AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1998
REGISTRATION NO. 333-39805
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 4
TO FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
GALACTICOMM TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 7373 65-0624233
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
PETER BERG, CHIEF EXECUTIVE OFFICER
4101 S.W. 47TH AVENUE GALACTICOMM TECHNOLOGIES, INC.
SUITE 101 4101 S.W. 47TH AVENUE, SUITE 101
FT. LAUDERDALE, FLORIDA 33314 FT. LAUDERDALE, FLORIDA 33314
(954) 583-5990 (954) 583-5990
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------
COPIES TO:
LESLIE J. CROLAND, ESQ. PHILIP B. SCHWARTZ, ESQ. LAWRENCE B. FISHER, ESQ.
LUCIO, MANDLER, CROLAND, BRONSTEIN, AKERMAN, SENTERFITT & EIDSON, P.A. ORRICK, HERRINGTON & SUTCLIFFE, LLP
GARBETT, STIPHANY & MARTINEZ, P.A. ONE S.E. 3RD AVENUE, 28TH FLOOR 30 ROCKEFELLER PLAZA
701 BRICKELL AVENUE, SUITE 2000 MIAMI, FLORIDA 33131-1704 NEW YORK, NEW YORK 10112
MIAMI, FLORIDA 33131 (305) 374-5600 (212) 506-3660
(305) 579-0012 (305) 374-5095 (FAX) (212) 506-3730 (FAX)
(305) 375-8075 (FAX)
---------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as reasonably practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [x]
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)
or Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
======================================================================================================================
PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) REGISTRATION FEE
Units, comprised of one share of Common
Stock, par value $.0001 per share, and one
Redeemable Common Stock Purchase
Warrant ("Warrant") exercisable for one
share of Common Stock(2) ................... 2,070,000 $ 6.10 $12,627,000 $ 3,724.97
----------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001(3)............ 2.070,000 $ 6.00 -- --
----------------------------------------------------------------------------------------------------------------------
Warrants(4) ................................. 2,070,000 $ 0.10 -- --
----------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon exercise
of Warrants(5) ............................. 2,070,000 $ 7.50 $15,525,000 $ 4,579.88
----------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon exercise of
Representatives' Warrants(6) ............... 180,000 $ 9.90 $ 1,782,000 $ 525.69
----------------------------------------------------------------------------------------------------------------------
Warrants issuable upon exercise of
Representatives' Warrants(6) ............... 180,000 $ 0.165 $ 29,700 $ 8.76
----------------------------------------------------------------------------------------------------------------------
Common Stock underlying Warrants
issuable upon exercise of
Representatives' Warrants(6) ............... 180,000 $ 12.375 $ 2,227,500 $ 657.11
----------------------------------------------------------------------------------------------------------------------
Total ....................................... $32,191,200 $ 9,496.40(7)
======================================================================================================================
(FOOTNOTES ON NEXT PAGE)
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
(FOOTNOTES FROM PREVIOUS PAGE)
---------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Includes 270,000 Units subject to the Underwriters' over-allotment option.
(3) Includes 270,000 shares of common stock that the Underwriters have the
option to purchase to cover over-allotments, if any.
(4) Includes 270,000 Warrants that the Underwriters have the option to purchase
to cover over-allotments, if any.
(5) Includes 270,000 shares of common stock issuable upon the exercise of the
Warrants that the Underwriters have the option to purchase to cover
over-allotments, if any.
(6) In connection with the Registrant's sale of the securities, the Registrant
is granting to the Representatives of the several Underwriters warrants to
purchase 180,000 shares of common stock and 180,000 Warrants.
(7) Registrant has previously paid $8,968.83 towards such fee.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 27, 1998
PROSPECTUS
GALACTICOMM TECHNOLOGIES, INC.
1,800,000 SHARES OF COMMON STOCK AND
1,800,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
(AS UNITS, EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND
ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT)
Galacticomm Technologies, Inc., a Florida corporation (the "Company"),
hereby offers 1,800,000 shares (the "Shares") of common stock, par value $.0001
per share (the "Common Stock"), and 1,800,000 redeemable common stock purchase
warrants (the "Warrants"), initially as units, each unit consisting of one
Share and one Warrant. The Shares and Warrants are sometimes hereinafter
collectively referred to as the "Securities." Until the completion of the
offering, the Shares and Warrants may only be purchased together on the basis
of one share of Common Stock and one Warrant, but each will be transferable
separately immediately following completion of the offering. Each Warrant
entitles the registered holder thereof to purchase one share of Common Stock at
an exercise price of $7.50 (subject to adjustment), during the period
commencing (the "First Exercise Date") one year after the date of this
Prospectus, or on such earlier date as may be determined by the Company and
Security Capital Trading, Inc. and First Equity Corporation of Florida (the
"Representatives"), as the representatives of the several Underwriters named
herein ("Underwriters"), and ending on the fifth anniversary of the date of
this Prospectus. No fractional shares will be issued upon exercise of the
Warrants. Outstanding Warrants are redeemable by the Company commencing 30 days
after the First Exercise Date, upon 30 days prior written notice to the holders
thereof, if the average closing bid and asked price of the Common Stock for a
period of 20 consecutive trading days ending three trading days prior to the
date of the redemption notice is at least equal to 150% of the initial public
offering price of the Common Stock (subject to adjustment).
Prior to the offering, there has been no public market for the Common
Stock or the Warrants. The Company has applied to list the Common Stock and the
Warrants on the Nasdaq SmallCap Stock Market ("Nasdaq") under the symbols
"GALA" and "GALAW," respectively. There can be no assurance that such
securities will be accepted for listing or, if accepted, that an active trading
market will develop or be sustained. See "Underwriting" for information
relating to the factors considered in determining the initial public offering
price.
THESE ARE SPECULATIVE SECURITIES. THIS OFFERING INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD ONLY BE CONSIDERED BY
INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS"
BEGINNING ON PAGE 8 AND "DILUTION" ON PAGE 20.
---------------
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.
================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)(3)
--------------------------------------------------------------------------------
Per Unit .................. $ 6.10 $ .61 $ 5.49
--------------------------------------------------------------------------------
Per Share of Common Stock $ 6.00 $ .60 $ 5.40
--------------------------------------------------------------------------------
Per Warrant .............. $ .10 $ .01 $ .09
--------------------------------------------------------------------------------
Total ..................... $10,980,000 $1,098,000 $9,882,000
================================================================================
(1) Does not include additional compensation to the Representatives, including
the Company's agreement to: (i) pay the Representatives a non-accountable
expense allowance equal to 3% of the gross proceeds from the sale of the
Securities; (ii) sell to the Representatives, for nominal consideration,
five-year warrants (exercisable commencing one year after the closing of
the offering) to purchase up to 180,000 shares of Common Stock and/or
180,000 warrants; (iii) enter into a two-year financial consulting
agreement with the Representatives pursuant to which the Company will pay
the Representatives $100,000 at the closing of the offering; and (iv)
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933 (the "Securities Act"). See
"Underwriting."
(2) Before deducting offering expenses, estimated to be approximately $791,400,
the Representatives' 3% non-accountable expense allowance and the fee
payable to the Representatives pursuant to the financial consulting
agreement, all of which are payable by the Company in connection with the
offering.
(3) The Company has granted the Underwriters an option ("Over-allotment
Option") exercisable within 45 days after the date hereof to purchase up
to an additional 270,000 shares of Common Stock and/or an additional
270,000 Warrants on the same terms set forth above, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $12,627,000, $1,262,700 and $11,364,300, respectively. See
"Underwriting."
---------------
The Securities are being offered by the Underwriters subject to prior
sale, receipt and acceptance by the Underwriters, approval of certain matters
by counsel, and certain other conditions. The Underwriters reserve the right to
withdraw or cancel such offer and to reject any offer, in whole or in part. It
is expected that delivery of the certificates for the Securities offered hereby
will be made against payment therefor on or about , 1998.
---------------
SECURITY CAPITAL TRADING, INC. FIRST EQUITY CORPORATION OF FLORIDA
THE DATE OF THIS PROSPECTUS IS , 1998
[PICTURES]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
THE WARRANTS, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
All trademarks, service marks, tradenames and related products referred to
in this Prospectus, other than as they relate directly to the Company's
products and services, are the property of their respective owners and the
Company disclaims ownership of same.
2
SUMMARY
THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS
PROSPECTUS. IN NOVEMBER 1996, THE COMPANY MERGED WITH TESSIER TECHNOLOGIES,
INC. ("TTI") AND ACQUIRED GALACTICOMM, INC., ITS OPERATING SUBSIDIARY. UNLESS
THE CONTEXT OTHERWISE REQUIRES OR UNLESS OTHERWISE NOTED: (I) ALL REFERENCES TO
THE "COMPANY" THROUGHOUT THIS PROSPECTUS REFER TO THE COMBINED OPERATIONS OF
THE COMPANY, GALACTICOMM, INC. AND TTI; (II) ALL FINANCIAL DATA IN THIS
PROSPECTUS REFLECTS THE PRO FORMA COMBINED OPERATIONS OF THE COMPANY,
GALACTICOMM, INC. AND TTI AS IF THE COMPANY HAD ACQUIRED SUCH COMPANIES ON
JANUARY 1, 1996; AND (III) ALL INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO A
4.061771824 TO ONE REVERSE STOCK SPLIT WHICH OCCURRED IN SEPTEMBER 1997 AND A
1.657080842 TO ONE REVERSE STOCK SPLIT WHICH OCCURRED IN JUNE 1998.
THE COMPANY
Galacticomm Technologies, Inc., a Florida corporation (the "Company"),
develops, markets, licenses and supports software that enables users to
communicate and conduct business over the Internet, on intranets, and on other
online communications systems. The Company's flagship product is Worldgroup
v3.1 ("Worldgroup") for Windows NT and Windows 95, which is an integrated suite
of five applications: E-mail, Polls and Surveys, Threaded Discussion Groups
(newsgroups), a Document Retrieval Center and Chat. Worldgroup allows an
individual or enterprise to establish an online system, an intranet or a
website and to make such online system accessible through the World Wide Web
using a standard web browser such as Microsoft Internet Explorer or Netscape
Navigator. Worldgroup's out-of-the-box software can be utilized to create an
online system with features such as those described above, which features are
generally sought by persons or entities seeking to develop an online system.
The Company believes that Worldgroup offers, at a competitive price, many of
the features contained in more costly, competitive software products.The
Company believes that since 1987, Worldgroup and its predecessor product, The
Major BBS, have been used to create more than 10,000 online systems worldwide,
including systems currently operated by Fortune 500 companies, financial and
educational institutions and government agencies. Versions of the Worldgroup
software are available in eight languages. Worldgroup v3.1 is also compatible
with Windows 98.
Worldgroup is not only an out-of-the-box product, but it is also a
development platform that can be configured to provide communications solutions
for many different businesses and industries. In conjunction with third party
developers, the Company has, using Worldgroup software, designed intranets and
other online systems for specific projects relating to education, small
business and online gaming. The Company and independent software vendors
currently offer over 100 products that add applications to the features already
included in Worldgroup, including add-ons that allow a Worldgroup online system
to offer: (i) outgoing online fax service; (ii) an online shopping mall; (iii)
form templates for workflow environments; (iv) video conferencing with
point-to-point broadcast, and video-on-demand; (v) group scheduling; (vi)
online publishing; and (vii) Internet access to users and optional support for
Radius security and accounting protocol for terminal server equipment.
In addition to Worldgroup, the Company currently markets the following
products, each of which utilizes the Worldgroup software platform:
WEBCAST. WebCast allows users to transmit real-time audio and visual
broadcasts, and to broadcast pre-recorded videos, on demand, over the Internet
to viewers who need only use a standard web browser to receive the broadcast.
The Company markets WebCast directly to individual consumers and to businesses
through value added resellers ("VARs"). The Company also seeks to enter into
bundling arrangements with camera and other hardware manufacturers. To date,
the Company has
3
entered into agreements to bundle WebCast with cameras and other hardware sold
by Eastman Kodak Company, Boca Research, Inc., Specom Technologies Corp., and
Aztech New Media Corp.
ACTIBASE. ActiBase enables a company with a web site or an online system
to publish its own databases on its system. ActiBase is compatible with most
common database software available in the market and can be used by persons
with only limited knowledge of computer database programming. ActiBase is
offered as an add-on application to Worldgroup. It can also be used on a stand
alone basis to publish a company's database on a web site so that such database
can be accessed through the World Wide Web.
WORLDLINK. Worldlink allows Worldgroup online communities to link
electronically with other Worldgroup online communities.
The Company's objective is to become a leading developer of communications
software for the Internet and for other online systems including intranets and
online communications systems. The Company intends to achieve its objectives by
implementing the following strategies: (i) developing quality software
applications and customized solutions for the individual needs of customers
using Worldgroup as the foundation; (ii) continuing to upgrade Worldgroup and
its applications and offering new applications that deliver high levels of
performance, ease of use and multi-tiered authorization to information; (iii)
establishing strategic alliances to increase sales and facilitate market
acceptance of the Company's products; (iv) providing timely, high quality
technical support to meet the diverse needs of its customers, VARs and
resellers; and (v) increasing marketing efforts to promote Worldgroup as a
premier communications software product.
All references in this Prospectus to shares of Common Stock outstanding as
of the date hereof shall: (a) include 29,479 shares of Common Stock that will
be issued to Union Atlantic Partners I Limited ("UA Partners") upon the
automatic conversion on the date of this Prospectus of an outstanding
convertible promissory note (the "UA Partners Note"); and (b) exclude: (i)
223,284 shares of Common Stock reserved for issuance under the Company's 1997
Stock Option Plan (the "1997 Plan"), of which options to purchase 50,886 shares
of Common Stock at an exercise price of $6.00 per share are currently
outstanding; (ii) an aggregate of 357,946 shares of Common Stock reserved for
issuance upon the exercise of outstanding options outside of the 1997 Plan,
which have exercise prices ranging from $4.24 to $6.21 per share; (iii) 84,310,
120,000 and 20,382 shares, respectively, of Common Stock reserved for issuance
to Union Atlantic L.C. ("Union Atlantic") upon the exercise of three warrants
having exercise prices of $4.24, $6.00 and $6.20 per share, respectively; (iv)
798,000 shares of Common Stock reserved for issuance upon the exercise of
warrants ("1997 Financing Warrants") having an exercise price of $6.00 per
share, which warrants were issued in connection with a private financing
completed by the Company in October 1997, as amended (the "1997 Financing");
(v) 100,579 shares of Common Stock issuable upon conversion of a $125,000
secured convertible promissory note (the "Kenworthy Note") held by Kenworthy
Investments Limited ("Kenworthy"), a wholly-owned subsidiary of the Peder Sager
Wallenberg Charitable Trust (the "Wallenberg Trust"), which note may be
converted, at the option of the holder, on or before January 15, 1999; (vi)
1,800,000 shares issuable upon the exercise of the Warrants; (vii) 540,000
shares of Common Stock reserved for issuance upon the exercise of the
Over-allotment Option and the Warrants included as part of the Over-allotment
Option; (viii) 156,000 shares of Common Stock reserved for issuance upon
exercise of warrants issued in August 1998 at an exercise price of $6.00 per
share in connection with loans by four persons to the Company totalling
$260,000; and (ix) 360,000 shares of Common Stock reserved for issuance upon
the exercise of the Representatives' Warrants and upon the exercise of the
warrants underlying the Representatives' Warrants. See "Management's Discussion
and Analysis of Financial Condition and Results of
Operations--Introduction"--"Liquidity and Capital Resources,"
"Management--Compensation Arrangements with Chairman," "--Stock Option Plan,"
"Certain Transactions," "Principal Shareholders" and "Underwriting."
4
The Company's executive offices are located at 4101 S.W. 47th Avenue,
Suite 101, Fort Lauderdale, Florida 33314. The Company can be reached by
telephone at (954) 583-5990 or through its website at http://www.gcomm.com.
None of the information contained on the Company's website shall be deemed a
part of this Prospectus.
THE OFFERING
SECURITIES OFFERED................. 1,800,000 Shares of Common Stock and
1,800,000 Warrants. The Shares and the
Warrants will be separately transferable
immediately following the completion of
this offering.
THE WARRANTS....................... Each Warrant entitles a holder to
purchase one share of Common Stock at an
exercise price per share equal to $7.50
per share. The Warrants will be
exercisable during the period commencing
("First Exercise Date") one year after the
date of this Prospectus, or on such
earlier date as may be determined by the
Company and the Representatives, and
ending on the fifth anniversary of the
date of this Prospectus. The Warrants will
be redeemable by the Company for nominal
consideration, commencing 30 days after
the First Exercise Date, upon 30 days
written notice, if the average of the
closing bid and asked price of the Common
Stock for 20 consecutive trading days
ending three trading days prior to the
date of the redemption notice is at least
equal to 150% of the initial public
offering price of the Common Stock. The
Warrants are subject to adjustment under
certain circumstances. See "Description of
Securities--Warrants."
COMMON STOCK OUTSTANDING PRIOR TO
THE OFFERING...................... 2,922,849 shares
COMMON STOCK OUTSTANDING AFTER
THE OFFERING...................... 4,722,849 shares
WARRANTS OUTSTANDING AFTER
THIS OFFERING...................... 1,800,000
USE OF PROCEEDS.................... The Company intends to use the net
proceeds from the offering for, among
other things: (i) repayment of
indebtedness, including, in part,
indebtedness due to management and due to
a shareholder of the Company; (ii) sales
and marketing; (iii) product development;
(iv) capital expenditures; and (v) working
capital. See "Use of Proceeds."
PROPOSED NASDAQ SMALLCAP
MARKET SYMBOLS.................... Common Stock--"GALA"
Warrants--"GALAW"
5
RISK FACTORS...................... The Securities offered hereby are
speculative and involve a high degree
of risk and immediate, substantial
dilution and should not be purchased by
investors who cannot afford the loss of
their entire investment. Prospective
investors are urged to carefully review
the "Risk Factors" starting on page 8
before making an investment decision.
FOR CALIFORNIA RESIDENTS ONLY...... Each purchaser of the Securities in
California must satisfy one of the
following suitability standards: (i) a
minimum net worth (exclusive of home, home
furnishings and automobiles) of at least
$250,000 and, during the last taxable year
(or such purchaser estimates that he or
she will have during the current taxable
year), gross income of at least $65,000,
(ii) minimum net worth (exclusive of home,
home furnishings and automobiles) of
$500,000 or $1,000,000 (inclusive of home,
home furnishings and automobiles); or
(iii) during the last taxable year (or
such purchaser estimates that he or she
will have during the current taxable year)
gross income of at least $200,000.
6
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
The following summary historical financial data for each of the years in
the two year period ended December 31, 1996 and 1997 has been derived from the
Company's Consolidated Financial Statements as of December 31, 1996 and 1997 and
for the two years ended December 31, 1997, which are included elsewhere herein.
The following summary historical unaudited financial data of the Company as of
June 30, 1998 and for the six months ended June 30, 1997 and 1998, has been
derived from the unaudited historical consolidated financial statements of the
Company included elsewhere herein which, in the opinion of management, include
all adjustments (consisting of only normal recurring adjustments) necessary for
a fair and consistent presentation of such data. Results for the six months
ended June 30, 1998 are not necessarily indicative of the results which can be
expected for the year ending December 31, 1998.
The following unaudited pro forma financial data gives effect to the
Company's November 1996 acquisition of Galacticomm, Inc. and its merger with
TTI as if such transactions were consummated on January 1, 1996. The pro forma
data is unaudited and is not necessarily indicative of the results of
operations of the Company had the Company actually acquired Galacticomm, Inc.
and TTI on January 1, 1996.
The following summary historical and unaudited pro forma financial data
should be read in conjunction with "Selected Historical and Unaudited Pro Forma
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited and unaudited financial statements
of the Company contained elsewhere herein.
GALACTICOMM TECHNOLOGIES, INC.
----------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------- --------------------------------
PROFORMA
(UNAUDITED) (UNAUDITED)
1996 1996 1997 1997 1998
--------------- ----------------- --------------- ---------------- ---------------
STATEMENT OF OPERATIONS DATA:
Revenues ..................................... $ 1,692,743 $ 6,189,505 $ 3,418,057 $ 1,787,879 $ 838,395
Total operating costs and expenses ........... 2,721,022 9,789,737 6,762,775 2,808,973 2,394,311
------------ ------------- ------------ ------------ ------------
Loss from operations ......................... (1,028,279) (3,600,232) (3,344,718) (1,021,094) (1,555,916)
Other expense, net ........................... (60,312) (655,321) (409,317) (68,475) (944,866)
------------ ------------- ------------ ------------ ------------
Net loss ..................................... $ (1,088,591) $ (4,255,553) $ (3,754,035) $ (1,089,569) $ (2,500,782)
============ ============= ============ ============ ============
Basic and diluted net loss per share ......... $ (1.12) $ (1.99) $ (1.72) $ (0.52) $ (0.95)
Shares used in computing basic and
diluted net loss per share .................. 973,649 2,139,443 2,188,474 2,085,303 2,639,463
JUNE 30, 1998
---------------------------------
DECEMBER 31, 1997 ACTUAL AS ADJUSTED(1)
------------------ --------------- ---------------
(UNAUDITED)
BALANCE SHEET DATA (END OF PERIOD):
Cash ................................... $ 226,281 $ 90,508 $6,166,994
Working capital (deficiency) ........... (665,855) (4,058,773) 5,021,090
Goodwill, net of amortization .......... 1,723,266 1,488,116 1,488,116
Total assets ........................... 3,850,567 3,084,678 8,706,822
Short-term obligations ................. 218,594 2,716,142 213,346
Long-term obligations .................. 2,571,762 653,993 3,993
Shareholders' equity (deficit) ......... $ (35,417) $ (2,014,657) $7,160,864
----------------
(1) Adjusted to give effect to: (a) the sale of the Shares and Warrants offered
hereby and the application of the net proceeds therefrom; (b) the
automatic conversion of the UA Partners Note on the date of this
Prospectus; (c) the settlement of the DataSafe litigation; and (d) the
write-off of deferred financing costs and original issue discount related
to the 1997 Financing in the aggregate amount of $360,686, which amount
will be expensed in the quarter in which the offering is completed. See
"Use of Proceeds," "Capitalization," "Business--Legal Proceeding" and
"Certain Transactions--Consulting Agreements with Union Atlantic."
7
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW THE FOLLOWING RISK FACTORS. THIS
INVESTMENT IS NOT RECOMMENDED FOR THOSE WHO CANNOT BEAR THE RISKS DESCRIBED
BELOW.
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING" STATEMENTS. FORWARD LOOKING
STATEMENTS ARE STATEMENTS ABOUT EVENTS THAT HAVE NOT OCCURRED. THEY INCLUDE
STATEMENTS ABOUT THE COMPANY'S FUTURE PLANS, GROWTH STRATEGIES AND INDUSTRY
TRENDS. THEY ALSO INCLUDE STATEMENTS WITH WORDS SUCH AS "ANTICIPATE," "INTEND,"
"BELIEVE," "PLAN," "ESTIMATE" AND "EXPECT." THESE FORWARD LOOKING STATEMENTS
ARE BASED LARGELY ON THE COMPANY'S EXPECTATIONS AND ARE SUBJECT TO MULTIPLE
RISKS AND UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THESE FORWARD LOOKING STATEMENTS AS A
RESULT OF THE FACTORS DESCRIBED IN THE FOLLOWING SECTION, AS WELL AS THE RISKS
DESCRIBED ELSEWHERE IN THIS PROSPECTUS. IN LIGHT OF THESE RISKS AND
UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS PROSPECTUS WILL IN FACT PROVE TO BE ACCURATE.
INDEPENDENT AUDITOR'S REPORT CONTAINS GOING CONCERN QUALIFICATION; LOSSES FROM
OPERATIONS; ACCUMULATED DEFICIT
The report of the Company's independent public accountants on consolidated
financial statements as of and for the years ended December 31, 1996 and 1997
contains an explanatory paragraph which states that the Company has suffered
recurring losses from operations and has negative working capital, which raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's unaudited consolidated financial statements as of and for the six
months ended June 30, 1998 reflected an accumulated deficit of $7,362,509 and
the Company's current liabilities exceeded its current assets by $4,058,773. The
Company (on a historical basis) has incurred substantial net losses of
$1,088,591 and $3,754,035 for the years ended December 31, 1996 and 1997,
respectively, and $2,500,782 for the six months ended June 30, 1998. As part of
its strategy, the Company intends to continue to make expenditures on new
product introductions, marketing and product development, all of which will
adversely affect operating results until revenues from sales of products reach a
level at which operating costs can be supported. The Company does not expect to
generate cash flows from operating activities during 1998 sufficient to offset
its operating expenditures. The Company's operations to date have been financed
primarily through sales of its debt and equity securities. The Company
anticipates, based on its currently proposed plans and assumptions relating to
operations, that the net proceeds from the sale of the Securities offered
hereby, together with projected cash flow from operations, will be sufficient to
satisfy the Company's contemplated cash requirements for at least 12 months
following the consummation of this offering. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and the Notes thereto.
LIMITED OPERATING HISTORY; RISKS ASSOCIATED WITH NEW BUSINESS IN EVOLVING
MARKET
The Company was incorporated in December 1995 and has only had a limited
operating history. Although the Company's subsidiary, Galacticomm, Inc., has
conducted operations since 1985, the business and operations of Galacticomm,
Inc. have only been operated by the Company and its management team since
November 1996. Furthermore, the Company's business plan is significantly
different from and larger in scope than the historic business of Galacticomm,
Inc. Accordingly, the Company's prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stage of development, particularly companies in new and rapidly evolving
markets such as computer software and the Internet. To address these risks, the
Company must, among other things, respond to competitive developments, endeavor
to attract, retain and motivate qualified personnel, and continue to upgrade
its technologies and commercialize products incorporating its technologies.
There can be no assurance that the Company will be successful.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly operating results have varied significantly in the
past and the Company expects that they will continue to vary in the future.
Sales in any one quarter may fluctuate based upon
8
a number of factors, including: (i) the timing of the release of new products
or product upgrades by the Company or its competitors, (ii) the size and timing
of individual orders by customers, (iii) deferral of orders by customers in
anticipation of new products or product upgrades, (iv) technological changes in
the operating systems upon which the Company's products run, and (v) changes in
the Internet or other networking technology. Fluctuations in operating results
may also occur as a result of the Company's business strategy to develop and
sell customized applications to larger customers to meet such customers'
specific requirements. The Company believes it will be difficult to predict the
timing of these types of sales because they are subject to both designing the
solution to meet the customer's needs and convincing the customer to purchase
the products, and other risks over which the Company has little or no control.
The Company's operating expenses for each quarter are generally fixed and the
Company is generally unable to adjust its spending quickly enough to compensate
for unexpected shortfalls in revenues. Consequently, a significant shortfall in
revenues in any quarter could adversely impact the Company's operating results
for that quarter. As a result, the Company believes that period-to-period
comparisons of its operating results will not necessarily be meaningful and
should not be relied upon as an indication of future performance.
PRODUCT CONCENTRATION
Revenues from sales of Worldgroup software (and related tools and
applications) accounted for approximately 50% and 42%, respectively, of the
Company's total revenues for the year ended December 31, 1997 and the six
months ended June 30, 1998. Although the Company has introduced several new
software products in an effort to, among other things, diversify its sources of
revenues, the Company expects that sales of and licenses for the use of
Worldgroup (and other software products based on the Worldgroup platform) will
continue to account for a substantial portion of the Company's future revenues.
Additionally, all of the Company's other products are either add-ons to, or
based upon, the Worldgroup software. Consequently, declines in demand for
Worldgroup and related products, whether as a result of competition,
technological change or otherwise, will likely have a material adverse effect
on the Company's business, operating results and financial condition.
NEW PRODUCT DEVELOPMENT AND RAPID TECHNOLOGICAL CHANGE
The market for the Company's software is characterized by rapidly changing
technology and industry standards. The introduction of products embodying new
technologies and the emergence of new industry standards can quickly render
existing software obsolete and unmarketable. The Company's future success will
depend in part on its ability to enhance existing products and to develop and
introduce new products to meet changing customer demands. Specifically, the
Company's new products (and enhancements) must: (i) incorporate new and
evolving industry standards, (ii) continue to offer improved performance and
features, (iii) respond to evolving customer needs, and (iv) achieve market
acceptance. The development of new products or enhanced versions of existing
products entails significant technical risks. There can be no assurance that
the Company will be successful in developing and marketing product enhancements
or new products that respond to technological change or evolving industry
standards, that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of these
products, or that its new products will adequately meet the requirements of the
marketplace and achieve market acceptance. If the Company is unable, for
technological or other reasons, to develop and introduce new products in a
timely and cost-effective manner or to address compatibility, inoperability or
other issues raised by technological changes or new industry standards, the
Company's business, operating results and financial condition could be
materially and adversely affected.
LENGTH OF SALES CYCLES
A component of the Company's current business strategy is to develop
customized applications using its Worldgroup software as a platform. The
Company intends to develop customized products on its own or with third party
software developers and then to seek to sell these products to companies,
educational institutions, government agencies or other organizations which can
utilize these products.
9
The final sale to these customers often requires a long lead time, and approval
by both the buyer's technical and management personnel, including approval of
the chief executive officer (for companies), a review board (for government
agencies) or a senior administrator or committee (for educational
institutions), who tend to carefully review their software purchases and
require the Company to educate them about how the product works. The Company
expects to invest a significant amount of time and resources in the sales
process for these customers before it completes any such sales. Thus, the
Company's revenues for a particular period may be impacted if sales to such
customers forecasted to close in a particular period are delayed by reason of
the education or approval process, or if such sales as are forecast do not
otherwise occur.
DEPENDENCE ON THE INTERNET
The success of the Company's products and services depends on the
continued development and growth of the Internet and on the need of businesses
and other organizations to continue to develop private intranets and other
online communication systems. The Internet is evolving and may not develop into
the large commercial marketplace that many predict. The following factors could
slow the growth of the Internet: (i) inadequate development of the necessary
infrastructure, (ii) untimely development of affordable complementary products,
such as high speed modems, (iii) delays in the development or adoption of new
standards to handle increased levels of Internet activity, or (iv) increased
government regulation. The number of Internet and intranet users has grown
significantly over the last few years, and such number is expected to continue
to grow. No assurance can be given that the Internet infrastructure will
continue to support the demands placed on it by this continued growth. The
Company's financial condition and consolidated results of operations could be
adversely impacted if the Internet does not become a large commercial
marketplace. See "Business--Industry Background."
POTENTIAL FOR UNDETECTED ERROR
The Company's software may contain undetected errors or "bugs" when first
introduced or when new versions are released. To minimize defects, the Company
tests its products before they are commercially released. Despite its quality
control efforts, it is possible that the Company may release new products (or
upgrades of existing products) that contain bugs. The Company's inadvertent
release of products containing bugs could result in: (i) revenue loss, (ii)
delay in market acceptance of the product and possibly the Company's other
products, (iii) increased service costs, and (iv) damage to the Company's
reputation.
COMPETITION
The Company faces intense and increasing competition from other software
companies. Many of the Company's competitors are substantially larger than the
Company, have greater financial resources and name recognition than the
Company, have longer operating histories in the Internet, intranet and online
communications markets and have greater technical and marketing resources than
the Company. As a result, such competitors may have a competitive advantage
over the Company in that they may be able to respond more quickly than the
Company to new or emerging technologies and changes in customer needs, or to
devote greater resources than the Company to the development, promotion and
sale of their products. Worldgroup faces competition from a number of products
that permit information exchange in ways similar to Worldgroup, including
Microsoft Back Office, Lotus Domino, and Novell's Intranet Ware. WebCast, the
Company's web broadcast software, competes with products offered by, among
others, White Pine Software, Inc., Real Networks, Vxtreme, Inc., Xing
Technology Corporation, NetSpeak Corporation, VocalTec, Inc., Vivo Software,
Inc. and VDOnet Corporation. See "Business--Competition."
UNCERTAINTY REGARDING TRADEMARK PROTECTION
Although the Company has five pending trademark applications with the
United States Patent and Trademark Office (the "PTO"), the Company has only one
federal registration, for the trademark
10
"Galacticomm." No assurance can be given that the PTO will grant registrations
for the Company's pending trademark applications. Among other things, it is
possible that the Company's trademarks could be deemed to be generic by the
PTO, in which case neither the Company nor any third party could claim
exclusive rights to such term. In such event, the Company intends to associate
the generic term with registrable or registered trademarks or logos in order to
seek to gain trademark protection over the resulting composite mark.
In July 1997, the Company became aware of the existence of a third party
which may claim a prior right in the trademark "Worldgroup." The Company and
the third party have had discussions regarding a co-existence arrangement
whereby the Company would have the right, without the payment of a royalty, to
continue to use the trademark "Worldgroup" on its present products and
services. Although the third party does not presently distribute products that
compete with the Company's products, the licensing arrangement proposed would
not preclude the third party from using the "Worldgroup" trademark in
competition with the Company. When the Company releases its next version of its
Worldgroup software, which is anticipated to occur in the first quarter of
1999, the Company may elect to use a name other than Worldgroup, in order to
resolve this issue and also to reflect what it believes will be the wider array
of features that the next version of Worldgroup is expected to offer to users.
There can be no assurance, however, that a change of name will not adversely
impact the Company's revenues and thereby the Company's operating results and
financial condition. See "Business--Proprietary Rights and Intellectual
Property."
In July 1997, the Company also became aware that several third parties had
filed applications for registration for the trademark "WebCast" prior to the
Company's application for such tradename with the PTO. If "WebCast" is
determined not to be a generic term and one of such third party applications is
accepted for registration, then such third party would have superior rights to
the Company in the name "WebCast." There can be no assurance that the Company
will be able to continue to use the name "WebCast" or that it will not have to
change the name of such product.
If a court were to find that the Company unintentionally infringed a third
party's mark, the Company's liability would be limited to its actual net profit
from the sale of infringing products, the third party's actual damages, and
injunctive relief. Further, if a court were to find that the Company wilfully
infringed a third party's trademark, the Company could be enjoined from further
use of the trademark and could be liable, under the federal Lanham Act, for the
lesser of: (i) the Company's net profit stemming from the sale of infringing
products and (ii) the third party's actual damages, plus three times the
greater of: (a) the Company's profit from the sale of the infringing product,
and (b) the third party's actual damages, plus prejudgment interest, attorneys'
fees, and the cost of litigation. See "Business--Proprietary Rights and
Intellectual Property."
UNCERTAINTY REGARDING INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards its software as proprietary and attempts to protect it
with copyrights, restrictions on disclosure, copying and transferring title,
and enforcement of trade secret laws. Despite these precautions, it is possible
for unauthorized third parties to copy the Company's products and it may be
possible for them to obtain and use information that the Company regards as
proprietary. In addition, existing copyright laws give only limited protection
to its software and some foreign countries' laws do not protect proprietary
rights to the same extent as United States laws. Consistent with the general
practice of software developed for retail sale, the Company licenses its
products primarily under "shrink wrap" license agreements that are not signed
by licensees and therefore may be unenforceable under the laws of certain
jurisdictions. Except to the extent noted above with respect to certain
trademark matters, the Company is not aware that it is infringing or violating
any proprietary rights of any third party relating to the Company or the
Company's products. The computer software market is characterized by frequent
and substantial intellectual property litigation and it is possible that third
parties might assert infringement claims against the Company in the future. If
this occurs, the Company might be forced into costly litigation or have to
obtain a license to the intellectual property rights of others. It is possible
that such licenses may not be available on reasonable terms, or at all.
11
The Company currently licenses some of its technology from third parties.
For a description of the material terms of the Company's third party licenses,
see "Business--Proprietary Rights and Intellectual Property." In the future,
such third party technology licenses may not be available to the Company on
commercially reasonable terms, if at all. If the Company cannot maintain any of
these technology licenses, it is possible that product shipments could be
delayed and the Company's financial condition could be adversely impacted. See
"Business--Proprietary Rights and Intellectual Property."
DEPENDENCE ON KEY EMPLOYEES AND CONSULTANT
The Company's success depends on the performance of the senior management,
particularly Chief Executive Officer, Peter Berg, President, Yannick Tessier,
and David Manovich, a consultant who is serving as Chairman of the Company's
Board of Directors and acting Chief Financial Officer. Mr. Berg and Mr. Tessier
are two of the principal shareholders of the Company. Although the Company has
entered into employment agreements with each of Mr. Berg and Mr. Tessier which
do not expire until November 20, 1999, such employment agreements may be
terminated by the employee upon not less than 45 days' prior written notice for
any reason. The agreement with Mr. Manovich can be terminated by the Company
six months after the completion of this offering, upon 90 days' prior written
notice. In such event, the Company is required to pay Mr. Manovich $60,000 in a
lump sum. The Company's success also depends on its ability to retain and
motivate other key employees, particularly software developers, software
programmers and customer support personnel. Competition for these types of
employees is intense and no assurance can be given that the Company will be
able to attract or retain satisfactory personnel. The loss of the services of
Messrs. Berg, Tessier, Manovich or other key personnel could adversely impact
the Company's prospects for success. The Company carries key man life insurance
on Messrs. Berg and Tessier in the amount of $1.0 million each. See
"Management--Employment Agreements" and "--Compensation Arrangements with
Chairman" and "Principal Shareholders."
