AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1996
REGISTRATION NO. 333-11751
================================================================================
SECURITIES AND EXCHANGE COMMISSION
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
_______________
AMENDMENT NO. 1 TO
Form SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_______________
WEBSECURE, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
_______________
DELAWARE 04-3296069
(STATE OR OTHER 7374 (I.R.S. EMPLOYER
JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE NUMBER)
ORGANIZATION)
_______________
ROBERT KUZARA, CHIEF EXECUTIVE OFFICER
1711 BROADWAY
SAUGUS, MASSACHUSETTS 01906
(617) 867-2300
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER OF PRINCIPAL
EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS AND NAME, ADDRESS AND
TELEPHONE NUMBER OF AGENT FOR SERVICE)
_______________
COPIES TO:
PAUL D. BROUDE, ESQUIRE WILLIAM M. PRIFTI, ESQUIRE
ANDREW D. MYERS, ESQUIRE LYNNFIELD WOODS OFFICE PARK
O'CONNOR, BROUDE & ARONSON 220 BROADWAY, SUITE 204
950 WINTER STREET, SUITE 2300 LYNNFIELD, MASSACHUSETTS 01940
WALTHAM, MASSACHUSETTS 02154 TELEPHONE: (617)593-4525
TELEPHONE: (617) 890-6600 FACSIMILE: (617)598-5222
FACSIMILE: (617) 890-9261
_______________
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as 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, as amended, check the following box. [x]
_______________
Pursuant to Rule 416, there are also being registered such additional
shares of Common Stock as may become issuable pursuant to antidilution
provisions of the Redeemable Warrants and the Representatives' Warrant.
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
================================================================================
WEBSECURE, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501 OF REGULATION S-B
ITEM NUMBER OF FORM SB-2 LOCATION OR CAPTION IN PROSPECTUS
------------------------ ---------------------------------
1. Front of the Registration Statement and Outside Front
Cover of Prospectus ................................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus .......................................... Inside Front Cover Page; Outside Back Cover
Page
3. Summary Information and Risk Factors .................. Prospectus Summary; Risk Factors
4. Use of Proceeds ....................................... Use of Proceeds
5. Determination of Offering Price ....................... Outside Front Cover Page; Risk
Factors -- Absence of Public Market;
Underwriting
6. Dilution .............................................. Dilution
7. Selling Security Holders .............................. Principal and Selling Stockholders
8. Plan of Distribution .................................. Outside Front Cover Page; Underwriting
9. Legal Proceedings ..................................... Business -- Legal Proceedings
10. Directors, Executive Officers, Promoters and Control Management -- Directors and
Persons ............................................. Executive Officers
11. Security Ownership of Certain Beneficial Owners and
Management .......................................... Principal and Selling Stockholders
12. Description of Securities ............................. Outside Front Cover Page; Description of
Securities
13. Interest of Named Experts and Counsel ................. Not Applicable
14. Disclosure of Commission Position on Indemnification Management -- Limitation on Officers' and
for Securities Act Liabilities ...................... Directors' Liabilities
15. Organization Within Last Five Years ................... Certain Transactions
16. Description of Business ............................... Business
17. Management's Discussion and Analysis or Plan of
Operation ........................................... Plan of Operations
18. Description of Property ............................... Business -- Facilities
19. Certain Relationships and Related Transactions ........ Certain Transactions
20. Market for Common Equity and Related Stockholder
Matters ............................................. Risk Factors -- Absence of Public
Market; Dividend Policy; Description of
Securities
21. Executive Compensation ................................ Management -- Executive Officers'
Compensation
22. Financial Statements .................................. Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................. Not Applicable
SUBJECT TO COMPLETION, DATED OCTOBER 24, 1996
PROSPECTUS
- ----------
[LOGO]
WEBSECURE, INC.
1,000,000 SHARES OF COMMON STOCK AND
1,000,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
WebSecure, Inc., a Delaware corporation (the "Company"), hereby offers
1,000,000 shares (the "Shares") of common stock, $.01 par value per share (the
"Common Stock") and 1,000,000 redeemable common stock purchase warrants (the
"Redeemable Warrants"). The Common Stock and the Redeemable Warrants offered
hereby (sometimes hereinafter collectively referred to as the "Securities") may
be purchased separately in this offering (the "Offering"). Each Redeemable
Warrant entitles the holder to purchase one share of Common Stock at a price of
$9.60 per share commencing ninety (90) days from the date of this Prospectus
until __________, 1999. The Redeemable Warrants are redeemable by the Company at
a redemption price of $.20 per Redeemable Warrant at any time commencing 90 days
from the date of this Prospectus on 30 days' prior written notice, provided that
the average of the high and low sales prices of the Common Stock during 10
consecutive trading days ending within 20 days prior to the notice of redemption
equals or exceeds $12.00 per share. A certain stockholder of the Company (the
"Selling Stockholder") has granted the underwriters of the Offering (the
"Underwriters") an option, exercisable within 30 days after the date hereof, to
purchase up to an additional 150,000 shares of Common Stock to cover
overallotments, if any. See "DESCRIPTION OF SECURITIES."
Prior to this Offering, there has been no public market for the Common Stock
or the Redeemable Warrants and no assurance can be given that any such market
will develop or, if developed, that it will be sustained. It is currently
anticipated that the initial public offering prices will be between $6.00 and
$8.00 per share of Common Stock and $.20 per Redeemable Warrant. For the method
of determining the initial public offering price of the Common Stock and
Redeemable Warrants, see "RISK FACTORS" and "UNDERWRITING." The Company intends
to apply for listing of the shares of Common Stock and Redeemable Warrants
offered hereby on the National Association of Securities Dealers Automated
Quotation System -- Small-Cap Market ("NASDAQ") and The Boston Stock Exchange
(the "BSE") under the symbols "WEBS" and "WEBS.W", respectively.
_______________
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 6 AND "DILUTION."
_______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
====================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
Per Share $ $ $
Per Redeemable Warrant $ $ $
Total(3) $ $ $
====================================================================================================
(1) Does not reflect additional compensation to be received in the form of (a)
a 3% non-accountable expense allowance and other compensation payable to
Coburn & Meredith, Inc. and Shamrock Partners, Ltd., the representatives of
the Underwriters (the "Representatives") and (b) a warrant (the
"Representatives' Warrant") to purchase up to 100,000 shares of Common
Stock at $10.40 per share and/or up to 100,000 Redeemable Warrants at $.26
per Redeemable Warrant. In addition, the Company has agreed to indemnify
the Underwriters against certain civil liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). See
"UNDERWRITING."
(2) Before deducting additional expenses of the Offering payable by the
Company, estimated at $480,000, excluding the Representatives'
non-accountable expense allowance.
(3) The Selling Stockholder and the Company have granted the Underwriters an
option to purchase up to an additional 150,000 shares of Common Stock and
up to 150,000 Redeemable Warrants, respectively, on the same terms and
conditions set forth above, solely to cover overallotments, if any. If the
overallotment option is exercised in full, the total "Price to Public,"
"Underwriting Discount," "Proceeds to Company" and Proceeds to Selling
Stockholders will be $____ , $____ , $____ and $____ , respectively. See
"UNDERWRITING."
_______________
The Shares and Redeemable Warrants are being offered on a "firm commitment
basis" by the Underwriters, when, as, and if delivered to and accepted by the
Underwriters and subject to prior sale, withdrawal or cancellation of the offer
without notice. It is expected that delivery of certificates representing the
Securities will be made at the clearing offices of Coburn & Meredith, Inc., New
York, New York, on or about _____________, 1996.
COBURN & MEREDITH, INC. SHAMROCK PARTNERS, LTD.
THE DATE OF THIS PROSPECTUS IS , 1996
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.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OR THE
REDEEMABLE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON NASDAQ, THE BSE, OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Prior to this Offering, the Company has not been a reporting company under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Subsequent
to this Offering, the Company intends to furnish to its stockholders annual
reports, which will include financial statements audited by independent
accountants, and such other periodic reports as it may determine to furnish or
as may be required by law.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes an initial public offering price of $8.00 per share, no
exercise of the Underwriters' overallotment option, the Redeemable Warrants or
the Representatives' Warrant.
THE COMPANY
WebSecure, Inc. (the "Company"), a development stage company, is an Internet
service provider that offers Internet access and support services to businesses
for secure commercial transactions and communications over the Internet. The
Company plans to offer a broad range of marketing, sales and connectivity
solutions to businesses and, to a lesser extent, to individuals, including the
establishment of (i) commercial sites on the World Wide Web (the "Web"), (ii)
electronic store design, (iii) browsing and purchasing capabilities, and (iv)
transaction processing. The Company will also provide general Internet services,
such as connectivity to the Internet and electronic mail hosting services. By
offering turnkey solutions to commercial Internet needs, the Company plans to
become a "one-stop provider" of Internet products and services to businesses
seeking to establish a commercial presence over the Internet. In addition to the
Company's array of Internet services generally offered by providers, the Company
plans to offer customers the ability to engage in secure personal computer
("PC") to PC Internet commerce transactions, utilizing software applications for
business transactions that contain credit card or other confidential
information, and for confidential Internet communications purposes.
The Company has developed for marketing to the public comprehensive service
and support capabilities that include the following:
* Internet access and host services.
* Internet business development and marketing services.
* Internet secure commerce processing.
* Internet hardware and software.
* Internet training.
The range of customized service options include full Internet access
service, SLIP/PPP connection, Web browsing capability, electronic mail and
USENET News, among others.
The Company's Internet business development and marketing services also
provide commercial users with a back-end link from the user's Internet host site
to major accounting systems, including SBT, and business management support for
integrating secure Internet commerce into the user's existing accounting
financial systems. In addition, a turn-key arrangement is available to meet the
needs of individual users, along with sales and marketing consulting to
implement Internet commerce capability. The Company further offers support to
develop and maintain a Web host presence for businesses and to assist clients in
marketing and selling through the Internet. To assist businesses in utilizing
the Internet, the Company offers training classes in accessing and navigating
through the Internet, which classes are tailored to each user's environment,
including support for Windows, Windows 95, Windows NT and Macintosh client
access.
According to Input, a market research firm, it is estimated that worldwide
corporate spending on Internet technologies and services more than tripled
between 1994 and 1995, reaching approximately $12 billion in 1995. By the year
2000, Input projects total spending to reach $200 billion, reflecting the growth
in this industry. The Internet and the Web provide users with the potential for
a new commercial marketplace in which goods, services and information can be
marketed and sold, and over which other financial transactions can occur.
Although no assurances can be given, the Company believes that the use of the
Internet as a commercial medium will become more widespread with the continued
development and acceptance of systems providing secure execution of financial
transactions.
From the net proceeds of this Offering, the Company expects to devote
approximately 30% to increased marketing and sales activity and approximately
30% for programming research and service development.
The Company was incorporated in Massachusetts on July 19, 1995 and was
reincorporated under Delaware law on September 12, 1995. The Company's executive
offices are located at 1711 Broadway, Saugus, Massachusetts 01906 and its
telephone number is (617) 867-2300.
3
THE OFFERING
Securities Offered by the
Company................. 1,000,000 shares of Common Stock and 1,000,000
Redeemable Warrants. Each Redeemable Warrant
entitles the holder to purchase one share of Common
Stock at a price of $9.60 per share commencing 90
days from the date of this Prospectus until
________, 1999. The Redeemable Warrants may be
redeemed by the Company if the average of the high
and low sales prices of the Common Stock equals or
exceeds $12.00 per share during 10 consecutive
trading days. See "DESCRIPTION OF SECURITIES."
Shares of Common Stock to
be Outstanding
After Offering.......... 5,605,000 shares(1)(2)
Use of Proceeds........... The net proceeds of the Offering will be used for
selling and marketing; research and development;
purchase or lease of capital equipment and software;
repayment of indebtedness; and working capital and
general corporate purposes. See "USE OF PROCEEDS."
Proposed NASDAQ and BSE Symbols(3):
Common Stock .......... WEBS
Redeemable Warrants ... WEBS.W
______________
(1) Excludes (a) 800,000 shares of Common Stock reserved for issuance upon
exercise of stock options which may be granted under the Company's 1996
Stock Option Plan, of which options to purchase 402,200 shares are
outstanding as of the date of this Prospectus and (b) 60,000 shares of
Common Stock reserved for issuance upon exercise of stock options which may
be granted under the Company's 1996 Formula Stock Option Plan, of which
options to purchase 5,000 shares are outstanding as of the date of this
Prospectus. See "RISK FACTORS -- Substantial Options and Warrants Reserved"
and "MANAGEMENT."
(2) Includes 2,500,000 shares of Common Stock issued upon the conversion of the
625,000 shares of Class B Common Stock outstanding as of the date of this
Prospectus.
(3) No assurance can be given that an active trading market will develop, or if
developed, will be sustained for the Common Stock or the Redeemable
Warrants. See "RISK FACTORS -- Absence of Public Market."
4
SUMMARY FINANCIAL INFORMATION
The following sets forth certain historical financial information of the
Company.
CUMULATIVE
PERIOD FROM FROM
FISCAL YEAR INCEPTION INCEPTION
ENDED (JULY 19, 1995) TO (JULY 19, 1995) TO
AUGUST 31, 1996 AUGUST 31, 1995 AUGUST 31, 1996
--------------- --------------- ---------------
STATEMENT OF OPERATIONS DATA:
Revenue ................................................... $ 97,255 $ -- $ 97,255
Loss from operations ...................................... (7,877,804) (33,626) (7,911,430)
Net loss .................................................. (7,924,014) (33,626) (7,957,640)
Net loss per common and common equivalent share(1) ........ (1.65) (0.01) (1.66)
Shares used in computing net loss per common and common
equivalent share(1) ..................................... 4,805,050 4,805,050 4,805,050
AUGUST 31, 1996
---------------
ACTUAL AS ADJUSTED(2)
------ --------------
BALANCE SHEET DATA:
Current assets ............................................ $ 106,976 $ 6,088,976
Total assets .............................................. 1,745,948 7,303,888
Working capital (deficiency) .............................. (1,441,857) 5,636,203
Total liabilities ......................................... 1,849,263 753,203
Stockholders' equity (capital deficit) .................... (103,315) 6,550,685
______________
(1) Computed on the basis described in Note 2 of Notes to Financial Statements.
(2) Gives effect to the receipt by the Company of the estimated net proceeds of
approximately $6,654,000 from the sale of the Securities offered hereby on
the initial application of such proceeds to reduce certain indebtedness.
See "RISK FACTORS -- Substantial Options and Warrants Reserved," "USE OF
PROCEEDS" and "UNDERWRITING."
5
RISK FACTORS
An investment in the Company is speculative in nature and should not be
considered by investors who are not able to bear the risk of losing their entire
investment. The following risk factors should be considered carefully in
addition to the other information contained elsewhere in this Prospectus before
purchasing the Common Stock or Redeemable Warrants offered hereby.
