-2 No. 333-07727) and related Prospectus of
Allegiant Technologies, Inc. for the registration of 2,130,469
shares of its common stock.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Diego, California
September 3, 1996
CONSENT OF INDEPENDENT PUBLIC CHARTERED ACCOUNTANTS
To the Board of Directors of
Allegiant Technologies Inc.
As independent public chartered accountants we hereby consent to the use
of our report dated January 27, 1995 for the year ended December 31, 1994
only (and to all references to our firm) included in or made as a part of this
Form SB-2 Registration Statement.
/s/ Baker & Company
Chartered Accountants
West Vancouver, Canada
September 4, 1996