MANAGEMENT OF A GROWING BUSINESS
The Company's growth strategy will place significant demands on the
Company's executive officers and financial resources. To be successful, the
Company must implement and improve its operational and financial systems and
expand, train and manage its employee base. No assurance can be given that
management will be able to successfully manage a growing business as will be
required to accomplish the Company's goals. Furthermore, the Company may
acquire companies or assets in the future, although the Company does not
presently have any understandings, commitments or arrangements with respect to
any acquisition. Acquisitions involve many unique risks including assimilating
acquired operations and products and the diversion of management's attention
from the Company's primary business.
ANTI-TAKEOVER PROVISION--ARTICLES OF INCORPORATION
The Company's Articles of Incorporation contain a provision that may have
the effect of discouraging transactions involving an actual or threatened
change of control of the Company. The Company's Articles of Incorporation
authorize the issuance of 1,000,000 shares of "blank check" preferred stock
with such designations, rights and preferences as may be determined from time
to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without shareholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other rights that could materially
adversely affect the voting power or other rights of the holders of the Common
Stock. In the event of issuance, the preferred stock could be utilized, under
certain circumstances, as a method of discouraging, delaying, or preventing a
change in control of the Company. Although the Company has no present intention
to designate a series or issue any shares of its preferred stock, there can be
no assurance that the Company will not do so in the future. To the extent
takeover attempts are discouraged by the foregoing provisions, temporary
fluctuations in the market price of the Common Stock, which may result from
actual or rumored takeover attempts, may be inhibited. See "Description of
Securities--Certain Provisions of the Articles and Bylaws."
12
ABSENCE OF DIVIDENDS
The Company has not paid any dividends and does not expect to pay any
dividends in the foreseeable future and intends to retain earnings, if any, to
provide funds for general corporate purposes and the implementation of the
Company's business plan. In addition, until all amounts due under the Kenworthy
Note have been paid, the Company is prohibited from paying any dividends to its
shareholders. See "Dividend Policy."
RIGHTS OF THIRD PARTIES TO DESIGNATE DIRECTORS
The composition of the Company's Board of Directors following the offering
will be influenced by the rights of the following third parties to nominate
representatives to the Board of Directors, to the extent that such rights are
exercised. Messrs. Berg and Tessier have, for so long as the Wallenberg Trust
beneficially owns more than 20 percent of the outstanding Common Stock, agreed
to vote their shares in favor of three persons nominated by the Wallenberg
Trust to the Board of Directors of the Company. The 16 persons who acquired
shares of Common Stock from Messrs. Berg and Tessier from June 28 to July 2,
1998 have the right to nominate and have elected one person to the Board of
Directors of the Company for a period of two years from the closing of the
offering. Union Atlantic has the right to designate and have elected one person
to the Board of Directors of the Company under the terms of its consulting
agreement with the Company. In addition, the Representatives have the right,
for a period of three years from the closing of the offering to nominate a
designee of the Representatives for election to the Board of Directors of the
Company. Other than Union Atlantic, none of the foregoing persons has exercised
his or its right to nominate a person for election to the Board of Directors.
See "Certain Transactions--Berg and Tessier Transaction," and
"Management--Rights to Designate Directors."
CURRENT DEFAULT UNDER 1997 FINANCING NOTES AND ISSUANCE OF ADDITIONAL WARRANTS
In October 1997, the Company completed the 1997 Financing by issuing 42
units of its securities ("Financing Units"), each Financing Unit consisting of
an unsecured non-negotiable promissory note in the principal amount of $50,000
("Financing Note") and a three year warrant to purchase 11,466 shares of Common
Stock at $6.21 per share. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." On June
30, 1998, the Company failed to make a scheduled interest payment of
approximately $140,959 in the aggregate due under the Financing Notes. In July
and August, 1998 the Company obtained a waiver of such default from the holders
of the Financing Notes and in consideration therefore, the Company will: (i)
issue to each such Financing Unit holder of another warrant to purchase 7,534
shares of Common Stock at a price of $6.00 per share exercisable until July 1,
2002; (ii) extend of the expiration date of the 1997 Financing Warrants to
coincide with the expiration date of the additional warrants; and (iii) reduce
the exercise price of the original 1997 Financing Warrants to $6.00 per share.
The Company does not believe that such default will have a material adverse
effect on the Company since all principal and interest accrued under the 1997
Financing Notes will be repaid by the Company at the closing of the offering.
The fair value of the additional 316,428 warrants and the incremental fair value
of the modified terms of the 1997 Financing Warrants is approximately $320,000.
Such amount will be recorded by the Company as an increase to additional paid-in
capital in the third quarter of 1998 with the resulting original issue discount
(OID) on the Financing Notes being amortized over the remaining term of the
Financing Notes. The total amount of the OID is expected to be recorded as
interest expense in the third quarter of 1998 as a result of the repayment of
the Financing Notes upon the completion of the offering. See "Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION OF 80% TO NEW INVESTORS
The initial public offering price of the Shares substantially exceeds the
net tangible book value of a share of the Common Stock (which at June 30, 1998
was negative). Assuming a $6.00 offering price per Share, purchasers will
experience immediate and substantial dilution in the adjusted net tangible book
value per share after the offering in the amount of $4.80 per share or 80% of
the offering price per Share. In addition, the Company may issue a substantial
number of additional shares of Common Stock in the future upon the exercise of
options and warrants having an exercise price below the initial public offering
price of the Shares. The issuance of a material number of such shares may have
the effect of increasing the dilution to new investors in this offering. See
"Dilution."
13
DETERMINATION OF OFFERING PRICE; NO ASSURANCE OF PUBLIC MARKET
Prior to the offering, there has been no public market for the Common
Stock or the Warrants. The Company has applied to list the Common Stock and the
Warrants for quotation on the Nasdaq SmallCap Market. No assurance can be given
that such securities will be accepted for listing, or, if accepted, that a
trading market for such securities will develop, or be sustained. The initial
public offering price of the Shares and Warrants and the exercise price and
other terms of the Warrants have been determined by negotiation between the
Company and the Representatives and may not be indicative of the market price
for such securities after the offering. The market prices for securities of
emerging companies, especially those involved in high technology and software
development, have historically been highly volatile and may be unrelated or
disproportionate to the operating performance of such companies. Future
announcements concerning the Company or its competitors, including
technological innovations or new commercial products, may have a significant
impact on the market price of the Common Stock and/or the Warrants. See
"Business--Competition" and "Underwriting."
CURRENT PROSPECTUS AND STATE REGISTRATION NEEDED TO EXERCISE WARRANTS
The Warrants may only be exercised if a current prospectus relating to the
Common Stock is then in effect under the Securities Act. While the Company will
use its best efforts to maintain the effectiveness of a current prospectus, the
Company cannot guarantee that it will be able to do so. After a registration
statement becomes effective, it may require continuous updating by the filing
of post-effective amendments. A post-effective amendment is required (i) when,
for a prospectus that is used more than nine months after the effective date of
the registration statement, the information contained therein (including the
certified financial statements) is as of a date more than 16 months prior to
the use of the prospectus, (ii) when facts or events have occurred which
represent a fundamental change in the information contained in the registration
statement, or (iii) when any material change occurs in the information relating
to the plan of distribution of the securities registered by such registration
statement. Furthermore, the Warrants may only be exercised if the Common Stock
is qualified for sale or exempt from qualification in the state where the
holder of the Warrant resides. The Warrants may have no value if the Common
Stock underlying the Warrants is not qualified or exempt from qualification in
a particular state, or if a prospectus is not kept current. See "Description of
Securities--Warrants."
REDEMPTION OF WARRANTS
The Warrants are subject to redemption by the Company, for nominal
consideration, at any time commencing 30 days after the First Exercise Date
upon 30 days' prior written notice to the holders thereof, if the average of
the closing bid and asked price for the Common Stock for a period of 20
consecutive trading days ending three trading days prior to the date of the
redemption notice is at least equal to 150% of the initial public offering
price of the Common Stock. In the event that the Warrants are called for
redemption by the Company, Warrant holders will have 30 days during which they
may exercise their rights to purchase shares of Common Stock. In the event a
current prospectus is not available, the Warrants may not be exercised and the
Company will be precluded from redeeming the Warrants. If holders of the
Warrants elect not to exercise the Warrants upon notice of redemption, and the
Warrants are subsequently redeemed prior to exercise, the holders would lose
the benefit of the difference between the market price of the underlying Common
Stock as of such date and the exercise price of such Warrants, as well as any
possible future price appreciation in the Common Stock. In addition, as a
result of an exercise of the Warrants, existing shareholders would be diluted
and the market price of the Common Stock may be adversely affected. See
"Description of Securities--Warrants."
ADJUSTMENTS TO WARRANT EXERCISE PRICE AND EXERCISE DATE AND IMPACT OF WARRANT
EXERCISE ON MARKET
The Company, in its sole discretion, and in accordance with the terms of
the Warrant Agreement with the Warrant Agent, may reduce the exercise price of
the Warrants and extend the time within
14
which the Warrants may be exercised, depending on such things as current market
conditions, the market price of the Common Stock and the Company's need for
additional capital. Further, in the event that the Company issues certain
securities or makes certain distributions to the holders of its Common Stock,
the exercise price of the Warrants (and the shares of Common Stock issuable on
exercise thereof) may be proportionately reduced. Any such price reductions
(assuming exercise of the Warrants) will provide less money for the Company and
could possible adversely affect the market price of the Company's securities.
Furthermore, if a substantial number of Warrants are exercised within a
reasonably short period of time after the right to exercise commences, the
resulting increase in the amount of Common Stock of the Company in the trading
market could substantially affect the market price of the Common Stock. See
"Description of Securities--Warrants."
CONTINUING RELATIONSHIP WITH REPRESENTATIVES; POTENTIAL INFLUENCE
Following the offering, the Company will have certain continuing
relationships with the Representatives. The Company has agreed with the
Representatives to: (i) sell the Representatives, for nominal consideration,
the Representatives' Warrants; (ii) grant the Representatives the right, for a
period of three years after the closing of this offering, to nominate a
designee to the Company's Board of Directors; and (iii) enter into a two-year
financial consulting agreement with the Representatives, commencing on the
closing of the offering. The foregoing relationships may allow the
Representatives to have a continuing influence over the Company's operations.
See "Description of Securities" and "Underwriting."
EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS
In addition to the 1,800,000 Warrants to be issued in connection with this
offering (2,070,000 Warrants if the Over-allotment Option is exercised in
full), the Company, upon completion of this offering, will sell the
Representatives the Representatives' Warrants, which will entitle the
Representatives to purchase 180,000 shares of Common Stock and/or 180,000
warrants. See "Underwriting."
The Company has issued the 1997 Financing Warrants to purchase an
aggregate of 798,000 shares of Common Stock at an exercise price of $6.00 per
share, as amended. In May 1998, the Company issued a secured convertible
promissory note in the aggregate principal amount of $125,000 to Kenworthy, a
wholly-owned subsidiary of the Wallenberg Trust, which is convertible into
100,579 shares of Common Stock. In August 1998, the Company issued warrants to
purchase 156,000 shares of Common Stock at an exercise price of $6.00 per
share. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources," "Certain
Transactions--Wallenberg Trust and UA Partners Investments" and "Description of
Securities--Registration Rights and Sales by Certain Shareholders." The Company
has 50,886 options outstanding under the 1997 Plan with an exercise price of
$6.00 per share and options and warrants to purchase an aggregate of 582,638
shares of Common Stock outside the 1997 Plan, of which 210,204 options and
warrants are exercisable at prices below the estimated initial public offering
price of the Shares. See "Description of Securities--Outstanding Options,
Warrants and Convertible Securities."
It may be expected that all of such options and warrants will be exercised
only if it is advantageous to the holders thereof. Therefore, during the period
in which such options and warrants may be exercised, the holders thereof are
given the opportunity to profit from a rise in the market price of the Common
Stock. To the extent that such options and warrants are exercised, dilution to
the interests of the Company's shareholders will occur. Further, the terms upon
which the Company will be able to obtain additional capital may be adversely
affected since the holders of such options and warrants can be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain any needed capital on terms more favorable to the Company than those
provided in such options and warrants.
15
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public
market following the offering could adversely affect the market price for the
Common Stock. Immediately prior to the date of this Prospectus, there were
2,922,849 shares of Common Stock issued and outstanding. Of such amount,
shareholders owning an aggregate of approximately 2,580,000 shares of Common
Stock have agreed not to sell or otherwise dispose of their shares of Common
Stock for a period of one year from the date of this Prospectus but subject to
any restrictions imposed by Nasdaq. Subject to such lock-up period, the
outstanding shares of Common Stock may be sold without registration under the
Securities Act in compliance with Rule 144. In general, under Rule 144, a
person who has satisfied a one-year holding period may under certain
circumstances sell, within any three-month period, a number of shares which
does not exceed the greater of 1% of the outstanding shares of Common Stock or
the reported average weekly trading volume in the four weeks preceding the
sale. Rule 144 also permits, under certain circumstances, the sale of shares
without any quantity limitation by a person who is not an affiliate of the
company and who has satisfied a two year holding period. See "Description of
Securities--Shares Eligible for Future Sale." In addition, the Company has
granted certain demand and registration rights with respect to 1,244,512 shares
of issued and outstanding Common Stock and 1,310,236 shares of Common Stock
underlying the 1997 Financing Warrants, the Representatives' Warrants and other
options, warrants and rights to acquire Common Stock; provided, however, the
shares of Common Stock underlying the 1997 Financing Warrants may not be sold
prior to 12 months from the date of this Prospectus. The exercise of such
registration rights would permit a large number of shares to become freely
tradeable without restriction (subject to any lock-up arrangements) under the
Securities Act immediately upon effectiveness of such registration. See
"Description of Securities--Registration Rights and Sales by Certain
Shareholders."
POSSIBLE DELISTING OF COMMON STOCK FROM NASDAQ AND RISKS OF COMMON STOCK
TRADING BELOW $5.00 PER SHARE.
Upon consummation of the offering, the Shares and Warrants are expected to
be listed on the Nasdaq SmallCap Market. In order to qualify for continued
listing on the Nasdaq SmallCap Market, the Company will be subject to
compliance with maintenance and corporate governance requirements, including:
(i) net tangible assets of at least $2 million, market capitalization of $35
million, or net income of $500,000; (ii) a public float of at least 500,000
shares valued at $1.0 million or more; (iii) at least two market makers; (iv)
at least 300 shareholders; and (v) a minimum bid price of $1.00 per share. The
corporate governance requirements for the Nasdaq SmallCap Market require
distribution of annual and interim reports to shareholders, a minimum of two
independent directors, an audit committee comprised of a majority of
independent directors, an annual shareholder meeting, a quorum requirement,
solicitations of proxies, review of conflicts of interest, shareholder approval
for certain corporate actions and voting rights protection. In connection with
its application to list the Shares and Warrants on the Nasdaq SmallCap Market,
the Company has applied for a 90-day waiver from the corporate governance
requirements related to independent directors and an audit committee. If the
Company is unable to satisfy the requirements for continued quotation on
Nasdaq, trading in the Securities would be conducted in the over-the-counter
market in what are commonly referred to as the "pink sheets" or on the OTC
Bulletin Board. As a result, an investor may find it more difficult to dispose
of or obtain accurate quotations as to the price of the Shares or Warrants. In
addition, if the listing of the Shares is suspended or terminated from Nasdaq
and at such time the Shares have a market price of less than $5.00 per share,
then the sale of the Securities would become subject to certain "penny stock"
regulations adopted by the Securities and Exchange Commission which impose
sales practice requirements on broker-dealers. For example, broker-dealers
selling the Securities would, prior to effecting the transaction, be required
to provide their customers with a document which discloses the risks of
investing in the Securities. Furthermore, if the person purchasing the
Securities is someone other than an accredited investor or an established
customer of the broker-dealer, the broker-dealer must also approve the
potential customer's account by obtaining information concerning the customer's
financial situation, investment experience and investment objectives. The
broker-dealer must also make a determination whether the transaction is
suitable for the customer and whether the customer has
16
sufficient knowledge and experience in financial matters to be reasonably
expected to be capable of evaluating the risk of transactions in the
Securities. Accordingly, if the listing of the Shares is suspended or
terminated from Nasdaq and is trading for less than $5.00 per share, the penny
stock regulations may restrict the ability of broker-dealers to sell the
Securities and may affect the ability of purchasers in this offering to sell
the Securities in the secondary market.
QUALIFICATION IN CALIFORNIA
The offering was approved in California on the basis of a limited offering
qualification where offers and sales can only be made to proposed offerees
based upon their meeting certain suitability standards as described under
"Summary--The Offering" and the Company did not have to demonstrate compliance
with any of the merit regulations of the California Department of Corporations
found in Title 10, CA Code of Regulations, Rule 60.140 et seq. The exemption
for secondary trading available under California Corporations Code Section
25104(h) will be withheld by the Department of Corporations, but there may be
other exemptions to cover private sales by the bona fide owner for his or her
own account without advertising and without being effected by or through a
broker dealer in a public offering.
LACK OF EXPERIENCE OF REPRESENTATIVE
Security Capital Trading, Inc. ("Security Capital"), one of the
Representatives, commenced operations in June 1995. Security Capital has
co-managed and participated as an underwriter in only two previous public
offerings of securities. Accordingly, Security Capital has limited experience
as a co-manager or underwriter of public offerings of securities. Security
Capital will not be acting as a market maker of the Securities and there can be
no assurance that any broker-dealer will become a market maker for any of the
Securities. See "Underwriting."
17
USE OF PROCEEDS
The net proceeds which the Company will receive from the sale of the
Securities offered hereby, based upon an assumed offering price of $6.00 per
Share and $.10 per Warrant and after deduction of underwriting discounts, the
non-accountable expense allowance and other offering expenses, will be
approximately $8,761,208 ($10,194,097 if the Over-allotment Option is exercised
in full). The Company intends to use the net proceeds of the offering as
follows:
APPROXIMATE
APPLICATION OF PROCEEDS DOLLAR AMOUNT PERCENTAGE
----------------------- --------------- -----------
REPAYMENT OF DEBT
Repayment of Financing and Other Notes(1) ................. $ 2,537,000 28.9%
Repayment of Indebtedness to Bank(2) ...................... $ 200,000 2.3%
Repayment of Indebtedness to Shareholders(3) .............. $ 193,000 2.3%
Repayment of Indebtedness to Management(4) ................ $ 100,000 1.1%
----------- ----
3,030,000 34.6%
COMPANY OPERATIONS
Sales and Marketing(5) .................................... $ 2,000,000 22.8%
Product Development(6) .................................... $ 1,300,000 14.8%
Capital Expenditures(7) ................................... $ 325,000 3.7%
Accounts Payable(8) ....................................... $ 500,000 5.8%
Working Capital and General Corporate Purposes(9) ......... $ 1,606,208 18.3%
----------- ----
$ 5,731,208 65.4%
----------- ----
Total ................................................... $ 8,761,208 100%
=========== ====
----------------
(1) Repayment of: (i) principal and estimated interest on the Financing Notes,
which were sold in October 1997 and bear interest at a rate of 10% per
year and are due and payable at the closing of the offering; and (ii)
principal and estimated interest on the notes ("Notes") that were issued
in August 1998 and bear interest at a rate of 10% per year and are due and
payable at the date of this Prospectus. Net proceeds from the Financing
Notes were used to fund operations ($1,369,500), repayment of indebtedness
($272,500) and to make office improvements ($40,000). Net proceeds from
the Notes were used to pay accounting fees ($130,000), directors and
officers insurance premiums ($50,000), a portion ($25,000) of the
Representative's non-accountable expense allowance and the remainder for
working capital. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" for
a description of the terms of such debt.
(2) Represents the outstanding amount owed under a working line of credit
issued to the Company by a financial institution. Interest is payable
monthly. The Company's financial obligations under the line of credit are
guaranteed by Peter Berg, the Chief Executive Officer of the Company, and
Yannick Tessier, the President of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for a description of the
terms of the debt.
(3) Represents payment of: (i) $170,000 of fees and expenses due to Union
Atlantic under its consulting agreements with the Company, and (ii)
interest (approximately $23,000) accrued under the 10% convertible secured
UA Partners Note, which interest is due and payable within five days after
the date of this Prospectus. The principal amount of the UA Partners Note
will be automatically converted into an aggregate of 29,479 shares of
Common Stock on the date of this Prospectus. See "Certain
Transactions--Consulting Agreements with Union Atlantic" for a description
of the terms of this debt.
(4) Represents: (i) repayment of a 10% note in the amount of $50,000 to Mr.
Tessier which is payable by the Company on the effective date of the
offering, and (ii) payment of $50,000 of fees and expenses due to David
Manovich pursuant to his consulting agreement with the Company. See
"Certain Transactions--Tessier Transaction" and "Management--Compensation
Arrangements with Chairman" for a description of terms of these debts.
(5) Includes expenditures for trade shows, product catalogs, print advertising,
cooperative dealer advertising, public relations and the hiring of
additional sales and marketing personnel.
(6) Includes the hiring of additional product development personnel and the
purchase of software development tools and related equipment. See
"Business--Product Development."
(7) For leasehold improvements, office furniture and modules, computer
equipment, Year 2000 compliance and software.
(8) Represents outstanding vendor obligations.
(9) Working capital and general corporate purposes consist primarily of
selling, general and administrative expenses. Proceeds from the exercise
of the Over-allotment Option, if any, will be used for general corporate
purposes.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds from the offering based upon the current state of the
Company's business operations, its current plans and current economic
conditions. Based on the Company's current proposed plans and assumptions
relating to the implementation of the Company's business strategy, the Company
anticipates that the net proceeds from the offering, together with projected
cash flow from operations, will be sufficient to satisfy contemplated cash
requirements for at least 12 months following the consummation of the
18
offering. Future events, including the problems, delays, expenses and
complications frequently encountered by software companies as well as changes
in regulatory, political and competitive conditions affecting the Company's
business and the success or lack thereof of the Company's business strategy,
may necessitate shifts in the allocation of funds. The Company also reserves
the right to allocate the net proceeds for acquisitions, although the Company
does not have any present understandings, commitments or arrangements with
respect to an acquisition.
Pending use of the proceeds of the offering, the Company may invest such
funds in interest bearing accounts, certificates of deposit, money market funds
or similar short-term investments.
CAPITALIZATION
The following table represents the capitalization of the Company as of
June 30, 1998 and as adjusted to give effect to: (i) the automatic conversion
at the date of this Prospectus of the UA Partners Note into 29,479 shares of
Common Stock, and (ii) the sale of Securities offered hereby and the
application of the net proceeds therefrom. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and the notes thereto appearing elsewhere in this Prospectus.
JUNE 30, 1998
---------------------------------------
ACTUAL AS ADJUSTED
--------------- ---------------------
Note Payable and Short-Term Borrowings .................... $ 341,816 15,789
Notes Payable--Shareholder ................................ 50,000 --
Advances from Shareholders ................................ 213,346 213,346
Long-Term Liabilities ..................................... 653,993 3,993 (1)
Financing Notes ........................................... 2,126,769 --
------------ -------
Total Debt .............................................. 3,385,924 233,128
Shareholders' (Deficit) Equity:
Preferred Stock, par value $.001 per share,
Authorized--1,000,000 shares; Issued--None ............. -- --
Common Stock, par value $.0001 per share,
Authorized--20,000,000 shares; Issued and outstanding--
2,639,463 shares actual, 4,722,849 as adjusted ......... 264 472
Additional Paid-in Capital ................................ 5,347,588 14,883,587
Accumulated Deficit ....................................... (7,362,509) (7,723,195)(2)
------------ ----------
Total Shareholders' (Deficit) Equity .................... (2,014,657) 7,160,864
------------ ----------
Total Capitalization .................................... $ (1,371,267) $ 7,393,992
============ =============
----------------
(1) Gives effect to the settlement of the DataSafe litigation.
(2) Reflects the write-off of (a) Original Issue Discount of $98,231 in
connection with the 1997 Financing; and (b) Deferred Financing Costs of
$262,455, upon the repayment in full, subsequent to June 30, 1998, of the
Financing Notes with the net proceeds of the offering. This expense will
be recorded in the quarter in which the offering is completed.
DIVIDEND POLICY
Holders of the Common Stock are entitled to cash dividends when, as and if
declared by the Board of Directors out of funds that are legally available to
pay such dividends. The Company does not anticipate the declaration or payment
of any dividends in the foreseeable future. The Company intends to retain
earnings, if any, to finance the development and expansion of its business.
Dividends will be subject to the discretion of the Board of Directors and will
be contingent upon future earnings, if any, the Company's financial condition,
capital requirements, general business conditions and such other factors as the
Board of Directors deems relevant. Until all amounts due under the Kenworthy
Note have been paid, the Company is prohibited from paying any dividends to its
shareholders. See "Certain Transactions--Wallenberg Trust and UA Partners
Investments." Moreover, dividend payments in the future may also be subject to
covenants contained in loan agreements, other financing documents or the terms
of any preferred stock. Therefore, there can be no assurance that dividends of
any kind will ever be paid.
19
DILUTION
Dilution is the difference between the price paid for the Shares and the
"net tangible book value" per share of the Common Stock before the offering.
Net tangible book value per share represents the amount of the Company's
tangible assets less the amount of its liabilities, divided by the number of
outstanding shares of Common Stock.
At June 30, 1998, the Company had a negative net tangible book value of
$4,062,643, or ($1.54) per share. After giving effect to the sale of 1,800,000
Shares offered hereby at an assumed offering price of $6.00 per share
(excluding the Warrants being offered hereby at $.10 per Warrant) and the
Company's receipt of the proceeds from the offering, less underwriting
discounts, the non-accountable expense allowance and other estimated offering
expenses, and without giving effect to the exercise of the Warrants, the
Over-allotment Option, the Representatives' Warrants or the exercise of any
other outstanding options or warrants, the net tangible book value of the
Company, as adjusted at June 30, 1998, would have been approximately
$5,667,220, or $1.20 per share. Accordingly, the cash investment by investors
in the offering of $6.00 per share will be diluted immediately by approximately
$4.80 per share or 80%. The aggregate increase in the net tangible book value
to the present shareholders, at no additional cost to them, will be
approximately $2.74 per share. The following table illustrates the per share
dilution effect:
Public offering price per share .......................................... $ 6.00
Pro forma net tangible book value per share before offering .............. $ (1.54)
-------
Increase per share attributable to payments by public investors .......... 2.74
-------
Adjusted pro forma net tangible book value per share after offering ...... 1.20
-------
Dilution of net tangible book value per share to public investors ........ $ 4.80
=======
If the Over-allotment Option is exercised in full, the net tangible book
value per share at June 30, 1998, as adjusted for this offering, would be
$1.42, and dilution of net tangible book value per share to public investors
would be $4.58, or 76%.
The following table summarizes the difference between public investors and
current shareholders of the Company with respect to the number of shares
purchased from the Company, the total consideration paid to the Company (based
upon an assumed offering price of $6.00 per Share and before deduction of
underwriting discounts, the non-accountable expense allowance and other
estimated offering expenses) and the applicable average purchase price per
share:
SHARES PURCHASED TOTAL CONSIDERATION
-------------------------- ------------------------------ AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
----------- ------------ --------------- ------------ --------------
Public Investors(1) .......... 1,800,000 38.1% $ 10,800,000 63.8% $ 6.00
Current Shareholders ......... 2,922,849 61.9% $ 6,122,852 36.2% $ 2.09
--------- ---- ------------ ---- ------
Total ........................ 4,722,849 100% $ 16,922,852 100%
========= ==== ============ ====
----------------
(1) Attributes no value to the Warrants.
20
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
The following selected historical financial data of: (i) the Company for
the two years ended December 31, 1997, has been derived from the Company's
Consolidated Financial Statements as of December 31, 1996 and 1997 and for the
two years ended December 31, 1997, and (ii) Galacticomm, Inc. for the ten
months ended October 31, 1996, has been derived from Galacticomm, Inc.'s
financial statements for the ten months ended October 31, 1996, which are
included elsewhere herein. The following selected historical unaudited
financial data of the Company as of June 30, 1998 and for the six months ended
June 30, 1997 and 1998, has been derived from the unaudited historical
consolidated financial statements of the Company included elsewhere herein
which, in the opinion of management, include all adjustments (consisting of
only normal recurring adjustments) necessary for a fair and consistent
presentation of such data. Results for the six months ended June 30, 1998 are
not necessarily indicative of results which can be expected for the year ending
December 31, 1998.
The following 1996 unaudited pro forma financial data gives effect to the
Company's November 1996 acquisition of Galacticomm, Inc. and its merger with
TTI as if such transactions were consummated on January 1, 1996. The pro forma
data is unaudited and is not necessarily indicative of the results of
operations of the Company had the Company actually acquired Galacticomm, Inc.
and TTI on January 1, 1996.
The following selected historical and unaudited pro forma financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited and unaudited
consolidated financial statements of the Company and Galacticomm, Inc. and the
notes thereto contained elsewhere herein.
GALACTICOMM, INC. GALACTICOMM TECHNOLOGIES, INC.
------------------- -----------------------------------------------
YEARS ENDED
DECEMBER 31,
-----------------------------------------------
TEN
MONTHS PRO FORMA
ENDED (UNAUDITED)
OCTOBER 31, 1996 1996 1996 1997
------------------- --------------- --------------- ---------------
STATEMENT OF OPERATIONS DATA:
Revenues ......................................... $ 3,293,876 $ 1,692,743 $ 6,189,505 $ 3,418,057
------------ ------------ ------------ ------------
Cost of revenues ................................. 1,005,595 758,050 2,515,462 869,252
Selling, general and administrative .............. 2,382,613 1,531,130 4,381,252 4,096,757
Depreciation ..................................... 150,185 47,533 415,452 163,221
Amortization of intangibles ...................... -- 36,607 574,733 505,577
Compensation expense on warrants and shares ...... 529,139 49,381 578,520 143,760
Customer support ................................. 387,797 72,772 460,569 398,137
Research and development ......................... 638,200 225,549 863,749 586,071
------------ ------------ ------------ ------------
Total operating expense ........................ 5,093,529 2,721,022 9,789,737 6,762,775
------------ ------------ ------------ ------------
Loss from operations ............................. (1,799,653) (1,028,279) (3,600,232) (3,344,718)
Other expense, net ............................... (468,153) (60,312) (655,321) (409,317)
------------ ------------ ------------ ------------
Net loss ......................................... $ (2,267,806) $ (1,088,591) $ (4,255,553) $ (3,754,035)
============ ============ ============ ============
Basic and diluted net loss per share ............. $ (1.12) $ (1.99) $ (1.72)
============ ============ ============
Shares used in computing basic and diluted net
loss per share .................................. 973,649 2,139,443 2,188,474
============ ============ ============
GALACTICOMM TECHNOLOGIES, INC.
--------------------------------
SIX MONTHS ENDED
JUNE 30,
--------------------------------
(UNAUDITED)
1997 1998
---------------- ---------------
STATEMENT OF OPERATIONS DATA:
Revenues ......................................... $ 1,787,879 $ 838,395
------------ ------------
Cost of revenues ................................. 502,310 178,935
Selling, general and administrative .............. 1,318,222 1,540,171
Depreciation ..................................... 78,891 117,576
Amortization of intangibles ...................... 287,338 231,461
Compensation expense on warrants and shares ...... 113,760 9,414
Customer support ................................. 205,934 94,015
Research and development ......................... 302,518 222,739
------------ ------------
Total operating expense ........................ 2,808,973 2,394,311
------------ ------------
Loss from operations ............................. (1,021,094) (1,555,916)
Other expense, net ............................... (68,475) (944,866)
------------ ------------
Net loss ......................................... $ (1,089,569) $ (2,500,782)
============ ============
Basic and diluted net loss per share ............. $ (0.52) $ (0.95)
============ ============
Shares used in computing basic and diluted net
loss per share .................................. 2,085,303 2,639,463
============ ============
JUNE 30, 1998
-------------------------------
DECEMBER 31, 1997 ACTUAL AS ADJUSTED(1)
------------------ --------------- ---------------
(UNAUDITED)
BALANCE SHEET DATA
Cash ................................... $ 226,281 $ 90,508 $6,166,994
Working capital (deficiency) ........... (665,855) (4,058,773) 5,021,090
Goodwill, net of amortization .......... 1,723,266 1,488,116 1,488,116
Total assets ........................... 3,850,567 3,084,678 8,706,822
Short-term obligations ................. 218,594 2,716,142 213,346
Long-term obligations .................. 2,571,762 653,993 3,993
Shareholders' (deficit) equity ......... $ (35,417) $ (2,014,657) $7,160,864
---------------
(1) Adjusted to give effect to: (a) the sale of the Securities offered hereby
and the application of the net proceeds therefrom; (b) the automatic
conversion of the UA Partners Note on the date of this Prospectus into
29,479 shares of Common Stock; (c) the settlement of the DataSafe
litigation; and (d) the write-off of deferred financing costs and
original issue discount related to the 1997 Financing in the aggregate
amount of $360,686, which amount will be expensed in the quarter in which
the offering is completed. See "Use of Proceeds," "Capitalization,"
"Business--Legal Proceeding" and "Certain Transactions--Consulting
Agreements with Union Atlantic."
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company was incorporated in December 1995 under the name i-View
Software, Inc. and acquired its primary operating subsidiary, Galacticomm,
Inc., on November 21, 1996. In April 1997, the Company changed its name to
Galacticomm Technologies, Inc.
The Company acquired Galacticomm, Inc. through the issuance of an
aggregate of 116,565 shares of Common Stock and $668,413 in cash. The
acquisition was financed through the sale of Common Stock and the issuance of
convertible notes to UA Partners and Hemingfold Investments Limited
("Hemingfold"), which has transferred its interest in such notes to the
Wallenberg Trust, an affiliate of Hemingfold. See "Certain
Transactions--Wallenberg Trust and UA Partners Investments." Immediately prior
to the Company's acquisition of Galacticomm, Inc., the Company acquired TTI by
merger.
The Company's revenues and operating results have varied substantially
from period to period, are likely to continue to vary in the future and should
not be relied upon as an indication of future results. The Company has
historically operated with no significant backlog. The Company's quarterly
results in the future may also be affected by the Company's focus on customized
software for use by specific customers or specific industries. See
"Business--Worldgroup Customized Applications."
At June 30, 1998, the Company had a net goodwill balance of $1,488,116 as
a result of its merger with TTI and the acquisition of Galacticomm, Inc. The
goodwill associated with the TTI merger (approximately $72,071 at June 30,
1998) is being amortized over a three year period. The goodwill associated with
the Galacticomm, Inc. acquisition is being amortized over a five year period.
Consequently, results of operations of the Company will be negatively impacted
by the non-cash amortization of goodwill of approximately $474,000 per year
until 1999 and $422,000 per year thereafter until 2001.
RESULTS OF OPERATIONS
The results of operations set forth below for the year ended December 31,
1996 reflect the operations of the Company combined with the operations of
Galacticomm, Inc. and TTI as if the Company had actually acquired such
companies on January 1, 1996. The Company has not provided a comparative
discussion with respect to the historical results of the Company for the year
ended December 31, 1996, since it does not believe that such comparisons are
meaningful. The pro forma financial information included herein is unaudited
and is not necessarily indicative of the results that would have actually
occurred had the Company acquired Galacticomm, Inc. and TTI at January 1, 1996,
nor is it necessarily indicative of future results of operations. Among other
things, the business and cost structure of the pro forma combined companies for
the year ended December 31, 1996 was significantly different than the business
and cost structure of the Company on a historical basis for the year ended
December 31, 1997, including significant differences between such periods in
the number of persons employed, occupancy costs, products and services sold and
marketing strategies.
SIX MONTHS ENDED JUNE 30, 1998 AS COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
Net revenues for the six months ended June 30, 1998 decreased 53%, from
$1,787,879 for the six month period ended June 30, 1997 to $838,395 for the
comparable period in 1998. The five components of the Company's net revenues
during these periods were software sales of Worldgroup, software source code
sales, service fees, sales of third-party hardware and royalties. For the six
months ended June 30, 1997 these components generated sales of approximately
$902,000 (plus $114,000 of revenues from sales of Webcast), $0, $500,000,
$210,000 and $61,000, respectively. For the six months ended June 30, 1998,
these components generated sales of approximately $356,000 (plus sales of
approximately $153,000 for ActiBase and WebCast), $90,000, $200,000, $22,000
and $17,000, respectively.
22
The release in December 1996 of Worldgroup v3.0 had a positive effect on
software sales in the six month period ended June 30, 1997, while results for
the six months of 1998 were adversely impacted by the delay until June 1998 of
the Company's release of Worldgroup 3.1 from its originally announced release
date of December 1997. The Company has historically experienced increased
software product revenues in the quarter after the introduction of new versions
of Worldgroup and reductions in sales after announcing upgrades until such
upgrade is released.