Limited Operating History; Accumulated Deficit; No Assurance of Successful
Operations; Qualified Report of Independent Certified Public Accountants. The
Company is a development stage company founded in July 1995 and presently has
only a limited number of customers utilizing its services on a trial basis. The
Company does not intend to offer most of its planned services commercially until
the second half of 1996. Accordingly, the Company has only a limited operating
history upon which an evaluation of the Company and its prospects can be based.
The Company's prospects are subject to all of the risks encountered by a company
in an early stage of development, particularly in light of the uncertainties
relating to the new and evolving markets in which the Company intends to
operate. To address these risks, the Company must, among other things, further
develop and/or license supporting software from third parties; commercially
offer its services; successfully implement its marketing strategy; respond to
competitive developments; attract, retain and motivate qualified personnel; and
develop and upgrade its technology. No assurance can be given that the Company
will succeed in addressing any or all of these issues and the failure to do so
would have a material adverse effect on the Company's business, prospects,
financial condition and operating results. In addition, the report by the
Company's independent certified public accountants on the Company's financial
statements for the fiscal year ended August 31, 1996, the period from inception
(July 19, 1995) to August 31, 1995 and for the cumulative period from inception
(July 19, 1995) to August 31, 1996 states that the Company incurred a cumulative
net loss of $7,957,640 through August 31, 1996 which raises substantial doubt
about the Company's ability to continue as a going concern without the
anticipated proceeds from the Offering and increased revenues and earnings from
operations.
The Company anticipates realizing only limited revenue during 1996, and the
Company's ability to generate meaningful revenue thereafter is subject to
substantial uncertainty. The Company anticipates that its operating expenses
will increase substantially in the foreseeable future as it further develops its
technology and offers its services, increases its sales and marketing
activities, creates and expands the distribution channels for its services and
broadens its customer support capabilities. Accordingly, the Company expects to
incur losses for the foreseeable future. No assurance can be given that the
Company's services will be rendered successfully or on a timely basis, or that
the Company will be successful in obtaining market acceptance of its services.
No assurance can be given that the Company will be able to achieve or sustain
operating profitability. See "PLAN OF OPERATIONS."
Early Stage of Market Development; Unproven Acceptance of the Company's
Proposed Products and Services. Most of the Company's services are designed as a
means of facilitating commerce over the Internet, which is a worldwide
communications system that allows users to transmit and receive messages and
information over telephone and other communications lines using terminals or
computers. The market for the Company's services is at a very early stage of
development, is evolving rapidly, and is characterized by an increasing number
of market entrants who have introduced or are developing competing products and
services. As is typical for a new and rapidly evolving industry, demand and
market acceptance for recently introduced products and services are subject to a
high level of uncertainty. The adoption of the Internet for commerce and as a
means of communication, particularly by those individuals and enterprises that
historically have relied upon traditional means of commerce and communication,
will require a broad acceptance of new methods of conducting business and
exchanging information. Enterprises that already have invested substantial
resources in other methods of conducting business may be reluctant or slow to
adopt a new strategy that may limit or compete with their existing business.
Individuals with established patterns of purchasing goods and services and
effecting payments may be reluctant to alter those patterns. Moreover, the
security and privacy concerns of existing and potential users of the Company's
services, as well as concerns related to confidentiality, may inhibit the growth
of Internet commerce and communication generally, and market acceptance of the
Company's services in particular.
6
The use of the Company's services is dependent in part upon the continued
development of an industry and infrastructure for providing Internet access and
carrying Internet traffic. The Internet may not prove to be a viable commercial
marketplace or communications network because of inadequate development of the
necessary infrastructure, such as adequate capacity, a reliable network,
acceptable levels of security or timely development of complementary products,
such as high speed modems. If the Company's market fails to develop or develops
more slowly than expected, or if the infrastructure for the Internet is not
adequately developed or the Company's services do not achieve market acceptance
by a significant number of individuals and businesses, the Company's business,
financial condition, prospects and operating results will be materially and
adversely affected.
Dependence on Third-Party Intellectual Property Rights. The Company
currently licenses certain proprietary and patented technology from third
parties. No assurance can be given that any patented technology licensed by the
Company will provide meaningful protection from competitors. Even if a
competitor's products were to infringe on patents licensed by the Company, it
would be costly for the Company to enforce its rights in an infringement action
and would divert funds and management resources from the Company's operations.
See "BUSINESS -- Proprietary Information."
All of the Company's planned services incorporating data encryption and
authentication is based on proprietary software of RSA Data Security ("RSA"),
which is licensed, on a non-exclusive basis, through SBT Corporation, a
nonaffiliated company ("SBT"). The Company has licensed the rights to another
encryption technology called Titan(tm) from a nonaffiliated company. No
assurance can be given as to when, or if, the Titan(tm) encryption technology
will be ready for commercial use by the Company. Until such technology may be
used by the Company, as to which no assurance can be given, the Company intends
to continue to use the RSA encryption software licensed through SBT. No
assurance can be given that the encryption software presently licensed by the
Company will continue to be available to the Company on commercially reasonable
terms, or at all. In the past, certain parties have claimed to have rights with
respect to the encryption software licensed by the Company. If such claims are
pursued successfully by such parties, the Company may be prevented from using
the software or, in the alternative, the Company may be forced to pay an
additional royalty to use such software.
The Company also licenses, on a non-exclusive basis, accounting and business
support software from SBT. No assurance can be given that the Company's third
party licenses will continue to be available to the Company on commercially
reasonable terms, or at all. The loss of or inability to maintain any of these
software licenses could result in delays in introduction of the Company's
services until equivalent software, if available, is identified, licensed and
integrated into the Company's planned services, which could have a material
adverse effect on the Company's business, financial condition, prospects and
operating results. See "BUSINESS -- Proprietary Information" and "BUSINESS --
Research and Development."
Competition. The market for Internet-based software and services is new and
rapidly evolving, resulting in a dynamic competitive environment. The Company
competes with many companies that have substantially greater financial,
marketing, technical and human resources than the Company. In addition, there
are many companies that may enter the market in the future with new
technologies, products and services that may be competitive with services
offered or to be offered by the Company. Because there are many potential
entrants to the field, it is extremely difficult to assess which companies are
likely to offer competitive products and services in the future, and in some
cases it is difficult to discern whether an existing product or service is
competitive with the Company's services. The Company expects competition to
persist and intensify in the future.
Competitive factors in the Internet-based software and services market
include core technology, breadth of product functionality and features, product
performance and quality, marketing and distribution resources, customer service
and support and price. Additional competition could come from other Internet
companies and software and hardware vendors that incorporate Internet payment
capabilities into their products or other Internet services companies that
provide hosting, connectivity, Internet training and domain registration
services. The payment mechanisms used by the Company in the provision of its
services utilize existing credit card verification procedures. Certain of the
Company's competitors and potential competitors have developed or are developing
new methods to transmit, verify and accept credit card payments over the
Internet. In this regard, MasterCard and Visa recently announced that they would
work together to establish a single industry standard for secure electronic
transactions. These and other potential new payment
7
mechanisms may be perceived to be superior to those employed by the Company and
could render the Company's services unmarketable. In addition, if an industry
standard is established, no assurance can be given that the technology upon
which such standard is based will be available to the Company on commercially
reasonable terms, or at all, which could have a material adverse effect on the
Company's business, financial condition, prospects and operating results.
Virtually all of the Company's current and potential competitors have longer
operating histories, greater name recognition, larger installed customer bases
and significantly greater financial, technical and marketing resources than the
Company. Such competitors may be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and make more attractive
offers to potential customers. In addition, many of the Company's current or
potential competitors, such as Netscape, Microsoft and AT&T have broad
distribution channels that may be used to bundle competing products directly to
end-users or purchasers. If such competitors were to bundle products that
compete with the Company for sale to their customers, the demand for the
Company's services may be substantially reduced, and the ability of the Company
to broaden the utilization of its services would be substantially diminished. No
assurance can be given that the Company will be able to compete effectively with
current or future competitors or that such competition will not have a material
adverse effect on the Company's business, financial condition, prospects and
operating results. See "BUSINESS -- Competition."
Potential Fluctuations in Quarterly Operating Results. As a result of the
Company's limited operating history, the Company has only limited historical
financial data for quarterly periods on which to base planned operating
expenses. The Company's planned expense levels are based in part on its
development and marketing requirements and anticipated competition, as well as
its expectations as to future revenue. However, the Company has recognized very
limited revenue to date, which makes future revenue levels difficult to
forecast. The Company may be unable to adjust its spending levels on a timely
basis to compensate for unexpected revenue shortfalls. In addition, the Company
anticipates that its operating expenses will increase substantially in the
future as the Company continues to develop and market its initial services,
seeks to increase its selling and marketing activities, attempts to create and
expand the distribution channels for its services, and broadens its customer
support capabilities. The inability of the Company to offer its services on a
timely basis or any material shortfall in demand for the Company's services in
relation to the Company's expectations would have a material adverse effect on
the Company's business, financial condition, prospects and operating results.
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors. These factors
include, among others, the timing of the introduction of, or enhancements to,
the Company's services; demand for the Company's services; the timing of
introduction of products or services by the Company's competitors; the mix of
the Company's services provided, market acceptance of Internet commerce, the
timing and rate at which the Company increases its expenses to support projected
growth; competitive conditions in the industry and general economic conditions.
The Company believes that period-to-period comparisons of its operating results
are not meaningful and should not be relied upon as any indication of future
performance. Due to the foregoing factors, among others, it is likely that the
Company's future quarterly operating results will not meet the expectations of
market analysts or investors from time to time or at all, which may have a
material adverse effect on the market price of the Company's Securities. See
"PLAN OF OPERATIONS."
Development of New Services, Industry Acceptance and Technological Change. A
portion of the Company's anticipated revenue will be derived from fees charged
to businesses and individuals for transactions effected through the Company.
Accordingly, broad acceptance of the Company's services by these businesses and
individuals is critical to the Company's success, as is the Company's ability to
design, develop, test, introduce and support new services and enhancements on a
timely basis that meet changing customer needs and respond to technological
developments and emerging industry standards. The market for the Company's
proposed services is characterized by rapidly changing technology and evolving
industry standards. The Company's proposed services are designed around certain
technical standards with respect to data encryption and current and future sales
of the Company's services will be dependent on industry acceptance of such
standards. While the Company intends to provide compatibility with the standards
promulgated by leading industry participants and groups, widespread adoption of
a proprietary or closed standard could preclude the Company from effectively
doing so. Moreover, a number of leading industry
8
participants have announced their intention to enter into or expand their
position in the market for Internet payments through the development of new
technologies and standards. No assurance can be given that the Company's
services will achieve market acceptance; that the Company will be successful in
developing and introducing its proposed services or new services that meet
changing customer needs; that the Company will be able to respond to
technological changes or evolving industry standards in a timely manner, if at
all; or that the standards upon which the Company's services are or will be
based will be accepted by the industry. In addition, no assurance can be given
that services or technologies developed by others will not render the Company's
services noncompetitive or obsolete. The inability of the Company to respond to
changing market conditions, technological developments, evolving industry
standards or changing customer requirements, or the development of competing
technology or products that renders the Company's services noncompetitive or
obsolete, would have a material adverse effect on the Company's business,
financial condition, prospects and operating results. See "BUSINESS -- Marketing
and Sales."
Risks of Defects and Development Delays. The Company has not sold a material
amount of its services and proposed services, in part because these services
require additional software development. Services based on sophisticated
software and computing systems often encounter development delays and the
underlying software may contain undetected errors or failures when introduced or
when the volume of services provided increases. The Company may experience
delays in the development of the software and computing systems underlying the
Company's proposed services. In addition, there can be no assurance that,
despite testing by the Company and potential customers, errors will not be found
in the underlying software, or that the Company will not experience development
delays, which could result in delays in the market acceptance of its services
and could have a material adverse effect on the Company's business, financial
condition, prospects and operating results. See "BUSINESS -- Research and
Development."
Dependence on Key Personnel. The Company's performance is substantially
dependent on the performance of its executive officers and key employees, most
of whom have worked together for only a short period of time. The Company is
dependent on its ability to retain and motivate high quality personnel,
especially its management and development teams. The Company does not have "key
person" life insurance policies on any of its employees. The loss of the
services of any of its key employees could have a material adverse effect on the
Company's business, financial condition, prospects and operating results. The
Company's future success also depends on its continuing ability to identify,
hire, train and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense. No assurance can be given that the
Company will be able to attract, assimilate or retain qualified technical and
managerial personnel in the future, and the failure of the Company to do so
would have a material adverse effect on the Company's business, financial
condition, prospects and operating results. See "BUSINESS -- Employees" and
"MANAGEMENT."
Limited Sales Force; Evolving Distribution Channels. The Company has few
sales and marketing employees and does not have established distribution
channels for its services. In order to generate substantial revenue, the Company
must achieve broad distribution of its services to businesses and individuals
and secure general adoption of its services and technology. No assurance can be
given as to the ability of the Company to generate sufficient demand for its
services and the inability of the Company to do so would have a material adverse
effect on the Company's business, financial condition, prospects and operating
results. See "BUSINESS -- Marketing and Distribution."
Dependence on Intellectual Property Rights; Risk of Infringement. The Company's
success and ability to compete are dependent in part upon its proprietary
technology relating to the encryption of credit card payment information over
the Internet. The Company has no patents and relies on applicable copyright,
trade secret and trademark laws to protect certain proprietary information of
the Company. To the extent proprietary technology is involved, the Company
relies on trade secrets that it seeks to protect, in part, through
confidentiality agreements with certain employees, consultants and other
parties. No assurance can be given that these agreements will not be breached,
that the Company will have adequate remedies for any breach, or that the
Company's trade secrets will not otherwise become known to, or independently
developed by, existing or potential competitors of the Company. The Company
generally does not seek to protect its proprietary information through patents
or registered trademarks, although it may seek to do so in the future. The
Company may be involved from time to
9
time in litigation to determine the enforceability, scope and validity of its
rights. In addition, no assurance can be given that the Company's products will
not infringe any patents of others. Litigation in order to protect the Company's
intellectual property rights could result in substantial cost to the Company and
diversion of effort by the Company's management and technical personnel. See
"BUSINESS -- Proprietary Information."
Risks Associated with Encryption Technology. A significant barrier to
Internet commerce is the secure exchange of financial information over public
networks. The Company relies on encryption and authentication technology
licensed from third parties to provide the security and authentication necessary
to effect the secure exchange of financial information over the Internet,
including public key cryptography technology licensed from RSA. No assurance can
be given that advances in computer capabilities, new discoveries in the field of
cryptography or other events or developments will not result in a compromise or
breach of the RSA or other algorithms used by the Company to protect customer
transaction data. In August and September 1995, certain RSA algorithms used by
Netscape were compromised. There can be no assurance that the Company's security
will not likewise be compromised. If any such compromise of the Company's
security were to occur, it could have a material adverse effect on the Company's
business, financial condition, prospects and operating results. In addition, no
assurance can be given that existing security systems of others will not be
penetrated or breached, which could have a material adverse effect on the market
acceptance of Internet security services. This could have a material and adverse
effect on the Company's business, financial condition, prospects and operating
results.
Government Regulation and Legal Uncertainties. The Company is not currently
subject to direct regulation by any government agency, other than regulations
applicable to businesses 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 a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, pricing and characteristics
and quality of products and services. The recently enacted Telecommunications
Reform Act of 1996 imposes criminal penalties on anyone who distributes obscene,
lascivious or indecent communications on the Internet. The adoption of any laws
or regulations governing commerce on the Internet may result in decreased growth
of the Internet, which could have an adverse effect on the Company's business,
financial condition, prospects and operating results. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, libel and personal privacy is uncertain. Further, due to the
encryption technology contained in the Company's products, such products are
subject to U.S. export controls. No assurance can be given that such export
controls, either in their current form or as may be subsequently enacted, will
not delay the introduction of new products or limit the Company's ability to
distribute products outside the United States or electronically. While the
Company intends to take precautions against unlawful exportation, the global
nature of the Internet makes it virtually impossible to effectively control the
distribution of the Company's products. In addition, federal or state
legislation or regulation may further limit levels of encryption or
authentication technology. Further, various countries regulate the import of
certain encryption technology and have adopted laws relating to personal privacy
issues which could limit the Company's ability to distribute products in those
countries. Any such export or import restrictions, new legislation or regulation
or government enforcement of existing regulations could have a material adverse
impact on the Company's business, financial condition, prospects and operating
results.
Future Capital Needs; Uncertainty of Additional Financing. The Company
currently anticipates that its available cash resources combined with the net
proceeds of this Offering, as well as anticipated funds from operations, will be
sufficient to meet its presently anticipated working capital and capital
expenditure requirements for at least the next 12 months. Thereafter, the
Company may need to raise additional funds. The Company may need to raise
additional funds sooner in order to fund more rapid expansion, to develop new or
enhanced services, to respond to competitive pressures or to acquire
complementary businesses or technologies. If additional funds are raised through
the issuance of equity securities, the percentage ownership of the stockholders
of the Company will be reduced, stockholders may experience additional dilution,
or such equity securities may have rights, preferences or privileges senior to
those of the holders of the Company's Common Stock. The Company anticipates that
it may seek to secure loan financing as business and economic conditions
warrant. If additional funds are raised through the issuance of debt, the
Company will be subject to certain risks associated with debt
10
financing, including those attributable to interest rate fluctuations and
insufficient cash flow. No assurance can be given that additional financing will
be available when needed on terms favorable to the Company or at all.
Substantially all of the Company's assets have been pledged as security for the
Company's obligations under an equipment lease agreement. The presence of a
first priority security interest in the Company's assets could have the effect
of impeding the Company's attempts to procure additional financing when needed.
If adequate funds are not available or are not available on acceptable terms,
the Company may be unable to develop or enhance its services, take advantage of
future opportunities or respond to competitive pressures, which could have a
material adverse effect on the Company's business, financial condition,
prospects and operating results. See "DILUTION," "USE OF PROCEEDS" and "PLAN OF
OPERATIONS -- Liquidity and Capital Resources."
Management of Growth. If there is market acceptance for the services to be
offered by the Company, the Company anticipates that it will be required to
expand its operations to address such market demand. In addition, the Company
anticipates significantly increasing the size of its research and development,
sales and marketing and customer support staff following the completion of this
Offering. There can be no assurance that such internal expansion will be
successfully completed, that such expansion will result in market acceptance of
the Company's services, that such expansion will generate sufficient revenues,
or that the Company will be able to compete successfully against the
significantly more extensive and well-funded sales and marketing and research
and development operations of the Company's competitors. In addition, a
substantial number of the Company's employees were only recently hired, thereby
subjecting the Company to increased risk of employee turnover. The Company's
rapid growth and the integration of operations is expected to place a
significant strain on the Company's managerial, operational and financial
resources. The inability of the Company to promptly address and respond to these
circumstances could have a material adverse effect on the Company's business,
financial condition, prospects or operating results.
Risk of Loss From Returned Transactions, Merchant Fraud or Erroneous
Transmissions. The Company intends to utilize two principal fund transfer
systems: the automated clearinghouse ("ACH") system for electronic fund
transfers and the national credit card systems (e.g., American Express,
Discover, MasterCard and Visa) for electronic credit card settlements. In its
use of these established payment systems, the Company may bear some of the
credit risks normally assumed by other users of these systems arising from
returned transactions caused by unauthorized use, disputes, theft or fraud. The
Company also may bear some risk of merchant fraud and transmission errors if it
is unable to have erroneously transmitted funds returned by an unintended
recipient. In addition, the agreement between the Company's users of its
services for allocation of these risks will be in electronic form, and while
digitally signed, will not be manually signed and hence may not be enforceable.
Finally, the Company may be subject to merchant fraud, including such actions as
inputting false sales transactions or false credits. Returned transactions,
merchant fraud or erroneous transmissions could have a material adverse effect
on the Company's business, financial condition, prospects or operating results.
See "BUSINESS -- Seamless Commerce(tm) over the World Wide Web."
System Interruption and Security Risks; Potential Liability and Lack of
Insurance. The Company's operations are dependent on its ability to protect its
computer system from interruption due to system malfunction or due to damage
from fire, earthquake, power loss, telecommunications failure, unauthorized
entry or other events, many of which are beyond the Company's control. Any
malfunction, damage, failure or other condition or event that causes
interruptions in the Company's operations could have a material adverse effect
on the Company's business, financial condition, prospects or operating results.
The Company has experienced disruption in its computer systems in the past due
to human error and it is possible that the Company may experience similar
disruptions in the future. Most of the Company's computer equipment, including
its processing equipment, is currently located at a single site. While the
Company believes that its existing and planned precautions of redundant systems,
regular data backups and other procedures are adequate to prevent any
significant system outage or data loss, no assurance can be given that such
procedures will be adequate to prevent or ameliorate any failure or loss.
Despite the implementation of security measures, the Company's data
infrastructure may also be vulnerable to computer viruses, hackers or similar
disruptive problems caused by its customers, other Internet users or otherwise,
which may result in significant liability to the Company and also may deter
potential customers from using the Company's services. Persistent problems
continue to affect public and private data networks. The Company intends to
limit its liability to customers, including liability arising from the failure
of the security features contained in the Company's system and services, through
contractual provisions. However, no assurance can be given
11
that such limitations will be enforceable. The Company currently does not have
product liability insurance to protect against these risks and no assurance can
be given that such insurance will be available to the Company on commercially
reasonable terms or at all.
Bank Failure; Limitation on Access to Funds. Certain of the Company's
services may involve holding funds of individuals in financial institutions.
These funds will be held in accounts by the Company as agent for these
individuals. The Company will use reasonable business judgment in selecting the
financial institutions in which funds are held, and will place funds only in
banks which are subject to state or federal regulation (or the non-U.S.
equivalent), are insured by the Federal Deposit Insurance Corporation and are
believed by the Company to be financially sound. Furthermore, the Company
believes that because the user funds would be held in a fiduciary or trust
capacity by the Company, they would not be subject to the claims of the
Company's creditors or a bankruptcy trustee. There can be no assurance, however,
that should there be a failure of a financial institution in which the Company
has placed user funds, or should a creditor or trustee of a user or of the
Company seek control over an agency account containing user funds, that the
Company would not be subject to litigation and possible liability to users. The
Company does not have insurance to protect against certain of these risks, and
there is no assurance that such insurance will become available, or if made
available, would be affordable to the Company.
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
Offering, there has been no public market for the Company's Common Stock or
Redeemable Warrants, and there can be no assurance that an active public market
for the Common Stock or Redeemable Warrants will develop or be sustained after
the Offering. The initial offering price will be determined by negotiation
between the Company and the Underwriters based upon several factors. See
"UNDERWRITING." The market price of the Company's Common Stock and Redeemable
Warrants is likely to be highly volatile and could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new software or services by the
Company or its competitors, changes in financial estimates by securities
analysts, or other events or factors, many of which are beyond the Company's
control. In addition, the stock market has experienced significant price and
volume fluctuations that have particularly affected the market prices of equity
securities of many high technology companies and that often have been unrelated
to the operating performance of such companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock and
Redeemable Warrants. In the past, following periods of volatility in the market
price for a company's securities, securities class action litigation has often
been instituted. Such litigation could result in substantial costs and a
diversion of management attention and resources, which could have a material
adverse effect on the Company's business, financial condition, prospects or
operating results.
Shares Eligible for Future Sale. Sales of substantial numbers of shares of
Common Stock in the public market following this Offering could adversely affect
the market price for the Common Stock. Upon completion of the Offering, the
Company will have outstanding an aggregate of 5,605,000 shares of Common Stock,
assuming no exercise of outstanding options and warrants. Of these shares, all
of the shares sold in this Offering will be freely tradeable without restriction
or further registration under the Securities Act of 1933, as amended (the
"Securities Act"), unless such shares are purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act
("Affiliates"). The remaining 4,605,000 shares of Common Stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act (the "Restricted Shares"). Restricted Shares may be
sold in the public market only if registered or if they qualify for an exemption
from registration. Between December 1997 and April 1998 all of the 4,605,000
shares of Common Stock outstanding as of the date of this Prospectus will become
available for sale under Rule 144 promulgated under the Securities Act. All of
the Company's officers, directors and holders of 5% or more of the Common Stock
have agreed not to sell shares of Common Stock beneficially held by them for a
period of 13 months following the date of this Prospectus (except for shares of
Common Stock subject to the Underwriters' overallotment option) without the
Representatives' written consent. In addition, the Company has agreed that it
will not issue any shares of Common Stock for a period of 13 months following
the date of this Prospectus without the Representatives' written consent, except
for shares of Common Stock issuable upon exercise of stock options that have
been or may be granted under the Company's 1996 Stock Option Plan (the "Plan")
and 1996 Formula Stock Option Plan (the "Formula Plan"). See "DESCRIPTION OF
SECURITIES" and "SHARES ELIGIBLE FOR FUTURE SALE."
12
Dilution; Possible Right to Purchase Additional Shares. Investors
participating in this Offering will incur immediate and substantial dilution. To
the extent outstanding options or warrants to purchase the Company's Common
Stock are exercised, there will be further dilution. See "DILUTION."
Substantial Options and Warrants Reserved; Representatives' Warrant. Under
the Plan and the Formula Plan, the Company may issue options to purchase up to
an aggregate of 860,000 shares of Common Stock to employees, officers,
directors, and consultants. Options to purchase 407,200 shares are outstanding
under the Plan and Formula Plan as of the date of this Prospectus. In addition,
the Redeemable Warrants offered hereby are exercisable to purchase shares of
Common Stock at any time commencing 90 days from the date of this Prospectus
until , 1999. The Company will also sell to the Representatives the
Representatives' Warrant to purchase up to 100,000 shares of Common Stock at a
price of $10.40 and up to 100,000 Redeemable Warrants at $0.26 per Redeemable
Warrant. The Redeemable Warrants underlying the Representatives' Warrant are
exercisable at $10.66 per share. The existence of the Redeemable Warrants, the
Representatives' Warrant and the options that may be issued under the Plans or
otherwise, may prove to be a hindrance to future financing efforts by the
Company. In addition, the exercise of any such options or warrants may further
dilute the net tangible book value of the Common Stock. Further, the holders of
such options and warrants may exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable to
the Company. See "MANAGEMENT -- Stock Option Plans" and "UNDERWRITING."
The Company has agreed that, under certain circumstances, it will register
under federal and state securities laws the Representatives' Warrant and/or the
Securities issuable thereunder. In addition, if the Representatives should
exercise their registration rights to effect the distribution of the
Representatives' Warrant or Securities underlying the Representatives' Warrant,
the Representatives, prior to and during such distribution, will be unable to
make a market in the Company's securities. If the Representatives cease making a
market, the market and market prices for the Securities may be adversely
affected, and holders thereof may be unable to sell or otherwise dispose of the
Securities. See "UNDERWRITING."
Redeemable Warrant Solicitation. Upon the exercise of the Redeemable
Warrants more than one year after the date of this Prospectus, and to the extent
not inconsistent with the guidelines of the National Association of Securities
Dealers, Inc., and the Rules and Regulations of the Securities and Exchange
Commission (the "Commission"), the Company has agreed to pay the Representatives
a commission equal to five percent of the exercise price of the Redeemable
Warrants in connection with solicitations of exercises of Redeemable Warrants
made by the Representatives. However, no compensation will be paid to the
Representatives in connection with the exercise of the Redeemable Warrants if
(a) the market price of the underlying shares of Common Stock is lower than the
exercise price, (b) the Redeemable Warrants are exercised in an unsolicited
transaction, or (c) the Redeemable Warrants subject to the Representatives'
Warrant are exercised. In addition, in connection with any solicitation by the
Representatives after the date of this Prospectus of Redeemable Warrant
exercises, unless granted an exemption by the Commission from Rule 10b-6
promulgated under the Exchange Act, the Representatives and any other soliciting
broker-dealer will be prohibited from engaging in any market making activities
with respect to the Company's securities for the period commencing either two or
nine business days (depending on the market price of the Common Stock) prior to
any solicitation of the exercise of Redeemable Warrants until the later of (i)
the termination of such solicitation activity or (ii) the termination (by waiver
or otherwise) of any right which the Representatives or any other soliciting
broker-dealer may have to receive a fee for the exercise of Redeemable Warrants
following such solicitation. As a result, the Representatives or any other
soliciting broker-dealer may be unable to provide a market for the Company's
securities, should they desire to do so, during certain periods while the
Redeemable Warrants are exercisable. See "UNDERWRITING."