For the six month period ended June 30, 1998, the Company sold the source
code for certain entertainment game add-ons to the Worldgroup platform under an
exclusive license in perpetuity for $90,000. As a result of the sale of the
source code, the Company will not recognize any revenues from these add-on
products in future periods, which is not expected to have a material adverse
effect on the Company's revenues. Although no assurance can be given, the
Company may continue to benefit from such sale through additional sales of the
Worldgroup platform, which is the exclusive platform upon which such add-ons
operate.
The reduction in sales of third-party hardware and service fees from
period to period was reflective of the Company's strategy to rely on VARs for
the sale of third-party hardware compatible with the Company's software and to
emphasize software sales. Software sales generate higher profit margins than
the three other areas of the Company's business. In the future, revenues from
software sales, as a percentage of net revenues, are expected to increase and
service fees and sales of third-party hardware, as a percentage of net
revenues, are expected to decrease, as the Company places greater emphasis on
the development and marketing of Worldgroup and Worldgroup based products.
Cost of revenues consists primarily of software product costs, hardware
purchased for resale and costs for billing and collection. For the six month
period ended June 30, 1998, cost of revenues decreased 64% from $502,310 in the
1997 period to $178,935 in the 1998 period. This decrease was primarily
attributed to fewer hardware purchases and lower costs for billing and
collection services as a result of lower service revenues for the 1998 period.
Since the primary focus of the Company in the future will be on software sales,
costs of revenues, as a percentage of revenues, is expected to be lower in the
future.
Selling, general, and administrative ("SG&A") expenses for the six month
period ended June 30, 1998 increased 17%, from $1,318,222 in 1997 to $1,540,171
in 1998. SG&A expenses consist primarily of employee compensation, marketing
expenses, professional services and office expenses. The increase in SG&A
expenses is due primarily to the following factors: (i) $46,000 of costs
incurred in the first quarter of 1998 associated with an acquisition that the
Company did not complete; (ii) $69,000 in consulting fees incurred in 1998 but
not in 1997; (iii) the lease during the first six months of 1998 of a T-3
fiber-optic circuit for $99,000; (iv) $78,000 in increased executive officer
compensation as a result of the hiring of additional management; and (v)
$62,000 in increased legal expenses during the first six months of 1998
primarily relating to certain settled litigation; offset in part by
approximately $143,000 in reduced trade show and direct mail expenses from
period to period.
Depreciation and amortization for the six month period ended June 30, 1998
decreased 5% from $366,229 in 1997 to $349,037 in 1998. Amortization of
intangibles, which primarily represents the amortization of goodwill resulting
from the Company's acquisitions of TTI and Galacticomm, Inc., is being
amortized over periods of three to five years.
Customer support expenses for the six month period ended June 30, 1998
decreased 54%, from $205,934 in 1997 to $94,015 in 1998. The decrease was
primarily caused by a decrease in customer support employees from period to
period, through both termination and transfer of personnel to other
departments. The Company expects that customer support expenses will increase
in the future as software sales increase.
Research and development expenses for the six month period ended June 30,
1998 decreased 26%, from $302,518 in 1997 to $222,739 in 1998, as a result of
the Company's lack of funding. The Company
23
expects that product development expenses will increase in the future when the
Company has funds available to further expand its product development
activities. See "Business--Product Development."
Net other expense, for the six month period ended June 30, 1998 was
$944,866 as compared to $68,475 for the six months ended June 30, 1997. The
increase in net other expense was due to the following factors: (i) increased
interest expense during the first six months of 1998 of $458,684 from the
issuance of the Financing Notes ($353,684 of which is non cash amortization of
deferred debt issuance costs and original issue discount and $105,000 of which
is accrued interest on the Financing Notes); (ii) $478,000 of interest expense
due to the issuance of the convertible note to Kenworthy in May 1998 (see Note
11(b) to the 1997 Consolidated Financial Statements of the Company); and (iii) a
decrease in interest expense of $62,500 due to the conversion of a $1,250,000
convertible note on December 31, 1997 (see Note 8(a) to the 1997 Consolidated
Financial Statements of the Company.
As a result of the foregoing factors, the Company's net loss for the six
month period ended June 30, 1998 increased $1,411,213, from $1,089,569 in 1997
($.52 per basic and diluted share) to $2,500,782 in 1998 ($.95 per basic and
diluted share).
YEAR ENDED DECEMBER 31, 1997 AS COMPARED WITH PRO FORMA YEAR ENDED DECEMBER 31,
1996 (ASSUMES THE ACQUISITION OF GALACTICOMM, INC. AND TTI HAD OCCURRED ON
JANUARY 1, 1996)
Net revenues for the year ended December 31, 1997 decreased 45%, from
$6,189,505 for 1996 to $3,418,057 for 1997. The decrease in revenue was
primarily attributable to: (i) the Company's divestiture of its adult
entertainment business in November 1996 ($1.4 million in 1996 revenue was
attributable to that business); (ii) the Company's decision to de-emphasize the
sale of modems and certain other third- party hardware products in late 1996,
resulting in reduced hardware sales of $582,000 from period to period; and
(iii) a reduction in software sales of $850,000. The reduction in software
sales arises for two reasons: (a) sales were hampered during 1997 due to the
fact that not all of the applications of the Company's Worldgroup v3.0 were
available during 1997 with Active HTML interface, and (b) the Company did not
have sufficient funds to properly market its products during 1997.
For the year ended December 31, 1997, cost of revenues decreased 65%, from
$2,515,462 in the 1996 period to $869,252 in the 1997 period. This decrease was
primarily attributable to fewer hardware purchases and lower costs for billing
and collection services as a result of lower service revenues from period to
period.
Selling, general, and administrative expenses for the year ended December
31, 1997 decreased 6% from $4,381,252 in 1996 to $4,096,757 in 1997 primarily
due to a decrease in expenditures for marketing in order to conserve cash.
Depreciation and amortization for the year ended December 31, 1997
decreased 32%, from $990,185 in 1996 to $668,798 in 1997. Such decrease
resulted primarily from a decrease of $252,231 in depreciation expense due to
the change in the depreciable life of computer equipment from five to three
years and the resultant full depreciation of certain assets during 1996.
Stock-related compensation expense for the years ended December 31, 1996
and 1997 amounted to $578,520 and $143,760, respectively. The 1997 non-cash
expense was a result of the issuance of warrants by two of the Company's
officers, directors and shareholders to another shareholder of the Company.
These warrants expired unexercised. See Note 8(c) to Notes to the Company's
Consolidated Financial Statements. The 1996 non-cash expense related to the
conversion of phantom stock units by former employees of Galacticomm, Inc. into
shares of common stock and the issuance to Mr. Tessier of 733,669 shares of
Common Stock pursuant to the Stock Issuance Agreement dated August 26, 1996.
See "Certain Transactions--Tessier Transaction."
24
Customer support expenses for the year ended December 31, 1997 decreased
14% from $460,569 in 1996 to $398,137 in 1997. This decrease was primarily
caused by lower telecommunications costs and lower payroll in the 1997 period.
Research and development expenses for the year ended December 31, 1997
decreased 32% from $863,749 in 1996 to $586,071 in 1997. The decrease was due
to a lack of funds available for research and development.
Other expense, net for the year ended December 31, 1997 decreased 38%,
from $655,321 in 1996 to $409,317 in 1997. Such decrease resulted primarily
from a penalty of $380,000 for early termination of a lease of office space in
1996, which was offset by an expense of approximately $86,000 related to the
issuance in August 1997 of an aggregate of 13,794 shares of Common Stock to
five persons to cancel certain royalty rights. See Note 6(a) to Notes to
Consolidated Financial Statements of the Company.
As a result of the foregoing factors, the net loss for the year ended
December 31, 1997 decreased $501,518, (or 11.8%) from $4,255,553 in 1996 to
$3,754,035 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed the acquisition of Galacticomm, Inc. in November 1996
and has financed its operations since such time primarily through the sale of
its debt and equity securities in private transactions.
The Company acquired 99.9 percent of the outstanding common stock of
Galacticomm, Inc. in November 1996 and in February 1997 through the issuance of
an aggregate of 116,565 shares of Common Stock and $668,413 in cash
consideration. The cash portion of the acquisition of Galacticomm, Inc. was
financed through investments in the Company by the Wallenberg Trust and UA
Partners, pursuant to which the Company received net proceeds of $2,610,641
from the sale of 324,267 shares of Common Stock and the issuance of secured
convertible promissory notes in the aggregate principal amount of $1,375,000.
One of these notes in the principal amount of $1,250,000, plus accrued interest
thereon, was converted on December 31, 1997 into 328,224 shares of Common
Stock. The second note in the principal amount of $125,000 will be
automatically converted into 29,479 shares of Common Stock on the date of this
Prospectus. See "Certain Transactions--Wallenberg Trust and UA Partners
Investments."
In June 1997, the Company received net proceeds of $844,553 from the sale
of 156,783 shares of Common Stock to nine persons in a private transaction (the
"June 1997 Private Placement"). The Company used $100,000 of the proceeds to
repay its existing credit facility with a financial institution and allocated
the balance of such funds for working capital and general corporate purposes.
In October 1997, the Company completed the 1997 Financing by issuing 42
units of its securities ("Financing Units"), each Financing Unit consisting of
an unsecured non-negotiable promissory note in the principal amount of $50,000
("Financing Note") and a three year warrant (the "1997 Financing Warrant")
exerciseable until October 27, 2000 ("Warrant Expiration Date") to purchase
11,466 shares of Common Stock at $6.21 per share. The Financing Notes, which
bear interest at the rate of 10% per year, are due and will be paid at the
closing of, and from the proceeds of, this offering. See "Use of Proceeds."
Interest payments under the Financing Notes of $140,959 and $105,288 are due
semi-annually on June 30 and December 31, 1998, respectively. The unpaid
principal and accrued interest under the Financing Notes are required to be
paid on the earlier to occur of January 4, 1999 or the closing of this
offering. The holders of the 1997 Financing Warrants have agreed not to
transfer the 1997 Financing Warrants or the shares of Common Stock underlying
such warrants for a period of 12 months following this offering. In exchange
for serving as the placement agent for the 1997 Financing, the Company paid
First Equity Corporation of Florida (one of the Representatives): (i) cash
compensation equal to 10 percent of the principal amount of the Financing
Notes; (ii) a non-accountable expense allowance equal to three percent of the
principal amount of the Financing Notes and certain accountable expenses
totaling $10,000; and
25
(iii) warrants to purchase 96,314 shares of Common Stock on terms substantially
the same as the Financing Warrants, which warrants have been returned to the
Company as canceled. After deducting these expenses and other expenses of the
1997 Financing, the Company received net proceeds of approximately $1,682,000.
The Company used approximately $272,500 from the net proceeds of the 1997
Financing to repay certain indebtedness, including approximately $200,000 of
outstanding amounts under the Company's line of credit with a financial
institution. Approximately $40,000 of the net proceeds from the 1997 Financing
were allocated to build out and make improvements to the Company's office
space, and the balance was allocated for working capital and general corporate
purposes.
The Company has obtained a waiver of default from the holders of the
Financing Notes for the Company's failure to make the scheduled June 30, 1998
interest payment due under the Financing Notes. In exchange for waiving such
default, the Company will: (i) issue to each of the holders of the Financing
Units another warrant to purchase 7,534 shares of Common Stock at a price of
$6.00 per share exercisable until July 1, 2002, (ii) extend the Warrant
expiration date to coincide with the expiration date of the additional warrants
and (iii) reduce the exercise price of all of the 1997 Financing Warrants to
$6.00 per share. The additional warrants contain substantially the same terms as
the 1997 Financing Warrants, except as set forth herein. The fair value of the
additional 316,428 warrants and the incremental fair value of the modified terms
to the 1997 Financing Warrants is approximately $320,000. Such amount will be
recorded by the Company as an increase to additional paid-in capital in the
third quarter of 1998 with the resulting original issue discount (OID) on the
Financing Notes being amortized over the remaining term of the Financing Notes.
The total amount of the OID is expected to be recorded as interest expense in
the third quarter of 1998 as a result of the repayment of the Financing Notes
upon the completion of the offering.
In May 1998, the Company borrowed $125,000 from Kenworthy. The unpaid
principal balance of the Kenworthy Note bears interest at the rate of 10% per
annum. All principal and accrued interest under the Kenworthy Note is required
to be paid on January 1, 1999, unless the aggregate principal and accrued
interest under the note is converted, at the option of Kenworthy, into shares
of Common Stock at the rate of $1.24 per share. The Company used the proceeds
from the loan for working capital.
From June 28 to July 2, 1998, the Company borrowed $175,000 from Peter
Berg, the Chief Executive Officer of the Company, and $125,000 Yannick Tessier,
the President of the Company, of which an aggregate of $247,000 was advanced as
of June 30, 1998. The Company used the proceeds from such loans to pay certain
accrued accounting and legal fees and other payables associated with this
offering. The aggregate principal amount of the loans accrue interest at the
rate of seven percent per annum. All principal and accrued interest is required
to be paid upon the earlier to occur of September 30, 1999 or 12 months from
the completion of this offering. See "Certain Transactions--Berg and Tessier
Transaction."
In August 1998, the Company borrowed an aggregate of $260,000 from four
persons pursuant to non-negotiable 10% unsecured promissory notes which mature
on the earlier of December 31, 1998 or the date of this Prospectus. In exchange
for such loans, the Company issued to the lenders five-year warrants to
purchase an aggregate of 156,000 shares of Common Stock at an exercise price of
$6.00 per share. The warrants may, at the option of the holder, be redeemed at
a price of $.60 per warrant at any time prior to September 30, 1999 if the
Company does not realize net total revenues of at least $5,000,000 for the
fiscal year ending December 31, 1998. The Company will use a portion of the
proceeds from the offering to repay these notes. See "Use of Proceeds."
The Company has a $200,000 line of credit with a bank, which line of
credit is guaranteed by Galacticomm, Inc. and Messrs. Berg and Tessier. As of
June 30, 1998, the Company had borrowed the full amount available under the
line of credit. Borrowings under the line of credit accrue interest at an
annual rate of 1.5% above the applicable prime rate.
The report of the Company's independent public accountants contains an
explanatory paragraph which states that the Company has suffered recurring
losses from operations and has negative working capital, which raises
substantial doubt about the Company's ability to continue as a going concern.
At June 30, 1998, the Company had an accumulated deficit of $7,362,509 and its
current liabilities exceeded its current assets by $4,058,773. In addition, the
Company is not currently generating positive cash flow from operations and
there can be no assurance that the Company will achieve or sustain positive
cash flow from operations or profitability. See "Risk Factors--Independent
Auditor's Report Contains Going Concern Qualification; Losses from Operations;
Accumulated Deficit."
26
The Company anticipates, based on its currently proposed plans and
assumptions relating to operations, that the net proceeds from the sale of the
Securities offered hereby, together with projected cash flow from operations,
will be sufficient to satisfy the Company's contemplated cash requirements for
at least 12 months following the consummation of the offering.
The Company has no material commitments for capital expenditures or lease
obligations other than the lease of its office space. See
"Business--Facilities." The Company intends to use approximately $325,000 of
the net proceeds from this offering to build out and make improvements to its
office space, complete its Year 2000 compliance expenditures and to acquire
office furniture and modules and computer equipment.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 compliance issue. As
the year 2000 approaches, such systems may be unable to accurately process
certain date-based information.
The Company believes that all of the software products which it sells are
Year 2000 compliant. However, hardware and administrative software which the
Company uses in its business will require modification to ensure Year 2000
Compliance. Internal and external resources will be used to make the required
modifications and test Year 2000 compliance. The Company plans to complete the
testing and modification of such hardware and software by June 30, 1999. The
Company estimates that the cost to address Year 2000 issues could be up to
$100,000.
In addition, the Company is communicating with its external service
providers to ensure that such providers are taking the appropriate action to
address Year 2000 issues. However, there can be no assurance that the systems
of third parties on which the Company's systems rely will convert, or that a
conversion that is incompatible with the Company's systems would not have an
adverse effect on the Company's systems.
27
BUSINESS
INTRODUCTION
The Company develops, markets, licenses and supports software that enables
users to communicate and conduct business over the Internet, intranets, or
other online communications systems. The majority of the Company's software
products are derived from the Company's flagship product, Worldgroup v3.1
("Worldgroup") for Windows NT and Windows 95, which is an integrated suite of
five applications: E-mail, Polls and Surveys, Threaded Discussion Groups
(newsgroups), a Document Retrieval Center and Chat. Worldgroup allows an
individual or enterprise to establish an online system, an intranet or website
and to make such an online system accessible through the World Wide Web using a
standard web browser, such as Microsoft Internet Explorer or Netscape
Navigator. The Company estimates that since 1987 Worldgroup and its predecessor
product, The Major BBS, have been installed on more than 10,000 online systems
worldwide, including systems currently operated by Fortune 500 companies,
financial and educational institutions and government agencies. Worldgroup v3.1
is also compatible with Windows 98.
Worldgroup features an open (non-proprietary) set of interfaces, a
scalable infrastructure that can grow with a company's needs, and multiple
means of connectivity, including connectivity to the Internet. Such features
allow Worldgroup to serve as a development platform for specific communication
solutions in a variety of businesses and industries. In conjunction with third
party developers, the Company has designed intranets and other online systems
for specific applications relating to education, small business and online
gaming. Worldgroup's open set of interfaces has allowed third party developers
to design and sell add-ons that supplement Worldgroup's standard features. As a
result, more than 30 independent software developers have designed more than
100 available products including add-ons, that enhance online systems which
utilize Worldgroup. Worldgroup is available in eight languages.
In addition to Worldgroup, the Company currently markets the following
products, each of which utilizes the Worldgroup software platform:
WEBCAST. WebCast allows users to transmit real-time audio and visual
broadcasts, and broadcast pre-recorded videos on demand, over the Internet to
viewers who need only use a standard web browser to receive the broadcast. The
Company markets WebCast directly to individual consumers and to businesses
through VARs and bundling arrangements with camera and other hardware
manufacturers. The Company also seeks to enter into bundling arrangments with
camera and other manufacturers. To date, the Company has entered into
agreements to bundle WebCast with cameras and other hardware sold by Eastman
Kodak Company, Boca Research, Inc., Specom Technologies Corp. and Aztech New
Media Corp.
ACTIBASE. ActiBase enables a company with a web site or an online system
to publish its own databases on its system. ActiBase is compatible with most
common database software available in the market and can be used by persons
with only limited knowledge of computer database programming. ActiBase is
offered as an additional application to Worldgroup. It can also be used on a
stand alone basis to publish a company's database on a web site so such
database can be accessed through the World Wide Web.
WORLDLINK. Worldlink allows a Worldgroup online community to link with
other Worldgroup online systems. The Company believes that the future
development and organization of online communities will result in additional
online systems using Worldgroup.
The Company's objective is to become a leading developer of communications
software for the Internet and for other online systems, including intranet and
online communications systems. The Company intends to achieve its objective by
implementing the following strategies: (i) developing quality software
applications and customized solutions for the individual needs of customers,
using
28
Worldgroup as the foundation; (ii) continuing to upgrade Worldgroup and its
applications and offering new applications that deliver high levels of
performance, ease of use and multi-tiered authorization to information; (iii)
establishing strategic alliances to increase sales and facilitate market
acceptance of the Company's products; (iv) providing timely, high quality
technical support to meet the diverse needs of its customers, VARs and
resellers; and (v) increasing marketing efforts to promote Worldgroup as a
premier communications software product.
INDUSTRY BACKGROUND
THE INTERNET AND THE WORLD WIDE WEB
Online communication has grown dramatically since 1987, when the Company
first began offering communications software. BUSINESS WEEK (May 5, 1997)
reported that it is estimated that over 40 million people exchange information
and communicate electronically using personal computers. By the year 2000, this
number is expected to increase to over 200 million.
The convergence of communications and computers was greatly accelerated in
the 1990s by the market acceptance and commercialization of the Internet, a
global web of computer networks. Developed in 1969, this "network of networks"
allows any computer connected to the Internet to communicate with any other
computer using a common telecommunication protocol. Originally subsidized by
the United States government, funding for the Internet infrastructure and
backbone operations shifted to the private sector in the 1990s as the number of
commercial entities relying on the Internet for business communications and
commerce increased. The rapid growth of the Internet has been caused by the
emergence of a network of servers and information available on the Internet
called the World Wide Web (the "Web"). The Web, which is based on a
client-server model and a set of standards for information access and
navigation, can be accessed using software that allows non-technical users to
exploit the capabilities of the Internet. Electronic documents are published on
Web servers in a common format called the Hypertext Markup Language ("HTML").
Web client software (known as browsers) can retrieve these documents across the
Internet by making requests using a standard protocol called Hypertext Transfer
Protocol ("HTTP"). The most common commercial browsers currently in use are
Microsoft Internet Explorer and Netscape Navigator.
The growth of online communications has created increasing demand for
software solutions that enable users to interact and communicate more
efficiently and effectively. In 1996, Forrester Research, Inc. estimated that
the worldwide Internet software market would increase from $382 million in 1996
to $8.5 billion in 1999. Uses for such software include the following:
INTRANETS AND OTHER ONLINE SYSTEMS
Businesses and other enterprises use personal computers to help their
employees communicate and collaborate with each other. Organizations have
developed Bulletin Board Systems ("BBSs"), local area networks (LANs) and Wide
Area Networks (WANs) and other closed systems (collectively, "Online Systems")
to electronically connect their employees as well as their customers. In
addition, the technology and protocols of the Internet have been applied to
expand the use of private data networks through the development of intranets.
An intranet is a network using the applicable protocol of the Internet that
connects an organization's computers in a way that makes information more
accessible and facilitates a user's navigation through all the resources and
applications of the organization's computing environment. In many instances,
the same software applications in use on the Internet and Online Systems can be
applied to intranets, thereby broadening the market for such software
applications. See "--Worldgroup Customized Applications."
ONLINE COMMERCE
Commercial uses of the Internet and Online Systems include
business-to-business and business-to-consumer transactions, product marketing,
advertising, entertainment, electronic publishing, electronic
29
services and customer support. This medium offers innovative opportunities for
retail and mail order businesses to target and manage a wider customer base.
Companies from many industries are using the Web to publish product and company
information, provide customer support, allow customers to buy products online,
and to collect customer feedback and demographic information interactively. The
Company uses the Internet and Online Systems to offer technical support for
products and save shipping costs by making software updates available
electronically through copying or "downloading" procedures. Other businesses,
such as financial institutions and brokerage firms, are also appearing online
as the Internet provides access to a growing base of home, business and
education customers.
ONLINE COMMUNITIES
Online "communities" are one of the fastest growing areas of the Internet,
according to a report by BUSINESS WEEK (May 5, 1997). An online community is a
network of users that communicate with one another via computer. Online
communities may be commercial or private, small or large. Prior to the advent
of the Internet, online communities existed through Bulletin Board Systems,
which consist of a personal computer running a software program onto which
users would typically connect through a standard telephone line. Many
applications that are now standard on the Internet such as newsgroups, file
transfers and E-mail were initially introduced on BBSs. Software that enabled
the creation of online communities included the Company's "The Major BBS"
software, which the Company offered from 1987 until 1995, when the Company
introduced Worldgroup. The Company believes that, based upon a report on the
Company prepared by an independent third party, The Major BBS, the predecessor
to Worldgroup, was, by 1994, the industry leader in the corporate market
segment for BBS software.
Until recently, online communities were primarily organized for
non-commercial purposes. The attraction to members of these communities is the
ability to interact with users with similar interests locally or worldwide.
Members engage in real-time conversation in chat rooms, post messages on a
variety of topics in newsgroups or on bulletin boards or play interactive
games, known as MUDs. Increasingly, businesses are creating commercial online
communities to attract and make sales to consumers. The premise behind these
commercial online communities is that consumers will visit and stay longer at a
website or Online System where they can interact with others who share a common
interest. To encourage interaction between consumers and to retain users at
their site, businesses have added online chat rooms, bulletin boards, e-mail
and other software applications to their commercial website or Online System.
WORLDGROUP
The Company's communication software applications are designed to connect
people and information over the Internet, intranets and Online Systems. The
majority of the Company's software applications are based on the Company's
flagship product, Worldgroup, a comprehensive software and development tool
that allows users in different locations to exchange ideas and information
using a variety of connection methods, including the Internet, dial up modem,
LANs, WANs, integrated services digital network (ISDN) and serial connection.
Using Worldgroup, businesses can establish an interactive web site (or improve
an existing website), organizations can establish intranets and exchange data
with remote employees, suppliers and customers, and entrepreneurs can create
their own online community similar to services such as America Online, as well
as offer their customers access to the Internet. The Company estimates that
since 1987 Worldgroup software and its predecessor product, "The Major BBS,"
have been installed on over 10,000 online servers worldwide, including systems
currently operated by Symantec Corporation, Motorola, Inc., 3Com Corporation,
Citibank, N.A., the United States Air Force and the National Weather Service.
These servers reach an estimated 1.1 million end-users who use and interact
with the Company's software. Worldgroup software is available in eight
languages.
Worldgroup is both an out-of-the-box product and a development platform
that can be configured to provide communications solutions for different
businesses and industries. One of Worldgroup's main
30
features is its security architecture, which allows the system operator or
administrator to create multi-tiered authorization to information within the
system. Out-of-the-box, Worldgroup is a suite of popular client/server and
web-based applications, including:
ELECTRONIC MAIL. Electronic mail or E-mail allows users to deliver a
private message to others who need not be there when the message arrives.
Worldgroup's E-mail has the following features: file attachments, carbon
copies, mail forwarding, distribution lists, offline filing cabinets, "new
mail" notification, and return receipt.
POLLS AND SURVEYS. This feature allows the Worldgroup system operator or
administrator ("Worldgroup Administrator") to create questionnaires,
application forms or opinion polls to ascertain market research and other
information about customers and other users, and to instantly tabulate and
display the results through the web and other formats.
THREADED DISCUSSIONS. Popularly known as newsgroups, threaded discussions
allow users to post messages and respond to messages posted by others.
DOCUMENT RETRIEVAL CENTER. This application allows users to share programs
and document files. Users can search files by library, category, file
names, file date, and descriptive words. A Worldgroup Administrator can
limit user access to particular files or programs.
CHAT. This application allows users to establish real-time conversations.
Chat enables group meetings where participants can exchange files in real
time with other users while continuing the conversation. The Worldgroup
Administrator can create different channels, each with its own moderator
and topic.
Worldgroup has Active HTML interfaces which permit access to a Worldgroup
server through the Internet using only a standard Web browser. The Company
believes that this "thin client" access, where there is no need to download
client software or employ other controls, makes access to a Worldgroup system
as convenient as accessing any website.
In addition to its thin client capabilities, all Worldgroup applications
continue to be available using the Company's proprietary client software,
Worldgroup Manager. The Company believes that the use of Worldgroup Manager has
many practical advantages over current thin client technology, including
reduced bandwidth needs, greater real time interactivity between users, and the
ability to compute "offline." The Company's client software is offered at no
cost, can be downloaded through the Web and can be launched from the Web
directly through the Worldgroup plug-in for Netscape Navigator and Microsoft
Internet Explorer.
Worldgroup has been designed for multiple connectivity. Users can access a
Worldgroup system through dial-up modems, ISDN and Novell-based networks (SPX),
as well as the Internet and TCP/IP based networks. The Company believes that
multiple connectivity has several advantages over Internet-only connectivity,
including enabling fixed bandwidth connections, alternative access routes if
the primary route is "down" or otherwise not available, and better security for
private transactions. Worldgroup is designed to run on DOS, as well as the
Windows NT and Windows 95 operating systems. Worldgroup is also compatible with
Windows 98.
In addition to being an out-of-the-box product, Worldgroup is a
development platform. The Company believes that one of Worldgroup's key
strengths is its standard set of interfaces and open architecture. Through
Worldgroup's application programming interfaces (APIs) and development kits,
more than 30 independent software vendors have developed and marketed
applications that can be added to an Internet or Online System using
Worldgroup's software. This allows Worldgroup users to pick and choose
additional applications for a Worldgroup system depending on their needs. For
example, if a group calendar/scheduling program is desired, an add-on
application can be integrated into the Worldgroup system. The Company and
independent software vendors currently offer over 100
31
add-on applications for Worldgroup, including add-ons that allow a Worldgroup
system to offer: (i) outgoing online fax service; (ii) an online shopping mall;
(iii) form templates for workflow environments; (iv) video conferencing with
point-to-point broadcast, and video-on-demand; (v) group scheduling; (vi)
online publishing; and (vii) Internet access to users and optional support for
Radius security and accounting protocol for terminal server equipment. Several
of these add-on applications are embedded in the Worldgroup software and
therefore can be electronically distributed to and immediately launched by a
Worldgroup user upon payment of a fee. To allow independent software vendors,
system operators and system integrators to create such add-ons as well as other
customized client-side applications, the Company offers a Worldgroup developer
kit for $699, which contains the source code for the five core Worldgroup
applications and in-depth developer information.
The Company believes that while most sales of Worldgroup have been to
domestic customers, significant opportunities will exist in the future for the
sale of Worldgroup into emerging international markets. It is estimated that
80% of the total demand for Internet access originates in the United States.
One of the primary reasons for the lack of Internet access in other countries
is cost. Consequently, the Company believes that the Worldgroup product
operating as a bulletin board using existing telephone systems (as opposed to
high speed Internet networks) offers an attractive and economically feasible
solution in emerging markets. The Company intends to seek to develop a loyal
customer base in such markets. The Company currently sells its products
worldwide. Worldgroup's ability to offer advanced communications technology to
third world countries has been recognized by the United Nations Development
Programme Global Technology Group, which, in January 1997, selected Worldgroup
to the United Nations Flag Technology Program.
The suggested retail price for Worldgroup for access by eight simultaneous
users is $695. The number of simultaneous users can be increased to up to 256
simultaneous users through the purchase of additional single user packs, at a
price of $49 per pack.
WORLDGROUP CUSTOMIZED APPLICATIONS
Using Worldgroup as the foundation, the Company, working in conjunction
with third party developers, has designed intranets and other online
communications systems for a number of industries and customers, including the
following:
EDUCATION
The Company has designed its Worldgroup software to be used in creating a
classroom intranet designed to connect teachers, students, parents and
administrators to a virtual community. This software offers "managed" Internet
access to schools, enabling students to browse the World Wide Web, but only to
sites approved by teachers and school administrators. The Company's software is
being sold to school systems in the State of Alabama through a VAR specializing
in the education marketplace. In January 1998, the Company entered into a
non-exclusive reseller agreement with Simon & Schuster, Inc., pursuant to which
Simon & Schuster, Inc. acts as a reseller of the Company's education software.
SMALL BUSINESS
The Company, using the Worldgroup platform, is developing a web software
solution called Imodule for small businesses. The Imodule software is being
designed to allow businesses to establish interactive web sites which offer
customers and vendors a means to interact and purchase goods and services from
the Company's data bases and personnel. The software is being developed under a
joint venture agreement with Express Web, Inc. The Imodule software is expected
to be available for shipping in the first quarter of 1999.
ONLINE GAMING
Worldgroup is currently being utilized in the development of online casino
games for both the entertainment and casino marketplace. The Company sells its
software to Aries Consulting which offers
32
a program called Aces Casino. Aces Casino is marketed to domestic and
international casinos who want to provide a non-monetary form of casino gaming
to their casino customers to encourage patronage. The Company has no intent to
offer gaming activities online.
OTHER PRODUCTS
The Company also currently markets the following products, each of which
utilizes the Worldgroup software platform:
WEBCAST
Introduced in March 1997, WebCast is an Internet multi-media software
product which enables users to broadcast real-time or pre-recorded audio and
video and other information displayed on the user's monitor over the Internet
to viewers who need only use a standard web browser to receive the broadcast.
Business and other applications of WebCast include: (i) the ability to have
customer service representatives or technicians talking live with customers,
(ii) the ability to have staff meetings with remote offices, and (iii) parents
away from home checking on their children or other family members. In October
1997, the Company released WebCast v2.0 offering video on demand and audio
capabilities without the need for client software.
The Company currently offers two WebCast products--WebCast Personal and
WebCast Add-on. WebCast Personal is designed for individual users and allows up
to four simultaneous viewers. In addition to its audio and video capabilities,
WebCast Personal provides Chat, caller ID, call blocking and password
authorization. The suggested retail price of WebCast Personal is $49.95.
WebCast Add-on is designed for commercial applications and allows up to
254 simultaneous viewers. The suggested retail price of WebCast Add-on is $995.
The Company markets WebCast directly to individual consumers and to
businesses through VARs and bundling arrangements with camera and other
hardware manufacturers. To date, the Company has entered into agreements to
bundle WebCast with cameras and other hardware sold by Eastman Kodak Company,
Boca Research, Inc., Specom Technologies Corp. and Aztech New Media Corp.
In August 1997, the Company entered into a licensing agreement with Boca
Research, Inc., pursuant to which the Company has granted Boca Research, Inc. a
license to include WebCast and related technology in their modems, video
conferencing and other hardware products, in exchange for royalty payments that
are determined based on the amount and type of product sold by Boca Research,
Inc.
ACTIBASE
ActiBase is an ODBC compliant database connectivity program which is fully
integrated with Worldgroup. ActiBase enables a company to publish its own
database, using the most common database software, directly onto the Web, with
only limited knowledge of computer programming or HTML. ActiBase features
include dynamically generated SQL (structured query language) and HTML Code, a
drag and drop form editor and security options. ActiBase, as a stand alone
product, includes support for eight simultaneous users with user count upgrades
available. ActiBase is also offered as an add-on to Worldgroup.
WORLDLINK
The Company believes that there are at present approximately 500
Worldgroup communities operating with the Company's Worldgroup and/or The Major
BBS software. Unlike larger Online Systems such as America Online and Microsoft
Network, the Company believes that Worldgroup communities are typically formed
by users and entrepreneurs with a common interest in a particular subject (e.g.
horse racing) or by users who are located in the same geographic area. The
Company
33
believes that localized service is attractive to users in much the same way
that a local newspaper appeals to many readers over a national one.
To meet this need, the Company has created Worldlink in order to connect
online Worldgroup systems to each other creating a global network of Worldgroup
communities. Worldlink has been developed to act as a central hub that enables
users of an online Worldgroup system in one location to interact and
communicate with users of a different online Worldgroup system. One of the
Company's objectives is to ultimately create a global network of Worldgroup
communities. The ability of the Company to successfully launch a global network
of Worldgroup communities is subject to a number of risks, many of which (such
as the participation of individual Worldgroup communities) are beyond the
control of the Company. No assurance can be given that the Company will be
successful in promoting the development of a global community of Worldgroup
systems.
SALES, MARKETING AND DISTRIBUTION
The Company markets and distributes its products worldwide through VARs,
resellers and directly to consumers. The Company markets its products on its
Web site, which contains demonstrations, free downloads of certain products and
significant other information regarding the Company's products. The Company
participates annually in trade shows, which typically include Comdex, PC Expo
and Internet World.
The Company intends to increase the sales and distribution of WebCast and
its other products by incorporating promotional versions of the Company's
software into computer hardware, such as web cameras and modems, that are
manufactured and marketed by other companies. Through these bundling
arrangements, end purchasers of the computer hardware have an opportunity to
try the Company's software and, if desired, to purchase a fully-functional
version of the Company's software. These arrangements generally provide that
the Company's software is, at no cost to the Company, advertised on the package
for the hardware product and that the hardware manufacturer receives a
percentage of the purchase price of any software purchased from the Company as
a result of such arrangement. To date, the Company has entered into agreements
with Eastman Kodak Company, Boca Research, Inc., Aztech New Media Corp. and
Specom Technologies Corp. to bundle WebCast with cameras and other computer
hardware products offered by such companies.
The Company is also working with Simon & Schuster, Inc. and several VARs
to sell the Company's software in the education market. The Company intends to
pursue additional VARs and resellers in the education marketplace and will seek
to license and co-brand its products, when appropriate.
The Company's marketing and sales efforts are supported by a sales and
marketing force of five people, three of whom are based at the Company's
headquarters in Ft. Lauderdale, Florida and one each is based in Mexico City,
Mexico and Sao Paulo, Brazil. The Company intends to add up to seven more
employees in sales and marketing following the closing of the offering. There
can be no assurance that such expansion will be successfully completed, or that
the cost of such expansion will not exceed the revenues generated.
PRODUCT DEVELOPMENT
The market for the Company's products is characterized by rapidly changing
technology and frequent new product introductions. The Company's future success
depends on its ability to enhance its existing products and to develop new
products that: (i) incorporate new and evolving industry standards, (ii)
respond to evolving customer requirements, and (iii) achieve market acceptance.
The primary aim of the Company's product development efforts is to identify
emerging online communications technology and standards and develop products
that address evolving market needs. Specifically, the Company intends to
improve and upgrade its existing products, and to develop and introduce new
products that deliver to customers high levels of performance, ease of use and
security.
The Company has incurred significant research and development costs over
the past two years to convert the Company's software to the Internet and
intranet markets. Research and development costs,
34
on a combined pro forma basis, were $863,749 and $586,071 for the fiscal years
ended December 31, 1996 and 1997, respectively, and $222,739 for the six month
period ended June 30, 1998. The Company believes that, consistent with its
business strategy, it will need to spend significant funds for product
development in the future to successfully implement its business strategy. See
"Use of Proceeds."