Requirement to Maintain Current Prospectus; Non-Registration in Certain
Jurisdictions of Shares Underlying the Redeemable Warrants; Possible Redemption
of Redeemable Warrants; Speculative Investment. Purchasers of the Redeemable
Warrants will have the right to exercise them to purchase shares of Common Stock
only if a current prospectus relating to such shares is then in effect and only
if the shares are qualified for sale under the securities laws of the state or
states in which the purchaser resides. Absent any material changes in the
Company's business which would cause this Prospectus to cease to be current at
an earlier date, this Prospectus will cease to be current nine months following
the date of this Prospectus. The Company has undertaken and intends to maintain
a current prospectus that will permit the purchase and sale
13
of the Common Stock underlying the Redeemable Warrants, but there can be no
assurance that the Company will be able to do so. The Company will not call the
Redeemable Warrants for redemption at any time that a current prospectus
covering the Redeemable Warrants is not effective. The Redeemable Warrants may
be deprived of any value if a current prospectus covering the shares is not, or
cannot be, registered in the applicable states. Commencing 90 days from the date
of this Prospectus, the Redeemable Warrants may be subject to redemption at $.20
per Redeemable Warrant on 30 days' prior written notice, provided that the
average of the high and low sales prices of the Common Stock equals or exceeds
$12.00 per share during the 10 consecutive trading days ending within 20 days
prior to the notice of redemption. In the event the Company exercises the right
to redeem the Redeemable Warrants, such Redeemable Warrants will be exercisable
until the close of business on the date fixed for redemption in such notice. If
any Redeemable Warrant called for redemption is not exercised by such time, it
will cease to be exercisable and the holder will be entitled only to the
redemption price. Therefore, upon the notice of redemption, holders of the
Redeemable Warrants may be forced to (i) exercise the Redeemable Warrants at a
time when it may be financially disadvantageous to do so, (ii) sell the
Redeemable Warrants, notwithstanding possible adverse market conditions, or
(iii) accept the nominal redemption price of $.20 per Redeemable Warrant.
No assurance can be given that the per share market price of the Common
Stock will ever increase to exceed the exercise price of the Redeemable
Warrants. Therefore, it may never become economically justifiable to exercise
the Redeemable Warrants prior to the expiration of the Redeemable Warrants on .
The failure of the per share market price of the Common Stock to increase to
exceed the exercise price of the Redeemable Warrants will, eventually, cause the
Redeemable Warrants to have no economic value. Because of the speculative nature
of the Securities, an investment in the Securities should only be considered by
those who can bear the risk of a loss of their entire investment. See
"DESCRIPTION OF SECURITIES."
Possible Anti-Takeover Effects of Certain Charter Provisions. The Company's
Certificate of Incorporation authorizes the Board of Directors to issue up to
1,000,000 shares of preferred stock, $.01 par value per share (the "Preferred
Stock"). No shares of Preferred Stock are currently outstanding, and the Company
has no present plans for the issuance thereof. The Preferred Stock may be issued
in one or more series, the terms of which may be determined at the time of
issuance by the Board of Directors, without further action by stockholders, and
may include voting rights (including the right to vote as a series on particular
matters), preferences as to dividends and liquidation, conversion and redemption
rights and sinking fund provisions. However, the issuance of any such shares of
Preferred Stock could adversely affect the rights of holders of Common Stock
and, therefore, could reduce the value of the Common Stock. In addition, the
ability of the Board of Directors to issue Preferred Stock could discourage,
delay, or prevent a takeover of the Company. See "DESCRIPTION OF SECURITIES."
In addition, the Company, as a Delaware corporation, is subject to the
General Corporation Law of the State of Delaware, including Section 203, an
anti-takeover law enacted in 1988. In general, the law restricts the ability of
a public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder. As a result of
the application of Section 203 and certain provisions in the Company's
Certificate of Incorporation and Bylaws, potential acquirors of the Company may
find it more difficult or be discouraged from attempting to effect an
acquisition transaction with the Company, thereby possibly depriving holders of
the Company's securities of certain opportunities to sell or otherwise dispose
of such securities at above-market prices pursuant to such transactions.
Control by Existing Stockholders. Upon completion of this Offering, the
existing stockholders will control approximately 82% of the shares of Common
Stock eligible to vote and will therefore be able to elect all of the members of
the Board of Directors and control the outcome of any issues which may be
subject to a vote of the Company's stockholders. See "MANAGEMENT," "DILUTION"
and "PRINCIPAL AND SELLING STOCKHOLDERS."
Benefit to Affiliates. The Company intends to use a portion of the proceeds
from the Offering to repay up to $750,000 of indebtedness owed to Centennial
Technologies, Inc. ("Centennial"). Centennial owns approximately 23% of the
issued and outstanding shares of Common Stock of the Company prior to the
Offering. In addition, Centennial will sell up to 150,000 shares of Common Stock
if the Underwriters' over-allotment option is exercised. See "PRINCIPAL AND
SELLING STOCKHOLDERS" and "CERTAIN TRANSACTIONS."
14
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Shares
and Redeemable Warrants offered hereby, after deducting underwriting commissions
and other estimated expenses of the Offering, including the Representatives'
non-accountable expense allowance, are estimated to be approximately $6,654,000
($6,680,100 if the Underwriters' overallotment option is exercised in full). The
net proceeds are intended to be used approximately as follows:
AMOUNT
------
Selling and Marketing ................................................... $ 2,000,000
Research and Development ................................................ 2,000,000
Purchase or Lease of Capital Equipment and Software ..................... 1,000,000
Repayment of Indebtedness ............................................... 750,000
Working Capital and General Corporate Purposes .......................... 904,000
----------
$6,654,000
==========
SELLING AND MARKETING
The Company intends to use up to $2,000,000 of the net proceeds of the
Offering to increase selling and marketing activities, including hiring
additional salespeople. The Company also intends to increase the number of
on-site and off-site demonstrations, increase advertising in trade publications
and on radio and television, and attend trade shows. See "BUSINESS -- Selling
and Marketing."
RESEARCH AND DEVELOPMENT
The Company intends to use approximately $2,000,000 of the net proceeds from
the Offering for research and development activities. The Company intends to
hire up to twelve programmers, graphic artists, designers and network engineers
to develop and enhance the Company's software, to build the Company's network
infrastructure and to provide ongoing systems support. The Company also intends
to refine and enhance its business and accounting software related to order
fulfillment and automated credit clearance. Software programmers may also
develop new products for the Company, including products developed from
technology licensed from third parties. The Company also intends to hire
additional graphic designers and Web site programmers to develop and refine
industry-specific Web site templates. See "BUSINESS -- Research and
Development."
PURCHASE OR LEASE OF CAPITAL EQUIPMENT AND SOFTWARE
The Company intends to use up to $1,000,000 of the net proceeds of the
Offering to purchase or lease additional equipment and software, including
workstations (approximately $200,000), computer servers (approximately
$200,000), communications equipment, such as telephone lines, routers and
switches (approximately $500,000) and software, including communications,
accounting, security and file management software (approximately $100,000).
REPAYMENT OF INDEBTEDNESS
The Company intends to use up to $750,000 of the proceeds from the Offering
to repay loans from Centennial Technologies, Inc. ("Centennial"). Centennial
has, from time to time, made loans to the Company for general corporate purposes
pursuant to promissory notes that bear interest at the rate of 9.0% per annum
and are due on demand. As of October 22, 1996, the principal balance on these
notes was approximately $700,000. See "PRINCIPAL AND SELLING STOCKHOLDERS" and
"CERTAIN TRANSACTIONS."
WORKING CAPITAL AND GENERAL CORPORATE PURPOSES
Approximately $904,000 of the net proceeds from the Offering will be used
for general corporate purposes, including working capital. These amounts may
also be used, in part, to purchase additional capital equipment or to fund joint
ventures or acquisitions within the Company's principal market. The Company
presently has no commitments with respect to any joint venture or acquisition.
The Company may deposit up to $600,000 allocated to working capital and general
corporate purposes as collateral to secure payment under a capital lease
agreement with a commercial bank. As of October 22, 1996, the Company had
approximately $600,000 outstanding under this agreement. See "PLAN OF OPERATION
- -- Liquidity and Capital Resources."
15
The allocation of the net proceeds of this Offering set forth above
represents the Company's best estimate based upon its present plans and certain
assumptions regarding general economic and industry conditions and the Company's
future revenues and expenditures. The Company reserves the right to reallocate
the proceeds within the above described categories or to other purposes in
response to, among other things, changes in its plans, industry conditions, and
the Company's future revenues and expenditures.
Based on the Company's operating plan, management believes that the proceeds
from this Offering and anticipated cash flow from operations will be sufficient
to meet the Company's anticipated cash needs and finance its plans for expansion
for at least 12 months from the date of this Prospectus. Thereafter, the Company
anticipates that it may require additional financing to meet its current or
future plans for expansion. No assurance can be given that the Company will be
successful in obtaining such financing on favorable terms, or at all. If the
Company is unable to obtain additional financing, its ability to meet its
current plans for expansion could be adversely affected. See "RISK FACTORS --
Future Capital Needs; Uncertainty of Additional Financing" and "PLAN OF
OPERATIONS."
Proceeds not immediately required for the purposes described above will be
invested principally in U.S. government securities, short-term certificates of
deposit, money market funds, or other high- grade, short-term, interest-bearing
investments.
16
DILUTION
At August 31, 1996, the net tangible book value of the Company was
approximately ($527,375), or ($.11) per share of Common Stock based on the
4,605,000 shares of Common Stock outstanding after giving retroactive effect to
the conversion of the Class B Common Stock into 2,500,000 shares of Common
Stock. Net tangible book value per share represents the amount of the Company's
total assets less the amount of its intangible assets and liabilities, divided
by the number of shares of Common Stock outstanding at August 31, 1996. After
giving effect to the receipt of the net proceeds (estimated to be approximately
$6,654,000) from the sale of the Securities offered hereby, the pro forma net
tangible book value of the Company at August 31, 1996, would have been
approximately $6,550,685 or $1.17 per share of Common Stock. This would result
in dilution to the public investors (i.e., the difference between the offering
price of a share of Common Stock and the net tangible book value thereof after
giving effect to this Offering) of $7.03 per share. The following table
illustrates the per share dilution:
Public offering price per share of Common Stock(1) .......................... $ 8.20
Net tangible book value per share of Common Stock at August 31, 1996 . ($ .11)
Increase in net tangible book value per share of Common Stock(1) ........... 1.28
----
Pro forma net tangible book value per share of Common Stock after
Offering(2) ............................................................... $ 1.17
======
Dilution of net tangible book value per share of Common Stock to new
investors ................................................................. $ 7.03
======
____________
(1) Including $.20 per Redeemable Warrant.
(2) The calculation of pro forma net tangible book value and the other
computations above does not include (a) 800,000 shares of Common Stock
reserved for issuance upon exercise of stock options which may be granted
under the Plan, of which options to purchase 402,200 shares are outstanding
as of the date of this Prospectus and (b) 60,000 shares of Common Stock
reserved for issuance upon exercise of stock options which may be granted
under the Formula Plan, of which options to purchase 5,000 shares are
outstanding as of the date of this Prospectus.
The following table sets forth, as of the date of this Prospectus, the
number of shares of Common Stock purchased, the percentage of Common Stock
purchased, the total consideration paid, the percentage of total consideration
paid, and the average price per share paid, by the existing stockholders of the
Company and the investors in this Offering:
SHARES PURCHASED TOTAL CONSIDERATION
---------------- -------------------
AVERAGE
PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
------ ---------- ------ ---------- -----
New Investors ........................... 1,000,000 17.8% $ 8,000,000 50.0% $8.00
Existing Stockholders(1) ................ 4,605,000 82.2% 7,854,325 50.0% $1.71
--------- ---- --------- ----
TOTAL ................................. 5,605,000 100.0% $15,854,325 100.0%
========= ===== =========== =====
_____________
(1) After giving effect to the conversion of Class B Common Stock into
2,500,000 shares of Common Stock.
17
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
August 31, 1996, and as adjusted to reflect the sale and issuance of the
Securities offered hereby and the initial application of the estimated net
proceeds thereof as described in "USE OF PROCEEDS."
AUGUST 31, 1996
PRO FORMA
ACTUAL AS ADJUSTED
Capital lease obligations, net of current .................... $ 300,430 $ 300,430
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock -- $.01 par value, authorized -- 1,000,000
shares, issued -- none ..................................... -- --
Common Stock -- $.01 par value, authorized -- 20,000,000
shares, issued -- 2,105,000 shares; 5,605,000 shares pro
forma, as adjusted(1)(2) ................................... 21,050 56,050
Class B Common Stock -- $.01 par value; authorized -- 2,000,000
shares, issued -- 625,000 shares, zero shares pro
forma, as adjusted(2) ...................................... 6,250 --
Additional paid-in capital ................................... 7,827,025 14,452,275
Accumulated deficit .......................................... (7,957,640) (7,957,640)
---------- ----------
Total stockholders' equity (capital deficit) ............... (103,315) 6,550,685
---------- ----------
TOTAL CAPITALIZATION ......................................... $ 197,115 $ 6,851,115
=========== ===========
_____________
(1) Does not include (a) 800,000 shares of Common Stock reserved for issuance
upon exercise of stock options which may be granted under the Plan, of
which options to purchase 402,200 shares are outstanding as of the date of
this Prospectus and (b) 60,000 shares of Common Stock reserved for issuance
upon exercise of stock options which may be granted under the Formula Plan,
of which options to purchase 5,000 shares are outstanding as of the date of
this Prospectus.
(2) Gives effect to the conversion of 625,000 shares of Class B Common Stock
into a total of 2,500,000 shares of Common Stock on the date of this
Prospectus.
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock since its inception
and does not intend to pay any dividends to its stockholders in the foreseeable
future. The Company currently intends to reinvest earnings, if any, in the
development and expansion of its business. The declaration of dividends in the
future will be at the election of the Board of Directors and will depend upon
the earnings, capital requirements, and financial position of the Company,
general economic conditions, and other pertinent factors.
18
SELECTED FINANCIAL DATA
The statement of operations data for the period from inception (July 19,
1995) through August 31, 1996 and the balance sheet at August 31, 1996 are
derived from, and should be read in conjunction with, the audited Financial
Statements and Notes thereto included elsewhere in the Prospectus. The
historical operating results are not necessarily indicative of future operating
results. The Selected Financial Data should be read in conjunction with "PLAN OF
OPERATIONS" and the Financial Statements and the notes thereto included
elsewhere in this Prospectus.
PERIOD FROM CUMULATIVE
FISCAL YEAR INCEPTION FROM INCEPTION
ENDED (JULY 19, 1995)TO (JULY 19, 1995)TO
AUGUST 31, 1996 AUGUST 31, 1995 AUGUST 31, 1996
---------------- ---------------- ---------------
STATEMENT OF OPERATIONS DATA:
Revenues:
Services .............................................. $ 78,833 $ -- $ 78,833
----------- ------------ -----------
Products .............................................. 18,422 -- 18,422
----------- ------------ -----------
Total revenues ...................................... 97,255 -- 97,255
----------- ------------ -----------
Cost of revenues:
Services .............................................. 177,469 -- 177,469
Products .............................................. 15,971 -- 15,971
----------- ------------ -----------
Total cost of revenues ............................. 193,440 -- 193,440
----------- ------------ -----------
Gross margin ....................................... (96,185) -- (96,185)
----------- ------------ -----------
Operating expenses:
Research and development .............................. 577,439 809 578,248
Selling and marketing ................................. 298,680 1,946 300,626
General and administrative ............................ 1,145,500 30,871 1,176,371
Charge for acquired research and development .......... 5,760,000 -- 5,760,000
----------- ------------ -----------
Total operating expenses ........................... 7,781,619 33,626 7,815,245
----------- ------------ -----------
Loss from operations ............................... (7,877,804) (33,626) (7,911,430)
Interest expense, net ................................... (46,210) -- (46,210)
----------- ------------ -----------
Net loss ........................................... $(7,924,014) $ (33,626) $(7,957,640)
=========== ============ ===========
Net loss per common and common equivalent
share(1) .......................................... $ (1.65) $ (.01) $ (1.66)
=========== ============ ===========
Shares used in computing net loss per common
and common equivalent share(1) ..................... 4,805,050 4,805,050 4,805,050
=========== ============ ===========
AUGUST 31, 1996
---------------
ACTUAL AS ADJUSTED(2)
------ --------------
BALANCE SHEET DATA:
Current assets $ 106,976 $ 6,088,976
Total assets 1,745,948 7,303,888
Working capital (deficiency) (1,441,857) 5,636,203
Total liabilities 1,849,263 753,203
Stockholders' equity (capital deficit) (103,315) 6,550,685
(1) Computed on the basis described in Note 2 of the Notes to Financial
Statements.
(2) Gives effect to the receipt by the Company of the estimated net proceeds of
approximately $6,654,000 from the sale of the Securities offered hereby and
the initial application thereof. See "RISK FACTORS -- Substantial Options
and Warrants Reserved," "USE OF PROCEEDS" and "UNDERWRITING."
19
PLAN OF OPERATIONS
OVERVIEW
The Company, a development stage company, offers Internet access and
support services for secure commercial transactions and communications over the
Internet. The Company plans to provide complete solutions for businesses seeking
to market and sell products and services over the Internet, including
establishing (i) a commercial Web site domain, (ii) electronic store design,
(iii) browsing and purchasing capabilities, and (iv) transaction processing. In
addition, the Company provides general Internet services, such as connectivity
and communications services. The Company also resells SBT, a prepackaged
accounting software program. By offering turnkey solutions to commercial
Internet needs, the Company plans to become a "one-stop provider" of Internet
products and services to businesses seeking to establish a commercial presence
over the Internet.
The financial results for the period from inception (July 19, 1995) to
August 31, 1996 relate to the Company's initial organization, establishment of
infrastructure and provision of Internet training courses. The Company has
incurred losses since inception and has a working capital deficiency. As a
result, the independent certified public accountants' report contains an
explanatory paragraph regarding the Company's ability to continue as a going
concern. The Company does not believe that the operating results from this
period will provide meaningful comparisons to subsequent periods.
The Company's plan of operation for the next twelve months will principally
involve software development to enable the Company to offer certain of its
planned services on a commercial basis, the sale of connectivity and the
provision of Internet access services, Web page development, intranet systems,
and the receipt of transaction fees. After the Offering, the Company intends to
use a portion of the proceeds of the Offering to hire additional personnel,
including marketing, sales and customer service personnel, to meet the Company's
anticipated growth, as to which no assurance can be given.
The Company recently upgraded its Internet access to a "Tier I" level,
which provides the Company with a direct connection to the National Access Point
("NAP") in Chicago, Illinois. In addition, the Company has established
redundancy systems in Boston, Massachusetts with respect to its communication
links and computer servers to be used should its direct NAP link or computer
servers located at the Company's Saugus, Massachusetts facility experience
temporary difficulties. See "RISK FACTORS -- System Interruption and Security
Risks; Potential Liability and Lack of Insurance."
Revenue. The Company has not recognized any meaningful revenue from its
inception through August 31, 1996. The Company's ability to generate significant
revenue thereafter is uncertain. The Company's services are directed at
businesses that intend to engage in commerce and communications over the
Internet. The Company's business plan contemplates that its initial revenue will
be derived from providing general Internet services, such as connectivity,
hosting and e-mail services. In the future, the Company anticipates it will
derive revenue from transaction processing fees from third parties, Web page
development, connectivity charges, charges for hosting services, education and
intranet networking.
Operating Expenses. The Company's cost of revenue has exceeded the
Company's service revenue due to the development stage nature of the business.
The Company's operating expenses have increased each quarter since the Company's
inception. The Company believes that operating expenses will increase in the
future as the Company continues the development of its services and expands its
operations.
Research and Development. The Company's research and development efforts
are focused on developing Web site templates suitable to conduct commerce over
the Internet. The Company is also developing intranet models for
intraorganization communications that can be used by municipal governments and
multi-site organizations. The Company's engineers are also developing the
Company's communications infrastructure to allow for daily information transfer
to the Company for periodic back-up of customer files and disaster control
purposes.
Selling and Marketing. Selling and marketing expenses are expected to
consist primarily of salaries, commissions, trade show expenses, and advertising
and marketing costs. The Company anticipates a substantial increase in its
selling and marketing expenses in the future. The Company intends to use a
direct selling force that will target certain industries and sell across
vertical markets, as well as independent sales agents.
20
General and Administrative. General and administrative expenses consist
primarily of compensation expenses and fees for professional services. General
and administrative expenses were approximately $1,176,371 for the period from
inception to August 31, 1996. Approximately $1,007,000 of these expenses were
paid to Employee Resource Inc. ("ERI"), an employee leasing company owned by the
Company's President and Chief Executive Officer, Robert Kuzara. ERI leases to
the Company all of its employees, including the officers of the Company. The
Company anticipates a substantial increase in its general and administrative
expenses in the future. See "CERTAIN TRANSACTIONS."
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its activities primarily from
notes payable to Centennial Technologies, Inc. ("Centennial") and the sale of
its Common Stock to private investors. Working capital deficiency at August 31,
1996 was ($1,441,857). The Company has two capital lease agreements which are
secured by fixed assets and guaranteed by Centennial. The outstanding balance as
of August 31, 1996 for one of these agreements, was approximately $372,000,
bears interest at the rate of 10.35% per annum and matures in December 2000. In
September 1996, the Company entered into the second capital lease agreement
under which it may borrow up to $1,000,000. As of October 22, 1996, the Company
had drawn $600,000 against this lease agreement. This amount bears interest at
the rate of 10.5% per annum and matures in September 2001. The Company has
agreed to deposit as collateral a portion of the proceeds from the Offering
equal to the amount outstanding under this agreement. See "USE OF PROCEEDS" and
"CERTAIN TRANSACTIONS."
Based on the Company's operating plan, management believes that the net
proceeds from this Offering and anticipated cash flow from operations will be
sufficient to meet the Company's anticipated cash needs and finance its plans
for expansion for at least 12 months from the date of the Prospectus.
Thereafter, the Company anticipates that it will require additional financing to
meet its current plans of expansion. No assurance can be given of the Company's
ability to obtain such financing on favorable terms, if at all. If the Company
is unable to obtain additional financing, its ability to meet its current plans
for expansion could be materially adversely affected.
IMPACT OF INFLATION
Although no assurance can be given, increases in the inflation rate are not
expected to materially adversely affect the Company's business.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
issued by the Financial Accounting Standards Board ("FASB"), is effective for
financial statements for fiscal years beginning after December 15, 1995. The new
standard establishes new guidelines regarding when impairment losses on
long-lived assets, which include plant and equipment and certain identifiable
intangible assets and goodwill, should be recognized and how impairment losses
should be measured. The Company does not expect the adoption of this standard to
have a material effect on its financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company has determined that it will continue to account for
stock-based compensation for employees under Accounting Principles Board Opinion
No. 25 and elect the disclosure-only alternative under SFAS No. 123. The Company
will be required to disclose the pro forma net income or loss and per share
amounts in the notes to the financial statements using the fair-value-based
method beginning in the year ending August 31, 1997, with comparable disclosures
for the year ended August 31, 1996. The Company has not determined the impact of
these pro forma adjustments.
21
BUSINESS
The Company, a development stage company, offers Internet access and
support services for secure commercial transactions and communications over the
Internet. The Company plans to offer a broad range of marketing, sales and
connectivity solutions to businesses and, to a lesser extent, to individuals,
including establishing (i) a commercial Web site domain, (ii) electronic store
design, (iii) browsing and purchasing capabilities, and (iv) transaction
processing. The Company will also provide general Internet services, such as
connectivity to the Internet and electronic mail hosting services. The Company
also resells SBT, a prepackaged accounting software program. By offering turnkey
solutions to commercial Internet needs, the Company plans to become a "one-stop
provider" of Internet products and services to businesses seeking to establish a
commercial presence over the Internet. In addition to the Company's array of
Internet services generally offered by providers, the Company plans to offer
customers the ability to engage in secure PC to PC Internet commerce
transactions, utilizing software applications for business transactions that
contain credit card or other confidential information, and for confidential
communications purposes.
The Company's comprehensive service and support capabilities include the
following:
* Internet access and host services.
* Internet business development and marketing services.
* Internet secure commerce processing.
* Internet hardware and software.
* Internet training.
The range of customized service options include full Internet access
service, SLIP/PPP connection, Web browsing capability, electronic mail and
USENET News, among others.
The Company's Internet business development and marketing services also
provide commercial users with a back-end link from the user's Internet host site
to major accounting systems, including SBT, and business management support for
integrating secure Internet commerce into the user's existing accounting
financial systems. In addition, a turn-key arrangement is available to meet the
needs of individual users, along with sales and marketing consulting to
implement Internet commerce capability. The Company further offers businesses
support in the development and maintenance of a Web host presence and assists
clients in marketing and selling through the Internet. The Company also offers
training classes for business users in accessing and navigating through the
Internet, which classes are tailored to each user's environment, including
support for Windows, Windows 95, Windows NT and Macintosh client access.
INDUSTRY BACKGROUND
THE INTERNET
The Internet is a rapidly growing global web of computer networks that
permits users to communicate throughout the world. Each Internet user has access
to every other user, as well as information contained on an increasing number of
"host" or "server" computers. Host computers are generally maintained by
Internet service providers ("ISPs"), such as the Company, that provide access to
the Internet.
According to Input, a market research firm, it is estimated that worldwide
corporate spending on Internet technologies and services more than tripled
between 1994 and 1995, reaching approximately $12 billion in 1995. By the year
2000, Input projects total spending to reach $200 billion. The Internet and the
Web provide users with the potential for a new commercial marketplace in which
goods, services and information can be marketed and sold, and over which other
financial transactions can occur. Although no assurances can be given, the
Company believes that the use of the Internet as a commercial medium will become
more widespread with the continued development and acceptance of systems
providing secure execution of financial transactions.
22
Until 1993, the Internet infrastructure was subsidized by the federal
government and commercial use was, for the most part, prohibited. The connection
of commercial Internet providers beginning in 1993 has lead to an increase in
the use of the Internet of nearly 20% per month compounded since December 1994.
Most of the growth in the number of commercial hosts is driven by the need of
businesses to enhance communications among workers, customers and suppliers
while cutting costs. The communications links of the Internet allow businesses
to make information and communications available to employees, customers and
suppliers with minimal human involvement. Industry data indicates that consumer
use of the Internet is also growing at a rapid rate. Consumer use of the
Internet is being driven by the growth of ISP's and on-line service providers,
such as America Online, CompuServe and Prodigy, which are expanding their
offerings to include Internet access. In addition, national and regional
telephone companies and cable television operators are expanding their services
to include Internet access.
ACCESS TO THE INTERNET
Unlike on-line services such as CompuServe, Prodigy and America Online, the
Internet is a loose confederation of millions of computers located worldwide.
When a user dials into an on-line service provider such as Prodigy, he or she
calls a modem connected to a central computer owned by Prodigy. The subject
areas and user interface that appear on the user's computer monitor are
determined by the service, which may also include Internet access as a component
of the overall service provided. Direct Internet access involves two steps,
accessing the Internet and connecting to one of the millions of machines
attached. AT&T and other telecommunications companies have begun to offer
Internet access and related services.
Once connected to the Internet, a computer has an address, much like a
telephone number, that makes it accessible to millions of other computers.
Unlike long-distance telephone calls, connections to services on the Internet
are not determined based on distance; instead, the connection cost is based on
the proximity of the user to its ISP, which in most cases is located close to
the user. Therefore, it often costs the same to access a computer on the other
side of the world as to access a computer across town. In addition, an Internet
user can move from communicating with one computer across the world to another
across town almost instantly.
The Internet is not controlled by any one country, corporation or other
entity. However, several major companies have become the major providers for the
communications that link the network together in the United States. The
companies that carry much of the commercial traffic on the Internet include AT&T
Corporation, Alternet, PSI, SprintLink, and ANS. The national providers act
primarily as wholesalers of their communications infrastructure to regional
ISPs. Regional providers establish satellite offices to provide local access
dial-up connections for their customers. These local dial-up connections connect
end users to a local point of presence (a "POP") established by the regional
provider to access the Internet. The end-user connects to the Internet through
the local POP.
THE WORLD WIDE WEB
The Web is a world wide collection of interlinked documents on the Internet
containing text, graphics, sound and video. The emergence of the Web has
fostered the recent rapid growth in Internet use by businesses and individuals.
International Data Corporation has estimated that the number of individuals
worldwide with access to the Internet will reach approximately 200 million by
the end of 1999, of which 125 million are expected to be accessing the Web. The
Web allows a broad range of users to easily access information on the Internet
and interact with individuals or organizations offering textual, graphic or
other information.
Utilizing the Web, merchants are able to provide full color graphic images
of their merchandise, up-to-the-minute pricing and inventory information,
automated order-taking and interactive customer support. Publishers and
information providers are using the Web to disseminate publications and
information to allow users to search and retrieve data. Consumers are
increasingly using browsers, such as Netscape Navigator(tm), to visit various
Web sites to access information and to purchase goods and services.
23
ELECTRONIC COMMERCE OVER THE INTERNET
The Internet provides businesses and individuals with a new economic
environment in which to conduct business. The availability of rapid, low-cost
access to millions of users offers several cost and marketing advantages to
businesses. For example, commercial Web sites enable a volume of visitors that
would be impossible through physical commerce. In addition, Internet merchants'
need for physical store premises, warehouses and distribution centers is greatly
reduced and in some cases eliminated by allowing shipment directly from the
manufacturer to the consumer. Internet communications may also reduce the cost
of advertising and marketing as access to electronic media spreads to compete
with print and traditional broadcast media. The overall costs to the consumer
may be reduced in the future by the marketing and distribution efficiencies made
possible by conducting commerce over the Internet. Although no assurance can be
given, the Company believes that commercial activity over the Internet will
increase substantially in the future.