SERVICES
SUPPORT PROGRAMS
The Company has made a commitment to provide timely, high quality
technical support to meet the diverse needs of its customers and VARs and to
facilitate the purchase and use of its products. Technical support is presently
included at no additional charge with each purchase of the Company's products.
Support for non-current products is charged at a flat rate of $29 per incident.
The Company also publishes a list of answers to frequently asked questions and
hosts a customer support forum on its website.
TRAINING
The Company offers several different training courses to system operators,
integrators and VARs. Topics covered in these courses include system
installation, configuration, administration, security and troubleshooting.
COMPETITION
The communications software industry is intensely competitive. Many of the
Company's competitors are substantially larger and have much greater financial
resources and name recognition than the Company, have longer operating
histories in the Internet, intranet markets and online communications markets
and have greater technical and marketing resources than the Company. To
maintain or increase its position in the industry, the Company will need to
continually enhance its current product line, and introduce new products. There
can be no assurance, however, that the Company will be able to compete
successfully in the future, or that competition will not have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Competition."
Worldgroup faces competition from a number of products that provide for
the exchange of information in ways similar to the applications under
Worldgroup. These include e-mail from Microsoft Exchange, EudoraPro, Netscape
and Lotus Notes and bulletin board servers from Ichat, Eshare and Mirabulis.
Other applications of Worldgroup can also be custom programmed using Microsoft
C++ and other programming languages. While these and other competitive products
offer features similar to Worldgroup, the Company believes that Worldgroup
maintains a competitive advantage over these products in terms of price,
multi-tiered authorization to information, accounting, ease of use, flexibility
and administration, particularly for small user groups.
WebCast competes with products offered by White Pine Software, Inc., Real
Networks, Vxtreme, Inc., Xing Technology Corporation, NetSpeak, Corporation,
VocalTec, Inc., Vivo Software, Inc. and VDOnet Corporation. The Company
competes against these products in terms of price and the fact that no special
client software, other than Netscape Navigator 2.0 or above or Microsoft
Internet Explorer 4.0 or above web browser, is required to view the WebCast
video or audio broadcast stream. See "--Other Products--WebCast."
ActiBase, the Company's Internet database connectivity program, competes
with, among others, Claris' Filemaker Pro, Microsoft's InterDev and Topspeed's
Clarion. The Company competes against these products in terms of price and
product features.
PROPRIETARY RIGHTS AND INTELLECTUAL PROPERTY
The Company regards its software as proprietary and attempts to protect it
with copyrights, trademarks, restrictions on disclosure, copying and
transferring title and enforcement of trade secret
35
laws. Despite these precautions, it is possible for unauthorized third parties
to copy the Company's products and it may be possible for them to obtain and
use information that the Company regards as proprietary. In addition, existing
copyright laws give only limited protection to its software and some foreign
countries' laws do not protect proprietary rights to the same extent as United
States laws. Consistent with the general practice of software developed for
retail sale, the Company licenses its products primarily under "shrink wrap"
license agreements that are not signed by licensees and therefore may be
unenforceable under the laws of certain jurisdictions. Although the Company has
five pending trademark applications with the United States Patent and Trademark
Office (the "PTO"), the Company has only one federal registration, for the
trademark "Galacticomm." No assurance can be given that the PTO will grant
registrations for the Company's pending trademark applications. Among other
things, it is possible that the Company's trademarks could be deemed to be
generic by the PTO, in which case neither the Company nor any third party could
claim exclusive rights to such term. In such event, the Company intends to
associate the generic term with registrable or registered trademarks or logos
in order to gain trademark protection over the resulting composite mark.
In July 1997, the Company became aware of the existence of a third party
which may claim a prior right in the trademark "Worldgroup." The Company and
the third party have had discussions regarding a co-existence arrangement
whereby the Company would have the right, without the payment of a royalty, to
continue to use the trademark "Worldgroup" on its present products and
services. Although the third party does not presently distribute products that
compete with the Company's products, the licensing arrangement proposed would
not preclude the third party from using the "Worldgroup" trademark in
competition with the Company. When the Company releases its next version of
Worldgroup, which is anticipated to occur in the first quarter of 1999, the
Company may elect to use a name other than Worldgroup in order to resolve this
issue and also to reflect what it believes will be the wider array of solutions
that the next version of Worldgroup is expected to offer to users. There can be
no assurance, however, that the change of name will not adversely impact the
Company's revenues and thereby the Company's operating results or financial
condition.
In July 1997, the Company also became aware that several other third
parties filed applications for registration for the trademark "WebCast," before
the Company filed its application. If "WebCast" is determined not to be a
generic term and one of the third party applications is accepted for
registration, then such third party will have superior rights to the Company in
the name "WebCast." See "Risk Factors--Uncertainty Regarding Trademark
Protection."
If a third party has superior rights to any of the Company's trademarks,
the Company believes that when the Company first commenced use of its
trademarks, it acted innocently, unintentionally, and without knowledge of the
existence of any third party's purported rights in such marks. Furthermore, if
the third party user of the "Worldgroup" name decides to enforce its trademark
rights through an infringement action, the Company believes that valid defenses
exist with respect to any such action, including, without limitation, waiver,
estoppel and laches and that as a result thereof, any liability of the Company
should be limited to injunctive relief prohibiting the Company from future use
of such mark.
Trademark litigation is expensive and complex and the outcome of such
litigation is difficult to predict. Generally, if a court were to find that the
Company unintentionally infringed a third party's mark, the Company's liability
would be limited to its actual net profit from the sale of infringing products,
the third party's actual damages, and injunctive relief. However, if a court
were to find that the Company wilfully infringed a third party's trademark, the
Company could be enjoined from further use of the trademark and could be
liable, under the federal Lanham Act, for the lesser of: (i) the Company's net
profit stemming from the sale of infringing products and (ii) the third party's
actual damages, plus three times the greater of: (a) the Company's profit from
the sale of the infringing product, and (b) the third party's actual damages,
plus prejudgment interest, attorneys' fees, and the cost of litigation.
Except to the extent noted above with respect to certain trademarks, the
Company does not believe that its products infringe on the rights of third
parties. The computer software market is characterized by frequent and
substantial intellectual property litigation and it is possible that third
36
parties might assert infringement claims against the Company in the future. If
this occurs, the Company might be forced into costly litigation or have to
obtain a license to the intellectual property rights of others. It is possible
that such licenses may not be available on reasonable terms, or at all.
The Company currently licenses the following technology from third
parties: (i) audio playback for java receiver software from Vosaic LLC
("Vosaic") allows WebCast users to hear live audio through a standard web
browser, pursuant to a Software License Agreement, dated September 19, 1997,
for which the Company pays Vosaic a royalty equal to 7% of the reseller's price
of any WebCast product that includes such software; (ii) multimedia graphical
display technology from Lead Technology, Inc., pursuant to an agreement, for
which the Company pays Lead Technology, Inc. a royalty of $75 for each sale of
Worldgroup Developer's Kit and $20 for each upgrade; (iii) TCP/IP data
transport for Worldgroup for DOS from Pacific Softworks Inc., for which
royalties are limited to a maximum of $30,000; (iv) a database engine for
Worldgroup, ActiBase and WebCast from Novell, Inc. for which no royalties are
paid or payable; and (v) VBX technology for the Worldgroup Manager from
Sheridan Software, for which no royalties are paid or payable. In the future,
these third party technology licenses may not be available to the Company on
commercially reasonable terms, if at all. If the Company cannot maintain any of
these technology licenses, it is possible that product shipments could be
delayed and the Company's financial condition and results of operations could
be adversely impacted.
GOVERNMENT REGULATIONS
The Company does not believe that its business activities are currently
subject to direct regulation by any government agency, other than regulations
applicable to business generally, and there are currently few laws or
regulations directly applicable to access to or commerce on the Internet.
However, due to the increasing popularity and use of the Internet, it is
possible that laws and regulations may be adopted in the future with respect to
the Internet, covering issues such as user privacy, pricing and characteristics
and quality of products and services. For example, Congress recently passed the
Communications Decency Act of 1996 prohibiting the distribution of obscene or
indecent material over the Internet, although this law was recently held
unconstitutional by the United States Supreme Court. The adoption of any such
laws or regulations may decrease the growth of the Internet, which could in
turn decrease the demand for the Company's products and increase the Company's
cost of doing business or otherwise have an adverse effect on the Company's
business, operating results or financial condition.
Furthermore, the application of existing laws governing issues such as
property ownership, libel and personal privacy on the Internet is uncertain.
Because material may be downloaded by an online or Internet service facilitated
by the Company, there is a potential risk that claims may be made against the
Company for defamation, negligence, copyright or trademark infringement or
other theories based on the nature and content of such materials. Although the
Company carries general liability insurance, the Company's insurance may not
cover potential claims of this type, or may not be adequate to indemnify the
Company for all liability that may be imposed. Any imposition of liability that
is not covered by insurance or is in excess of insurance coverage could have a
material adverse effect on the Company's business, results of operations and
financial condition.
FACILITIES
The Company leases 11,129 square feet of office space for its corporate
headquarters in Fort Lauderdale, Florida. The monthly rent under this lease is
$9 per square foot (plus applicable taxes), which amount increases annually by
four percent. The Company has options to extend the lease for up to an
additional six years past its present expiration date in 2001. The Company
intends to use a portion of the proceeds from the offering to further build out
and improve its leasehold to meet the Company's future requirements. See "Use
of Proceeds."
37
EMPLOYEES
As of the date of this Prospectus, the Company employs 19 persons,
including nine in engineering and support, six in sales and marketing, one in
production and six in executive administration and accounting. None of the
Company's employees is currently represented by a union or any other form of
collective bargaining unit. The Company regards its relations with employees as
good.
LEGAL PROCEEDING
A suit was filed against the Company on December 16, 1997 in the United
States District Court for the District of New Mexico (the "Court") by DataSafe
Publications, Inc. ("DataSafe"), a reseller of the Company's products, alleging
price fixing, price discrimination, resale price maintenance, predatory
practices, breach of contract and economic coercion by the Company under
federal antitrust laws and New Mexico state laws. DataSafe sought treble the
amount of its actual damages alleged to be in excess of $1.5 million and costs
and expenses.
On June 1, 1998, the Company and DataSafe entered into a settlement
agreement, pursuant to which DataSafe has filed with the Court a dismissal of
the litigation with prejudice. In consideration of DataSafe's dismissal of the
litigation, the Company has placed in escrow with a third party escrow agent
253,907 shares of Common Stock. DataSafe and the Company have agreed that one
year from the closing of this offering (the "Distribution Date"), the escrow
agent will disburse to DataSafe the lesser of 253,907 shares or the number of
shares of Common Stock determined by dividing $650,000 by the market price (as
defined in the agreement) on the Distribution Date of a share of the Common
Stock. As part of the settlement, the Company has also granted DataSafe certain
demand registration rights with respect to the shares of Common Stock issued to
DataSafe. DataSafe may exercise such rights, commencing 12 months from, and
ending 18 months from, the closing of the offering. While the shares of Common
Stock are in escrow, DataSafe is deemed the owner of such shares with all
attendant voting rights and other privileges. Because litigation of the type
brought by DataSafe is inherently complex and expensive, the costs to defend a
similar action brought by any other reseller or customer of the Company could
have a material adverse effect on the financial condition of the Company.
The Company is also subject to certain other litigation arising in the
ordinary course of business which, in the opinion of management, will not have
a material adverse effect on the financial position and results of operations
of the Company.
38
MANAGEMENT
DIRECTORS, OFFICERS AND KEY EMPLOYEES OF THE COMPANY
The following table sets forth certain information concerning the
directors and executive officers of the Company:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Peter Berg ............... 43 Chief Executive Officer, Secretary, and Director
Yannick Tessier .......... 29 President and Director
David Manovich ........... 46 Chairman of the Board and acting Chief Financial Officer
Timothy Mahoney .......... 41 Director
PETER BERG has served as Chief Executive Officer and Secretary of the
Company since November 1996 and as Chairman of the Board from November 1996
until April 1998. From December 1995 to November 1996, Mr. Berg was the
President of the Company. From 1992 to 1995, Mr. Berg was the Senior Vice
President of Marketing of Integrated Communications Network, Inc. (and its
predecessor company Visions Communications, Inc.), a direct response marketing
firm. Mr. Berg received his bachelor of science degree, Magna Cum Laude, from
Florida State University.
YANNICK TESSIER has served as the President of the Company since November
1996 when TTI was merged into the Company. Prior to joining the Company, Mr.
Tessier was the Chief Executive Officer of TTI, which he founded in 1989. Mr.
Tessier has over 12 years of experience in online software development, systems
integration and product distribution.
DAVID MANOVICH has served as a director of the Company since December
1997, as Chairman of the Board since April 1998 and as acting Chief Financial
Officer since July 1998. Mr. Manovich has over 10 years experience with Apple
Computer, Inc., ("Apple"), where he served in a variety of management and sales
executive positions. From March 1997 until he joined the Company, Mr. Manovich
was executive vice president, worldwide sales and services for Apple. From
January 1992 until January 1996, Mr. Manovich's positions with Apple included
vice president of the consumer sales division, director of channel sales,
director of marketing for the personal computer business division and country
manager for Apple UK. From May 1996 to March 1997, he was vice president of
sales for Fujitsu PC Corporation, where he was responsible for establishing and
managing Fujitsu's retail and distribution channels in the Americas. Mr.
Manovich received a Masters of Business Administration in Finance and a
bachelor of science in business administration from the University of Montana.
Mr. Manovich is a certified public accountant.
TIMOTHY MAHONEY has served as a director of the Company since January
1997. Mr. Mahoney has over 15 years of experience with the operations and
management of technology companies. Mr. Mahoney has, since 1994, served as a
managing member of Union Atlantic, a consulting firm specializing in emerging
technology companies and presently serves as Union Atlantic's designee to the
Board of Directors. He founded and served, from 1991 to 1994, as the president
of the consumer products business for SyQuest Technology, a manufacturer of
removable cartridge disk drives. He also founded and served, from 1986 to 1991,
as the president of Rodime Systems, a computer disk-drive sub-system
manufacturer. Mr. Mahoney received a Masters of Business Administration degree
from George Washington University.
OTHER KEY EMPLOYEES
RICHARD SKURNICK, age 33, has been the Director of Engineering since
January 1998. Since 1989, Mr. Skurnick has been employed by the Company in
various capacities, including Management Information Systems manager. Mr.
Skurnick, who has significant programming experience, served as the Project
Manager for Worldgroup v3.1 and developed the Company's customer database
program.
BILL POSNER, age 49, has served the Company as its Director of Product
Marketing since April 1998. From November 1995 until April 1998, he was
Director of Customer Operations and was responsible
39
for the Technical Support and Customer Service departments. From May 1993 until
he joined the Company, Mr. Posner served as Director of Operations for
Knowledge Based Technologies, Inc., an Internet consulting company.
COMPENSATION OF DIRECTORS
The Company does not presently pay any cash compensation to the directors
of the Company for serving on the board. On January 14, 1997, the Company
granted Claus Stenbaek, then a director, an immediately exercisable three year
option to purchase 3,714 shares of Common Stock at an exercise price of $4.24
per share as consideration for serving on the Board of Directors. On December
15, 1997, the Company granted Mr. Manovich an immediately exercisable three
year option to purchase 18,104 shares of Common Stock at an exercise price of
$6.21 per share as consideration for serving on the Board of Directors.
COMMITTEES OF THE BOARD AND INDEPENDENT DIRECTORS
The Company has established a compensation committee. The compensation
committee, which is comprised of Messrs. Mahoney and Manovich, is responsible
for the review and approval of the compensation of the Company's employees, the
administration of the 1997 Plan and related compensation matters. Within 90
days of the date of this Prospectus, the Company will, in order to meet the
requirements of the Nasdaq SmallCap Market, add at least two additional
independent directors to its Board of Directors and establish an audit
committee comprised of a majority of independent directors.
RIGHTS TO DESIGNATE DIRECTORS
Messrs. Berg and Tessier have, for so long as the Wallenberg Trust
beneficially owns more than 20 percent of the outstanding Common Stock, agreed
to vote their shares in favor of three persons nominated by the Wallenberg
Trust to the Board of Directors of the Company. The persons who acquired shares
of Common Stock from Messrs. Berg and Tessier in June 1998 have the right to
nominate and have elected one person to the Board of Directors of the Company
for a period of two years from the closing of this offering. See "Certain
Transactions--Berg and Tessier Transaction." Union Atlantic has the right to
designate and have elected one person to the Board of Directors of the Company
under the terms of its consulting agreement with the Company. In addition, the
Representatives have the right, for a period of three years from the closing of
this offering to nominate a designee of the Representatives for election to the
Board of Directors of the Company. Other than Union Atlantic, none of the
foregoing persons has exercised his or its right to nominate a person for
election to the Board of Directors.
40
SUMMARY COMPENSATION TABLE
The following table provides the cash and other compensation paid (or
accrued) by Galacticomm Technologies, Inc. to its Chief Executive Officer and
President.
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------ --------------
SECURITIES
NAME AND FISCAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS COMPENSATION
------------------ ------- ---------------- ------- -------------- -------------
Peter Berg, 1997 $ 170,961 -- 106,973 --
Chief Executive Officer 1996 $ 73,461 -- -- --
1995 $ 0 -- -- --
Yannick Tessier, 1997 $ 170,961 -- 106,973 --
President 1996 $ 21,538(1)
----------------
(1) Represents salary to Mr. Tessier subsequent to his joining the Company in
November 1996.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the stock option grants to the Company's
Chief Executive Officer and President made during the fiscal year ended
December 31, 1997. No stock appreciation rights have been granted to date.
% OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR PRICE PER SHARE DATE
---- ----------------- ----------------- ------------------ -----------
Peter Berg 106,973 34% $ 6.20 (1)
Yannick Tessier 106,973 34% $ 6.20 (1)
----------------
(1) Such options expire in one-third increments on November 20, 2002, November
20, 2003 and November 20, 2004. See "--Employment Agreements."
FISCAL YEAR-END OPTION VALUES
The following table provides information about the number and value of
options held by the Company's Chief Executive Officer and President at December
31, 1997.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
------------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------- --------------- ------------- --------------
Peter Berg 35,658 71,315 $ 0 $ 0
Yannick Tessier 35,658 71,315 $ 0 $ 0
----------------
(1) There was no public trading market for the Common Stock as of December 31,
1997. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $6.00 per share of Common Stock,
less the exercise price of $6.20 per share.
EMPLOYMENT AGREEMENTS
In June 1998, the Company entered into an amended employment agreement
with each of Peter Berg, the Chief Executive Officer of the Company, and
Yannick Tessier, the President of the Company. Each employment agreement
provides for an annual salary of $138,000 for each officer, which salary will
increase each contract year by 10 percent of the prior year's salary. Messrs.
Berg and Tessier are also eligible to receive an annual cash bonus at the
discretion of the Compensation Committee of the Board of Directors. Pursuant to
their respective employment agreements, Messrs. Berg and Tessier have each been
granted options to purchase 106,973 shares of Common Stock at an exercise price
of
41
$6.20 per share. One-third of such options vested on November 21, 1997,
one-third vest on November 21, 1998 and the final one-third vest on November
21, 1999. Such options expire five years after the respective dates of vesting.
Pursuant to the terms of their respective employment agreements, the Company
provides Messrs. Berg and Tessier with a term life insurance policy in the
amount of $1,000,000.
The employment agreements provide for a three-year term that expires
November 20, 1999, which term may be terminated earlier by the Company with or
without cause (as defined in the employment agreements). Such employment
agreements may be terminated earlier by the employee, upon 45 days' prior
written notice, with or without cause.
Pursuant to the employment agreements, the Company has agreed to indemnify
each of Messrs. Berg and Tessier to the fullest extent permitted by law for any
action related to his employment with the Company or for serving as a director
of the Company.
Each of the Company's employment agreements with Messrs. Berg and Tessier
imposes prohibitions against the disclosure of confidential information and
contains non-compete provisions. There can be no assurance that these
provisions will protect the Company from unauthorized disclosure or use of its
proprietary information, nor can there be any assurance that these provisions
will be held enforceable in whole or in part by a court if they are contested
by an employee.
COMPENSATION ARRANGEMENTS WITH CHAIRMAN
The Company has entered into an agreement, dated as of June 23, 1998, with
David Manovich, pursuant to which he is responsible for managing the business,
affairs, property and personnel of the Company, subject only to the supervision
of the Board of Directors. Mr. Manovich is required to devote such time to the
Company's affairs as is required to fulfill his duties under the agreement. The
agreement provides for monthly payments to Mr. Manovich of $10,000 and
reimbursement of all business expenses.
Mr. Manovich's agreement with the Company expires 12 months from the
closing of the offering, unless extended for successive one-year periods upon
the mutual consent of both parties. However, the agreement can be terminated by
the Company for any reason after the six month anniversary date of the
completion of this offering on 90 days' prior written notice. In such event,
the Company is required to pay Mr. Manovich $60,000 in a lump sum.
If there is a change in control of the Company, all amounts owed to Mr.
Manovich under the agreement are required to be paid to him on the date of such
event, and the agreement automatically will be extended for one year from the
expiration date of the then-current term of the agreement. A change in control
is defined in the agreement to occur when: (i) any person (other than Messrs.
Berg or Tessier) becomes the beneficial owner of or acquires voting control
with respect to 50 percent of the Company's voting securities, or (ii) the
shareholders of the Company approve the sale of all or substantially all of the
assets of the Company.
Pursuant to the terms of the agreement with Mr. Manovich, the Company
granted him options to purchase up to 120,694 shares of Common Stock. The
exercise price of all vested options is $5.22 per share. All options that vest
after this offering will have an exercise price of $5.40 per share. Pursuant to
the terms of the options, 12,069 shares vested on June 5, 1998 and 9,052 shares
each will vest on June 5, 1999 and 2000. An additional 15,087 shares will vest
upon the closing of this offering and an additional 15,087 shares each will
vest on the first and second anniversary of the closing of this offering.
Another 15,087 shares will vest when the Company attains positive net income
after taxes in any fiscal quarter up through the quarter ended December 31,
1999. Thereafter, an additional 15,087 shares each will vest on the first and
second anniversary of the Company attaining such positive net income after
taxes. In the event of a change in control of the Company (as defined in the
preceding paragraph), all of the options granted to Mr. Manovich will vest on
the date of such event. All of the options expire three years from their
respective vesting dates.
42
STOCK OPTION PLAN
The Company has adopted the 1997 Stock Option Plan (the "1997 Plan").
Pursuant to the 1997 Plan, options to acquire a maximum of 223,284 shares of
Common Stock may be granted to directors, executive officers, employees
(including employees who are directors), independent contractors and
consultants of the Company. Options to purchase 50,886 shares at an exercise
price of $6.00 per share are presently outstanding under the 1997 Plan, none of
which are currently exercisable.
The 1997 Plan is administered by the Compensation Committee of the Board
of Directors. The Compensation Committee determines which persons will receive
options and the number of options to be granted to such persons. The
Compensation Committee also interprets the provisions of the 1997 Plan and
makes all other determinations that it may deem necessary or advisable for the
administration of the 1997 Plan. No more than 22,328 options may be granted to
a single person in any fiscal year.
Pursuant to the 1997 Plan, the Company may grant ISOs (Incentive Stock
Options) and NQSOs (Non-Qualified Stock Options). The price at which the Common
Stock may be purchased upon the exercise of ISOs granted under the 1997 Plan is
required to be at least equal to the per share fair market value of the Common
Stock on the date particular options are granted. Options granted under the
1997 Plan may have maximum terms of not more than 10 years and are not
transferable, except by will or the laws of descent and distribution. None of
the ISOs under the 1997 Plan may be granted to an individual owning more than
10 percent of the total combined voting power of all classes of stock issued by
the Company unless the purchase price of the Common Stock under such option is
at least 110 percent of the fair market value of the shares issuable on
exercise of the option determined as of the date the option is granted, and
such option is not exercisable more than five years after the grant date. ISOs
granted under the 1997 Plan are subject to the restriction that the aggregate
fair market value (determined as of the date of grant) of options which first
become exercisable in any calendar year cannot exceed $100,000. Generally,
options granted under the 1997 Plan may remain outstanding and may be exercised
at any time up to six months after the person to whom such options were granted
is no longer employed or retained by the Company or serving on the Company's
Board of Directors.
Pursuant to the 1997 Plan, unless otherwise determined by the Compensation
Committee, one-fourth of the options granted to an individual are exercisable
180 days after grant, one-fourth are exercisable on the first anniversary of
such grant, one-fourth are exercisable on the second anniversary and the final
one-fourth are exercisable on the third anniversary of such grant. However,
one-half of all outstanding options under the 1997 Plan shall become
immediately exercisable upon a "change in control" of the Company. The
remaining one-half of the outstanding options shall become exercisable upon the
first anniversary of a "change in control" of the Company. A "change in
control" is generally deemed to occur when: (i) any person (other than Messrs.
Berg or Tessier) becomes the beneficial owner of or acquires voting control
with respect to more than 50 percent of the Common Stock, (ii) a change occurs
in the composition of a majority of the Company's Board of Directors during a
two-year period, provided that a change with respect to a member of the
Company's Board of Directors shall be deemed not to have occurred if the
appointment of a member of the Company's Board of Directors is approved by a
vote of at least 75 percent of the individuals who constitute the then existing
Board of Directors, or (iii) the shareholders of the Company approve the sale
of all or substantially all of the assets of the Company.
The 1997 Plan provides for appropriate adjustments in the number and type
of shares covered by the 1997 Plan and options granted thereunder in the event
of any reorganization, merger, recapitalization or certain other transactions
involving the Company.
INDEMNIFICATION PROVISIONS
Pursuant to the Company's Articles of Incorporation and Bylaws, officers
and directors of the Company are entitled to be indemnified by the Company to
the fullest extent allowed under Florida law for claims brought against them in
their capacities as officers and directors. Indemnification is allowed if
43
the officer or director acts in good faith and, in the case of conduct in his
official capacity, in a manner reasonably believed to be in the best interests
of the Company, or in all other cases, with a reasonable belief that his
conduct was at least not opposed to the Company's best interests. In the case
of criminal proceedings, it is necessary that an officer or director have no
reasonable cause to believe his conduct was unlawful. In addition, the Company
has agreed to indemnify Messrs. Berg and Tessier pursuant to their employment
agreements with the Company. See "--Employment Agreements." Accordingly, it is
possible that indemnification may occur for liabilities arising under the
Securities Act. The Underwriting Agreement also contains provisions under which
the Company and the Underwriters have agreed to indemnify each other (including
officers and directors) against certain liabilities under the Securities Act.
See "Underwriting." Insofar as indemnification for liabilities arising under
the Securities Act may be permitted for directors, officers and controlling
persons of the Company pursuant to the foregoing provisions or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
44
CERTAIN TRANSACTIONS
TESSIER TRANSACTION
Pursuant to a Stock Issuance Agreement, dated August 26, 1996, among the
Company, Peter Berg and Yannick Tessier, the Company agreed to issue to Mr.
Tessier shares of Common Stock equal to the number of shares of Common Stock
held by Peter Berg. The Company committed to issue these shares to Mr. Tessier
in consideration for his efforts in founding and organizing the Company's
software platform and computer infra-structure. When the Company completed its
merger with TTI, the Company issued Mr. Tessier 733,669 shares of Common Stock
pursuant to its obligations under the Stock Issuance Agreement. In connection
with the merger, two former shareholders of TTI received an aggregate of 40,091
shares of Common Stock in exchange for their shares of TTI common stock. Mr.
Tessier was elected to the Board of Directors of the Company and was appointed
the President of the Company upon completion of such transaction. A Worldgroup
online community operated by Mr. Tessier that was initially excluded from the
assets acquired by the Company in the merger with TTI was subsequently acquired
by the Company in June 1997 for $30,000, payable in 12 equal monthly
installments. Mr. Tessier advanced $50,000 to TTI in 1996 to fund operations
and was issued a 10% note in the amount of $50,000, which becomes payable by
the Company on the date of this Prospectus. See "Use of Proceeds."
WALLENBERG TRUST AND UA PARTNERS INVESTMENTS
Effective November 21, 1996, the Company raised a total of $2,750,000 from
the sale of shares of Common Stock and convertible notes to Hemingfold
Investments, Ltd. ("Hemingfold") and Union Atlantic Partners I Limited ("UA
Partners"). On November 21, 1996, the Company used approximately $611,476 of
such proceeds to acquire substantially all of its interests in the shares of
Galacticomm, Inc. See "--Acquisition of Galacticomm, Inc." The remaining
proceeds of this funding were allocated to working capital. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In September 1997, Hemingfold transferred all of its rights and interests
in the agreements described below to Kenworthy, a wholly-owned subsidiary of
the Wallenberg Trust, an affiliate of Hemingfold. Accordingly, references to
the Wallenberg Trust below and elsewhere in this Prospectus refer to Hemingfold
for all periods prior to such transfer.
In connection with the transaction with the Wallenberg Trust, the Company
entered into a Stock Purchase Agreement (the "Wallenberg Trust Stock Purchase
Agreement"), whereby the Wallenberg Trust received 294,788 shares of Common
Stock in exchange for $1,250,000 in cash or $4.24 per share. Pursuant to the
Wallenberg Trust Stock Purchase Agreement, the Wallenberg Trust was originally
granted the following rights with respect to such shares of Common Stock: (i)
piggyback registration rights ("Piggyback Registration Rights") for up to four
registrations; (ii) demand registration rights ("Demand Registration Rights")
for one registration; (iii) tag-along rights ("Tag Along Rights") that require
that such shares be included on a pro rata basis in certain sales of Common
Stock by either Peter Berg or Yannick Tessier; and (iv) bring along rights
("Bring Along Rights") that require that such shares be included on a pro rata
basis in certain offers for the purchase of the Common Stock of either Peter
Berg or Yannick Tessier for a three year period ending November 20, 1999. The
Wallenberg Trust Stock Purchase Agreement originally provided that the shares
acquired by the Wallenberg Trust would additionally be granted: (x) certain
anti-dilution rights if the Company issues securities below $4.24 per share;
(y) preemptive rights for any issuance of the Company's securities; and (z)
certain rachet rights which would have entitled the Wallenberg Trust to receive
approximately 149,104 shares of Common Stock if the Company's after tax
earnings for the year ended December 31, 1997 were less than $1,000,000 and
approximately 74,552 shares of Common Stock if the Company's after tax earnings
for such period were between $1,000,000 and $1,500,000.
By letter agreement, dated September 8, 1997, the ratchet rights were
waived in exchange for the Company's September 1997 issuance of 49,029 shares
of Common Stock to the Wallenberg Trust. As
45
part of that letter agreement, the Wallenberg Trust agreed to automatically
waive its anti-dilution and preemptive rights from and after the date of this
Prospectus. Messrs. Berg and Tessier have, for so long as the Wallenberg Trust
beneficially owns more than 20 percent of the outstanding Common Stock, agreed
to vote their shares in favor of three persons nominated by the Wallenberg
Trust to the Board of Directors of the Company. See "Management--Rights to
Designate Directors" and "Principal Shareholders." To date, the Wallenberg
Trust has not exercised its right to add additional directors.
Simultaneous with the Wallenberg Trust Stock Purchase Agreement, the
Wallenberg Trust loaned the Company $1,250,000 and received a Convertible
Promissory Note (the "Wallenberg Trust Note"), dated November 21, 1996. On
December 31, 1997, the Wallenberg Trust converted all principal and interest
($1,391,781) outstanding under such note into 328,224 shares of Common Stock
based upon the conversion rate of $4.24 per share set forth in the Wallenberg
Trust Note. The shares of Common Stock issued upon conversion of the Wallenberg
Trust Note have been granted the same Piggyback Registration, Demand
Registration, Tag Along and Bring Along Rights as those granted in connection
with the Wallenberg Trust Stock Purchase Agreement.
On November 21, 1996, the Company entered into a Stock Purchase Agreement
(the "UA Partners Stock Purchase Agreement") with UA Partners, pursuant to
which UA Partners acquired 29,479 shares of Common Stock for cash consideration
of $125,000 or $4.24 per share and loaned the Company $125,000. In exchange for
the loan, the Company issued a Convertible Promissory Note ("UA Partners Note")
to UA Partners. Other than the number of shares purchased and amount loaned,
the terms of the UA Partners Stock Purchase Agreement and the UA Partners Note
are identical in all material respects to the Wallenberg Trust Stock Purchase
Agreement and the Wallenberg Trust Note (since converted). By letter agreement,
dated September 8, 1997, UA Partners waived the ratchet rights originally set
forth in the UA Partners Stock Purchase Agreement in exchange for the Company's
September 1997 issuance of 4,457 shares of Common Stock. As part of that letter
agreement, UA Partners agreed to automatically waive its anti-dilution and
preemptive rights effective on the date of this Prospectus. The outstanding
principal of the UA Partners Note will be automatically converted into 29,479
shares of Common Stock (based upon a conversion price of $4.24 per share) as of
the date of this Prospectus. Interest on such note accrues at a rate of 10% per
year and will be paid from the proceeds of this offering. See "Use of
Proceeds." The UA Partners Note is secured by, among other things, the
accounts, inventory, equipment and general intangibles of the Company, which
security interest will terminate upon conversion of such note and the payment
of all accrued interest.
In connection with their loans to the Company, the Wallenberg Trust and UA
Partners entered into an Intercreditor Agreement with the Company and Union
Atlantic. Pursuant to this agreement, the Wallenberg Trust and UA Partners have
appointed Union Atlantic to serve as their collateral agent with respect to the
loans made to the Company under the Wallenberg Trust Note and the UA Partners
Note and have agreed that, in the event of default by the Company under such
notes, the parties will share any payments in proportion to the amount
outstanding under their respective notes from the Company.
The Wallenberg Trust purchased 40,373 shares of Common Stock in the June
1997 Private Placement and 10 Units in the 1997 Financing. UA Partners
purchased two Financing Units in the 1997 Financing. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
In May 1998, Kenworthy loaned the Company $125,000 and received a Secured
Convertible Promissory Note (the "Kenworthy Note"), dated May 7, 1998. The
unpaid principal balance of the Kenworthy Note bears interest at the rate of
10% per annum. All principal and accrued interest under the Kenworthy Note is
required to be paid on January 1, 1999. Subject to certain adjustments, the
aggregate principal and accrued interest under the Kenworthy Note can be
converted into shares of Common Stock at the rate of $1.24 on demand by
Kenworthy. The shares received upon conversion of the Kenworthy Note will have
the same Piggyback Registration, Demand Registration, Tag Along and Bring Along
Rights as those granted in connection with the Wallenberg Trust Stock Purchase
46
Agreement. In connection with the loan, the Company granted Kenworthy a
security interest in its assets which is subordinate to the security interests
previously granted by the Company to Union Planters Bank (the successor to
Capital Bank) and UA Partners. Until all amounts due under the Kenworthy Note
have been paid, the Company is prohibited from paying any dividends to its
shareholders.
CONSULTING AGREEMENTS WITH UNION ATLANTIC
The Company has engaged the services of Union Atlantic since November
1996. Union Atlantic is a consulting firm specializing in emerging technology
companies. Timothy Mahoney, who is a managing member of Union Atlantic, is also
a director of the Company. See "Management--Directors, Officers and Key
Employees of the Company" for additional information regarding Mr. Mahoney's
experience with respect to the operations and management of technology
companies. Pursuant to one of two consulting agreements that the Company has
entered into with Union Atlantic, Union Atlantic is entitled to receive a
monthly fee of $10,000 until June 30, 2001 for providing consulting services
with respect to the Company's operations, administration, corporate development
and marketing and distribution strategies. Union Atlantic owns all of the
outstanding voting securities of UA Partners, which acquired 29,479 shares of
Common Stock and the UA Partners Note in November 1996. See "--Wallenberg Trust
and UA Partners Investments." In connection with the UA Partners investment,
the Company paid Union Atlantic the following amounts for identifying the
Wallenberg Trust to the Company: (i) cash compensation of $357,500; (ii) a
three-year warrant to purchase 84,310 shares of Common Stock at an exercise
price of $4.24 per share with Demand and Piggyback Registration Rights; and
(iii) 47,152 shares of Common Stock. Similarly, the Company paid Union Atlantic
the following amounts for identifying investors in the June 1997 Private
Placement: (y) cash compensation of $126,209; and (z) a three-year warrant to
purchase 20,382 shares of Common Stock at an exercise price of $6.20 per share
with Demand and Piggyback Registration Rights. Pursuant to the consulting
agreement between Union Atlantic and the Company, Union Atlantic has designated
Mr. Mahoney as its representative to the Company's Board of Directors.
Pursuant to its second consulting agreement with the Company, from January
1997 to December 1997, Union Atlantic provided the Company with the services of
Robert O'Brien. The Company was required to pay Union Atlantic a fee of $7,000
per month for Mr. O'Brien's services and agreed to reimburse Mr. O'Brien for
business expenses approved by the Company. Pursuant to such consulting
agreement, the Company granted Mr. O'Brien an immediately exercisable, three
year option to purchase 1,486 shares of Common Stock at an exercise price of
$4.24 per share. The shares of Common Stock underlying such option have been
granted Demand and Piggyback Registration Rights. Mr. O'Brien has also been
granted an option to purchase 4,457 shares of Common Stock at a per share price
of $6.00 under the 1997 Plan.
Union Atlantic has agreed to forebear taking action against the Company
for collection of approximately $170,000 due under its consulting agreements,
in exchange for a commitment from the Company to pay such amount on the closing
date of the offering and for the issuance of warrants to purchase 120,000
shares of Common Stock at a price of $6.00 per share exercisable until four
years from the date of this Prospectus.
ACQUISITION OF GALACTICOMM, INC.
The Company owns 99.9% of Galacticomm, Inc.'s common stock. In November
1996, the Company acquired 8,037,203 shares of the common stock of Galacticomm,
Inc. (representing approximately 96% of Galacticomm, Inc.'s then issued and
outstanding shares of common stock) in exchange for the issuance of 90,679
shares of Common Stock and cash of $611,476. In February 1997, the Company
acquired an additional 848,404 shares of the common stock of Galacticomm, Inc.
in exchange for the issuance of 25,886 shares of Common Stock and cash
consideration of $56,937. For a discussion of costs related to this
acquisition, see "--Consulting Agreements with Union Atlantic."
47
BERG AND TESSIER TRANSACTION
From June 28 to July 2, 1998, Peter Berg, the Chief Executive Officer of
the Company, and Yannick Tessier, the President of the Company, sold 141,129
and 100,806 shares owned by them, respectively, to 16 private investors for an
aggregate purchase price of $300,000, or $1.24 per share of Common Stock. Such
per share amount is approximately $4.76 below the per share price of the Common
Stock offered hereby. Messrs. Berg and Tessier have advised the Company that
the price of the shares sold by them was determined by negotiation between
Messrs. Berg and Tessier and the purchasers. Among the factors considered by
Messrs. Berg and Tessier in such negotiation were: (i) their inability to
obtain funds on better terms from alternative sources; (ii) the fact that no
assurance could be given that this offering would be completed on a timely
basis if at all; (iii) the requirement of the purchasers not to dispose of such
shares for a one-year period following the date of this Prospectus; and (iv)
the $1.24 conversion price of the Kenworthy Note issued by the Company in May
1998. The proceeds of such sale were loaned to the Company and the Company used
the funds to pay certain accrued accounting and legal fees associated with this
offering. The Company issued promissory notes to Mr. Berg and Mr. Tessier in
the aggregate principal amount of $175,000 and $125,000, respectively. The
aggregate principal amount of the notes accrues interest at the rate of seven
percent per annum. The effective interest rate on these notes was estimated at
20%, using current interest rates at which similar loans would be made to
borrowers with similar credit ratings and remaining maturities. The difference
of approximately $33,000 between the effective interest rate and the stated
interest rate on the $247,000 advanced as of June 30, 1998 is included in
additional paid-in capital in the Company's consolidated balance sheet at June
30, 1998, contained elsewhere in this Prospectus. All principal and accrued
interest under the notes is required to be paid upon the earlier to occur of
September 30, 1999 or 12 months from the completion of this offering.
In order to induce the investors to purchase the shares of Common Stock
sold by Messrs. Berg and Tessier, the Company granted the investors the right
to nominate and have elected one person to serve on the Board of Directors of
the Company out of a total of not more than nine directors for a period of two
years from the date hereof. In addition, the Company granted the investors the
following rights: (i) tag-along rights that require that the shares of Common
Stock of the investors be included on a pro rata basis in any sales of Common
Stock by Peter Berg and/or Yannick Tessier; (ii) piggyback registration rights,
commencing 12 months from the closing of this offering; and (iii) certain anti-
dilution rights if the Company issues securities below $1.24 per share.
Although the Company may have lacked sufficient disinterested independent
directors to ratify one or more of the foregoing transactions at the time that
they were initiated, the Company believes that the foregoing transactions
between the Company and its officers, directors and five percent or greater
shareholders were on terms no less favorable to the Company than those which
could have been obtained from unaffiliated parties. Any future material
transactions between the Company and its officers, directors or five percent or
greater shareholders will be on terms no less favorable to the Company than
could be obtained from unaffiliated parties.
48
PRINCIPAL SHAREHOLDERS
The following table sets forth with respect to: (i) each person (or group)
who is known by the Company to own beneficially more than 5% of the Common
Stock, (ii) each of the Company's directors, (iii) each of the named executive
officers, and (iv) all directors and executive officers of the Company as a
group, certain information with respect to the beneficial ownership of the
Company's outstanding Common Stock as of the date of this Prospectus and as
adjusted to reflect the sale by the Company of the Shares offered hereby.
Unless otherwise specified, the address of each shareholder is the address of
the Company set forth herein.
PERCENTAGE BENEFICIALLY OWNED(1)
SHARES BENEFICIALLY -----------------------------------
NAME OF BENEFICIAL OWNER OWNED(2) BEFORE OFFERING AFTER OFFERING
------------------------ ----------------------- ----------------- ---------------
Peter Berg ......................................... 568,198(3) 19.2% 11.9%
Yannick Tessier .................................... 608,521(4) 20.6% 12.7%
Peder Sager Wallenberg Charitable Trust ............ 925,712(5) 29.5% 18.7%
Bayard Trust Company, Limited ...................... 925,712(5) 29.5% 18.7%
Mees Pierson Management (Guernsey) Limited ......... 925,712(5) 29.5% 18.7%
Insinger S.A. ...................................... 1,217,893(5)(6) 38.2% 24.4%
DataSafe Publications, Inc. ........................ 253,907(7) 8.7% 5.3%
Timothy Mahoney .................................... 155,106(6) 5.2% 3.2%
David Manovich ..................................... 45,260(8) 1.5% *
All directors and executive officers
as a group (four persons) ........................ 1,377,085 44.5% 28.1%
----------------
* Less than one percent.
(1) Percentage of ownership is based on 2,922,849 shares of Common Stock
outstanding immediately prior to the offering and 4,722,849 shares of
Common Stock outstanding immediately after this offering. All such amounts
include 29,479 shares of Common Stock underlying the UA Partners Note that
will be automatically converted on the effective date of this Prospectus.
See "Certain Transactions--Wallenberg Trust and UA Partners Investments."
(2) Calculated pursuant to Rule 13d-3(d)1 of the Securities Exchange Act of
1934. Shares not outstanding that are subject to options or other rights
exercisable by the holder thereof within 60 days of the date of this
Prospectus are deemed outstanding for the purposes of calculating the
number and percentage owned by such shareholder and all directors and
officers as a group, but not deemed outstanding for the purpose of
calculating the percentage owned by each other shareholder listed. In
connection with the Underwriting Agreement, Messrs. Berg and Tessier will
on the closing of the offering enter into a Voting Agreement with the
Company, pursuant to which Messrs. Berg and Tessier will agree, for a
period of two years following the closing of this offering, to vote all
voting securities beneficially owned by them in the same proportion as the
votes cast by non-affiliates of the Company in any vote of the
shareholders of the Company on the following two matters: (i) a
liquidation of the Company; or (ii) any business combination in which the
Company is not the surviving corporation or any sale of all or
substantially all of the Company's assets. See "Underwriting."
(3) Includes: (i) 35,658 shares of Common Stock underlying presently
exercisable options having an exercise price of $6.20 per share, and (ii)
22,270 shares of Common Stock over which Mr. Berg has granted options to a
total of nine persons to purchase such shares at a per share exercise
price of $5.05. Does not include options granted to Mr. Berg to purchase
an aggregate of 71,315 shares of Common Stock which are not exercisable
within 60 days of the date hereof. Such options were granted to Mr. Berg
in connection with Mr. Berg's employment agreement with the Company.
(4) Includes: (i) 35,658 shares of Common Stock underlying presently
exercisable options having an exercise price of $6.20 per share, and (ii)
22,303 shares of Common Stock over which Mr. Tessier has granted options
to a total of five persons to purchase such shares at a per share exercise
price of $5.05. Does not include options granted to Mr. Tessier to
purchase an aggregate of 71,315 shares of Common Stock which are not
exercisable within 60 days of the date hereof. Such options were granted
to Mr. Tessier in connection with Mr. Tessier's employment agreement with
the Company.
(5) Includes: (i) 328,224 shares of Common Stock acquired upon the conversion
of Wallenberg Trust Note; (ii) 114,659 shares of Common Stock underlying
1997 Financing Warrants; and (iii) 100,579 shares of Common Stock which
may be acquired upon the conversion of the Kenworthy Note on the date
hereof. Wallenberg Trust has waived its preemptive rights regarding the
issuance of the Company's securities from and after the date of this
Prospectus. See "Certain Transactions--Wallenberg Trust and UA Partners
Investments." The trustees of the Wallenberg Trust are Bayard Trust
Company Limited ("Bayard") and Mees Pierson Management (Guernsey), Limited
("Mees Pierson"). Bayard is a wholly-owned subsidiary of Insinger S.A. and
has designated two of its directors--Martyn D. Crespel and John B.
Wilson--to act on behalf of Bayard. Mees Pierson is a subsidiary of Fortis
AG and Fortis AMEV (collectively "Fortis") and has designated two of its
directors--Paul Backhouse and Julie Scott--to act on behalf of Mees
Pierson. Integro Trust (Jersey) Ltd., a subsidiary of Insinger S.A.,
serves as trustee for three trusts--the Hive Trust, the Coach Trust and
the Cascade Trust--that beneficially own an aggregate of 155,220 shares of
Common Stock. Insinger S.A., a publicly-traded Luxembourg bank holding
company, disclaims any pecuniary interest in such shares or in the
Wallenberg Trust shares for which Bayard or Integro Trust (Jersey) Ltd.
serves as the trustee.
49
Mr. Crespel, who serves as a director of Integro Trust (Jersey) Ltd.,
separately beneficially owns 16,388 shares of Common Stock. Insinger S.A.
also beneficially owns 136,961 shares of Common Stock beneficially owned by
Bayard Management Services (BVI) Limited, a wholly-owned subsidiary of
Insinger S.A. and one of the managing members of Union Atlantic L.C. For a
description of such securities, see footnote 6 immediately below. Peder
Sager Wallenberg disclaims any beneficial ownership of the shares of Common
Stock owned beneficially or of record by the Wallenberg Trust. The address
of Bayard and the Wallenberg Trust is c/o Bayard, 2nd Floor, Queen's House,
Don Road, St.Helier Jersey JEI 4HP, Channel Islands, Great Britain. The
address of Insinger S.A. is Residence Centre du St Esprit, 1A, rue du St
Esprit, L-1475, Luxembourg. The address of Mees Pierson and Fortis, an
international insurance, banking and investment company, is Boulevard Emile
Jacqmain 53, 1000 Brussels, Belgium.
(6) Represents: (i) warrants to purchase an aggregate of 34,897 shares of
Common Stock distributed by Union Atlantic, L.C. ("Union Atlantic") to the
managing members of Union Atlantic; (ii) 15,717 shares of Common Stock
distributed by Union Atlantic to the managing members of Union Atlantic;
(iii) 29,479 shares of Common Stock, issuable to Union Atlantic Partners
I, Limited ("UA Partners") upon conversion of the UA Partners Note; (iv)
47,624 shares of Common Stock owned by UA Partners; (v) 4,457 shares
issued to UA Partners to cancel certain ratchet and other rights; and (vi)
22,932 shares of Common Stock underlying the 1997 Financing Warrants. Does
not include 120,000 shares of Common Stock underlying warrants which are
not exercisable within 60 days of the date hereof. See "Certain
Transactions."
(7) Represents 253,907 shares held in escrow pursuant to the settlement of
certain litigation brought by DataSafe Publications, Inc. against the
Company. See "Business--Legal Proceeding."
(8) Represents: (i) 18,104 shares of Common Stock underlying options having an
exercise price of $6.21 per share; and (ii) 12,069 and 15,087 shares of
Common Stock underlying options having an exercise price of $5.22 and
$5.40 per share, respectively, assuming the completion of the offering.
Does not include 93,538 shares of Common Stock underlying options which
are not exercisable within 60 days of the date hereof. See
"Management--Compensation of Directors" and "--Compensation Arrangements
with Chairman."
50
DESCRIPTION OF SECURITIES
The following section does not purport to be complete and is qualified in
its entirety by reference to the detailed provisions of the Company's Articles
of Incorporation and Bylaws, copies of which have been filed with the Company's
Registration Statement on Form SB-2, of which this Prospectus forms a part.
The Company's authorized capital consists of 20,000,000 shares of Common
Stock, par value $.0001 per share, and 1,000,000 shares of preferred stock, par
value $.001 per share (the "Preferred Stock").
COMMON STOCK
On the date of this Prospectus, there are approximately 85 shareholders of
record who own 2,922,849 shares of issued and outstanding Common Stock. Upon
completion of this offering, there will be 4,722,849 shares of Common Stock
issued and outstanding. Each outstanding share of Common Stock is entitled to
one vote, either in person or by proxy, on all matters that may be voted upon
by the owners thereof at meetings of the shareholders. The holders of Common
Stock: (i) have equal ratable rights to dividends from funds legally available
therefor, when, as and if declared by the Board of Directors of the Company,
(ii) are entitled to share ratably in all of the assets of the Company
available for distribution to holders of Common Stock upon liquidation,
dissolution or winding up of the affairs of the Company, (iii) do not have
preemptive, subscription or conversion rights, or redemption or sinking fund
provisions applicable thereto, and (iv) are entitled to one non-cumulative vote
per share on all matters on which shareholders may vote at all meetings of
shareholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any series of
preferred stock that may be issued in the future, including voting, dividend,
and liquidation rights.
The holders of shares of Common Stock of the Company do not have
cumulative voting rights, which means that the holders of more than 50% of such
outstanding shares, voting for the election of directors, can elect all of the
directors of the Company if they so choose and, in such event, the holders of
the remaining shares will not be able to elect any of the Company's directors.
PREFERRED STOCK
The Company's Board of Directors has the authority to issue 1,000,000
shares of Preferred Stock, none of which is issued and outstanding, in one or
more series and to fix, by resolution, conditional, full, limited or no voting
powers, and such designations, preferences and relative, participating,
optional or other special rights, if any, and the qualifications, limitations
or restrictions thereof, if any, including the number of shares in such series
(which the Board of Directors may increase or decrease as permitted by Florida
law), liquidation preferences, dividend rates, conversion or exchange rights,
redemption provisions of the shares constituting any series, and such other
special rights and protective provision with respect to any class or series as
the Board of Directors may deem advisable without any further vote or action by
the shareholders. Any shares of Preferred Stock so issued would have priority
over the Common Stock with respect to dividend or liquidation rights or both
and could have voting and other rights of shareholders. The issuance of
Preferred Stock with voting or conversion rights may adversely affect the
voting rights of the holders of Common Stock. The Company has no present plans
to issue shares of Preferred Stock.
WARRANTS
The Warrants will be issued in registered form pursuant to the terms of a
Warrant Agreement (the "Warrant Agreement") between the Company and Continental
Stock Transfer & Trust Co., New York, New York, as warrant agent (the "Warrant
Agent").
The Company has authorized the issuance of up to 2,070,000 Warrants to
purchase an aggregate of 2,070,000 shares of Common Stock (exclusive of
securities issuable pursuant to the Representatives'
51
Warrants) and has reserved an equivalent number of shares of Common Stock for
issuance upon exercise of such Warrants. None of the Warrants are currently
issued and outstanding.
For each Warrant, the holder is entitled to purchase one share of Common
Stock upon payment of the exercise price set forth on the cover page of this
Prospectus, subject to adjustment. The Warrants are exercisable at any time
commencing on the first anniversary of the date of this Prospectus (the "First
Exercise Date"), and ending on the fifth anniversary of the date of this
Prospectus, provided that at such time a current prospectus relating to the
Common Stock is in effect and the Common Stock is qualified for sale or exempt
from qualification under applicable state securities laws. The Warrants are
immediately transferrable separately from the Common Stock issued with such
Warrant upon completion of the offering.
The Company may, at its option, redeem all, but not less than all,
outstanding Warrants, commencing 30 days after the First Exercise Date upon not
less than 30 days prior notice to the registered holders of the Warrants for a
redemption price of $.10 for each share of Common Stock to which the Warrant
holder would then be entitled upon exercise of the Warrants being redeemed, in
the event that: (i) there exists a current prospectus relating to the Common
Stock issuable upon exercise of the Warrants under an effective registration
statement filed with the Securities and Exchange Commission and the issuance of
the Common Stock upon exercise of the Warrants has been qualified for sale or
exempt from qualification under applicable state securities laws, and (ii) the
shares of Common Stock of the Company have had an average closing bid and asked
price of not less than 150% of the initial public offering price of the Common
Stock (assuming an initial public offering price of $6.00 per share; $9.00,
subject to adjustment) for a period of 20 consecutive trading days ending three
trading days prior to the date of the redemption notice. Holders of Warrants
will automatically forfeit their rights to purchase the shares of Common Stock
issuable upon exercise of such Warrants unless the Warrants are exercised
before 5:00 p.m. (New York time) on the date set for redemption. All of the
outstanding Warrants may be affected. A notice of any redemption of the
redemption date is required to be mailed to each of the registered holders of
the Warrants by first class mail, postage prepaid, 30 days before the date
fixed for redemption. The notice of redemption is required to specify the date
fixed for redemption, and the right to exercise the Warrants shall terminate at
5:00 p.m. (New York time) on the redemption date.
The Warrants may be exercised upon surrender of the certificates therefor
on or prior to the final exercise date (as explained above) at the offices of
the Warrant Agent with the "Election to Purchase" on the reverse side of the
certificate(s) completed and executed as indicated, accompanied by payment (in
the form of certified or cashier's check payable to the order of the Company)
of the full exercise price for the number of Warrants being exercised. The
Company is not required to issue fractional shares of Common Stock, and in lieu
thereof, will make a cash payment based upon the current market value of such
fractional shares.
The holders of the Warrants will not have any of the rights or privileges
of shareholders of the Company (except to the extent they own Common Stock of
the Company) prior to the exercise of the Warrants. The exercise price of the
Warrants and the number of shares of Common Stock issuable upon the exercise
thereof are subject to adjustment upon the occurrence of certain events such as
stock splits, stock dividends or the like, as set forth in the Warrant
Agreement.
In the event of a capital reorganization of the Company, reclassification
of the Common Stock or a consolidation or merger of the Company with or into,
or a disposition of substantially all of the Company's properties and assets
to, any other corporation, the Warrants then outstanding will thereafter be
exercisable into the kind and amount of shares of stock or other securities or
property (including cash) to which the holders thereof would have been entitled
if they had exercised such Warrants and received shares of Common Stock
immediately prior to such reorganization, reclassification, consolidation,
merger or disposition, consistent with the requirements for exercise set forth
in the Warrant Agreement.
For the life of the Warrants, the Warrants holders have the opportunity to
profit from a rise in the market price of the Common Stock without assuming the
risk of ownership of the shares of Common
52
Stock issuable upon the exercise of the Warrants, with a resulting dilution in
the interest of the Company's shareholders by reason of exercise of Warrants at
a time when the exercise price is less than the market price for the Common
Stock. Further, the terms on which the Company could obtain additional capital
during the life of the Warrants may be adversely affected as a result of the
Warrants being outstanding. The Warrant holders may be expected to exercise
their Warrants at a time when the Company would, in all likelihood, be able to
obtain any needed capital by an offering of Common Stock on terms more
favorable than those provided for by the Warrants.
For a holder to exercise the Warrants there must be a current registration
statement in effect with the Securities and Exchange Commission and
registration or qualification with, or approval from, various state securities
agencies with respect to the shares or other securities underlying the
Warrants. The Company has agreed to use its best efforts to cause a
registration statement with respect to such securities under the Securities Act
to continue to be effective during the term of the Warrants and to take such
other actions under the laws of various states as may be required to cause the
sale of Common Stock upon exercise of Warrants to be lawful, unless such action
would cause the Company to be subject to general service of process or require
it to amend its charter documents or any action taken by the Company's Board of
Directors. However, the Company will not be required to honor the exercise of
Warrants if, in the opinion of the Company's Board of Directors upon advice of
counsel, the sale of securities upon exercise would be unlawful.
The Warrant exercise price was arbitrarily determined by negotiation
between the Company and the Representatives. The Company may reduce the
exercise price of the Warrants or extend the warrant expiration date upon
notice to Warrant holders.
The foregoing is merely a summary of the rights and privileges of the
holders of the Warrants, and is qualified in its entirety by reference to the
Warrant Agreement.
OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES
On the date of this Prospectus, the following shares of Common Stock may
be acquired upon the exercise or conversion of outstanding options, warrants
(exclusive of the Warrants, the Representatives Warrants and the Warrants
underlying the Representatives' Warrants) or convertible securities: (i) 50,886
shares of Common Stock upon the exercise of presently issued and outstanding
stock options granted under the 1997 Plan; (ii) 357,946 shares of Common Stock
upon the exercise of outstanding options granted outside of the 1997 Plan;
(iii) 224,692 shares of Common Stock which may be acquired upon the exercise of
three warrants; (iv) 29,479 shares of Common Stock underlying the UA Partners
convertible promissory note which will be automatically converted on the date
of this Prospectus; and (v) 798,000 shares of Common Stock reserved for
issuance upon the exercise of the 1997 Financing Warrants; (vi) 156,000 shares
of Common Stock reserved for issuance upon exercise of warrants issued in
August 1998 and (vii) 100,579 shares of Common Stock underlying a secured
convertible promissory note that may be converted on demand by Kenworthy on or
before January 15, 1999, assuming the conversion of the note on the date
hereof.
REGISTRATION RIGHTS AND SALES BY CERTAIN SHAREHOLDERS
The Company has granted Demand Registration Rights and Piggyback
Registration Rights to the Wallenberg Trust, Kenworthy, UA Partners, Union
Atlantic and Robert O'Brien with respect to an aggregate of 1,139,940 shares of
Common Stock held by them and/or issuable to them upon conversion or exercise
of promissory notes or warrants held by them. See "Certain Transactions." The
Demand Registration Rights are limited to one registration and may not be
exercised until the earlier of November 20, 1999 or the date the Company's
equity securities are publicly traded. The Piggyback Registration Rights
provide that if the Company proposes to register any of its securities under
the Securities Act, the holders of such rights are entitled to include shares
of Common Stock in the registration (other than this offering). Such
registration rights are subject to certain conditions and limitations, among
them the right of the underwriters of a registered offering to limit the number
of shares included in such registration.
53
Pursuant to the terms of the Representatives' Warrants to be sold to the
Representatives in connection with the offering, the Company has agreed that,
for a period of five years commencing on the date of this Prospectus, upon
written demand of the holders of a majority of the Representatives' Warrants
and the securities issued pursuant thereto, the Company will, on one occasion,
register for sale in a public offering under the Securities Act all or any
portion of the securities issuable upon exercise of the Representatives'
Warrants (and the Warrants and Shares included therein). See "Underwriting."
Any such registration would be at the Company's expense. The Company has also
agreed to include such underlying securities in any appropriate registration
statement which is filed by the Company during the five years following the
date of this Prospectus.
In connection with the 1997 Financing, the Company agreed to register with
the Securities and Exchange Commission, six months from the date of this
Prospectus, the 798,000 shares of Common Stock underlying the 1997 Financing
Warrants. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." Holders of the 1997
Financing Warrants have agreed not to sell or transfer the shares of Common
Stock underlying the 1997 Financing Warrants for a 12 month period following
the date of this Prospectus. Sales of Common Stock after the expiration of the
12 month period by such selling shareholders or even the potential of such
sales will likely have an adverse effect on the market prices of the Common
Stock.
In connection with the settlement of certain litigation brought by
DataSafe against the Company, the Company has granted DataSafe certain demand
registration rights with respect to a maximum of 253,907 shares of Common Stock
currently being held in escrow. DataSafe may exercise such rights commencing 12
months from, and ending 18 months from, the closing of the offering. See
"Business--Legal Proceeding."
The Company granted certain persons who purchased shares of Common Stock
from Messrs. Berg and Tessier piggyback registration rights, commencing 12
months from the closing of the offering. See "Certain Transactions--Berg and
Tessier Transaction." The Company granted the four persons who purchased
$260,000 notes from the Company piggyback registration rights with respect to
an aggregate of 156,000 shares of Common Stock underlying the warrants issued
in connection therewith, which rights commence 12 months from the closing of
the offering. Such four persons have agreed not to sell or transfer the shares
of Common Stock underlying the warrants for a 12 month period following the
date of this Prospectus.
CERTAIN PROVISIONS OF THE ARTICLES AND BYLAWS
GENERAL. A number of provisions of the Articles of Incorporation
("Articles") and Bylaws ("Bylaws") of the Company concern matters of corporate
governance and the rights of shareholders. Certain of these provisions, as well
as the ability of the Board of Directors to issue shares of Preferred Stock and
to set the voting rights, preferences and other terms thereof, may be deemed to
have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors (including takeovers which certain
shareholders may deem to be in their best interests). To the extent takeover
attempts are discouraged, temporary fluctuations in the market price of the
Common Stock, which may result from actual or rumored takeover attempts, may be
inhibited. These provisions, together with the ability of the Board of
Directors to issue Preferred Stock without further shareholder action, also
could delay or frustrate the removal of incumbent directors or the assumption
of control by shareholders, even if such removal or assumption would be
beneficial to shareholders of the Company. These provisions also could
discourage or make more difficult a merger, tender offer or proxy contest, even
if they could be favorable to the interests of shareholders, and could
potentially depress the market price of the Common Stock. The Board of
Directors believes that these provisions are appropriate to protect the
interests of the Company and all of its shareholders.
MEETINGS OF SHAREHOLDERS. The Bylaws provide that a special meeting of
shareholders may be called by the Board of Directors or the holders of not less
than 10% of the outstanding Common Stock entitled to vote at such a meeting
unless otherwise required by law. The Bylaws provide that only those
54
matters set forth in the notice of the special meeting may be considered or
acted upon at that special meeting, unless otherwise provided by law. In
addition, the Bylaws set forth certain advance notice and informational
requirements and time limitations on any director nomination or any new
business which a shareholder wishes to propose for consideration at an annual
meeting of shareholders.
INDEMNIFICATION AND LIMITATION OF LIABILITY. The Articles provide that
directors, officers and employees and agents of the Company shall be
indemnified by the Company to the fullest extent authorized by Florida law, as
it now exists or may in the future be amended, against all expenses and
liabilities reasonably incurred in connection with service for or on behalf of
the Company. The Articles also provide that the right of directors and officers
to indemnification shall not be exclusive of any other right possessed or
hereafter acquired under any bylaw, agreement, vote of shareholders or
otherwise.
AMENDMENT OF BYLAWS. The Articles provide that the Bylaws may be amended
or repealed by the Board of Directors or by the shareholders. Such action by
the Board of Directors requires the affirmative vote of a majority of the
directors then in office. Such action by the shareholders requires the
affirmative vote of the holders of at least two-thirds of the total votes
eligible to be cast by holders of voting stock with respect to such amendment
or repeal at an annual meeting of shareholders or a special meeting called for
such purposes.
SHARES ELIGIBLE FOR FUTURE SALE
After completion of the offering, the Company will have 4,722,849 shares
of Common Stock outstanding assuming no exercise of the 1997 Financing
Warrants, the Over-allotment Option, the Representatives' Warrants (and the
Warrants included therein) or any other outstanding options or warrants. Of
these shares, all of the shares of Common Stock offered hereby will be freely
tradeable without restriction or further registration under the Securities Act,
unless purchased by "affiliates" of the Company, as that term is defined in
Rule 144. The remaining 2,922,849 shares of Common Stock were issued and sold
by the Company in private transactions and are eligible for public sale only if
registered under the Securities Act, sold in accordance with Rule 144
thereunder or pursuant to an exemption from registration.
In general, under Rule 144 of the Securities Act as currently in effect,
any affiliate of the Company or any person (or persons whose shares are
aggregated in accordance with the Rule) who has beneficially owned restricted
securities for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of 1% of the
outstanding shares of Common Stock or the reported average weekly trading
volume in the over-the-counter market for the four weeks preceding the sale.
Sales under Rule 144 are also subject to certain manner of sale restrictions
and notice requirements and to the availability of current public information
concerning the Company. Persons who have not been affiliates of the Company for
at least three months and who have held their shares for more than two years
are entitled to sell restricted securities without regard to the volume, manner
of sale, notice and public information requirements of Rule 144.
The Company, its executive officers, directors and shareholders (other
than those noted below) have agreed that for a period of one year from the date
of this Prospectus, they will not, without the prior written consent of the
Representatives, offer, sell, contract to sell, or otherwise dispose of, any
shares of Common Stock or any securities convertible into, or exercisable or
exchangeable for, shares of Common Stock. See "Underwriting." As of the date of
this Prospectus, 343,246 shares of the Company's outstanding Common Stock are
not subject to any lockup agreement. Included in such amount are 253,907 shares
issued to DataSafe, which are subject to a 12 month escrow arrangement. See
"Business--Legal Proceeding." Subject to any restriction imposed by Nasdaq, the
Representatives, in their sole discretion at any time and without notice, may
release any and all shares from the lock-up agreement and permit holders of the
shares to resell all or any portion of their shares prior to the expiration of
the one-year lock-up period.
Prior to the offering, there has been no market for the Common Stock and
no prediction can be made as to the effect, if any, that market sales of shares
of Common Stock or the availability of such
55
shares for sale will have on the market prices prevailing from time to time.
The possibility that substantial amounts of shares of Common Stock may be sold
in the public market may adversely affect prevailing market prices for the
shares of Common Stock and/or may impair the Company's ability to raise equity
capital in the future.
TRANSFER AGENT AND WARRANT AGENT
The transfer agent for the Common Stock and the Warrant Agent for the
Warrants is Continental Stock Transfer & Trust Co., New York, New York.
56
UNDERWRITING
The Underwriters named below, for whom Security Capital Trading, Inc. and
First Equity Corporation of Florida are acting as Representatives, have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement (the form of which is an exhibit to the Registration Statement filed
with the Commission of which this Prospectus is a part) to purchase from the
Company the respective number of shares of Common Stock and the number of
Warrants set forth opposite their respective names below:
NUMBER OF NUMBER OF
UNDERWRITERS SHARES WARRANTS
------------ ----------- ----------
Security Capital Trading, Inc. ..............
First Equity Corporation of Florida .........
Total ...................................... 1,800,000 1,800,000
========= =========
The Securities are being sold on a firm commitment basis. The Underwriting
Agreement provides, however, that the obligations of the several Underwriters
to purchase and pay for the Securities are subject to certain conditions
precedent, including approval of certain legal matters by counsel. The
Underwriters are committed to purchase all of the Securities offered hereby if
any are purchased. The Securities are being offered by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters.
The Representatives have advised the Company that the Underwriters propose
initially to offer the Securities to the public at the public offering price
set forth on the cover page of this Prospectus. The Underwriters may allow to
certain dealers who are members of the National Association of Securities
Dealers, Inc. ("NASD") concessions not to exceed $ per Share and $
per Warrant. Such dealers may re-allow a concession not in excess of $
per Share and $ per Warrant to other dealers who are members of the NASD.
Although the Representatives will not change the public offering price until
after the initial public offering has been completed, the concessions and the
reallowances may be changed by the Representatives thereafter.
The Company has granted to the Underwriters an option, exercisable not
later than 45 days after the date of this Prospectus, to purchase from the
Company at the public offering price, less underwriting discounts and the
non-accountable expense allowance, up to 270,000 additional Shares and/or
270,000 additional Warrants. The Underwriters may exercise this option in whole
or, from time to time, in part, for the sole purpose of covering
over-allotments, if any, made in connection with the sale of the Securities
offered hereby. To the extent the Underwriters exercise such option, each
Underwriter will have a firm commitment, subject to certain conditions, to
purchase that number of the additional Shares and/or Warrants.
The Company has agreed to pay the Representatives a non-accountable
expense allowance equal to 3% of the gross proceeds of the offering (including
the sale of the Securities subject to the Over-allotment Option), of which
$50,000 has been paid as of the date of this Prospectus. The Company has also
agreed to pay all expenses in connection with qualifying the Securities offered
hereby for sale under the laws of such states as the Representatives may
designate, including fees and expenses of counsel retained for such purposes by
the Representatives and the costs and disbursements in connection with
qualifying the offering with the NASD.
The Company has agreed, upon closing of the offering, to sell to the
Representatives and their designees, for $75.00, the Representatives' Warrants
which entitle the Representatives to purchase 180,000 shares of Common Stock
and/or 180,000 non-redeemable warrants, exclusive of Securities sold under the
Over-allotment Option. The Representatives' Warrants will be exercisable for a
four-year
57
term, commencing one year from the closing of the offering, at an initial
exercise price equal to $9.90 per share of Common Stock (165% of the public
offering price of the Shares offered hereby) and $0.165 per Warrant (165% of
the public offering price of the Warrants offered hereby). The Warrants
issuable upon exercise of the Representatives' Warrants are initially
exercisable at a price of $12.375 per Share (165% of the exercise price of a
Warrant). The Representatives' Warrants will be restricted from sale, transfer,
assignment or hypothecation (other than to officers and partners of the
Representatives or to other NASD members participating in the offering or their
officers or partners) for one year following the date of this Prospectus. The
number of Securities issuable pursuant to the Representatives' Warrants and the
exercise price are subject to adjustment upon the subdivision, combination or
reclassification of the Common Stock, or certain mergers and consolidations.
It may be expected that the Representatives' Warrants (and the warrants
issuable upon its exercise) will be exercised only if it is advantageous to the
Representatives. Therefore, during the period in which the Representatives'
Warrants may be exercised, the holders thereof are given, at a nominal cost,
the opportunity to profit from a rise in the market price of the Common Stock.
To the extent that the Representatives' Warrants (and the Warrants included
therein) are exercised, dilution to the interests of the Company's shareholders
will occur. Further, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected since the holders of the
Representatives' Warrants can be expected to exercise at a time when the
Company would, in all likelihood, be able to obtain any needed capital on terms
more favorable to the Company than those provided in the Representatives'
Warrants. Any gain from the sale of the shares issued upon exercise of the
Representatives' Warrants may be deemed additional underwriter compensation to
the Representatives. The Company has granted the Representatives certain
registration rights with respect to the securities underlying the
Representatives' Warrants. See "Description of Securities--Registration Rights
and Sales by Certain Shareholders."
The Company has also granted to the Representatives the right, for a
period of three years from the closing of the offering, to nominate a designee
of the Representatives for election to the Board of Directors of the Company.
The Company's officers, directors and principal shareholders have agreed to
vote their shares in favor of such designee. The Representatives have not yet
exercised their right to designate such a person. If the Representatives elect
not to exercise this right, then the Representatives may designate one person
to attend meetings of the Board of Directors.
The Company has agreed to enter into a consulting agreement with the
Representatives for them to offer financial consulting services to the Company
for a period of two years commencing on the closing date of this offering for a
fee of $4,166.67 per month, the entire amount of which is to be prepaid in full
at the closing of the offering. Pursuant to the consulting agreement, the
Representatives will provide such financial consulting services and advice
pertaining to the Company's business affairs as the Company may from time to
time reasonably request, including assisting the Company in developing,
studying and evaluating financing, merger and acquisition proposals. The
consulting agreement will not require the Representatives to devote a specific
amount of time to the performance of their duties thereunder.
First Equity Corporation of Florida acted as placement agent for the
Company in connection with the 1997 Financing and was paid a placement fee
equal to: (i) cash compensation equal to 10 percent of the principal amount of
the Financing Notes; and (ii) a non-accountable expense allowance equal to
three percent of the principal amount of the Financing Notes and certain
accountable expenses totaling $10,000.
The holders of an aggregate of 2,579,603 shares of Common Stock (88.3% of
the outstanding shares of Common Stock without giving effect to the offering),
consisting of all the officers and directors of the Company, and all
shareholders of the Company (other than holders of 343,246 shares), have agreed
not to sell, transfer or otherwise dispose of any beneficial interest in any
Common Stock owned by them, other than gifts to immediate family (so long as
the transferees remain subject to the restrictions), for a period of 12 months
following the date of this Prospectus, without the consent of the
Representatives but subject to any restrictions imposed by Nasdaq.
58
Prior to the offering there has been no public trading market for the
Common Stock or the Warrants. Consequently, the initial public offering price
of the Common Stock and the exercise price of the Warrants have been determined
by negotiation between the Company and the Representatives, do not necessarily
bear any relationship to the Company's assets, book value, revenues or other
established criteria of value, and should not be considered indicative of the
actual value of the Company's securities. Factors considered in determining
such public offering price, in addition to prevailing market conditions,
include the history of and prospects for the industry in which the Company
competes, an assessment of the Company's management, its past and present
operations, the prospects of the Company, market prices of similar securities
of comparable publicly-traded companies, the general condition of the
securities market and such other factors as were deemed relevant.