SEAMLESS COMMERCE(tm) OVER THE WORLD WIDE WEB
The Company plans to provide complete Internet start-up and maintenance
services for businesses that wish to conduct commerce over the Internet. The
Company offers its services separately, so that customers may elect to use some
or all of the Company's capabilities to achieve "Seamless Commerce(tm)." The
Company's services can be categorized as follows:
INTERNET CONNECTIVITY
The Company provides access to the Internet by establishing a connection
from its customers to one of the Company's points of presence, or POPs, which
are strategically located communications centers that connect directly to the
Internet. The Company currently operates two POPs, one at its main office in
Saugus, Massachusetts, and one in Salem, Massachusetts. The Company plans to use
a portion of the proceeds from this Offering to establish several other POPs in
New England. Links from the Company's customers to the Company's POPs may be
made through regular or upgraded telephone lines or through other high-capacity
links that can accommodate heavier user traffic. For its connectivity service,
the Company anticipates it will charge customers a one time set up fee in
addition to a monthly fee that will vary depending on the type of connection
from the customer to the POP.
As part of its Internet access services, the Company establishes electronic
mail ("e-mail") addresses for its customers. E-mail allows Internet users to
communicate electronically with other Internet users around the world. The
Company has also established e-mail services that allow for communication within
an organization through the Company's host computer, without access to the
Internet. The Company provides "intranet" e-mail to businesses and other
organizations seeking to accommodate convenient intracompany communications at a
reduced cost.
CONSULTING AND DEVELOPMENT SERVICES
The Company plans to design, develop and manage Web sites for its business
customers. Web sites may contain graphic design, text, video and audio
components. The Web sites designed by the Company for its customers contain
order forms to receive orders for customers products and services. To date, the
Company has designed six Web sites, of which four were for related parties. See
"CERTAIN TRANSACTIONS."
As part of its consulting and development services, the Company may design
and install networks at customers' facilities to access and download information
from the Company's server to the customers' computers. This information may be
organized by the Company in accordance with customer specifications to include
information such as total visits, visits per hour, visits per geographic
location, links viewed, comments provided, total orders received and orders per
hour. For some customers, the Company may also provide complete back room
support services. These services would include inventory control and purchasing,
order and delivery tracking and other services.
24
COMMERCIAL HOST SERVICES
The Company believes that its commercial host services will allow
businesses to establish a reliable, high performance Web site without having to
invest in the technology and human components necessary to maintain an on-line
presence. The maintenance of a Web site by the Company includes the use of
sufficient storage capacity on the Company's server computer to accommodate
visits, or "hits," by Internet users to a customer's Web site. Web sites may
vary in popularity and complexity, requiring different degrees of storage
capacity. Web sites allow for user comments and order taking and may contain a
number of links to other Web sites either at the Company's server or at
different locations. The Company can identify and track the number of "hits" to
a Web site, as well as, in most cases, the e-mail address of the visitor. The
Company may charge for the maintenance and use of this information.
Commercial host services will also include the provision of technical
support and access management control, the latter of which allows for the
restriction of access to certain information. For example, by providing a
special access code to certain customers, companies can permit someone to review
information on the status of an order, proposed delivery dates, or price lists
over the Internet without human involvement. Management of the Company believes
that this can be an attractive feature to customers of manufacturers,
fulfillment houses and others.
ORDER PROCESSING
One of the services the Company plans to offer includes receiving and
processing orders for its customers with a minimum level of human involvement.
Processing orders over the Internet involves the following:
Automatically download order form. The Company has designed links within
customers' Web sites that contain order forms. When a user visits the link
containing such forms, software can automatically be downloaded to the
user's personal computer to accept an order and encrypt the credit card
information of the user. Once the user completes the requested information,
the user may send the order information to the Company's server through the
press of a button on the user's computer. The user may also elect to
complete the order orally over the telephone. See "RISK FACTORS --
Dependence on Third Party Intellectual Property Rights; Risk of
Infringement" and "RISK FACTORS -- System Interruption and Security Risks;
Potential Liability and Lack of Insurance."
Clear credit card information. The Company's computers can automatically
decrypt the user's credit card information from the order form. The credit
card information is then checked and cleared over traditional networks.
Fulfillment. Once credit is cleared, the order information may be
transmitted automatically to the customer or the customer's fulfillment
house. The order information may include (i) a "pick list," which contains a
list of the merchandise ordered, (ii) a manifest for shipping, (iii) a
shipping label, and (iv) an order identification tag.
Transfer of funds. The Company will electronically transfer funds it
receives from the credit card company to its customer.
Order tracking. Order tracking and delivery may be monitored through the
order identification tag transmitted to the customer or its fulfillment
house. In addition, most delivery services now also have their own tracking
systems, allowing for order tracking from the moment the order is received
by the Company through fulfillment to final delivery.
INTERNET TRAINING
The Company provides Internet training at its facility in Saugus,
Massachusetts to teach and promote use of the Internet. The Company's classes
are all hands-on, with students learning by actually using the Internet during
the session, which generally lasts for four hours.
25
SELLING AND MARKETING
The Company has conducted limited selling and marketing efforts to date. The
Company primarily markets its services through presentations to local business
organizations, advertising and, to a lesser degree, attendance at trade shows.
The Company plans to use a portion of the net proceeds from the Offering to
increase its selling and marketing activities by hiring an additional ten sales
people, purchasing additional demonstration equipment and attending additional
trade shows and advertising on radio and television. See "USE OF PROCEEDS."
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are presently focused on
programming off-the- shelf software to refine and enhance Web site templates.
The Company is developing Web site templates for distribution companies,
manufacturers and service providers. Templates will be customized by the Company
for individual customers. In addition, the Company plans to install, test and
enhance business development software licensed from third parties to automate
order processing and business support services for the Company's customers. The
Company intends to use a portion of the net proceeds from the Offering to hire
additional programmers to support its research and development activities. See
"USE OF PROCEEDS."
In March 1996, the Company acquired an exclusive worldwide license from
Manadarin Trading Company Limited ("MTCL") to develop and market three software
programs related to the management of data collection and processing from remote
sites. The Company presently intends to further develop these programs. In
connection with the license, the Company issued 625,000 shares of Class B Common
Stock to the licensor. See "DESCRIPTION OF SECURITIES."
In April 1996, the Company entered into an exclusive, ten year agreement
with International Software Development Limited ("ISDL") pursuant to which the
Company licensed the right to use and sublicense an encryption software program
called Titan(tm). In exchange for the license, the Company issued 802,500 shares
of Common Stock to ISDL. The Company intends to further test and develop
Titan(tm) to determine whether Titan(tm) would be able to withstand attempts to
violate its integrity. No assurance can be given as to whether Titan(tm) will be
commercially offered by the Company. See "RISK FACTORS -- Dependence on
Intellectual Property Rights; Risks of Infringement."
PROPRIETARY INFORMATION
The Company's success and ability to compete is dependent in part upon
proprietary technology relating to the encryption of credit card payment
information over the Internet. The Company has no patents and relies on
copyright, trade secret and trademark laws to protect certain proprietary
information of the Company. To the extent proprietary technology is involved,
the Company relies on trade secrets that it seeks to protect, in part, through
confidentiality agreements with certain personnel, consultants and other
parties. No assurance can be given that these agreements will not be breached,
that the Company will have adequate remedies for any breach, or that the
Company's trade secrets will not otherwise become known to, or independently
developed by, existing or potential competitors of the Company. The Company
generally does not seek to protect its proprietary information through patents
or registered trademarks, although it may seek to do so in the future. The
Company may be involved from time to time in litigation to determine the
enforceability, scope and validity of its rights. In addition, no assurance can
be given that the Company's products will not infringe any patents of others.
Litigation to protect the Company's intellectual property rights could result in
substantial cost to the Company and diversion of effort by the Company's
management and technical personnel.
The Company currently licenses certain proprietary and patented technology
from third parties. No assurance can be given that any patented technology
licensed by the Company will provide meaningful protection from competitors.
Even if a competitor's products were to infringe on patented technology licensed
by the Company, it would be costly for the Company to enforce its rights in an
infringement action and would divert funds and management resources from the
Company's operations.
26
All of the Company's planned services incorporating data encryption and
authentication is based on proprietary software of RSA Data Security, which is
licensed, on a non-exclusive basis, through SBT Corporation. The Company has
licensed the rights to another encryption technology called Titan(tm). No
assurance can be given as to when, or if, the Titan(tm) encryption technology
will be ready for commercial use by the Company. Until such time as Titan(tm)
may be used by the Company, as to which no assurance can be given, the Company
intends to continue to use the RSA encryption software licensed through SBT. No
assurance can be given that the encryption software presently licensed by the
Company will continue to be available to the Company on commercially reasonable
terms, or at all. In the past, certain parties have claimed to have rights with
respect to the encryption software licensed by the Company. If such claims are
successfully pursued by such parties, such parties may prevent the Company from
using the software or, in the alternative, may force the Company to pay an
additional royalty to use such software.
The Company also licenses, on a non-exclusive basis, accounting and business
support software from SBT. No assurance can be given that the Company's third
party licenses will continue to be available to the Company on commercially
reasonable terms, or at all. The loss of or inability to maintain any of these
software licenses could result in delays in introduction of the Company's
services until equivalent software, if available, is identified, licensed and
integrated into the Company's planned services, which could have a material
adverse effect on the Company's business, financial condition, prospects or
operating results. See "RISK FACTORS -- Dependence on Intellectual Property
Rights; Risks of Infringement" and "RISK FACTORS -- Dependence on Third-Party
Intellectual Property Rights."
COMPETITION
The market for Internet-based software and services is new and rapidly
evolving, resulting in a dynamic competitive environment. The Company competes
with many companies that have substantially greater financial, marketing,
technical and human resources than the Company. In addition, there are many
companies that may enter the market in the future with new technologies,
products and services that may be competitive with services offered or to be
offered by the Company. Because there are many potential entrants to the field,
it is extremely difficult to assess which companies are likely to offer
competitive products and services in the future, and in some cases it is
difficult to discern whether an existing product or service is competitive with
the Company's services. The Company expects competition to persist and intensify
in the future.
Competitive factors in the Internet-based software and services market
include core technology, breadth of product functionality and features, product
performance and quality, marketing and distribution resources, customer service
and support and price. Additional competition could come from other Internet
companies and software and hardware vendors that incorporate Internet payment
capabilities into their products or other Internet services companies that
provide hosting, connectivity, Internet training and domain registration
services. The payment mechanisms used by the Company in the provision of its
services utilize existing credit card verification procedures. Certain of the
Company's competitors and potential competitors have developed or are developing
new methods to transmit, verify and accept credit card payments over the
Internet. In this regard, MasterCard and Visa recently announced that they would
work together to establish a single industry standard for secure electronic
transactions. These and other potential new payment mechanisms may be perceived
to be superior to those employed by the Company and could render the Company's
services unmarketable. In addition, if an industry standard is established, no
assurance can be given that the technology upon which such standard is based
will be available to the Company on commercially reasonable terms, or at all,
which could have a material adverse effect on the Company's business, financial
condition, prospects and operating results.
Virtually all of the Company's current and potential competitors have longer
operating histories, greater name recognition, larger installed customer bases
and significantly greater financial, technical and marketing resources than the
Company. Such competitors may be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and make more attractive
offers to
27
potential customers. In addition, many of the Company's current or potential
competitors, such as Netscape, Microsoft and AT&T have broad distribution
channels that may be used to bundle competing products directly to end-users or
purchasers. If such competitors were to bundle competing products for their
customers, the demand for the Company's services may be substantially reduced,
and the ability of the Company to broaden successfully the utilization of its
services would be substantially diminished. No assurance can be given that the
Company will be able to compete effectively with current or future competitors
or that such competition will not have a material adverse effect on the
Company's business, financial condition, prospects or operating results.
PERSONNEL
As of August 31, 1996, the Company had 24 full-time personnel that were leased
from ERI, of which three were executive officers (one of which is also involved
with sales and marketing), eight were involved with sales and marketing
functions, six were involved with research and product development, three were
involved with administration and four were involved with operations and customer
support.
None of the Company's personnel is represented by a labor union, and the
Company is not aware of any activities seeking such organization. The Company
considers its relationships with its personnel to be satisfactory.
FACILITIES
The Company's principal executive offices and operations are based in a
facility located in Saugus, Massachusetts that consists of approximately 20,000
square feet of space. The Company currently pays rent in the amount of
approximately $15,000 per month, $4,591 of which is paid pursuant to a lease
that expires in August 2000, and the balance is paid on a month-to-month basis.
The Company subleases approximately 2,000 square feet of this space on a
month-to-month basis.
The Company believes that its facilities are adequate for its current needs
and that adequate facilities for expansion, if required, are available at
competitive rates.
LEGAL PROCEEDINGS
The Company is not a party to any material pending litigation.
28
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers and key personnel of the Company, their
positions held with the Company and their ages are as follows:
NAME AGE POSITION
---- --- --------
John J. Shields ......................... 58 Chairman of the Board of Directors
Robert Kuzara ........................... 52 President, Chief Executive Officer, Secretary
and Director
Carole Ouellette ........................ 45 Chief Financial Officer, Treasurer and
Director
William Blocher ......................... 42 Chief Technology Officer
Michael Appe ............................ 45 Director
Directors are elected each year for a period of one year at the Company's
annual meeting of stockholders and serve until their successors are duly elected
by the stockholders. Vacancies and newly created directorships resulting from
any increase in the number of authorized directors may be filled by a majority
vote of directors then in office. Officers are elected by, and serve at the
pleasure of, the Board of Directors. The Board of Directors intends to establish
Audit and Compensation Committees following the completion of this Offering.
The following is a brief summary of the background of each director and
executive officer of the Company:
JOHN J. SHIELDS has served as the Chairman of the Board of Directors of the
Company since April 1996. Since April 1993, Mr. Shields has served as the
President and Chief Executive Officer of Kings Point Holdings Incorporated, a
technical consulting and venture capital company that is also engaged in
cranberry cultivation. From January 1990 to April 1993, Mr. Shields served as
the President and Chief Executive Officer of Computervision Corporation, a
publicly traded provider of software for computer- aided design.
ROBERT KUZARA has served as President, Chief Executive Officer and a
Director of the Company since its inception in July 1995. From 1978 to the
present, Mr. Kuzara has also served as a principal of Kuzara Consultants, Inc.,
a financial consulting firm specializing in the rehabilitation of troubled
companies. Mr. Kuzara is also a principal of the Center for Business Planning
Limited, a provider of business support services for small businesses, Employee
Resources, Inc., an employee leasing company, and Cauldron Corporation, a
t-shirt screening and distribution company. From March 1994 through November
1995, Mr. Kuzara served on the Board of Directors of Centennial Technologies,
Inc., a publicly traded manufacturer of personal computer cards.
CAROLE OUELLETTE has served as the Company's Chief Financial Officer and
Treasurer since March 1996 and as a Director since May 1996. From March 1991
through February 1996, Ms. Ouellette served as the Controller at Centennial
Technologies, Inc., a publicly traded manufacturer of personal computer cards.
Ms. Ouellette holds a Masters of Business Administration from Suffolk University
School of Management.
WILLIAM K. BLOCHER, PH.D. has served as the Company's Chief Technology
Officer since January 1996. From 1990 to June 1995, Dr. Blocher served as the
President and Chief Technologist of BBC Computers, Inc. Since July 1995, Dr.
Blocher has also served as Chief Technologist of Presage Corporation, a
communications company. Dr. Blocher also serves on the teaching staff of Boston
University and Harvard University. As part of his employment agreement with the
Company, Mr. Blocher has agreed to devote a minimum of 40 hours per week to the
business of the Company. Dr. Blocher has a Ph.D. in computer science from Boston
University and a Masters in Mathematics from Boston University.
29
MICHAEL APPE has served as a Director of the Company since May 1996. Since
November 1994, Mr. Appe has been an independent marketing consultant. From July
1987 through November 1994, he served in various capacities at Microsoft, most
recently as Vice President of U.S. Sales. Mr. Appe earned a Bachelors of Science
in Mathematics from the University of Vermont.
EXECUTIVE OFFICERS' COMPENSATION
All of the Company's personnel are leased from ERI, an employee leasing
company. Under the Company's arrangement with ERI, the Company pays ERI a
service fee based on employee salary, state and federal taxes, and health
benefits offered. ERI administers the Company's payroll and benefit policies.
See "CERTAIN TRANSACTIONS."
The following table sets forth the compensation paid to Mr. Robert Kuzara,
the Company's President and Chief Executive Officer, through ERI, during the
period from inception through May 31, 1996. There were no executive officers of
the Company who earned total compensation in excess of $100,000 during this
period.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------
NAME AND ALL OTHER
PRINCIPAL POSITION YEAR(1) SALARY BONUS COMPENSATION(2)
(A) (B) (C) (D) (I)
- ------------------------------------ ------- ------ ----- ---------------
Robert Kuzara, President and Chief
Executive Officer ................... 1996 $132,000 $0 $7,500
(1) For the period from inception (July 19, 1995) to August 31, 1996.
(2) Mr. Kuzara received a monthly car allowance of $1,000 per month from August
1995 through May 1996.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
In April 1996, the Company entered into an employment and non-competition
agreement with Mr. Kuzara, the Company's President and Chief Executive Officer,
that expires on April 4, 1999 (the "Kuzara Employment Agreement"). The Kuzara
Employment Agreement provides for a salary of $150,000 per annum plus annual
bonuses following the Company's initial public offering based on increases in
the market price of the Company's Common Stock. Mr. Kuzara is also entitled to
receive benefits offered to the Company's personnel generally as well as
severance benefits equal to one year's salary plus the average bonus Mr. Kuzara
received during the three years prior to the termination of his employment,
payable in a lump sum if: (i) the Company or a substantial portion of the
Company is acquired without the Board of Directors' approval; (ii) his
employment is terminated without cause (as defined below); (iii) his salary is
reduced without his consent or (iv) there is a change in his principal place of
employment from the greater Boston, Massachusetts area without his consent. The
Kuzara Employment Agreement provides that "cause" includes (i) the failure of
Mr. Kuzara to substantially perform the services described in his employment
agreement; (ii) conviction of a felony; and (iii) fraud or embezzlement
involving the Company, its customers, suppliers or affiliates. The Kuzara
Employment Agreement contains a provision prohibiting Mr. Kuzara from competing
with the Company for a one-year period following termination of his employment.
Mr. Kuzara also received options to purchase 200,000 shares of Common Stock of
the Company at $4.00 per share in connection with his employment with the
Company.
In May 1996, the Company entered into an employment and non-competition
agreement with Ms. Ouellette, the Company's Chief Financial Officer, that
expires on May 1, 1999 (the "Ouellette Employment Agreement"). The Ouellette
Employment Agreement provides for an annual salary of $85,000 plus bonuses as
may be determined by the Company's Board of Directors. Ms. Ouellette is entitled
to receive benefits offered to other executive officers of the Company as well
as severance
30
benefits equal to 150% of her monthly base salary then in effect for a period of
six months from the date of termination, if: (i) the Company or a substantial
portion of the Company is acquired without the Board of Directors' approval;
(ii) her employment is terminated without cause (as defined below); (iii) her
salary is reduced without her consent or (iv) there is a change in her principal
place of employment from the greater Boston, Massachusetts area without her
consent. The Ouellette Employment Agreement provides that "cause" includes (i)
the material and repetitive failure or refusal to perform the services described
in her employment agreement; (ii) conviction of a felony; and (iii) fraud or
embezzlement involving the Company, its customers, suppliers or affiliates. The
Ouellette Employment Agreement contains a provision prohibiting Ms. Ouellette
from competing with the Company for a one-year period following termination of
employment.
In October 1996, the Company entered into an employment and non-competition
agreement with Mr. Blocher, the Company's Chief Technical Officer, that expires
on October 1, 1999 (the "Blocher Employment Agreement"). The Blocher Employment
Agreement provides for an annual salary of $102,000 plus bonuses as may be
determined by the Company's Board of Directors. Mr. Blocher is entitled to
receive benefits offered to other executive officers of the Company as well as
severance benefits equal to 150% of his monthly base salary then in effect for a
period of six months from the date of termination, if: (i) the Company or a
substantial portion of the Company is acquired without the Board of Directors'
approval; (ii) his employment is terminated without cause (as defined below);
(iii) his salary is reduced without his consent; (iv) there is a change in his
principal place of employment from the greater Boston, Massachusetts area
without his consent or (v) his employment agreement is not renewed wihout his
consent. The Blocher Employment Agreement provides that "cause" includes (i) the
material and repetitive failure or refusal to perform the services described in
his employment agreement; (ii) conviction of a felony; and (iii) fraud or
embezzlement involving the Company, its customers, suppliers or affiliates. The
Blocher Employment Agreement contains a provision prohibiting Mr. Blocher from
competing with the Company for a six-month period following termination of
employment.
COMPENSATION OF DIRECTORS
The Directors of the Company received no compensation for their services as
Directors during 1995. Following this Offering, each of the non-management
Directors will receive a fee of $2,000 per year plus travel expenses.
Non-employee Directors also participate in the Company's Formula Plan.
LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES
Pursuant to the Company's Certificate of Incorporation and under Delaware
law, Directors of the Company are not liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty, except for liability in
connection with a breach of loyalty, for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, or for
dividend payments or stock repurchases in violation of Delaware law or for any
transaction in which a Director has derived an improper personal benefit.
In addition, the Company's Bylaws include provisions to indemnify its
officers and Directors and other persons against expenses, judgments, fines and
amounts paid in settlement in connection with threatened, pending or completed
suits or proceedings against such persons by reason of serving or having served
as officers, Directors or in other capacities, except in relation to matters
with respect to which such persons shall be determined not to have acted in good
faith, lawfully or in the best interests of the Company. With respect to matters
to which the Company's officers, Directors, personnel, agents or other
representatives are determined to be liable for misconduct or negligence in the
performance of their duties, the Company's Bylaws provide for indemnification
only to the extent that the Company determines that such person acted in good
faith and in a manner not opposed to the best interests of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Directors, officers, underwriters 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.
31
STOCK OPTION PLANS
1996 STOCK OPTION PLAN
In February 1996, the Board of Directors and stockholders of the Company
adopted the Plan, which provides for the grant to employees, officers,
Directors, and consultants of options to purchase up to 800,000 shares of Common
Stock, consisting of both "incentive stock options" within the meaning of
Section 422 of the United States Internal Revenue Code of 1986, as amended (the
"Code"), and non-qualified options. Incentive stock options are issuable only to
employees of the Company, while non-qualified options may be issued to
non-employee Directors, consultants, and others, as well as to employees of the
Company.
The per share exercise price of the Common Stock subject to any incentive
stock option may not be less than the fair market value of the Common Stock on
the date the option is granted. The per share exercise price of the Common Stock
subject to a non-qualified option may be established by the Board of Directors.
The aggregate fair market value (determined as of the date the option is
granted) of the Common Stock that first becomes exercisable by any employee in
any one calendar year pursuant to the exercise of incentive stock options may
not exceed $100,000. No person who owns, directly or indirectly, at the time of
the granting of any incentive stock option to him or her, more than 10% of the
total combined voting power of all classes of stock of the Company (a "10%
Stockholder") shall be eligible to receive any incentive stock options under the
Plan unless the option price is at least 110% of the fair market value of the
Common Stock subject to the option, determined on the date of grant.
No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution, and during the lifetime of an optionee, the
option will be exercisable only by him or her. In the event of termination of
employment other than by death or disability, the optionee will have three
months after such termination during which he or she can exercise the option.
Upon termination of employment of an optionee by reason of death or permanent
total disability, his or her options remain exercisable for one year thereafter
to the extent such options were exercisable on the date of such termination. No
similar limitation applies to non-qualified options.
Options under the Plan must be granted within 10 years from the effective
date of the Plan. The incentive stock options granted under the Plan cannot be
exercised more than 10 years from the date of grant except that incentive stock
options issued to a 10% Stockholder are limited to five year terms. All options
granted under the Plan provide for the payment of the exercise price in cash or
by delivery to the Company of shares of Common Stock already owned by the
optionee having a fair market value equal to the exercise price of the options
being exercised, or by a combination of such methods of payment. Therefore, an
optionee may be able to tender shares of Common Stock to purchase additional
shares of Common Stock and may theoretically exercise all of his or her stock
options with no additional investment other than his or her original shares.
Any unexercised options that expire or that terminate upon an employee
ceasing to be employed with the Company become available once again for
issuance. As of the date of this Prospectus, options to purchase 402,200 shares
of Common Stock have been granted under the Plan, including to the following
officers and Directors of the Company:
EXERCISE
NUMBER OF PRICE EXPIRATION
NAME AND TITLE OPTIONS PER SHARE DATE
-------------- ------- --------- ----------
John J. Shields.................................. 100,000 $4.00 4/30/01
Chairman of the Board
Robert Kuzara.................................... 200,000 $4.00 4/01/01
President and Chief Executive Officer
Carole Ouellette................................. 17,500 $4.00 4/01/01
Chief Financial Officer
William Blocher.................................. 50,000 $4.00 2/12/01
Chief Technical Officer
32
1996 FORMULA STOCK OPTION PLAN
In February 1996, the Company's Board of Directors and stockholders adopted
the Formula Plan to incentivize non-employee Directors who will administer the
Company's discretionary stock option plans. Under the Formula Plan, options will
be granted pursuant to a formula that determines the timing, pricing and amount
of the option awards using only objective criteria, without discretion on the
part of the administrators of the Formula Plan. The Formula Plan provides that
its provisions may not be amended more than once every six months, other than to
comply with changes in the Internal Revenue Code, the Employee Retirement Income
Security Act, or the rules thereunder. Also, any provision for forfeiture or
termination of an option award will be specific and objective, rather than
general, subjective or discretionary.
Options to purchase up to sixty thousand (60,000) shares of Common Stock
may be granted under the Formula Plan.
Beginning on June 1, 1996, and annually thereafter on the business day
immediately following the Company's annual meeting of stockholders, options
shall be granted under the Formula Plan, without approval or discretion on the
part of the Board, to non-employee Directors as follows: Each non-employee
Director who has not been a Director on such date for at least one year will
receive options to purchase five thousand (5,000) shares of common stock, which
will vest fully one year thereafter, subject to continued service as a Director
of the Company. Each non-employee Director who has been a Director of the
Company for at least one year as of such date will receive options to purchase
one thousand (1,000) shares of common stock, which will vest fully upon the date
of the grant.
The exercise price of such options will be the fair market value of the
shares of stock on the date of the grant, and said options will be exercisable
subject to the Directors' continued service as a Director of the Company on such
date.
No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution, and during the lifetime of an optionee, the
option will be exercisable only by him or her. In the event that the optionee
ceases to be a Director for any reason other than death, the option will be
exercisable only to the extent of the purchase rights, if any, which have
accrued as of the date of such cessation; provided that upon any such cessation
of service, the remaining rights to purchase shall in any event terminate upon
the expiration of the original term of the option.
Upon termination of service as a Director by reason of death, the
Director's options remain exercisable until the expiration of the original term
of the options. However, any such exercise is limited to the purchase rights
that have accrued as of the date when the optionee ceased to be a Director
whether by death or otherwise.
Options under the Formula Plan must be granted within ten years from the
effective date of the Formula Plan. The options granted under the Formula Plan
cannot be exercised more than ten years from the date of grant.
Under the Formula Plan, the number of options that will be granted to the
eligible recipients (only non-employee Directors) can be determined; however,
the exercise price of such options cannot be determined, as the exercise price
will be that which is equal to the fair market value of the Company's Common
Stock on the date of each grant.
As of the date of this Prospectus, options to purchase up to 5,000 shares
of Common Stock have been granted under the Formula Plan to Mr. Appe.
33
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus, the
ownership of the Common Stock by (i) each person who is known by the Company to
own of record or beneficially more than five percent (5%) of the Common Stock,
(ii) each of the Company's Directors and executive officers, and (iii) all
Directors and executive officers as a group. Except as otherwise indicated, the
stockholders listed in the table have sole voting and investment powers with
respect to the shares indicated.
PERCENTAGE OF CLASS(1)
----------------------
NUMBER OF
SHARES
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(2) OWNED OFFERING OFFERING(3)
--------------------------------------- ------------ -------- -----------
International Software Development Limited ............... 802,500 17.4% 14.3%
Centennial Technologies, Inc.(4) ......................... 488,750 10.6 8.7
Robert Kuzara(5) ......................................... 180,000 3.9 3.2
Michael Appe(6) .......................................... 60,000 1.3 1.1
John J. Shields(7) ....................................... 0 0 0
Carole Ouellette(8) ...................................... 0 0 0
All Officers and Directors as a
Group(1)(3)(5)(6)(7)(8)(9) ............................. 240,000 5.2 4.3
___________
(1) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person shown in the
table. Percentage ownership listed also gives effect to the issuance of
2,500,000 shares of Common Stock as of the date of this Prospectus upon the
conversion of 625,000 shares of Class B Common Stock, which results in
4,605,000 and 5,605,000 shares of Common Stock outstanding before and after
the Offering, respectively.
(2) The address for all of these individuals except Centennial Technologies,
Inc. is WebSecure, Inc., 1711 Broadway, Saugus, Massachusetts 01906. The
address for Centennial Technologies, Inc. is 37 Manning Road, Billerica,
Massachusetts 01821.
(3) Unless specified otherwise in the notes below, excludes shares of Common
Stock issuable upon the exercise of: (i) the Redeemable Warrants; (ii) the
Representatives' Warrant; (iii) Redeemable Warrants subject to the
overallotment option and the Representatives' Warrant and (iv) up to
860,000 options which have been or may be granted under the Plan and the
Formula Plan. See "MANAGEMENT -- Stock Option Plans," and "UNDERWRITING."