Security Capital Trading, Inc. ("Security Capital"), one of the
Representatives, commenced operations in June 1995. Security Capital has
co-managed and participated as an underwriter in only two previous public
offerings of securities. Accordingly, Security Capital has limited experience
as a co-manager or underwriter of public offerings of securities. Security
Capital will not be acting as a market maker of the Securities and there can be
no assurance that any broker-dealer will become a market maker for any of the
Securities.
In connection with the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the prices of the
Common Stock and the Warrants. Specifically, the Underwriters may overallot the
offering, creating a syndicate short position. The Underwriters may bid for and
purchase the Common Stock and the Warrants in the open market to cover such
syndicate short position or to stabilize the price of the Common Stock and the
Warrants. The Underwriters may also reclaim selling concessions allowed to a
dealer for distributing the Securities in the offering, if the Underwriters
repurchase previously distributed Securities in transactions to cover short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock and the Warrants
above independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make.
The Representatives have informed the Company that they do not expect
sales to discretionary accounts by the Underwriters to exceed 5% of the total
number of Securities offered hereby. See "Principal Shareholders."
In connection with the Underwriting Agreement, Messrs. Berg and Tessier
will on the closing of the offering enter into a Voting Agreement with the
Company, pursuant to which Messrs. Berg and Tessier will agree, for a period of
two years following the closing of the offering, to vote all voting securities
beneficially owned by them in the same proportion as the votes cast by
non-affiliates of the Company in any vote of the shareholders of the Company on
the following two matters: (i) a liquidation of the Company; or (ii) any
business combination in which the Company is not the surviving corporation or
any sale of all or substantially all of the Company's assets.
The foregoing includes a summary of all material terms of the Underwriting
Agreement. Such summary, however, is qualified in its entirety by reference to
the copy of the form of Underwriting Agreement filed as an exhibit to the
Company's Registration Statement of which this Prospectus forms a part.
59
LEGAL MATTERS
The validity of the issuance of the Shares and Warrants (and the shares of
Common Stock underlying the Warrants) being offered hereby will be passed upon
for the Company by Lucio, Mandler, Croland, Bronstein, Garbett, Stiphany &
Martinez, P.A., Miami, Florida ("Lucio Mandler"). Akerman, Senterfitt & Eidson,
P.A, Miami, Florida and Orrick, Herrington & Sutcliffe, LLP, New York, New York
are acting as counsel for the Underwriters in connection with this offering.
The legal fees of Lucio Mandler relating to the offering which are in
excess of $100,000 are only required to be paid by the Company if this offering
is completed. When this offering is completed, Lucio Mandler will be paid its
legal fees (at its standard hourly rates), plus 120% of the amount of the fees
in excess of $100,000.
EXPERTS
The consolidated financial statements of the Company as of and for the
years ended December 31, 1996 and 1997 and the financial statements of
Galacticomm, Inc. for the year ended December 31, 1995 and the ten months ended
October 31, 1996 have been included herein and in the registration statement in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein and upon the authority of said
firm as experts in auditing and accounting.
AVAILABLE INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form
SB-2 filed by the Company with the Securities and Exchange Commission under the
Securities Act with respect to the Securities offered hereby. This Prospectus
omits certain of the information contained in the Registration Statement, and
reference is hereby made to the Registration Statement and related exhibits and
schedules for further information with respect to the Company and the
Securities offered hereby. Any statements contained herein concerning the
provisions of any document are not necessarily complete, and in each such
instance reference is made to the copy of such document filed as an exhibit to
the Registration Statement. Each such statement is qualified in its entirety by
such reference. The Registration Statement and the exhibits and schedules
forming a part thereof can be inspected and copied at the public reference
facilities maintained by the Securities and Exchange Commission at Room 124,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and should
also be available for inspection and copying at the following regional offices
of the Securities and Exchange Commission: 7 World Trade Center, Suite 1300,
New York, New York 10007; and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can
be obtained from the Public Reference Section of the Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Registration Statement may also be obtained from the Securities and
Exchange Commission's website on the Internet, the address of which is
http://www.sec.gov. Consistent with the requirements for continued inclusion on
the Nasdaq Stock Market, the Company intends to furnish its shareholders with
annual reports containing financial statements certified by independent
auditors and quarterly reports for the first three quarters of each year
containing unaudited financial statements.
60
INDEX TO FINANCIAL STATEMENTS
PAGE
NUMBERS
--------
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
Independent Auditors' Report ............................................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and (Unaudited)
as of June 30, 1998 .................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1996 and 1997
and (Unaudited) for the six months ended June 30, 1997 and 1998 ........................ F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 1996 and 1997 and (Unaudited) for the six months ended June 30, 1998 ...... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1997
and (Unaudited) for the six months ended June 30, 1997 and 1998 ........................ F-6
Notes to Consolidated Financial Statements .............................................. F-8
GALACTICOMM, INC.
Independent Auditors' Report ............................................................ F-26
Statements of Operations for the year ended December 31, 1995 and for the ten months
ended October 31, 1996 ................................................................. F-27
Statements of Cash Flows for the year ended December 31, 1995 and for the ten months
ended October 31, 1996 ................................................................. F-28
Notes to Financial Statements ........................................................... F-29
PRO FORMA
Unaudited Pro Forma Consolidated Statement of Operations of Galacticomm Technologies,
Inc. for the year ended December 31, 1996 .............................................. F-35
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Galacticomm Technologies, Inc.
Fort Lauderdale, Florida:
We have audited the accompanying consolidated balance sheets of
Galacticomm Technologies, Inc. and subsidiary for the years ended December 31,
1996 and 1997, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Galacticomm
Technologies, Inc. and subsidiary as of December 31, 1996 and 1997 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
note 1 to the consolidated financial statements, the Company has suffered
recurring losses from operations and has negative working capital that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KPMG PEAT MARWICK LLP
Fort Lauderdale, Florida
January 30, 1998 except as to the sixth paragraph of note 8(a)
which is as of August 21, 1998, the last paragraph of
note 8(a) which is as of August 17, 1998,
note 10(b) which is as of June 26, 1998, the third paragraph of
note 10(e) which is as of June 1, 1998,
note 11(a) which is as of June 23, 1998,
note 11(b) which is as of May 7, 1998,
note 11(c) which is as of May 29, 1998,
note 11(d) which is as of July 2, 1998, and
note 11(e) which is as of August 6, 1998
F-2
GALACTICOMM TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
-------------- -------------- ---------------
(UNAUDITED)
ASSETS
Current assets:
Cash ........................................................... $ 1,466,392 226,281 90,508
Accounts receivable, net of allowance of $90,363 in 1996,
$494,436 in 1997 and (unaudited) $186,281 in 1998 ............ 31,762 311,428 198,984
Inventories .................................................... 83,730 78,737 46,383
Prepaid expenses and other current assets ...................... 32,991 31,921 50,694
------------ ------- -------
Total current assets ......................................... 1,614,875 648,367 386,569
Property and equipment, net ..................................... 544,569 770,904 640,676
Goodwill, net ................................................... 2,032,011 1,723,266 1,488,116
Deferred debt issuance costs .................................... 139,359 530,461 262,455
Deferred offering costs ......................................... 10,000 162,298 291,887
Other assets .................................................... 45,883 15,271 14,975
------------ --------- ---------
Total assets ................................................. $ 4,386,697 3,850,567 3,084,678
============ ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................................... $ 395,994 627,607 1,015,399
Notes payable and short-term borrowings ........................ 343,575 -- 326,027
Notes payable--shareholder ..................................... 50,000 70,000 50,000
Advances from shareholders ..................................... -- -- 213,346
Current installments of promissory notes ....................... -- 125,000 2,126,769
Deferred revenue ............................................... 305,145 209,023 101,301
Accrued expenses ............................................... 921,678 258,998 596,711
Other current liabilities ...................................... 74,063 23,594 15,789
------------ --------- ---------
Total current liabilities .................................... 2,090,455 1,314,222 4,445,342
Promissory notes, excluding current installments ................ 1,375,000 1,916,091 --
Other liabilities ............................................... 18,999 655,671 653,993
------------ --------- ---------
Total liabilities ............................................ 3,484,454 3,885,984 5,099,335
------------ --------- ---------
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock; $.001 par value; 1,000,000 shares
authorized; none issued ...................................... -- -- --
Common stock; $.0001 par value; 20,000,000 shares
authorized; 2,065,747 shares issued and outstanding
December 31, 1996; 2,639,463 shares issued and
outstanding December 31, 1997; 2,639,463 shares
(unaudited) issued and outstanding June 30, 1998 ............. 207 264 264
Additional paid-in capital ..................................... 2,009,728 4,826,046 5,347,588
Accumulated deficit ............................................ (1,107,692) (4,861,727) (7,362,509)
------------ ---------- ----------
Total shareholders' equity (deficit) ......................... 902,243 (35,417) (2,014,657)
------------ ---------- ----------
Total liabilities and shareholders' equity (deficit) ......... $ 4,386,697 3,850,567 3,084,678
============ ========== ==========
See accompanying notes to consolidated financial statements.
F-3
GALACTICOMM TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------------- ---------------------------------
1996 1997 1997 1998
----------------- --------------- --------------- ---------------
(UNAUDITED)
Revenue:
Product revenue .............................. $ 1,385,233 2,547,731 1,540,288 471,077
Service, royalty and other revenue ........... 307,510 870,326 247,591 277,318
Source code revenue .......................... -- -- -- 90,000
------------- --------- --------- -------
Total revenue .............................. 1,692,743 3,418,057 1,787,879 838,395
Operating costs and expenses:
Cost of revenue .............................. 758,050 869,252 502,310 178,935
Selling, general and administrative .......... 1,531,130 4,096,757 1,318,222 1,540,171
Depreciation ................................. 47,533 163,221 78,891 117,576
Amortization of intangibles .................. 36,607 505,577 287,338 231,461
Compensation expense on issuance of warrants
and common stock ........................... 49,381 143,760 113,760 9,414
Research and development ..................... 225,549 586,071 302,518 222,739
Customer support ............................. 72,772 398,137 205,934 94,015
------------- --------- --------- ---------
Total operating costs and expenses ......... 2,721,022 6,762,775 2,808,973 2,394,311
------------- --------- --------- ---------
Loss from operations .......................... (1,028,279) (3,344,718) (1,021,094) (1,555,916)
------------- ---------- ---------- ----------
Other income (expense):
Interest expense:
Amortization of deferred debt issuance costs
and original issue discount ............... -- (233,799) (43,553) (353,684)
Interest expense on convertible
promissory note ........................... -- -- -- (478,474)
Interest on outstanding debt ................ (91,217) (200,611) (84,759) (112,528)
Other income (expense), net .................. 30,905 25,093 59,837 (180)
------------- ---------- ---------- ----------
(60,312) (409,317) (68,475) (944,866)
------------- ---------- ---------- ----------
Net loss ................................... $ (1,088,591) (3,754,035) (1,089,569) (2,500,782)
============= ========== ========== ==========
Basic and diluted net loss per share .......... $ (1.12) (1.72) (.52) (.95)
============= ========== ========== ==========
Number of shares used in calculating basic and
diluted net loss per share ................... 973,649 2,188,474 2,085,303 2,639,463
============= ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
GALACTICOMM TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998
COMMON STOCK
--------------------- ADDITIONAL
NUMBER OF PAR PAID-IN ACCUMULATED
SHARES VALUE CAPITAL DEFICIT TOTAL
----------- ------- --------------- --------------- ---------------
Balance, December 31, 1995 ..................... 829,888 $ 83 19,917 (19,101) 899
Capital contributions ......................... -- -- 29,684 -- 29,684
Stock issued to acquire Tessier
Technologies, Inc. ............................ 40,091 4 145,710 -- 145,714
Stock issued as compensation expense .......... 733,669 73 49,308 -- 49,381
Stock issued in private placement (net of
$139,359 of issuance costs) ................. 324,268 33 1,235,608 -- 1,235,641
Stock issued to acquire Galacticomm, Inc. ..... 137,831 14 529,501 -- 529,515
Net loss for the year ended
December 31, 1996 ........................... -- -- -- (1,088,591) (1,088,591)
------- ---- --------- ---------- ----------
Balance, December 31, 1996 ..................... 2,065,747 207 2,009,728 (1,107,692) 902,243
Stock issued to acquire Galacticomm, Inc. ..... 25,886 3 139,892 -- 139,895
Warrants issued for compensation .............. -- -- 143,760 -- 143,760
Stock issued in private placement (net of
$126,209 of issuance costs) ................. 156,783 15 844,538 -- 844,553
Stock issued to terminate royalty
agreement ................................... 13,794 1 85,713 -- 85,714
Stock issued for retraction of ratchet rights 49,029 5 (5) -- --
Warrants issued for promissory notes .......... -- -- 210,672 -- 210,672
Stock issued for convertible notes ............ 328,224 33 1,391,748 -- 1,391,781
Net loss for the year ended
December 31, 1997 ............................ -- -- -- (3,754,035) (3,754,035)
--------- ---- --------- ---------- ----------
Balance, December 31, 1997 ..................... 2,639,463 264 4,826,046 (4,861,727) (35,417)
Net loss for the six months ended June 30,
1998 (unaudited) ............................ -- -- -- (2,500,782) (2,500,782)
Warrants issued for promissory notes
(unaudited) ................................. -- -- 478,474 -- 478,474
Stock issued for advances from
shareholders (unaudited) .................... -- -- 33,654 -- 33,654
Stock options issued for compensation
(unaudited) ................................. -- -- 9,414 -- 9,414
--------- ---- --------- ---------- ----------
Balance, June 30, 1998 (unaudited) ............. 2,639,463 $264 5,347,588 (7,362,509) (2,014,657)
========= ==== ========= ========== ==========
See accompanying notes to consolidated financial statements.
F-5
GALACTICOMM TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------- -------------------------------
1996 1997 1997 1998
----------------- --------------- --------------- ---------------
(UNAUDITED)
Cash flows from operating activities:
Net loss ................................................. $ (1,088,591) (3,754,035) (1,089,569) (2,500,782)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ........................... 84,140 668,798 366,229 348,739
Amortization of debt issuance costs ..................... -- 207,036 43,553 268,006
Amortization of financing loan discount ................. -- 26,763 -- 85,678
Expense on shares issued for royalties .................. -- 85,714 -- --
Loss (gain) on sale of property and equipment ........... 10,373 27,501 2,083 (2,500)
Compensation expense on issuance of shares .............. 49,381 -- -- 9,414
Compensation expense on warrants ........................ -- 143,760 113,760 478,474
Changes in assets and liabilities, net of effects of
purchase business combinations:
Accounts receivable .................................... 65,692 (344,666) (91,421) 92,444
Inventories ............................................ 8,046 4,993 (49,679) 32,354
Prepaid expenses and other current assets .............. 13,372 1,070 (90,346) (18,773)
Other assets ........................................... (33,571) 30,612 (11,721) 296
Accounts payable and accrued expenses .................. 525,744 (289,286) (369,003) 725,505
Deferred revenue ....................................... (50,383) (96,122) (147,124) (107,722)
Other liabilities ...................................... (37,963) 586,203 (38,205) (9,483)
------------- ---------- ---------- ----------
Net cash used in operating activities ................. (453,760) (2,701,659) (1,361,443) (598,350)
------------- ---------- ---------- ----------
Cash flows (used in)provided by investing activities:
Purchases of property and equipment ...................... (150,220) (322,057) (21,649) (5,861)
Proceeds from the sale of property and equipment ......... 65,000 -- -- 25,000
Acquisitions, net of cash acquired ....................... (548,911) (56,937) (56,937) --
------------- ---------- ---------- ----------
Net cash (used in) provided by
investing activities ............................... (634,131) (378,994) (78,586) 19,139
------------- ---------- ---------- ----------
Cash flows provided by financing activities:
Proceeds from notes payable .............................. 80,000 -- -- 326,027
Proceeds from advances from shareholders ................. -- -- -- 247,000
Proceeds from promissory notes ........................... 1,375,000 2,100,000 -- --
Repayments on notes payable and notes payable--
shareholder ............................................ (35,000) (353,575) (145,000) --
Net proceeds from the sale of common stock ............... 1,235,641 844,553 670,395 --
Debt issuance costs ...................................... (139,359) (598,138) -- --
Offering costs ........................................... (10,000) (152,298) (140,807) (129,589)
Additional capital contributions ......................... 29,684 -- -- --
------------- ---------- ---------- ----------
Net cash provided by financing activities ............. 2,535,966 1,840,542 384,588 443,438
------------- ---------- ---------- ----------
Net increase (decrease) in cash ........................... 1,448,075 (1,240,111) (1,055,441) (135,773)
Cash, beginning of period ................................. 18,317 1,466,392 1,466,392 226,281
------------- ---------- ---------- ----------
Cash, end of period ....................................... $ 1,466,392 226,281 410,951 90,508
============= ========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ................. $ 12,016 25,159 68,750 7,858
============= ========== ========== ==========
F-6
GALACTICOMM TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In February 1997, the Company acquired the remaining minority interest in
Galacticomm, Inc. for 25,886 shares of the Company's common stock valued at
$139,895 and cash of $56,937.
In June 1997, the Company received equipment of $30,000 from an officer of
the Company in exchange for a note payable of $30,000 [see note 6(c)].
In August 1997, the Company retracted rights to receive royalties from
certain investors for 13,794 shares of the Company's common stock.
In September 1997, the Company retracted ratchet rights held by certain
investors in exchange for 49,029 shares of the Company's common stock [see note
8(a)].
In October 1997, the Company received computer equipment with an estimated
value of $65,000 in full satisfaction of a note receivable of $65,000 due from
a related party.
In October 1997, in connection with certain financing obtained, the
Company issued warrants to purchase 577,884 shares of the Company's common
stock. Such warrants were valued at $210,672 or $0.37 per warrant, and were
reflected as a discount on the financing [see note 8(a)].
In December 1997, the holder of convertible promissory notes of $1,250,000
converted such notes plus accrued interest of $141,781 into 328,224 shares of
the Company's common stock, at the conversion price of $4.24 per share [see
note 6(b)].
See accompanying notes to consolidated financial statements.
F-7
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
(1) THE COMPANY AND LIQUIDITY
Galacticomm Technologies, Inc. and subsidiary (the "Company") develop,
market, license, and support software that enables users to communicate and
conduct business over the internet, intranets or other online communication
systems. The Company was incorporated in December 1995 under the name of I-view
Software, Inc. ("Iview"), and changed its name to Galacticomm Technologies,
Inc. after acquiring Galacticomm, Inc. ("Galacticomm") in November 1996 (see
note 2). The Company was originally incorporated with 5,000,000 authorized
shares, par value $.001. At that time, 829,888 shares were issued, of which
733,669 were owned by the Chairman and Chief Executive Officer. The aggregate
consideration paid for these founders shares was $20,000. During 1996 the
founding shareholders contributed an additional $29,684, bringing the per share
price for the founders' shares to $.060 per share.
In August 1996, the Company entered into a Stock Issuance Agreement (SIA)
with the principal shareholder of Tessier Technologies, Inc. (TTI) to issue
this individual a number of shares of the Company's common stock that would
make this individual an equal shareholder to the Company's then principal
shareholder. The Company committed to issue these shares to this individual in
consideration for his efforts in founding and organizing the Company's software
and computer infra-structure. The shares, which were issued in connection with
the Company's acquisition of TTI (see note 2), amounted to 733,669 shares
having a fair value of $49,381. Such value was based on the fair value of the
Company's common stock in August 1996 as determined by an independent valuation
consultant and was charged to operations in 1996.
On November 19, 1996, the Board of Directors of the Company approved the
recapitalization of the Company which increased the authorized shares of common
stock from 5,000,000 shares to 20,000,000, reduced the par value from $.001 per
share to $.0001 per share and effected a 2 for 1 split of the Company's common
stock. In addition, the Company's Board of Directors recommended and the
shareholders approved the authorization of 1,000,000 shares of preferred stock,
par value $.001 per share. Such designation, rights and preferences will be
determined from time to time by the Board of Directors. In September 1997, the
Company effected a 4.061771824 to one reverse split of the Company's common
stock. In June 1998, the Company effected a 1.657080842 to one reverse stock
split of the Company's common stock. The par value of each common share
remained $.0001 for each of these reverse stock splits. All share and per share
amounts have been restated to retroactively reflect these reverse stock splits.
Prior to the acquisition of Galacticomm, Iview developed, marketed and
supported software that enabled individuals to broadcast and receive video and
audio signals over the Internet and on dial-up networks and offered online
subscription services using such software. Galacticomm was incorporated in July
1985 and develops and sells network-centric software applications and tools.
Its primary product, Worldgroup, a client-server software, is a platform that
merges Bulletin Board Systems, E-Mail, and Worldgroup functions that enable
individuals or enterprises to establish an online system, intranet or website
and also enables users to access all applications using only a standard
browser. On November 21, 1996, the Company merged with TTI (see note 2). TTI
specialized in the on-line software industry selling platform software from
Galacticomm. TTI also developed its own line of business and entertainment
software as add-ons to the Worldgroup baseline product.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Since inception,
the Company has incurred significant losses. At December 31, 1997, the
Company's current liabilities exceeded its current assets by $665,855. In
F-8
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
addition, the Company incurred net losses of $1,088,591 and $3,754,035 for the
years ended December 31, 1996 and 1997, respectively. The accompanying
unaudited June 30, 1998 consolidated financial statements indicate that these
situations are continuing as current liabilities exceeded current assets by
$4,058,773 (unaudited) at June 30, 1998 and a net loss of $2,500,782
(unaudited) was incurred for the six months ended June 30, 1998. The Company's
losses have been funded through the sale of debt and equity securities. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might arise from the outcome of these uncertainties.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing and ultimately attain profitability. The
Company plans to achieve positive cash flow from operations by introducing new
products and product upgrades and by increasing sales of current products
through increased marketing; targeted sales efforts focused on, among others,
value added resellers; and strategic alliances with third party computer
software and hardware companies, including co-branding, licensing, OEM and
bundling agreements. In addition, the Company intends to improve its cash flow
position by raising additional capital through an initial public offering (IPO)
of its securities [see note 11(c)] and obtaining interim debt financing. There
is no assurance that such conditions or events will occur.
(2) ACQUISITIONS
In November 1996, the Company entered into an agreement whereby it
received title to the outstanding common stock of TTI. Such agreement had two
purposes. This agreement was used to effectuate the issuance of shares of the
Company's common stock obligated to be issued by the SIA (see note 1).
Additionally, this agreement was used to acquire the common stock of TTI owned
by TTI's minority shareholders. Given the existence of the SIA, the principal
shareholder of TTI agreed to receive no additional shares and in effect
relinquished his shares for no consideration. In connection with this
transaction, the Company issued 40,091 shares of its common stock to TTI's
minority shareholders valued at $145,714. This amount was used to value the
acquisition of TTI and resulted in recording goodwill of $157,246.
On November 21, 1996, the Company acquired 96 percent of the outstanding
common stock of Galacticomm in exchange for 137,831 shares of the Company's
common stock valued at $529,515 and $698,978 in cash. Such amounts include
consideration of 90,679 shares of common stock valued at $329,495 and $611,476
in cash exchanged for Galacticomm's prior shareholder's interests, and $287,522
of acquisition costs consisting of $87,502 in cash and 47,152 shares of common
stock valued at $4.24 per share [see note 8(a)]. Certain shares of the
Galacticomm common stock acquired by the Company on November 21, 1996 were
subject to a stock purchase warrant (the "Galacticomm Warrant") that had been
granted to certain third parties by the previous owner of such Galacticomm
common stock. In connection with the cancellation of the Galacticomm Warrant,
the two majority shareholders of the Company granted such holders 44,573
warrants (the "New Warrants") to purchase shares of the Company's common stock
from such majority shareholders. The New Warrants bear an exercise price of
$5.05 per warrant and may be exercised at any time through November 21, 1999.
The fair value of the New Warrants was immaterial to the Company's acquisition
of Galacticomm.
In February 1997, the Company acquired an additional 848,404 shares of
common stock of Galacticomm, Inc. in exchange for the issuance of an aggregate
of 25,886 shares of common stock and an aggregate cash payment of $56,937.
F-9
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
The above transactions were recorded under the purchase method of
accounting. Accordingly, the results of operations of TTI and Galacticomm for
the period from October 31, 1996 to December 31, 1996 have been included in the
accompanying consolidated financial statements. The operations from October 31,
1996 to November 20, 1996 for TTI and to November 21, 1996 for Galacticomm are
not material to the consolidated financial statements. The purchase prices have
been allocated to assets acquired and liabilities assumed based on the fair
market values at the dates of acquisition. The fair value of assets acquired
and liabilities assumed is as follows:
GALACTICOMM TESSIER
--------------- ------------
Current assets .................. $ 347,136 44,360
Property and equipment .......... 451,113 66,141
Goodwill ........................ 1,911,431 157,246
Current liabilities ............. (1,452,338) (38,114)
Long-term liabilities ........... (28,849) (83,919)
------------ -------
$ 1,228,493 145,714
============ =======
The following unaudited pro forma financial information for the Company
for the year ended December 31, 1996 gives effect to the TTI and Galacticomm
acquisitions as if they had occurred on January 1, 1996, after including the
impact of certain adjustments, such as amortization of goodwill and interest
expense related to financings obtained to fund the acquisitions. In
management's opinion, the unaudited pro forma combined results of operations
are not necessarily indicative of the actual results that would have occurred
had the acquisition been consummated at January 1, 1996, or of future
operations of the acquired companies under the ownership and management of the
Company.
Revenue, net ................................. $ 6,189,505
=============
Net loss ..................................... $ (4,255,553)
=============
Basic and diluted net loss per share ......... $ (1.99)
=============
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited consolidated balance sheet as of June 30, 1998, the
unaudited consolidated statements of operations and cash flows for the six
months ended June 30, 1997 and 1998 and the unaudited consolidated statement of
shareholders' deficit for the six months ended June 30, 1998 include, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the Company's consolidated financial
position, results of operations and cash flows. Operating results for the six
months ended June 30, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998.
(B) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Galacticomm
Technologies, Inc. and its wholly owned subsidiary, Galacticomm. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
F-10
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
(C) CASH FLOWS
The Company considers investments with maturities of three months or less,
when purchased, to be cash equivalents.
(D) ACCOUNTS RECEIVABLE
Accounts receivable are principally from distributors and end-users of the
Company's products. The Company performs periodic credit evaluations of its
customers and has recorded an allowance for potential credit losses and product
returns of $90,363 and $494,436 at December 31, 1996 and 1997, respectively.
The Company's business is subject to rapid changes in technology and shifts in
consumer demand which could result in credit losses and product returns in
excess of the Company's reserves at December 31, 1997.
(E) INVENTORIES
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out ("FIFO") method.
The Company's inventories consist primarily of software media, manuals and
related packaging materials and hardware and hardware components which are
subject to rapid technological obsolescence or reduction in value as a result
of new products developed by competitors or as a result of normal competitive
pressures. The Company periodically estimates an allowance for obsolete
inventory based on current market conditions.
Changes in the marketplace may significantly affect management's
estimates.
(F) LONG-LIVED ASSETS
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets. Maintenance and repairs are charged to
expense as incurred. Improvements are capitalized and amortized over the useful
lives of the improvement. Upon the sale or retirement of assets, the related
cost and accumulated depreciation are removed from the assets and any gain or
loss is recognized.
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally three to five years. During 1996 and 1997,
approximately $38,000 and $504,000, respectively, was recorded as goodwill
amortization expense.
The Company implemented the provisions of Statement of Financial
Accounting Standards No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," effective January 1, 1996.
The Company reviews its long-lived assets (property, plant and equipment, and
related intangible assets that arise from business combinations accounted for
under the purchase method) for impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be recoverable. If the
sum of the expected cash flows, undiscounted and without
F-11
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
interest, is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the assets exceeds its
fair value. The adoption of Statement No. 121 had no impact on the Company's
financial position or results of operations.
(G) REVENUE RECOGNITION
Product Revenue is recognized at the time the software and hardware is
delivered and service revenue is recognized on the straight-line basis over the
service period, in accordance with the provisions of American Institute of
Certified Public Accountants Statement of Position 91-1 ("SOP 91-1"), "SOFTWARE
REVENUE RECOGNITION" through December 31, 1997. While the Company has no
obligations to perform future services subsequent to shipment, the Company
provides telephone customer support as an accommodation to purchasers of its
products. Costs associated with this effort are not significant and are
expensed as incurred. The Company provides reserves for estimated future
returns, exchanges and price protection. The Company offers distributors co-op
funds that are used to promote the Company's products. These funds are
generally paid as a credit against outstanding invoices and are included in
marketing expense during the period in which the revenue is recognized.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "SOFTWARE REVENUE RECOGNITION" ("SOP 97-2").
SOP 97-2 is effective for transactions entered into in fiscal years beginning
after December 15, 1997, and supersedes SOP 91-1. SOP 97-2 provides guidance on
revenue recognition for licensing, selling, leasing or otherwise marketing
computer software. The Company adopted SOP 97-2 for the six months ended June
30, 1998 and it did not have a material impact on the Company's consolidated
financial position, results of operations, or liquidity.
At December 31, 1996 and 1997, the Company had deferred revenues recorded
in the accompanying consolidated balance sheets related to customer upgrades
paid in advance.
(H) BUSINESS CONCENTRATION
During February and April 1996, the Company entered into license
agreements with two marketing and sales companies ("Sales Companies"). In
November 1996, the Company terminated these agreements and entered into new
licensing agreements with Sales Companies to use the Company's service mark.
These agreements require royalties of 12 percent of the licensee's gross
revenue and expire in 1999. The royalty revenue is recognized as the gross
revenue is reported by the licensees. During 1996 and 1997, the revenue from
all the above agreements was approximately $1,480,000 and $560,000,
respectively.
(I) SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs under Statement of
Financial Accounting Standards No. 86, "Accounting for Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed" ("SFAS 86"). Under SFAS 86,
the costs associated with software development are required to be capitalized
after technological feasibility has been established. Costs incurred by the
Company subsequent to the establishment of technological feasibility have been
insignificant and, as a result, the Company has not capitalized any development
costs. The Company does not incur costs related to the development or purchase
of internal-use software.
F-12
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
(J) INCOME TAXES
The Company elected S corporation status effective upon inception and
maintained that status until October 29, 1996, when it became a taxable
corporation. Under S corporation status, each shareholder was individually
responsible for reporting his or her share of taxable income or loss.
Accordingly, through October 29, 1996, no provision for Federal income taxes
has been reflected in the accompanying consolidated financial statements. A
provision for state income taxes is made where applicable. Given that the
Company has incurred net losses since inception, had the Company been a taxable
corporation prior to October 30, 1996, no material provision for income taxes
would have been recorded.
Beginning October 30, 1996, the Company has followed the asset and
liability method of accounting for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(Statement 109). Under Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(K) STOCK OPTION PLAN
The Company accounts for its stock option plan [see note 8(d)] in
accordance with the provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which permits entities to recognize as an expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants as if the fair-value-based method
defined in SFAS No. 123 had been applied. Under APB Opinion No. 25,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. The Company
has elected to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS No. 123.
(L) PER SHARE COMPUTATIONS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), EARNINGS PER
SHARE. SFAS 128 specifies new standards designed to improve the earnings per
share ("EPS") information provided in financial statements by simplifying the
existing computational guidelines, revising the disclosure requirements and
increasing the comparability of EPS data on an international basis. Some of the
changes made to simplify the EPS computations include (i) eliminating the
presentation of primary EPS and replacing it with basic EPS, (ii) eliminating
the modified treasury stock method and the three percent materiality provision
and (iii) revising the contingent share provisions and the supplemental EPS
data requirements. SFAS 128 also makes a number of changes to existing
disclosure requirements. SFAS 128 is effective for financial statements issued
for periods ending after December 15, 1997. The adoption of SFAS 128 in 1997
did not have a significant impact on the Company's reported EPS.
F-13
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
Net loss per share calculations are based on the weighted average number
of shares of common stock outstanding during the period. In accordance with
Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 98,
certain common stock and common stock equivalents issued for nominal
consideration prior to the initial filing of a registration statement relating
to an IPO are treated as outstanding for the entire period. The Company had no
nominal issuances during this period.
(M) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
inventories, prepaid expenses, accounts payable and notes payable approximates
fair value because of the short maturity of these instruments.
The fair value of each of the Company's long-term debt instruments is
based on the amount of future cash flows associated with each instrument
discounted using the Company's current borrowing rate for similar debt
instruments of comparable maturity. The carrying amounts approximate the
estimated fair value at December 31, 1996 and 1997.
(N) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Significant estimates
are primarily related to provisions for sales returns, bad debt and obsolete
inventory. Actual results could materially differ from these estimates.
(O) YEAR 2000
In December 1997, the Company developed a plan to deal with the Year 2000
issue and began converting its computer systems to be Year 2000 compliant. The
plan provides for the conversion efforts to be completed by June 30, 1999. The
Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The total cost of the
project is estimated to be $100,000 (unaudited) and is expected to be funded
through funds received from an IPO and if an IPO is not consummated, it will be
funded through operating cash flows. The Company will expense costs associated
with these systems changes as the costs are incurred. As of December 31, 1997,
none of these costs have been incurred.
F-14
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
(4) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following at December 31,
1996 and 1997:
ESTIMATED
1996 1997 USEFUL LIFE
----------- ------------- ------------
Equipment ............................................... $ 464,023 559,174 3-5 years
Furniture and fixtures .................................. 105,875 90,695 7 years
Purchased computer software ............................. 13,464 201,284 3 years
Construction in progress ................................ -- 116,862
--------- -------
583,362 968,015
Less: accumulated depreciation and amortization ......... (38,793) (197,111)
--------- --------
$ 544,569 770,904
========= ========
(5) INCOME TAXES
Income tax expense for the years ended December 31, 1996 and 1997 was $0,
and differed from the amounts computed by applying the United States federal
income tax rate of 34 percent to pretax losses as a result of the following:
1996 1997
------------- -------------
Computed "expected" tax benefit ....................................... $ 370,121 1,276,372
Increase (reduction) in income taxes resulting from:
State income tax benefit, net of federal ............................. 19,349 115,597
Various non-deductible expenses ...................................... (3,928) 296,000
Non-utilization of net operating loss ................................ -- (904,087)
S-corporation earnings from January 1, 1996 to October 29,
1996 not subject to corporate tax .................................. (54,716) --
Increase in the valuation allowance for deferred tax assets .......... (330,826) (783,882)
---------- ---------
$ -- --
========== =========
F-15
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
1997 are presented below:
1996 1997
------------- ---------------
Deferred tax assets:
Allowances for returns and bad debts ......... $ 9,143 109,042
Net operating loss carryforwards .... ......... 339,730 988,340
Goodwill ............................ ......... 8,852 --
Accrued expenses .............................. 5,303 33,149
---------- -------
Total gross deferred tax assets ............. 363,028 1,130,531
Less valuation allowance ....................... (330,826) (1,130,531)
---------- ----------
Total deferred tax asset .................... 32,202 --
---------- ----------
Deferred tax liabilities:
Property and equipment ........................ 32,202 --
---------- ----------
Total deferred tax liability ................ 32,202 --
---------- ----------
Net deferred tax asset ...................... $ -- --
========== ==========
Realization of deferred tax assets associated with net operating loss
carryforwards is dependent upon generating sufficient taxable income prior to
their expiration. Management believes that there is a risk that these net
operating loss carryforwards may expire unused and, accordingly has established
a valuation allowance for the deferred tax asset.
The Company's net operating loss carry forward of $2,600,000 expires in
the year 2012. However, the Company's future utilization of net operating loss
carryforwards may be subject to limitations under Section 382 of the Internal
Revenue Code due to a change in ownership for tax purposes.
(6) DEBT
At December 31, 1996 and 1997, debt consisted of the following:
(A) NOTES PAYABLE
Prior to May 1997, the Company's subsidiary had a line of credit with a
bank for $300,000 which bore interest at the bank's prime rate plus 1 percent.
At December 31, 1996, $298,575 was outstanding under the line of credit
agreement. During May 1997, the Company repaid $100,000 of the outstanding
amount on the line of credit and entered into a $200,000 line of credit due on
demand with a final maturity of September 30, 1997. The line was secured by the
Company's accounts receivable, inventory and other assets, and was personally
guaranteed by two officers of the Company. All amounts outstanding under the
line of credit were repaid during October 1997 [see note 8(b)]. In November
1997, the Company was approved for the continuation of its credit line, with
interest payable monthly at prime plus 1.5 percent (10 percent at December 31,
1997). No amounts were outstanding under this line of credit as of December 31,
1997. A total of $200,000 (unaudited) was outstanding under this line of credit
as of June 30, 1998.
F-16
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
The Company issued five notes payable in the original total amount of
$80,000, each due on demand, with interest rates of 12 percent per annum. At
December 31, 1996 the total unpaid principal balance was $45,000. These notes
were repaid during January 1997.
Under the terms of the notes, the Company was obligated to pay a royalty
("Royalty") to the creditors equivalent to a certain percentage (ranging from
1.0 percent to 2.0 percent) of the Company's gross revenues while the notes are
outstanding. Additionally, after the notes are repaid, the Company is obligated
to pay a royalty to the creditors equivalent to a certain percentage (ranging
from 0.5 percent to 1.5 percent) of the Company's net revenue (the "Additional
Royalty").
During August 1997 the Company terminated the Royalty and Additional
Royalty obligation by issuing 13,794 shares of the Company's common stock and
paying $72,500 of accrued royalties to such creditors. In connection with the
issuance of such common stock, the Company recognized related expense of
approximately $86,000, representing the fair value of the common stock.
(B) CONVERTIBLE PROMISSORY NOTES
On November 21, 1996, the Company received proceeds in the amount of
$1,375,000 from the issuance of secured convertible promissory notes payable to
two shareholders of the Company. These notes are secured by all of the
Company's tangible and intangible assets. Each note bears interest at a rate of
10 percent per annum and interest is payable quarterly. The notes each mature
at the earliest to occur of:
(i) November 21, 1998;
(ii) The completion of a private placement offering by the Company
greater than $3,000,000; or
(iii) The completion of an IPO of equity or debt securities by the
Company.
In addition, upon written demand of the creditors all principal and
accrued interest due and payable under these notes will be converted into
shares of the Company's common stock equal to the unpaid outstanding amount of
the notes divided by the conversion price of $4.24 per share, the fair value of
the Company's common stock on the date of the debt issuance. The conversion
will occur automatically at the earliest of the following events:
(i) Upon written demand of the creditors; or
(ii) An IPO of the Company's securities is declared effective by the
SEC.
On December 31, 1997, one of the holders of the convertible promissory
notes converted $1,250,000 of the principal due under such note, plus accrued
interest of $141,781, into 328,224 shares of the Company's common stock, at the
conversion price of $4.24 per share.
The Company did not make the quarterly interest payments due in each
quarter in 1997 and (unaudited) March 31, 1998 and (unaudited) June 30, 1998.
The Company has obtained a waiver from the holder of the remaining promissory
notes outstanding at December 31, 1997, waiving all such principal and interest
payments until the earlier of December 31, 1998 or the completion of an IPO.
F-17
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
(C) NOTES PAYABLE-SHAREHOLDER
At December 31, 1996, notes payable-shareholder includes a non-interest
bearing note payable totaling $50,000. On December 31, 1997, this note payable
was amended to bear interest at 10 percent, with repayment due at the earlier
of the completion of an IPO of equity or debt securities of the Company, or
December 31, 1998.
In 1997, the Company purchased $30,000 of equipment for a note payable to
this shareholder. This note payable, of which $20,000 was outstanding at
December 31, 1997, was non-interest bearing, and was repaid in March 1998
through the assignment of a note receivable of $20,000.
(7) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1996 and 1997:
1996 1997
----------- ----------
Salaries, wages and other compensation .......... $307,306 151,719
Professional fees ............................... 115,620 35,000
Rent ............................................ 138,953 --
Interest ........................................ 80,000 54,729
Other ........................................... 279,799 17,550
-------- -------
$921,678 258,998
======== =======
(8) SHAREHOLDERS' EQUITY
(A) PRIVATE PLACEMENT
On November 21, 1996, the Company completed a private placement for
$1,375,000 in convertible notes payable (see note 6(b)) and 324,267 shares of
its common stock at $4.24 per share. Under the terms of the stock purchase
agreement for the sale of the 324,267 shares, the buyers of such shares were
granted piggy-back, demand registration and antidilution rights and certain
other rights. On September 8, 1997, the Company issued such buyers 49,029
shares of the Company's common stock in exchange for the buyers retraction of
certain rights which were in the original stock purchase agreement.
According to the terms of the stock purchase agreement, the buyers had
preemptive rights to purchase approximately 180,000 shares at exercise prices
ranging from $4.24 to $6.21 per share. The buyers have waived their preemptive
rights regarding the issuance of the Company's securities from and after the
effective date of an IPO.
In connection with the private placement and the acquisition of
Galacticomm, the Company issued the following consideration in exchange for
consulting and advisory services with respect to the Company's finances to a
consultant who is a current shareholder of the Company: (i) a three-year
warrant to purchase 84,310 shares of the Company's common stock at an exercise
price of $4.24 per warrant having an approximate fair value of $28,000, (ii)
47,152 shares of the Company's common stock having an approximate fair value of
$200,000, and (iii) cash of $357,500. Accordingly, of the total consideration,
(i) approximately $140,000 was allocated as a direct cost of the common stock
issued in
F-18
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
the private placement, (ii) approximately $140,000 was allocated to the
convertible debt issued in the private placement and such amount was
capitalized as a deferred debt issuance cost and (iii) approximately $300,000
was allocated to the Company's acquisition of Galacticomm and such amount was
included in the Company's purchase price of Galacticomm.
In October 1997, the Company completed a private financing of 42 units of
its securities, each of which consisted of a $50,000 unsecured promissory note
and a three year warrant ("1997 Financing Warrants") to purchase 11,466 shares
of the Company's common stock at an exercise price of $6.21 per share. The total
principal amount of the promissory notes of $2,100,000 bears interest of 10
percent per year. Accrued interest is due semi-annually beginning June 30, 1998
and the note will mature upon the earlier of January 4, 1999 or the completion
of an IPO. After deducting fees and expenses paid to an investment banking firm
of $273,000, and $135,000 for other expenses related to the financing, net
proceeds of this financing were approximately $1,682,000. A portion of the
proceeds of the financing were used to repay all amounts then outstanding under
the Company's line of credit.
Additionally, in connection with the financing, the Company issued 96,314
warrants at an exercise price of $6.21 per share to an investment banking firm
with terms similar to the aforementioned warrants. The fair value of all
warrants issued to holders of the promissory notes was determined to be
$210,672 using the Black-Sholes pricing model, and is included in additional
paid-in capital in the accompanying consolidated balance sheet, with the
resulting original issue discount (OID) on the loan being amortized using a
method which approximates the interest method over the term of the note.
Interest expense related to the note payable, including amortization of OID,
was $61,763 in 1997. The following is a reconciliation of the aforementioned
components of this loan in the consolidated balance sheet at December 31, 1997:
Original loan ............................................... $ 2,100,000
OID ......................................................... (210,672)
Accumulated amortization of OID ............................. 26,763
-----------
1,916,091
Note payable in connection with private placement ........... 125,000
-----------
Total promissory notes .................................... 2,041,091
Less current installments ................................... 125,000
-----------
Promissory notes, excluding current installments ......... $ 1,916,091
===========
On June 30, 1998, the Company failed to make the scheduled interest payment
of approximately $140,959. In July and August, 1998 the Company obtained a
waiver for its failure to make the scheduled interest payment. In exchange for
waiving the Company's default, the Company: (i) issued to each unit holder
another warrant to purchase 7,534 shares of Common Stock at a price of $6.00 per
share exercisable until July 1, 2002; (ii) extended the expiration date of the
1997 Financing Warrants to coincide with the expiration date of the additional
warrants; and (iii) reduced the exercise price of such 1997 Financing Warrants
to 6.00 per share. The incremental fair value of the 1997 Financing Warrants due
to the modified terms of the warrants is approximately $110,000. The fair value
of the additional warrants issued in July and August 1998 is approximately
$210,000. The total amount of $320,000 will be recorded by the Company in
additional paid in capital in the third quarter 1998 and with the resulting
additional OID on the warrants being amortized using a method which approximates
the interest method over the remaining term of the note (6 months).
On August 17, 1998 the 96,314 (unaudited) warrants issued to the
investment banking firm were canceled and returned to the Company.
(B) SALE OF COMMON STOCK
In June 1997, the Company sold an aggregate of 156,783 shares of its
common stock at $6.20 per share. Net proceeds to the Company after deducting a
$126,209 fee paid to a shareholder of the
F-19
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
Company were $844,553. In connection with such sale of common stock, the
Company issued, to a shareholder of the Company, a three year warrant to
purchase 20,382 shares of the Company's common stock at an exercise price of
$6.20 per share. The fair value of such warrant was immaterial to such sale of
common stock.
(C) WARRANTS
On March 14, 1997, two principal shareholders of the Company issued
warrants for 371,434 shares of the Company's common stock to another
shareholder of the Company at an exercise price of $5.39 per share. These
warrants were automatically exerciseable upon completion of an IPO. The Company
recognized a related expense of $113,760 representing the fair value of the
warrants issued. Additionally, on September 8, 1997, in consideration of the
payment of $50,000, the Company permitted the common stock underlying such
warrants to have certain registration rights. On October 17, 1997, the warrants
were amended to extend the expiration date to March 31, 1998. As a result of
this amendment, related incremental expense of approximately $30,000 was
recognized in October 1997. On March 31, 1998, the warrants expired and were
not renewed.
In January 1997, the Company issued 3,714 warrants at $4.24 per share to a
director of the Company as consideration for serving on the board of directors.
(D) STOCK OPTION PLAN
On September 4, 1997 the Company adopted the 1997 Stock Option Plan (the
"Plan"). Pursuant to the Plan, the Company's board of directors may grant
incentive or non-qualified stock options to employees or service providers.
Under the Plan, 223,284 shares of the Company's common stock are reserved for
issuance and options granted shall vest 25 percent 180 days after issuance and
then 50 percent, 75 percent and 100 percent over the first, second and third
anniversaries of the grant date, respectively. The Plan has a ten year term and
no options granted under the Plan shall have a life greater than ten years.
During September 1997, the Company granted 117,373 options under the Plan to
various employees with an exercise price of $6.00 per option of which 50,886
(unaudited) are still outstanding at June 30, 1998. Of options granted under
the Plan, 50,887 options have been canceled. The fair value of these options is
immaterial to the consolidated financial statements.
(9) 401(K) RETIREMENT PLAN
The Company maintains a 401(k) retirement plan. All of the Company's
employees who have attained the age of 21 and completed one year of service are
eligible. The plan allows vesting at 20 percent per year beginning in the
second year of service. Participants can contribute up to 15 percent of their
annual compensation and the Company may make discretionary contributions. The
Company made contributions of $0 and $28,361 during 1996 and 1997,
respectively.
On April 1, 1997 and effective January 1, 1997, the 401(k) retirement plan
was amended to allow eligibility for employees after having completed 6 months
of service and vesting at 25 percent per year beginning in the first year of
service.
F-20
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
(10) COMMITMENTS AND CONTINGENCIES
(A) LEASES
The Company leased its main administrative office and warehouse premises
under a lease which expired on May 13, 1997. On July 21, 1997, the Company
entered into a new lease agreement for such premises which runs through October
2001. The Company also leases office equipment under various operating leases.
The following summarizes future minimum obligations under non-cancelable
operating leases:
YEAR ENDING
DECEMBER 31,
------------
1998 ................ $327,318
1999 ................ 317,504
2000 ................ 181,658
2001 ................ 96,506
2002 ................ 1,323
--------
$924,309
========
Total rent expense under operating leases was $249,688 and $31,045,
respectively, for the years ended December 31, 1997 and 1996.
(B) EMPLOYMENT AGREEMENTS
On November 21, 1996, the Company entered into employment contracts
through November 20, 1999 with two of its officers that included commitments
for a base salary plus bonuses (at the discretion of the Compensation Committee
of the Board of Directors) of approximately $175,000. On June 26, 1998, they
amended these employment agreements to modify the base salary commitment for
each officer of approximately $138,000. This salary will increase each contract
year by 10 percent of the prior year's salary. In addition, on June 30, 1997,
each officer was granted stock options for 106,973 shares of common stock with
an exercise price of $6.20 per share. One-third of the options vested on
November 21, 1997 and an additional one-third vests each year thereafter. The
options expire five years from the respective vesting dates and any non-vested
options shall be forfeited upon termination of employment.
On December 15, 1997, the Company granted 18,104 stock options with an
exercise price of $6.21 to a director of the Company. The fair value of such
options is immaterial to the consolidated financial statements.
(C) CONSULTING AGREEMENT
On November 20, 1996, the Company entered into a consulting agreement with
a shareholder to perform consulting and advisory services with respect to the
operations and finances of the Company. The consulting fee under this agreement
is $10,000 per month until June 30, 2001. Other than the monthly fee, no
material commitments exist under the Company's agreement with such consultant.
On January 15, 1997, the Company entered into a second consulting
agreement with such shareholder pursuant to which the Company has engaged the
services of an employee of such
F-21
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
shareholder to develop the Company's sales and marketing strategies. The fee
under this agreement for the services of such employee is $7,000 per month and
the agreement expired December 31, 1997. Under such consulting agreement, the
Company also issued an option to such employee to acquire 1,486 shares of the
Company's common stock at a per share price of $4.24. Such option was
immediately exerciseable and has a three year life. In addition, such employee
has been granted options to purchase 4,457 shares of common stock under the
Company's 1997 Stock Option Plan at an exercise price of $6.00 per share. The
fair value of such options is immaterial to the consolidated financial
statements.
The consultant has agreed to forbear taking action against the Company for
collection of approximately $170,000 due under these consulting agreements in
exchange for a commitment from the Company to pay such amount on the completion
of an IPO and for the issuance of warrants to purchase 120,000 shares of common
stock at an exercise price of $6.00 per share exercisable until four years from
the completion of an IPO.
(D) PAYROLL TAXES
During August 1997, the Company reached a settlement with the IRS relating
to payroll taxes due for 1996 employee wages. The amount of such settlement was
$89,000 and is reflected as an accrued expense at December 31, 1996. This
amount was paid in full in October 1997.
(E) LEGAL MATTERS
In July 1997, the Company became aware of the existence of a third party
which may claim a prior right in the trademark "Worldgroup." The Company and
the third party are presently discussing a co-existence arrangement whereby the
Company would have the right, without the payment of a royalty, to continue to
use the trademark "Worldgroup" on its present products and services. The
Company may elect to change the name when it releases its next version of this
product, which is presently anticipated to occur in the first quarter of 1999.
However, there can be no assurances that the version of this product will be
released when anticipated. If the third party has superior rights to this
trademark and such third party decides to enforce its trademark rights through
an infringement action, management believes the Company has valid defenses with
respect to any such action. There can be no assurance, however, that a change
of name will not adversely impact the Company's revenues and thereby the
Company's operating results and financial condition.
In July 1997, the Company became aware that several other third parties
filed applications for trademark registration of "WebCast" (the name of a
product of the Company), before the Company filed its application. If "WebCast"
is not determined to be generic and one of the third party applications matures
into registration, then such third party will have superior rights to the
Company. If a third party has superior rights to this trademark and such third
party decides to enforce its trademark rights through an infringement action,
management believes that the Company has valid defenses with respect to any
such action. There can be no assurance that the Company will be able to
continue to use the name "Webcast" or that it will not have to change the name
of such product.
A suit was filed against the Company on December 16, 1997 by a reseller of
the Company's products alleging price fixing, price discrimination, resale
price maintenance, predatory practices, breach of contract and economic
coercion by the Company. On June 1, 1998, the Company settled with the third
party which will require under the settlement agreement that the Company
disburse to the third
F-22
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
party one year from the closing date of the IPO (distribution date) the lesser
of (a) 253,907 shares or (b) the number of shares of common stock determined by
dividing $650,000 by the market price of the common stock at the distribution
date. The expected fair market value of stock on the distribution date is
$6.00. Therefore, management and legal counsel for the Company are of the
opinion that the settlement is probable and estimated at $650,000. The Company
recorded this amount as a charge and included this amount in other liabilities
at December 31, 1997.
The Company is subject to certain other legal matters arising in the
ordinary course of business which, in the opinion of management, will not have
a material effect on the financial position and results of operations of the
Company.
(11) SUBSEQUENT EVENTS
(A) CONSULTING AGREEMENT
On March 3, 1998, the Company entered into a consulting agreement with its
Chairman of the Board of Directors to be responsible for managing the business
of the Company. The consulting fee under this agreement is $10,000 per month
for a 90 day term automatically renewing for successive 30 day terms. On June
23, 1998, this Agreement was amended and now expires 12 months from the closing
of an IPO unless extended for successive one-year periods upon the mutual
consent of both parties. However, the agreement can be terminated by the
Company for any reason six months from the completion of an IPO upon 90 days'
prior written notice. In such event, the Company is required to pay the
Chairman $60,000 in a lump sum payment.
Under such consulting agreement and amendment, the Company also issued an
option to acquire 120,693 shares of common stock. Of such shares, 12,069 shares
were vested on June 5, 1998 and 9,052 shares shall vest for two years
thereafter. Additionally, 15,087 of the options shall vest immediately upon the
closing of the IPO and an additional 15,087 will vest for two years thereafter.
Further, 15,087 of the options shall vest immediately upon the Company
realizing positive net income after taxes in any fiscal quarter through the
quarter ended December 31, 1999 and 15,087 of the shares will vest for two
years thereafter.
The exercise price of all options granted shall be 90 percent of the per
share price of the common stock in an IPO. Those conditions that are satisfied
before an IPO shall have an exercise price of $5.22. All options expire three
years from the respective vesting dates.
The 12,069 shares that became exerciseable on June 5, 1998, was recorded as
a charge to the consolidated statement of operations and an increase in
additional paid-in-capital in the amount of approximately $9,400 (unaudited) for
the second quarter which represents the difference between the fair market value
($6.00) and the exercise price ($5.22).
(B) CONVERTIBLE PROMISSORY NOTE
On May 7, 1998, the Company received proceeds in the amount of $125,000
from the issuance of a secured convertible promissory note payable to Kenworthy
Investments, Ltd. ("Kenworthy"). This note is secured by all of the Company's
assets. This note bears interest at a rate of 10 percent per annum. All
principal and interest payments are due on January 1, 1999.
F-23
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
In addition, at the option of Kenworthy, all principal and accrued
interest due and payable under this note may be converted on demand on or
before January 15, 1999 into shares of the Company's stock equal to the unpaid
outstanding amount of the note divided by the conversion price of $1.24 per
share. The difference between the conversion price and the fair value ($6.00)
of the Company's common stock on the date of the debt issuance was recorded in
the second quarter as a charge to the consolidated statements of operations and
an increase in additional paid-in-capital of approximately $478,000
(unaudited).
(C) PLANNED INITIAL PUBLIC OFFERING
The Company intends to conduct an initial public offering (IPO) with two
investment banking firms (the "Representatives"). The Company has agreed to (a)
pay the Representatives cash compensation equal to 10 percent of the principal
amount of the gross proceeds of the offering; (b) pay the Representatives a
non-accountable expense allowance equal to 3% of the gross proceeds of the sale
of the shares; (c) sell to the Representatives, for nominal consideration, five
year warrants to purchase up to 10 percent of the shares of Common Stock and/or
10 percent of the warrants at an exercise price above the IPO price and (d)
enter into a two-year financial consulting agreement with the Representatives,
pursuant to which the Company will pay $100,000 at the closing of the IPO. The
costs related to the financial consulting agreement will be deferred and
amortized over the life of the agreement. Costs related to the IPO incurred
through December 31, 1997 are approximately $160,000. All offering costs
incurred through the time of the IPO are capitalized and will be netted against
the proceeds of the IPO.
(D) SUBSEQUENT FINANCING
From June 28 to July 2, 1998, two shareholders of the Company sold 241,935
shares owned by them to 16 private investors (the "Private Investors") for an
aggregate purchase price of $300,000 or $1.24 per share of common stock. The
shareholders received proceeds from these sales in June 1998 in the amount of
approximately $247,000, with the remaining $53,000 received in July 1998. The
proceeds of such sales were loaned to the Company and the Company used the
funds to pay certain accrued accounting and legal fees associated with the
planned public offering. On July 1, 1998, the Company executed a note for the
aggregate amount of the advances of $300,000. The aggregate principal amount of
the loans accrue interest at the rate of seven percent per annum. All principal
and accrued interest is required to be paid upon the earlier of September 30,
1999 or twelve months from the completion of an IPO.
The effective interest rate on these loans was estimated at 20%, using
current interest rates at which similar loans would be made to borrowers with
similar credit ratings and remaining maturities. The difference of
approximately $33,000 between the effective interest rate and the stated
interest rate on the $247,000 advance as of June 30, 1998 is included in
additional paid-in capital in the accompanying consolidated balance sheet as
OID. The resulting OID on the advances will be amortized using a method which
approximates the interest method over the term of the advances. An additional
$7,000 was recorded in July 1998 as OID and additional paid-in capital for the
additional advances of $53,000.
In connection with this transaction, the Company granted the Private
Investors certain tag-along, piggyback registration, and certain anti-dilution
rights if the Company issues securities below $1.24 per share.
F-24
GALACTICOMM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997 AND (UNAUDITED) JUNE 30, 1998
(E) SUBSEQUENT AUGUST FINANCING
In August 1998, the Company received proceeds in the amount of $260,000
from four persons pursuant to non-negotiable 10% unsecured promissory notes
which mature on the earlier of December 31, 1998 or the consummation of an IPO.
In exchange for such notes, the Company issued to the lenders five-year
warrants to purchase an aggregate of 156,000 shares of the Company's common
stock at an exercise price of $6.00 per share. The warrants may, at the option
of the holder, be redeemed at a price of $0.60 per warrant at any time prior to
September 30, 1999 if the Company does not realize net total revenues of at
least $5,000,000 for the year ending December 31, 1998. The fair value of these
warrants are considered immaterial to the Company's consolidated financial
statements.
(12) NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the FASB issued Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997 and establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general purpose financial statements. SFAS No. 130 requires
all items to be recognized under accounting standards as components of
comprehensive income to be reported in a separate financial statement. The
Company does not believe that the adoption of SFAS No. 130 will have a
significant impact on the Company's financial reporting.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION"
("SFAS No. 131"). SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. SFAS No. 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. The Company does not believe that the adoption
of SFAS No. 131 will have a significant impact on the Company's financial
reporting.
In March 1998, the AICPA issued Statement of Position 98-5 (SOP 98-5)
"REPORTING ON THE COSTS OF START-UP ACTIVITIES." Pursuant to the provisions of
SOP 98-5, all costs associated with start-up activities, including organization
costs, should be expensed as incurred. Companies that previously capitalized
such costs are required to write-off the unamortized portion of such costs as a
cumulative effect of a change of accounting principle. The Company has an
immaterial amount of these costs and the adoption of SOP 98-5 will not have a
significant impact on the Company's financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS
No. 133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires an entity to recognize
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. The Company does not believe that the
adoption of SFAS No. 133 will have a significant impact on the Company's
financial reporting.
F-25
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Galacticomm, Inc.
Fort Lauderdale, Florida:
We have audited the accompanying statements of operations and cash flows
of Galacticomm, Inc. for the year ended December 31, 1995 and the ten months
ended October 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of Galacticomm, Inc.'s operations and
cash flows for the year ended December 31, 1995 and the ten months ended
October 31, 1996 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Ft. Lauderdale, Florida
August 22, 1997
F-26
GALACTICOMM, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED TEN MONTHS ENDED
DECEMBER 31, OCTOBER 31,
1995 1996
-------------- -----------------
Revenue ................................................ $ 7,487,983 $ 3,293,876
Operating costs and expenses:
Cost of revenue ....................................... 1,737,170 1,005,595
Selling, general and administrative ................... 3,602,809 2,382,613
Depreciation and amortization ......................... 131,713 150,185
Compensation expense related to phantom units ......... -- 529,139
Compensation expense on option exercise ............... 443,242 --
Research and development .............................. 1,034,174 638,200
Customer support ...................................... 425,924 387,797
----------- ------------
Total operating costs and expenses .................. 7,375,032 5,093,529
----------- ------------
Operating profit (loss) ............................. 112,951 (1,799,653)
Other income (expense):
Lease termination ..................................... -- (380,040)
Interest income ....................................... 33,042 10,760
Realized loss on short-term investments ............... (225,818) --
Other expense, net .................................... (5,249) (98,873)
----------- ------------
Total other expense ................................. (198,025) (468,153)
----------- ------------
Net loss ............................................ $ (85,074) $ (2,267,806)
=========== ============
See accompanying notes to financial statements.
F-27
GALACTICOMM, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED TEN MONTHS ENDED
DECEMBER 31, OCTOBER 31,
1995 1996
-------------- -----------------
Cash flows from operating activities:
Net loss ........................................................ $ (85,074) $ (2,267,806)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization ................................. 131,713 150,185
Loss on disposal of equipment ................................. 10,000 24,582
Bad debt and product return provisions ........................ 16,786 80,065
Compensation expense related to phantom units ................. -- 529,139
Compensation expense on stock option exercise ................. 443,242 --
Realized loss on short-term investments ....................... 225,818 --
Interest income on subscription notes receivable .............. (1,393) (1,874)
Changes in assets and liabilities:
Accounts receivable .......................................... (51,108) 270,956
Inventories .................................................. (77,593) 195,869
Prepaid expenses and other assets ............................ (171,711) 230,264
Accounts payable ............................................. 111,153 (69,701)
Deferred revenue ............................................. 105,034 150,031
Accrued expenses ............................................. 142,028 227,860
---------- ------------
Net cash provided by (used in) operating activities ......... 798,895 (480,430)
---------- ------------
Cash flows used in investing activities:
Capital expenditures ............................................ (164,129) (19,815)
---------- ------------
Cash flows from financing activities:
Net proceeds from notes payable ................................. -- 298,575
Payments on capital lease obligations ........................... (23,952) (24,515)
Dividends to stockholders ....................................... (775,261) (28,295)
Net proceeds from the exercise of stock options and sale of
common stock .................................................. 23,277 --
---------- ------------
Net cash (used in) provided by financing activities ......... (775,936) 245,765
---------- ------------
Net decrease in cash and cash equivalents ........................ (141,170) (254,480)
Cash and cash equivalents--beginning of period ................... 504,347 363,177
---------- ------------
Cash and cash equivalents--end of period ......................... $ 363,177 $ 108,697
========== ============
See accompanying notes to financial statements.
F-28
GALACTICOMM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND OCTOBER 31, 1996
(1) THE COMPANY AND BASIS OF PRESENTATION
Galacticomm, Inc. (the "Company") develops and sells network-centric
software applications and tools. The Company's primary product, Worldgroup, a
client/server software, is a platform that merges Bulletin Board Systems,
E-mail, and workgroup functions and enables enterprises to provide client/
server applications over the Internet and intranets and secure external data
exchanges with customers, field agents, suppliers, and others.
Substantially all of the Company's revenue is derived from sales of the
Worldgroup software product and related hardware, documentation and training
manuals, and royalties. The Company operates in a highly competitive industry
characterized by rapidly changing technology which could adversely affect the
Company's revenues and the related results of operations.
On November 21, 1996, 8,037,203 of the issued and outstanding common
shares of the Company, representing a 96 percent ownership of the Company, were
purchased by Galacticomm Technologies, Inc., (formerly Iview Software, Inc.) in
exchange for $.094 in cash and .0644 shares of Galacticomm Technologies, Inc.
for each share of the Company's common stock.
The accompanying financial statements were prepared for inclusion in a
registration statement of Galacticomm Technologies, Inc. The separate audited
balance sheets of the Company are not presented at December 31, 1995 and
October 31, 1996 as the fair value of the acquired assets and assumed
liabilities has been included in the December 31, 1996 consolidated balance
sheet of Galacticomm Technologies, Inc.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ACCOUNTS RECEIVABLE
Accounts receivable are principally from distributors and end-users of the
Company's products. The Company performs periodic credit evaluations of its
customers and has recorded an allowance for potential credit losses and product
returns of $85,680 and $110,428 at December 31, 1995 and October 31, 1996,
respectively. The Company is subject to rapid changes in technology and shifts
in consumer demand which could result in credit losses and product returns in
excess of the Company's reserves.
(B) INVENTORIES
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out ("FIFO") method.
The Company's inventories consist primarily of software media, manuals and
related packaging materials and hardware and hardware components which are
subject to rapid technological obsolescence or reduction in value as a result
of new products developed by competitors or as a result of normal competitive
pressures. The Company periodically estimates an allowance for obsolete
inventory based on current market conditions. Changes in the marketplace may
significantly affect management's estimates.
(C) LONG-LIVED ASSETS
The Company presents its property and equipment at cost less accumulated
depreciation. Property and equipment are depreciated using the straight-line
method over the estimated useful lives of the
F-29
GALACTICOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND OCTOBER 31, 1996
assets. Maintenance and repairs are charged to expense when incurred;
betterments are capitalized. Upon the sale or retirement of assets, the cost
and accumulated depreciation are removed from the account and any gain or loss
is recognized.
The Company implemented the provisions of Statement of Financial
Accounting Standards No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," effective January 1, 1996.
The Company reviews its long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest, is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value. The adoption of Statement No. 121 had no impact on the Company's
results of operations.
(D) REVENUE RECOGNITION
Product revenue is recognized at the time software and hardware is
delivered, in accordance with the provisions of American Institute of Certified
Public Accountants Statement of Position 91-1, "Software Revenue Recognition".
While the Company has no obligations to perform future services subsequent to
shipment, the Company provides telephone customer support as an accommodation
to purchasers of its products. Costs associated with this effort are not
significant and are expensed as incurred. Sales to distributors are subject to
agreements allowing limited rights of return and price protection. The Company
provides reserves for estimated future returns, exchanges and price protection.
The Company offers distributors co-op funds that are used to promote the
Company's products. These funds are generally paid as a credit against
outstanding invoices and are included in marketing expense during the period in
which the revenue is recognized.
The Company has various contracts which require the Company to provide
consulting services, custom systems integration and training at specified
contractual rates. Such contracts are short-term in nature. The Company records
as deferred revenue, all payments received on each contract until the contract
is completed.
Deferred revenues are recorded for short-term contracts and customer
subscriptions paid in advance.
(E) ROYALTIES
The Company licenses software used to develop components of Worldgroup.
Royalties are payable to developers of the software at various rates and
amounts, generally based on unit sales. Royalty expense was approximately
$7,000 and $46,000 for the year ended December 31, 1995 and the ten months
ended October 31, 1996, respectively. Such costs are included as a component of
cost of revenues in the accompanying statements of operations.
(F) SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs under Statement of
Financial Accounting Standards No. 86, "Accounting for Costs of Computer
Software to Be Sold, Leased or Otherwise
F-30
GALACTICOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND OCTOBER 31, 1996
Marketed" ("FAS 86"). Under FAS 86, the costs associated with software
development are required to be capitalized after technological feasibility has
been established. Costs incurred by the Company subsequent to the establishment
of technological feasibility have been insignificant and, as a result, the
Company has not capitalized any research and development expenses.
(G) INCOME TAXES
Prior to the sale to Galacticomm Technologies, Inc. (see note 1), the
Company was an S corporation for federal income tax purposes. As such, the
income tax effects of the results of operations of the Company accrued directly
to its stockholders. Accordingly, the accompanying financial statements do not
include a provision for income taxes.
(H) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period to
prepare these financial statements in conformity with generally accepted
accounting principles. Significant estimates are primarily related to
provisions for sales returns, bad debt and obsolete inventory. Actual results
could materially differ from these estimates.
(3) INVESTMENT ACTIVITY
The Company's short-term investments consisted of various call options
which were indexed to interest rates on thirty-year U.S. treasury instruments
and expired between January and December 1995. In December 1995, the final call
option expired and had a zero fair value, resulting in the Company realizing an
investment loss of $225,818 for the year ended December 31, 1995. The Company
has no other short-term investments at December 31, 1995 or October 31, 1996.
(4) LINE OF CREDIT
The Company had a line of credit with a bank for $300,000 which bears
interest at prime plus 1 percent and is collateralized by the Company's
accounts receivable, inventory and property and equipment. This line of credit
expired January 9, 1997. As of October 31, 1996, the Company had borrowed
$298,575 under the line of credit agreement.
F-31
GALACTICOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND OCTOBER 31, 1996
(5) INCENTIVE STOCK OPTION PLAN
The Company has reserved 3,000,000 shares of its common stock for issuance
under its 1987 Incentive Stock Option Plan (the "Plan"). Under the Plan,
options may be granted to purchase common stock at exercise prices not less
than fair market value at the date of grant, as determined by the Board of
Directors. During August 1996, the Board of Directors approved the conversion
of all stock options outstanding, on a one-for-one basis, into phantom units
under the Company's phantom stock plan, and changed the number of shares of
common stock reserved for issuance under the Plan to 500,000. All options
expire on the date specified in the option agreement and in no event later than
the tenth anniversary of the date on which the option was granted. A summary of
incentive stock option activity is as follows:
NUMBER OF EXERCISE
OPTIONS PRICE
------------- -----------------
Options outstanding, December 31, 1994 ......... 1,220,050 $ .30 - 2.85
Options granted ................................ 50,000 3.18
Options canceled ............................... (65,000) 1.46 - 3.18
Options exercised .............................. (283,765) 1.23 - 1.85
---------
Options outstanding, December 31, 1995 ......... 921,285 .30 - 3.18
Converted to phantom units ..................... (921,285) .30 - 3.18
--------- ------------
Options outstanding, October 31, 1996 .......... -- $ --
========= ============
On November 21, 1996 the Plan was canceled.
In 1994, the Company exchanged 83,620 shares of common stock for $122,492
in promissory notes issued by two directors. Also in 1994, a director of the
Company exercised 187,760 options and issued a promissory note of $56,328 as
consideration thereof.
The promissory notes referred to above bear interest at rates ranging from
4.00 -5.86 percent and mature in September 1996 through January 1997 and are
collateralized by common stock of the Company held by the two directors. During
1996, such notes were repaid with 563,536 shares of the Company's common stock.
The non-cash option transactions described above have been excluded from
the accompanying statements of cash flows.
During 1995, a former employee of the Company exercised 279,000 options to
acquire shares of common stock. The exercise price for the first 1,864 options
exercised was funded by an exchange of 1,000 shares of common stock held by the
former employee. Such common shares exchanged had been held by the former
employee greater than six months. Subsequent to the initial exercise, the
former employee immediately used the shares of common stock acquired under
option to satisfy the exercise price for additional shares under the same
option (the "Pyramiding Exercise"), until the former employee's remaining
277,136 options were exercised.
The shares of common stock used in the Pyramiding Exercise were considered
"immature" as they were held less than six months by the former employee.
Accordingly, the Company recognized $443,242 in compensation expense in 1995.
F-32
GALACTICOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND OCTOBER 31, 1996
(6) PHANTOM STOCK PLAN
In July 1994, the Company's Board of Directors authorized the Galacticomm,
Inc. Phantom Stock Plan. The purpose of the plan is to provide equity-based
compensation to certain employees and directors through the awarding of rights
or "units" associated with the common stock of the Company. These units entitle
the holder to receive bonus compensation and an election may be made by the
holder to receive the common stock of the Company based on the occurrence of
certain events.
A summary of the Phantom Stock Plan's activity is as follows:
Units outstanding, December 31, 1994 ......... 98,296
Units granted ............................... 89,675
Units canceled .............................. (15,361)
-------
Units outstanding, December 31, 1995 ......... 172,590
Units granted ............................... 4,009,947
Units canceled .............................. (64,729)
Units converted to common stock ............. (3,625,429)
----------
Units outstanding, October 31, 1996 .......... 492,379
==========
During August 1996, the Board of Directors approved the increase of
phantom units that may be issued under the Phantom Stock Plan to 4,500,000. As
a result of the purchase by Galacticomm Technologies, Inc. (see note 1) of
8,037,203 of the issued and outstanding common shares of the Company, certain
provisions in the Phantom Stock Plan were met and triggered the conversion into
common stock feature of all currently outstanding phantom units. As such, all
phantom unit holders at October 31, 1996 had the option to convert each phantom
unit held into a common share of the Company. Accordingly, $529,139 of
compensation expense was recorded, representing the fair value of the Company's
common stock underlying all phantom units outstanding on October 31, 1996. On
November 21, 1996 the Phantom Stock Plan was canceled.
(7) LEASE TERMINATION
On June 8, 1996, the Company entered into a third amendment to a certain
10-year office space lease agreement, under which the Company stipulated that
the Company did not desire to take occupancy of the subject property. As of
October 31, 1996 the Company has recorded a lease termination expense of
$380,040 representing lost security deposits and future lease payments.
F-33
GALACTICOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND OCTOBER 31, 1996
(8) COMMITMENTS
The Company leases its main office and warehouse premises under an
operating lease which expires on May 13, 1997. The Company also leases office
equipment under operating leases. The following summarizes future minimum
leases under non-cancelable operating leases as of October 31, 1996:
1997 ................ $ 76,192
1998 ................ 4,531
--------
$ 80,723
========
Rent expense under operating leases for the year ended December 31, 1995
and the ten months ended October 31, 1996 amounted to $78,857 and $96,671,
respectively.
The Company also leases certain computer equipment under capital leases.
The annual maturities of these capital lease obligations are as follows:
OCTOBER 31,
-----------
1997 ................ $ 33,092
1998 ................ 23,361
1999 ................ 5,488
--------
$ 61,941
========
F-34
GALACTICOMM TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma consolidated statement of operations of
Galacticomm Technologies Inc. ("GTI") for the year ended December 31, 1996
gives effect to the following pro forma events, as if such events had occurred
on January 1, 1996: (i) the inclusion of the results of operations of
Galacticomm, Inc. and Tessier Technologies, Inc. for the year ended December
31, 1996 as if such acquisitions were consummated on January 1, 1996; (ii) the
elimination of intercompany transactions between Galacticomm Technologies,
Inc., Galacticomm, Inc. and Tessier Technologies, Inc. for the year ended
December 31, 1996 assuming these entities reported on a consolidated basis;
(iii) an increase of amortization of goodwill as a result of the acquisitions
of Galacticomm, Inc. and Tessier Technologies, Inc. assuming such acquisitions
were consummated on January 1, 1996; and (iv) an increase of interest expense
due to the financings obtained to fund the acquisitions of Galacticomm, Inc.
and Tessier Technologies, Inc. assuming such acquisitions were consummated on
January 1, 1996.
These unaudited pro forma consolidated statements of operations should be
read in conjunction with the audited consolidated financial statements of
Galacticomm Technologies, Inc. The unaudited pro forma data are not necessarily
indicative of the results of operations of Galacticomm Technologies, Inc. that
would have occurred if the pro forma events had been in effect at the beginning
of the periods presented, nor are they necessarily indicative of future results
of operations.
GTI TTI(7) GALACTICOMM(7)
--------------- ------------- ----------------
Revenues ..................... $ 1,692,743 $1,350,204 $ 3,293,876
Cost of revenues ............. 758,050 865,715 1,005,595
------------ ---------- ------------
Gross profit ................. 934,693 484,489 2,288,281
Selling, general and
administrative .............. 1,531,130 472,729 2,196,421
Depreciation ................. 47,533 31,542 336,377
Amortization
of intangibles .............. 36,607 -- --
Compensation expense
on warrants ................. 49,381 -- 529,139
Customer support ............. 72,772 -- 387,797
Research and
development ................. 225,549 -- 638,200
------------ ---------- ------------
Total operating expenses ..... 1,962,972 504,271 4,087,934
------------ ---------- ------------
Income (loss) from
operations .................. (1,028,279) (19,782) (1,799,653)
Other income (expense) ....... (60,312) -- (468,153)
------------ ---------- ------------
Loss before income taxes ..... (1,088,591) (19,782) (2,267,806)
Income taxes ................. -- -- --
------------ ---------- ------------
Net loss ..................... $ (1,088,591) $ (19,782) $ (2,267,806)
============ ========== ============
Net loss per share ...........
Shares used in computing
net loss per share ..........
PRO FORMA
COMBINED ADJUSTMENTS PRO FORMA
--------------- ------------------------ ---------------
Revenues ..................... $ 6,336,823 $ (147,318)(1,2) $ 6,189,505
Cost of revenues ............. 2,629,360 113,898 (1,2) 2,515,462
------------ ------------ ------------
Gross profit ................. 3,707,463 (33,420) 3,674,043
Selling, general and
administrative .............. 4,200,280 180,972 (3,4) 4,381,252
Depreciation ................. 415,452 -- 415,452
Amortization
of intangibles .............. 36,607 538,126 (5) 574,733
Compensation expense
on warrants ................. 578,520 -- 578,520
Customer support ............. 460,569 -- 460,569
Research and
development ................. 863,749 -- 863,749
------------ ------------ ------------
Total operating expenses ..... 6,555,177 719,098 7,274,275
------------ ------------ ------------
Income (loss) from
operations .................. (2,847,714) (752,518) (3,600,232)
Other income (expense) ....... (528,465) (126,856)(6) (655,321)
------------ ------------ ------------
Loss before income taxes ..... (3,376,179) (879,374) (4,255,553)
Income taxes ................. -- -- --
------------ ------------ ------------
Net loss ..................... $ (3,376,179) $ (879,374) $ (4,255,553)
============ ============ ============
Net loss per share ........... $ (1.99)
Shares used in computing
net loss per share .......... 2,139,443
----------------
(1) Adjustment reflects elimination of intercompany sales from Galacticomm,
Inc. to Tessier Technologies, Inc.
(2) Adjustment reflects the remaining portion of the elimination of
intercompany sales.
(3) Adjustment reflects additional officers salaries as if officers employment
agreements were effective January 1, 1996.
(4) Adjustment reflects additional consulting fees to a stockholder of the
company as if the related consulting agreement had been entered into on
January 1, 1996.
(5) Adjustment reflects an additional ten months goodwill amortization related
to the Galacticomm, Inc. and Tessier Technologies, Inc. acquisitions.
(6) Adjustment reflects additional interest expense on debt incurred to finance
the acquisition of Galacticomm and Tessier as if the acquisitions were
consummated on January 1, 1996.
(7) Reflects operations from January 1, 1996 through October 31, 1996.
F-35
================================================================================
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY AN UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY ANY SECURITY OTHER THAN THE SHARES OFFERED BY THIS PROSPECTUS, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO ITS DATE.
-----------------------------------
TABLE OF CONTENTS
PAGE
----
Summary ................................ 3
Risk Factors ........................... 8
Use of Proceeds ........................ 18
Capitalization ......................... 19
Dividend Policy ........................ 19
Dilution ............................... 20
Selected Historical and Unaudited
Pro Forma Financial Data ............ 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ....................... 22
Business ............................... 28
Management ............................. 39
Certain Transactions ................... 45
Principal Shareholders ................. 49
Description of Securities .............. 51
Underwriting ........................... 57
Legal Matters .......................... 60
Experts ................................ 60
Available Information .................. 60
Index to Financial Statements .......... F-1
-----------------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), 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.
GALACTICOMM TECHNOLOGIES, INC.
1,800,000 SHARES
AND
1,800,000 REDEEMABLE COMMON STOCK
PURCHASE WARRANTS
(AS UNITS, EACH CONSISTING OF ONE
SHARE OF COMMON STOCK AND ONE
REDEEMABLE COMMON STOCK PURCHASE
WARRANT)
----------------
PROSPECTUS
----------------
SECURITY CAPITAL TRADING, INC.
FIRST EQUITY CORPORATION
OF FLORIDA
, 1998
================================================================================
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Pursuant to the provisions of Section 607.0850(1) of the Florida Business
Corporation Act, the Company has the power to indemnify any person who is or
was a party to any proceeding (other than an action by, or in the right of, the
Company), because such person is or was a director, officer, employee, or agent
of the Company (or is or was serving at the request of the Company under
specified capacities) against liability incurred in connection with such
proceeding provided such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, the best interest of the
Company (and with respect to any criminal action or proceeding, such person had
no reasonable cause to believe such person's conduct was unlawful).
With respect to a proceeding by or in the right of the Company to procure
a judgment in its favor, Section 607.085(2) of the Florida Business Corporation
Act provides that the Company shall have the power to indemnify any person who
is or was a director, officer, employee, or agent of the Company (or is or was
serving at the request of the Company under specified capacities) against
expenses and amounts paid in settlement not exceeding, in the judgment of the
Board of Directors, the estimated expense of litigating the proceeding to
conclusion, actually and reasonably incurred in connection with the defense or
settlement of such proceeding provided such person acted in good faith and in a
manner such person reasonably believed to be in, or not opposed to, the best
interest of the Company, except that no indemnification shall be made in a case
in which such person shall have been adjudged to be liable to the Company
unless and only to the extent that the court in which the proceeding was
brought, shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses.
Indemnification as described above shall only be granted in a specific
case upon a determination that indemnification is proper under the
circumstances using the applicable standard of conduct which is made by (a) a
majority of a quorum of directors who were not parties to such proceeding, (b)
if such a quorum is not attainable or by majority vote of a committee
designated by the Board of Directors consisting of two or more directors not
parties to the proceeding, (c) by independent legal counsel selected by the
Board of Directors described in the foregoing parts (a) and (b), or if a quorum
cannot be obtained, then selected by a majority vote of the full Board of
Directors, or (d) by the shareholders by a majority vote of a quorum consisting
of shareholders who are not parties to such proceeding.
Section 607.0850(12) of the Florida Business Corporation Act permits the
Company to purchase and maintain insurance on behalf of any director, officer,
employee or agent of the Company (or is or was serving at the request of the
Company in specified capacities) against any liability asserted against such
person or incurred by such person in any such capacity whether or not the
Company has the power to indemnify such person against such liability.
ARTICLES OF INCORPORATION
The Articles of Incorporation of the Company (the "Articles") provide for
the indemnification of directors and officers of the Company to the fullest
extent permitted by Section 607.0850 of the Florida Business Corporation Act.
The Articles further provide that the indemnification provided for therein
shall not be exclusive of any rights to which those indemnified may be entitled
under any bylaw, agreement, vote of shareholders or disinterested directors, or
otherwise.
The Articles also contain a provision that eliminates the personal
liability of the Company's directors for monetary damages unless the director
has breached his or her fiduciary duty and such breach constitutes or includes
certain violations of criminal law, a transaction from which the director
derived an improper personal benefit, certain unlawful distributions or certain
other reckless, wanton or wilful acts or misconduct. This provision does not
alter a director's liability under the federal securities laws. In addition,
this provisions does not affect the availability of equitable remedies, such as
an injunction or rescission, for breach of fiduciary duty.
II-1
SECURITIES AND EXCHANGE COMMISSION POLICY
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company,
the Company has been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses (other than the underwriting discounts and
commissions) in connection with the issuance and distribution of the securities
registered hereunder are as follows:
SEC Registration Fee* .................... $ 9,496.40
NASD Filing Fee* ......................... $ 3,719.52
NASDAQ Listing Fee* ...................... $ 10,000
Printing Expenses ........................ $ 120,000
Accounting Fees and Expenses ............. $ 260,000
Legal Fees and Expenses .................. $ 315,000
Blue Sky Fees and Expenses ............... $ 50,000
Transfer Agent Fees and Expenses ......... $ 15,000
Miscellaneous ............................ $ 8,177
------------
Total .................................. $ 791,392.92
============
----------------
* Actual amount.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth below is certain information regarding sales of securities by
the Company without registration under the Securities Act. Such information
gives retroactive effect to the Company's November 1996 1 for 2 forward stock
split of the Common Stock, the Company's September 1997 4.061771824 for 1
reverse stock split of the Common Stock and the Company's June 1998 1.657080842
for 1 reverse stock split of the Common Stock.
On December 4, 1995, the Company issued an aggregate of 829,888 shares of
Common Stock to Peter Berg, Lorraine Gouger and Mitch Segal for an aggregate
consideration of $20,000. The offer and sale of such securities was made in
reliance on Section 4(2) of the Securities Act for transactions not involving a
public offering. In reliance upon such exemption from registration, the Company
determined that each of the foregoing persons had such knowledge and experience
in financial and business matters so as to be able to evaluate the merits and
risks of an investment in the Company and each person had access to the type of
information that would have been included in a registration statement filed
with the Commission.
On November 20, 1996, the Company issued an aggregate of 40,091 shares of
Common Stock to Walter Muharsky and Vincent Toscano in connection with the
merger of TTI with and into the Company. The recorded value of such shares of
Common Stock was $145,714. The Company, on November 20, 1996, also issued
733,669 shares of Common Stock to Yannick Tessier, pursuant to the Stock
Issuance Agreement, dated August 26, 1996. The recorded value of such shares of
Common Stock was $49,381. The offer and sale of such securities was made in
reliance on Section 4(2) of the Securities Act for transactions not involving a
public offering. In reliance upon such exemption from registration, the Company
determined that each of the foregoing persons had such knowledge and experience
in financial and business matters so as to be able to evaluate the merits and
risks of an investment in the Company and each person had access to the type of
information that would have been included in a registration statement filed
with the Commission.
On November 21, 1996, the Company issued to the Wallenberg Trust and UA
Partners: (i) an aggregate of 324,267 shares of Common Stock in exchange for
aggregate consideration of $1,375,000 or $4.24 per share; and (ii) convertible
promissory notes in the principal aggregate amount of $1,375,000,
II-2
which are convertible into shares of Common Stock at a rate of $4.24 per share.
On December 31, 1997, the Company issued 328,224 shares of Common Stock to the
Wallenberg Trust upon conversion of their convertible note in the aggregate
amount of $1,391,781. As consideration for its services in connection with the
November 1996 transaction, the Company granted Union Atlantic a three-year
warrant to purchase 84,310 shares of common Stock at an exercise price of $4.24
per share and issued 47,152 shares of Common Stock which shares were valued at
$200,020. The offer and sale of such securities to the Wallenberg Trust was
made in an offshore offering in reliance on Regulation S of the Securities Act.
The offer and sale of such securities to Union Atlantic and UA Partners was
made in reliance on Section 4(2) for transactions not involving a public
offering. In reliance upon such exemption from registration, the Company
determined that each of the foregoing persons had such knowledge and experience
in financial and business matters to be able to evaluate the merits and risks
of an investment in the Company and each person had access to the type of
information that would have been included in a registration statement filed
with the Commission.
On November 21, 1996, the Company acquired from eight shareholders of
Galacticomm, Inc. an aggregate of 8,037,203 shares of the common stock of
Galacticomm, Inc. (representing approximately 96 percent of the then issued and
outstanding shares of the common stock of Galacticomm, Inc.) in exchange for
the issuance of an aggregate of 90,679 shares of Common Stock and the aggregate
cash payment of $611,476. The offer and sale of such securities was made in
reliance on Rule 504 of Regulation D promulgated under the Securities Act.
On January 14, 1997, the Company granted Claus Stenbaek a three-year
option to purchase 3,714 shares of Common Stock at an exercise price of $4.24
per share as consideration for serving on the Company's board of directors and
granted Robert O'Brien a three-year option to purchase 1,486 shares of Common
Stock at an exercise price of $4.24 per share in exchange for sales and
marketing consulting services rendered to the Company. The offer and sale of
such securities was made in reliance on Rule 701 of the Securities Act.
In February 1997, the Company acquired from 34 persons an additional
848,404 shares of the common stock of Galacticomm, Inc. in exchange for the
issuance of an aggregate of 25,886 shares of Common Stock and the aggregate
cash payment of $56,937. The recorded value of such shares of Common Stock was
$139,895. The offer and sale of such securities was made in reliance on Rule
504 of Regulation D promulgated under the Securities Act.
In June 1997, the Company issued 156,783 shares of Common Stock to nine
persons (3 accredited and 6 non-accredited) for aggregate consideration of
$970,762. As consideration for its services in connection with such
transaction, the Company granted Union Atlantic three-year warrants to purchase
20,382 shares of Common Stock at an exercise price of $6.20 per share. The
offer and sale of such securities was made in reliance on Rule 506 of
Regulation D promulgated under the Securities Act. Each of the non-accredited
investors represented to the Company, among other things, that such investor
had such experience in financial and business matters so as to be able to
evaluate the merits and risks of the investment.
On June 30, 1997, the Company granted options to purchase an aggregate of
213,946 shares of Common Stock at an exercise price of $6.20 per share to
Messrs. Berg and Tessier pursuant to the terms of their respective employment
agreements with the Company. The offer and sale of such securities was made in
reliance on Section 4(2) of the Securities Act for transactions not involving a
public offering. In reliance upon such exemption from registration, the Company
determined that each of the foregoing persons had such knowledge and experience
in financial and business matters so as to be able to evaluate the merits and
risks of an investment in the Company and each person had access to the type of
information that would have been included in a registration statement filed
with the Commission.
In August 1997, the Company issued an aggregate of 13,794 shares of Common
Stock to five persons, pursuant to the terms of five Agreements to Distribute
Proceeds entered into between December 1995 and February 1997. The offer and
sale of such securities was made in reliance on Section 4(2) of the Securities
Act for transactions not involving a public offering. In reliance upon such
exemption from registration, the Company determined that each of the foregoing
persons had such
II-3
knowledge and experience in financial and business matters so as to be able to
evaluate the merits and risks of an investment in the Company and each person
had access to the type of information that would have been included in a
registration statement filed with the Commission.
In September 1997, the Company granted options to purchase an aggregate of
117,373 shares of Common Stock (of which 50,866 are outstanding prior to the
offering) at an exercise price of $6.00 per share to 36 employees or
consultants of the Company pursuant to the 1997 Plan. The offer and sale of
such securities was made in reliance on Rule 701 of the Securities Act.
On September 8, 1997, the Company issued an aggregate of 49,029 shares of
Common Stock to the Wallenberg Trust and UA Partners as consideration for
relinquishing the following rights that were originally set forth in the Stock
Purchase Agreements, dated November 21, 1997, between the Company and each of
the Wallenberg Trust and UA Partners: (i) ratchet rights that required the
Company to issue additional shares of Common Stock to such persons based on the
Company's 1997 after tax earnings as follows: (x) 0.1581 shares for each share
then owned if after tax earnings were less than $1,000,000; (y) 0.0790 shares
for each share then owned if after tax earnings were between $1,000,000 and
$1,500,000; and (z) no additional shares if after tax earnings exceeded
$1,500,000; (ii) certain preemptive rights; and (iii) certain anti-dilutive
rights. The foregoing transaction was recorded as a reclassification of the par
value of such shares of Common Stock from additional paid in capital to common
stock.
On October 28, 1997, the Company issued to 39 persons (26 accredited
investors and 13 non-accredited investors) 42 units ("Financing Units"), each
unit consisting of a promissory note in the principal amount of $50,000 and
three year warrants ("Financing Warrants") to purchase 11,466 shares of Common
Stock at an exercise price of $6.21 per share. Such offering was made in
reliance on Rule 506 of Regulation D promulgated under the Securities Act. Each
of the non-accredited investors represented to the Company, among other things,
that such investors had such experience in financial and business matters to be
able to evaluate the merits and risks of the investment. As consideration for
serving as the placement agent for such offering, the Company paid First Equity
Corporation a placement fee equal to: (i) cash compensation of $210,000; (ii) a
non-accountable expense allowance of $63,000 and accountable expenses totaling
$10,000; and (iii) warrants to purchase 96,314 shares on terms substantially the
same as the warrants sold to the investors, which were subsequently returned to
the Company. In July and August 1998, the Company obtained a waiver of interest
payment default in exchange for which the Company: (i) issued to each Financing
Unit holder another warrant to purchase 7,534 shares of Common Stock at a price
of $6.00 per share exercisable until July 1, 2002; (ii) extended the expiration
date of the Financing Warrants to coincide with the expiration date of the
additional warrants; and (iii) reduced the exercise price of the original
Financing Warrants to $6.00 per share. Such offering was made in reliance on
Rule 506 of Regulation D promulgated under the Securities Act.
On December 15, 1997, the Company granted David Manovich a three year
option to purchase 18,104 shares of Common Stock at an exercise price of $6.21
per share as consideration for serving on the board of directors of the
Company. The offer and sale of such securities was made in reliance on Rule 701
of the Securities Act.
As of March 3, 1998, the Company granted David Manovich an option to
purchase up to 120,694 shares of Common Stock as consideration for serving as
Chairman of the Board of Directors of the Company. The exercise price of all
vested options is $5.22 per share. After the Company's initial public offering
the exercise price of the options will be $5.40 per share. The offer and sale
of such securities was made in reliance on Section 4(2) of the Securities Act
for transactions not involving a public offering. In reliance upon such
exemption from registration, the Company determined that Mr. Manovich had such
knowledge and experience in financial and business matters so as to be able to
evaluate the merits and risks of an investment in the Company and he had access
to the type of information that would have been included in a registration
statement filed with the Commission.
In May 1998, Kenworthy Investments Limited ("Kenworthy") loaned the
Company $125,000 and received a Secured Convertible Promissory Note (the
"Kenworthy Note"), dated May 7, 1998. All principal and accrued interest (at
the rate of 10% per annum) under the Kenworthy Note is required to be paid on
January 1, 1999. Subject to certain adjustments, the aggregate principal and
accrued interest
II-4
under the Kenworthy Note can be converted into shares of Common Stock at the
rate of $1.24 on demand by Kenworthy. The offer and sale of the Kenworthy Note
was made in reliance on Section 4(2) of the Securities Act for transactions not
involving a public offering. In reliance upon such exemption from registration,
the Company determined that Kenworthy had such knowledge and experience in
financial and business matters so as to able to evaluate the merits and risks
of an investment in the Company and Kenworthy had access to the type of
information that would have been included in the registration statement filed
with the Commission.
As of June 1, 1998, the Company and DataSafe Publications, Inc.
("DataSafe") settled certain litigation brought against the Company by
DataSafe. See "Business--Legal Proceeding." Pursuant to the settlement, the
Company has placed in escrow with a third party escrow agent 253,907 shares of
Common Stock. One year from the closing of an initial public offering of the
Company's securities (the "Distribution Date"), the escrow agent will disburse
to DataSafe the lesser of 253,907 shares or the number of shares of Common
Stock determined by dividing $650,000 by the market price (as defined in the
escrow agreement) on the Distribution Date of a share of Common Stock. In
connection with this transaction, DataSafe represented to the Company, among
other things, that DataSafe has such knowledge and experience in financial and
business matters (as required by Rule 506 of Regulation D of the Securities
Act) and has had such opportunity as it deems necessary or appropriate to ask
questions of and receive from personnel of the Company so as to enable DataSafe
to evaluate the merits and risks associated with the ownership of the Common
Stock and the business, assets, liabilities, financial condition, cash flow and
operations of the Company. Accordingly, the issuance of the shares of Common
Stock was made in reliance on Rule 506 of Regulation D promulgated under the
Securities Act.
From June 28 to July 2 1998, Peter Berg, the Chief Executive Officer of
the Company and Yannick Tessier, the President of the Company, sold 141,129 and
100,805 shares owned by them, respectively, to 16 persons for an aggregate
purchase price of $300,000, or $1.24 per share of Common Stock. The private
resale of such Common Stock was made in reliance on the exemption from
registration commonly referred to as Section 4(11/2). Among the factors
considered in connection with such exemption were: (i) a determination that
each purchaser possessed the sophistication to evaluate the merits and risks of
an investment in the shares; (ii) a determination that each purchaser purchased
for investment and not with a view to resale or distribution; (iii) each
purchaser agreed not to transfer the shares for a period of 12 months following
the offering made pursuant to this Registration Statement; (iv) each purchaser
was provided with access to the type of information that a registration
statement would provide; (v) Mr. Berg had, at the time of sale, held his
respective portion of the shares for more than 21/2 years and Mr. Tessier had,
at the time of sale, held his respective portion of the shares for more than
11/2 years; and (vi) the number of purchasers.
In connection with loans made by Messrs. Berg and Tessier to the Company,
the Company issued promissory notes to each of them. All principal and accrued
interest under the notes is required to be paid upon the earlier to occur of
September 30, 1999 or 12 months from the completion of this offering. The
issuance of the notes to Messrs. Berg and Tessier was made in reliance on
Section 4(2) of the Securities Act for transactions not involving a public
offering. In reliance upon such exemption from registration, the Company
determined that Mr. Berg and Mr. Tessier had such knowledge and experience in
financial and business matters so as to be able to evaluate the merits and
risks of an investment in the Company and each persons, as executive officers
of the Company, had access to the type of information that would have been
included in a registration statement filed with the Commission.
On August 12, 1998, the Company borrowed an aggregate of $260,000 from
four persons (all accredited investors) pursuant to a non-negotiable 10%
unsecured promissory note which bears interest at a rate of 10 percent per year
and which matures on the earlier of December 31, 1998 or the effective date of
this Registration Statement, and in connection therewith issued warrants to
purchase an aggerate of 156,000 shares of Common Stock at an exercise price of
$6.00 per share. The offer and sale of such securities was made in reliance on
Rule 506 of Regulation D promulgated under the Securities Act.
II-5
ITEM 27. EXHIBITS
(A) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1. Form of Underwriting Agreement between the Company and the Underwriters.*
3.1 Articles of Incorporation of the Company as filed with the Secretary of State on
December 4, 1995.*
3.2 Articles of Amendment to Articles of Incorporation of the Company as filed with the
Florida Secretary of State on November 19, 1996.*
3.3 Articles of Amendment to Articles of Incorporation of the Company as filed with the
Florida Secretary of State on May 1, 1997.*
3.4 Articles of Amendment to Articles of Incorporation of the Company as filed with the
Florida Secretary of State on September 9, 1997.*
3.5 Articles of Amendment to Articles of Incorporation of the Company as filed with the
Florida Secretary of State on dated September 30, 1997.*
3.6 Articles of Merger of the Company as filed with the Florida Secretary of State on
November 21, 1996.*
3.7 Bylaws of the Company, as amended on June 20, 1998.*
3.8 Articles of Amendment to Articles of Incorporation of the Company as filed with the
Florida Secretary of State on June 23, 1998.*
4.1 Form of Common Stock Certificate.*
4.2 Form of Warrant Agreement.*
4.3 Form of Warrant Certificate.*
4.4 Form of Representatives' Warrant Agreement, including form of Warrant Certificate.*
4.5 Omitted.
4.6 Form of Consulting Agreement between the Representatives and the Company.*
4.7 Form of Agreement Among Underwriters.*
5 Opinion of Lucio, Mandler, Croland, Bronstein, Garbett, Stiphany & Martinez, P.A.*
10.1 Stock Purchase Agreement, dated November 21, 1996, among the Company, Peter Berg
("Berg"), Yannick Tessier ("Tessier") and Hemmingfold Investments Ltd.
("Hemmingfold").*
10.2 Letter Agreement, dated September 8, 1997, by and among the Company, Berg, Tessier
and Hemmingfold amending the Stock Purchase Agreement dated November 21, 1996.*
10.3 Secured Convertible Promissory Note, dated November 21, 1996, from the Company in
favor of Hemmingfold.*
10.4 Letter Agreement, dated September 8, 1997, by and between the Company and
Hemmingfold amending the Secured Convertible Promissory Note, dated November 21,
1996.*
10.5 Stock Purchase Agreement, dated November 21, 1996, among the Company, Berg, Tessier
and Union Atlantic Partners I Limited ("UA Partners").*
10.6 Letter Agreement, dated September 8, 1997, by and among the Company, Berg, Tessier
and UA Partners amending the Stock Purchase Agreement, dated November 21, 1996.*
II-6
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.7 Secured Convertible Promissory Note, dated November 21, 1996, from the Company in
favor of UA Partners.*
10.8 Letter Agreement, dated September 8, 1997, by and between the Company and Union
Atlantic Partners amending the Secured Convertible Promissory Note, dated November 21,
1996.*
10.9 Warrant dated November 21, 1996, between Company and Union Atlantic, L.C. ("Union
Atlantic").*
10.10 1997 Stock Option Plan.*
10.11 Form of Bridge Note.*
10.12 Form of Bridge Warrant.*
10.13 Form of Bridge Registration Rights Agreement.*
10.14 Agreement and Plan of Merger between Company and Tessier Technologies, Inc. dated
November 20, 1996.*
10.15 Lease Agreement to lease office space between Galacticomm, Inc. and New Town
Commerce Center, Ltd., dated July 21, 1997.*
10.16 Agreement to lease T-3 Fiber Optic Digital Equipment between AT&T and the Company,
dated December 26, 1996.*
10.17 Letter Agreement to acquire Galacticomm, Inc. between Company and Galacticomm, Inc.
dated October 29, 1996.*
10.18 Amended and Restated Consulting Agreement, dated July 1, 1997, between the Company
and Union Atlantic.*
10.19 Consulting Agreement, dated January 15, 1997, by and among the Company, Union
Atlantic and Robert J. O'Brien.*
10.20 Amended and Restated Employment Agreement, dated June 30, 1997, between the
Company and Berg.*
10.21 Amended and Restated Employment Agreement, dated June 30, 1997, between the
Company and Tessier.*
10.22 Employment Agreement, dated August 25, 1997, between the Company and T. Michael
Love.*
10.23 Stock Option and Agreement between the Company and Berg.*
10.24 Stock Option and Agreement between the Company and Tessier.*
10.25 Stock Issuance Agreement among the Company, Berg and Tessier dated August 26, 1996.*
10.26 Promissory Note, dated November 5, 1997, from the Company to Capital Bank.*
10.27 Promissory Note, dated April 2, 1996, from the Company in favor of Skyline, Inc.*
10.28 Promissory Note, dated August 3, 1996, from Tessier Technologies, Inc. in favor of Tessier.*
10.29 Promissory Note Extension, dated December 31, 1996 in favor of Tessier by the Company.*
10.30 Bundling Agreement with Authorization to Replicate Products between Eastman Kodak
Company and Galacticomm, Inc. dated May 29, 1997.*
10.31 Agreement between Majorware Inc., and Galacticomm, Inc. dated April 30, 1997.*
10.32 Sale of High Society BBS to Galacticomm, Inc. Agreement dated June 10, 1997.*
II-7
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.33 Galacticomm Agreement between the Company and Specom Technologies Corp., dated
May 8, 1997.*
10.34 Letter of Permission to Distribute Software between Galacticomm, Inc. and Aztech New
Media Corp., dated May 21, 1997.*
10.35 Software Distribution License between Galacticomm, Inc. and Digital Vision, Inc. dated
May 30, 1997.*
10.36 Software Distribution License between Best Data Products and Galacticomm, Inc. dated
May 30, 1997.*
10.37 Letter Agreement between Galacticomm, Inc. and DataSafe Publications, Inc. dated
October 28, 1997.*
10.38 Restated Software License Agreement between Galacticomm, Inc. and LEAD
Technologies, Inc. dated September 29, 1995.*
10.39 Annual Source Support and Maintenance Agreement between Galacticomm, Inc. and
Pacific Software, Inc. dated September 14, 1995.*
10.40 Software Source Code and Software Binary Distribution License Agreement between
Galacticomm, Inc. and Pacific Software, Inc. dated April 14, 1995.*
10.41 License Agreement between Crown Communications, Inc. and the Company dated
November 18, 1996.*
10.42 Renewal and Modification Agreement to Distribution Agreement between Tech Data
Corporation and Galacticomm, Inc. dated October 8, 1995.*
10.43 Start-Up Agreement between Galacticomm, Inc. and Ingram Micro, Inc. dated April 9,
1997.*
10.44 Reseller Agreement between Galacticomm, Inc. and World Commerce Online, Inc. dated
March 27, 1997.*
10.45 Distribution Agreement between Galacticomm, Inc. and DistribuPro dated February 10,
1994.*
10.46 Web Hosting Agreement between Galacticomm, Inc. and Horst Entertainment, Inc. dated
September 9, 1997.*
10.47 Software License Agreement, dated August 12, 1997 between the Company and Boca
Research, Inc.***
10.48 Reseller Agreement, dated December 12, 1997, between the Company and Microland
Trading, Inc.***
10.49 Reseller Agreement, dated January 12, 1998, between the Company and Simon & Schuster,
Inc.***
10.50 Joint Venture Agreement, dated January 8, 1998, by and between the Company and
Express Web, Inc.***
10.51 Form of Voting Agreement between the Company and Messrs. Berg and Tessier.*
10.52 Form of Lock-Up Agreement.*
10.53 Promissory Note Extension, dated December 31, 1997 in favor of Tessier.*
10.54 First Amendment to Amended and Restated Employment Agreement, dated April 3, 1998,
between the Company and Berg.*
II-8
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.55 Second Amendment to Amended and Restated Employment Agreement, dated June 26,
1998, between the Company and Berg.*
10.56 First Amendment to Amended and Restated Employment Agreement, dated April 3, 1998,
between the Company and Tessier.*
10.57 Second Amendment to Amended and Restated Employment Agreement, dated June 26,
1998, between the Company and Tessier.*
10.58 Agreement, dated March 5, 1998, between the Company and David Manovich
("Manovich").*
10.59 First Amendment to Agreement, dated June 22, 1998, between the Company and
Manovich.*
10.60 Second Amendment to Agreement, dated June 23, 1998, between the Company and
Manovich.*
10.61 Omitted.
10.62 Amended and Restated Stock Option and Agreement between the Company and
Manovich.*
10.63 Promissory Note, dated July 1, 1998, from the Company to Berg.*
10.64 Promissory Note, dated July 1, 1998, from the Company to Tessier.*
10.65 Form of Stock Subscription Agreement.*
10.66 Letter Agreement amending Stock Subscription Agreement.*
10.67 Form of Registration Rights Agreement.*
10.68 Escrow Agreement, dated June 1, 1998, among the Company, DataSafe Publications, Inc.
and the Escrow Agent.*
10.69 Registration Rights Agreement, dated June 1, 1998, between the Company and DataSafe
Publications, Inc.*
10.70 Letter from Kenworthy Investments, Ltd., dated January 21, 1998, to the Company.*
10.71 Secured Convertible Promissory Note, dated May 7, 1998, from the Company to
Kenworthy Investments, Ltd.*
10.72 Security Agreement, dated May 7, 1998, between the Company and Kenworthy
Investments, Ltd.*
10.73 Security Agreement, dated November 5, 1997, between the Company and Capital Bank.*
10.74 Continuing Guaranty of Tessier in favor of Capital Bank.*
10.75 Continuing Guaranty of Berg in favor of Capital Bank.*
10.76 Form of Subscription Agreement (August 1998).*
10.77 Form of Non-Negotiable 10% Unsecured Promissory Note (August 1998).*
10.78 Form of Warrant (August 1998).*
10.79 Form of Registration Rights Agreement (August 1998).*
10.80 Asset Purchase Agreement, dated May 27, 1998, between the Company and Metropolis,
Inc.*
11. Per share computation.*
II-9
EXHIBIT
NUMBER DESCRIPTION
------- -----------
21. Subsidiaries of the Company: Galacticomm, Inc., a corporation organized under the laws of
the State of Florida.
23.1 Consent of KPMG Peat Marwick LLP re: Galacticomm Technologies, Inc.
23.2 Consent of KPMG Peat Marwick LLP re: Galacticomm, Inc.
24. Power of Attorney (included in the Signature Page of initial filing of the Registration
Statement).
27. Financial Data Schedule (for SEC purposes only).
----------------
* Previously filed with this Registration Statement.
** To be filed by amendment.
*** Portions of such exhibit have been omitted pursuant to a request for
confidential treatment. Omitted portions have been filed with the
Securities and Exchange Commission.
ITEM 28. UNDERTAKINGS.
(a) The undersigned small business issuer hereby undertakes to provide to
the underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer of controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a(3) of the
Securities Act;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or together, represent a
fundamental change in the information in the registration statement; and
notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar
II-10
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 Securities and Exchange
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in the
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused Amendment No. 4 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Fort
Lauderdale, State of Florida, on the 27th day of August 1998.
GALACTICOMM TECHNOLOGIES, INC.
By /S/ PETER BERG
-----------------------------------
Peter Berg, Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, Amendment No.
4 to this Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Peter Berg Chief Executive Officer (Principal August 27, 1998
------------------------- Executive Officer)
Peter Berg
/s/ Yannick Tessier President and Director August 27, 1998
-------------------------
Yannick Tessier
/s/ David Manovich* Chairman of the Board of Directors August 27, 1998
-------------------------- and acting Chief Financial Officer
David Manovich (Principal Financial and
Accounting Officer)
/s/ Timothy Mahoney* Director August 27, 1998
--------------------------
Timothy Mahoney
By: /s/ Peter Berg
--------------------------
Peter Berg
Attorney-in-fact
II-12
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
------- -----------
23.1 Consent of KPMG Peat Marwick LLP re: Galacticomm Technologies, Inc.
23.2 Consent of KPMG Peat Marwick LLP re: Galacticomm, Inc.
27 Financial Data Schedule (for SEC purposes only).
EX-23.1
2
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Galacticomm Technologies, Inc.
and Subsidiary:
We consent to the use of our report included herein and to the reference
to our firm under the heading "Experts" in the Prospectus.
Our report dated January 30, 1998 except as to the sixth paragraph of
note 8(a) which is as of August 21, 1998, the last paragraph of note 8(a) which
is as of August 17, 1998, note 10(b) which is as of June 26, 1998, the third
paragraph of note 10(e) which is as of June 1, 1998, note 11(a) which is as of
June 23, 1998, note 11(b) which is as of May 7, 1998, note 11(c) which is as of
May 29, 1998, note 11(d) which is as of July, 1998 and Note 11(e) which is as
of August 6, 1998, contains an explanatory paragraph that states that the
Company has suffered recurring losses from operations and has negative working
capital, that raise substantial doubt about its ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of that uncertainty.
/s/ KPMG Peat Marwick LLP
Fort Lauderdale, Florida
August 27, 1998
EX-23.2
3
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Galacticomm, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
/s/ KPMG Peat Marwick LLP
Fort Lauderdale, Florida
August 27, 1998
EX-27
4
5
12-MOS 6-MOS
DEC-31-1997 DEC-31-1997
JAN-01-1997 JAN-01-1998
DEC-31-1997 JUN-30-1998
226,281 90,508
0 0
805,864 385,265
(494,436) (186,281)
83,730 46,383
648,367 386,569
968,015 943,877
(197,111) (303,201)
3,850,567 3,084,678
1,314,222 4,445,342
0 0
0 0
0 0
264 264
(35,681) (2,536,463)
3,850,567 3,084,678
3,418,057 838,395
3,418,057 838,395
869,252 178,935
6,762,775 2,394,311
409,317 180
0 0
434,410 944,686
(3,754,035) (2,500,782)
0 0
(3,754,035) (2,500,782)
0 0
0 0
0 0
(3,754,035) (2,500,782)
(1.72) (.95)
(1.72) (.95)