(4) If the Underwriters' overallotment option is exercised in full, Centennial
Technologies, Inc. ("Centennial") will sell to the Underwriters 150,000
shares of Common Stock, in which event Centennial will beneficially own
approximately 5.9% after the Offering. John J. Shields, the Chairman of the
Board of Directors of the Company, has been a Director of Centennial since
April 1996. See "CERTAIN TRANSACTIONS."
(5) Does not include 200,000 shares of Common Stock issuable upon exercise of
stock options at an exercise price of $4.00 per share that vest beginning
in April 1997.
(6) Does not include 5,000 shares of Common Stock issuable to Mr. Appe upon
exercise of stock options that vest in May 1997 at an exercise price of
$4.00 per share.
(7) Does not include 100,000 shares of Common Stock issuable upon exercise of
stock options at an exercise price of $4.00 per share that vest beginning
in April 1997.
(8) Does not include 17,500 shares of Common Stock issuable upon exercise of
stock options at an exercise price of $4.00 per share that vest beginning
in April 1997.
(9) Does not include options to purchase 50,000 shares of Common Stock at $4.00
per share issuable upon exercise of stock options held by Mr.
Blocher that vest beginning in April 1997.
34
CERTAIN TRANSACTIONS
The Company has provided and continues to provide Internet access, Web site
development and management and other services to Centennial Technologies, Inc.
("Centennial"), ERI and Cauldron Corp. ERI is and Cauldron Corp. was, until July
1996, owned by Mr. Kuzara, the Company's President and Chief Executive Officer
and a member of the Board of Directors. Until October 1996, the Company's
services had been provided at no cost in exchange for such companies agreeing to
serve as test sites for the Company's services during its development stage. The
Company currently charges these companies fees at the Company's standard rates.
Centennial purchased 350,000 shares of the Company's Common Stock in October
1995 in exchange for $10,000 and the guaranty of certain lease obligations of
the Company. In April 1996, Centennial purchased 138,750 shares of Common Stock
for $555,000 in connection with a private placement conducted by the Company, in
which it raised $2,000,000 from Centennial and unaffiliated investors.
Centennial has, from time to time, made loans to the Company for general
operations. The loans are evidenced by promissory notes that bear interest at
the rate of 9.0% per annum and are due on demand. As of October 22, 1996,
approximately $700,000 remained outstanding under these loans. The Company
intends to repay this amount with a portion of the proceeds from this Offering.
In addition, in September 1996, Centennial agreed to guaranty certain additional
lease obligations of the Company relating to the acquisition of capital
equipment. The Company also purchased $371,500 of computer equipment from
Centennial during 1996. See "Use of Proceeds".
Mr. Shields has been a Director of Centennial since April 1996. Mr. Kuzara
served as a Director of Centennial from April 1994 through November 1995. Prior
to this Offering and the conversion of the Class B Common Stock, Centennial owns
approximately 23% of the Company's outstanding Common Stock. If the
Underwriters' overallotment option is exercised, Centennial will sell up to
150,000 shares of its Common Stock in connection with this Offering. See "RISK
FACTORS - Benefit to Affiliates" and "PRINCIPAL STOCKHOLDERS."
All of the Company's employees are leased by ERI, an employee leasing firm
wholly owned by Mr. Kuzara. For the year ended August 31, 1996, approximately
$1,007,000 was billed by ERI to the Company. The Company owed ERI approximately
$99,000 as of August 31, 1996 which is included in the amount due to related
parties in the balance sheet within the attached financial statements. ERI and
an affiliate also owed the Company approximately $46,000, which is included in
the amounts due from related parties in the accompanying August 31, 1996 balance
sheet within the attached financial statements. The amounts due to and due from
related parties do not bear interest and are due on demand. The Company also
charges ERI approximately $2,000 per month for subletting office space and
equipment rental.
The Center for Business Planning ("CBP") is a back room support company
founded by Mr. Kuzara in May 1995. CBP provided services to the Company in
connection with developing the Company's products. CBP charged the Company a
management fee for its services. For the year ended August 31, 1996,
approximately $74,000 was billed from CBP to the Company. The Company also
charged CBP approximately $15,000 for subletting office space and equipment
rental which was charged to operations. CBP ceased operations as of June of
1996, at which time two former CBP employees joined the Company.
Information Capture Corporation ("ICC") is developing a data acceptance
device which is being built for ERI. Mr. Kuzara owned twenty percent (20%) of
the outstanding Common Stock of ICC, which he sold in August 1996. For the year
ended August 31, 1996, the Company billed approximately $14,000 to ICC for the
sublet of office space and equipment rental, all of which was paid as of August
31, 1996.
The Company believes that the above arrangements were on terms at least as
favorable as could be obtained from unaffiliated parties.
Mr. Kuzara and Mr. Appe received 180,000 and 60,000 shares of Common Stock
of the Company for nominal consideration in connection with the founding of the
Company. See "PRINCIPAL STOCKHOLDERS."
35
DESCRIPTION OF SECURITIES
The following summary description of the Company's capital stock is
qualified in its entirety by reference to the Company's Certificate of
Incorporation, as amended.
COMMON STOCK
The Company is authorized to issue up to 20,000,000 shares of Common Stock,
$.01 par value per share. As of the date of this Prospectus, the Company had 37
stockholders of record (not including holders of Class B Common Stock).
Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There is no
cumulative voting for election of Directors. Subject to the prior rights of any
series of preferred stock which may from time to time be outstanding, if any,
holders of Common Stock are entitled to receive ratably dividends when, as, and
if declared by the Board of Directors out of funds legally available therefor
and, upon the liquidation, dissolution, or winding up of the Company, are
entitled to share ratably in all assets remaining after payment of liabilities
and payment of accrued dividends and liquidation preferences on the preferred
stock, if any. Holders of Common Stock have no preemptive rights and have no
rights to convert their Common Stock into any other securities. The outstanding
Common Stock is, and the Common Stock to be outstanding upon completion of this
Offering will be, validly authorized and issued, fully paid, and nonassessable.
Subsequent to the completion of this Offering, the current stockholders of
the Company will own approximately 82% of the outstanding Common Stock (77% if
the Underwriters' overallotment option is exercised in full). As a result, the
current stockholders will be able to elect all of the members of the Board of
Directors and control the policies and affairs of the Company.
CLASS B COMMON STOCK
The Company is authorized to issue up to 2,000,000 shares of Class B Common
Stock, $.01 par value per share. In March 1996, the Company issued 625,000
shares of Class B Common Stock to MTCL. See "BUSINESS -- Research and
Development."
Holders of Class B Common Stock are not entitled to vote on any actions to
be taken by the stockholders of the Company unless expressly required by law.
Holders of Class B Common Stock are entitled to receive dividends ratably with
holders of unclassified shares of Common Stock when, as, and if declared by the
Board of Directors out of funds legally available therefor and only after
holders of unclassified shares of Common Stock have received a dividend or
dividends equal to $10.00 per share. Upon the liquidation, dissolution, or
winding up of the Company, holders of Class B Common Stock are entitled to share
ratably in all assets of the Company up to a maximum of $1.00 per share of Class
B Common Stock after payment of liabilities and payment of accrued dividends and
liquidation preferences on the preferred stock, if any, and after the holders of
Common Stock have been paid an amount equal to $8.00 per share. Holders of
Common Stock have no preemptive rights. Each share of Class B Common Stock
converts automatically into four shares of Common Stock upon one of the
following events: (a) the effectiveness of a firm commitment underwriting of the
Company's securities for gross proceeds equal to or greater than $5,000,000, or
(b) the sale of all or substantially all of the Company's assets based on a
value of the Company equal to or greater than $30,000,000. The Company's 625,000
outstanding shares of Class B Common Stock will convert automatically into
2,500,000 shares of Common Stock as of the date of this Prospectus.
REDEEMABLE WARRANTS
The following is a brief summary of certain provisions of the Redeemable
Warrants, but such summary does not purport to be complete and is qualified in
all respects by reference to the actual text of the Warrant Agreement between
the Company and American Securities Transfer & Trust, Incorporated (the
"Transfer and Warrant Agent"). A copy of the Warrant Agreement has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part. See
"ADDITIONAL INFORMATION."
36
Exercise Price and Terms
Each Redeemable Warrant entitles the registered holder thereof to purchase
at any time commencing ________, 1997 through _________, 1999, one share of
Common Stock at a price of $9.60 per share, subject to adjustment in accordance
with the anti-dilution and other provisions referred to below.
The holder of any Redeemable Warrant may exercise such Redeemable Warrant
by surrendering the certificate representing the Redeemable Warrant to the
Company's Transfer and Warrant Agent, with the subscription on the reverse side
of such certificate properly completed and executed, together with payment of
the exercise price. The Redeemable Warrants may be exercised at any time in
whole or in part at the applicable exercise price commencing 90 days from the
date of this Prospectus until expiration of the Redeemable Warrants on_______,
1999. No fractional shares will be issued upon the exercise of the Redeemable
Warrants.
Redemption
Commencing 90 days from the date of this Prospectus, the Redeemable Warrants
are subject to redemption at $.20 per Redeemable Warrant on 30 days' prior
written notice, provided that the average high and low sales prices of the
Common Stock equals or exceeds $12.00 per share during the 10 consecutive
trading days ending within 20 days prior to the notice of redemption. In the
event the Company exercises the right to redeem the Redeemable Warrants, such
Redeemable Warrants will be exercisable until the close of business on the date
fixed for redemption in such notice. If any Redeemable Warrant called for
redemption is not exercised by such time, it will cease to be exercisable and
the warrantholder will be entitled only to the redemption price.
Adjustments
The exercise price and the number of shares of Common Stock purchasable upon
the exercise of the Redeemable Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications on or of the Common Stock. Additionally, an
adjustment would be made in the case of a reclassification or exchange of Common
Stock, consolidation or merger of the Company with or into another corporation
or sale of all or substantially all of the assets of the Company in order to
enable holders of Redeemable Warrants to acquire the kind and the number of
shares of stock or other securities or property receivable in such event by a
holder of the number of shares that might otherwise have been purchased upon the
exercise of the Redeemable Warrants. No adjustments will be made unless such
adjustment would require an increase or decrease of at least $.10 or more in
such exercise price. No adjustment to the exercise price of the shares subject
to the Redeemable Warrants will be made for dividends (other than stock
dividends), if any, paid on the Common Stock or for securities issued pursuant
to exercise of the Redeemable Warrants, the Representative's Warrant, currently
outstanding options or options which may be granted under the Plan or shares
issued in connection with the acquisition of another business by the Company.
Transfer, Exchange And Exercise
The Redeemable Warrants are fully registered and may be presented to the
Transfer and Warrant Agent for transfer, exchange or exercise at any time
beginning 90 days after the date of this Prospectus until the close of business
on _________, 1999, at which time the Redeemable Warrants become wholly void and
of no value. If a market for the Redeemable Warrants develops, the holder may
sell the Redeemable Warrants instead of exercising them. There can be no
assurance, however, that a market for the Redeemable Warrants will develop or
continue. If the Company is unable to qualify for sale in particular states its
Common Stock underlying the Redeemable Warrants, holders of the Redeemable
Warrants desiring to exercise the Redeemable Warrants in those states will have
no choice but to either sell such Redeemable Warrants or let them expire. See
"RISK FACTORS -- Requirement to Maintain Current Prospectus; Non-Registration in
Certain Jurisdictions of Shares Underlying the Redeemable Warrants; Possible
Redemption of Redeemable Warrants."
37
Warrantholder not a Stockholder
The Redeemable Warrants do not confer upon holders any voting or other
rights as stockholders of the Company.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of preferred
stock, $.01 par value per share (the "Preferred Stock"). The Preferred Stock may
be issued in one or more series, the terms of which may be determined at the
time of issuance by the Board of Directors, without further action by
stockholders, and may include voting rights (including the right to vote as a
series on particular matters), preferences as to dividends and liquidation,
conversion rights, redemption rights, and sinking fund provisions.
No shares of Preferred Stock will be outstanding as of the closing of this
Offering, and the Company has no present plans for the issuance thereof. The
issuance of any such Preferred Stock could adversely affect the rights of the
holders of Common Stock and, therefore, reduce the value of the Common Stock.
The ability of the Board of Directors to issue Preferred Stock could discourage,
delay, or prevent a takeover of the Company. See "RISK FACTORS -- Possible
Issuance of Preferred Stock."
TRANSFER AGENT
The Company has appointed American Securities Transfer & Trust,
Incorporated, Lakewood, Colorado, as Transfer and Warrant Agent for its Common
Stock and Redeemable Warrants.
38
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 5,605,000 shares of
Common Stock outstanding. Of these shares, the 1,000,000 Shares offered hereby
will be freely tradeable without further registration under the Securities Act.
Up to 150,000 additional shares of Common Stock may be purchased by the
Representative after the first anniversary date of this Prospectus through the
exercise of the Representatives' Warrant. Any and all shares of Common Stock
purchased upon exercise of the Representatives' Warrant may be freely tradeable,
provided that the Company satisfies certain securities registration and
qualification requirements in accordance with the terms of the Representatives'
Warrant. See "UNDERWRITING."
All of the presently outstanding 4,605,000 shares of Common Stock are
"restricted securities" within the meaning of Rule 144 of the Securities Act and
will not be eligible for sale in the public market in reliance upon, and in
accordance with, the provisions of Rule 144 until November 1997. See
"UNDERWRITING," "RISK FACTORS -- Shares Eligible For Future Sale" and "RISK
FACTORS -- Sales Pursuant to Rule 144."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act,
will be entitled to sell within any three-month period a number of shares
beneficially owned for at least two years that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock, or (ii) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice, and the availability of current
public information about the Company. However, a person who is not deemed to
have been an affiliate of the Company during the 90 days preceding a sale by
such person, and who has beneficially owned shares of Common Stock for at least
three years, may sell such shares without regard to the volume, manner of sale,
or notice requirements of Rule 144.
Prior to this Offering, there has been no public market for the Company's
securities. Following this Offering, the Company cannot predict the effect, if
any, that sales of Common Stock pursuant to Rule 144 or otherwise, or the
availability of such shares for sale, will have on the market price prevailing
from time to time. Nevertheless, sales by the current stockholders of
substantial amounts of Common Stock in the public market could adversely affect
prevailing market prices for the Common Stock. In addition, the availability for
sale of a substantial amount of Common Stock acquired through the exercise of
the Redeemable Warrants or the Representatives' Warrant could adversely affect
prevailing market prices for the Common Stock. The Company's officers, Directors
and holders of 5% of the outstanding shares of Common Stock, in addition to
holders of shares of Common Stock issued upon conversion of the shares of Class
B Common Stock have agreed not to sell the shares beneficially owned by such
persons for a period of 13 months from the date of this Prospectus (except for
shares of Common Stock that are subject to the Underwriters' overallotment
option) without the Representatives' written consent. In addition, the Company
has agreed that it will not issue any shares of Common Stock for a period of 13
months following the date of this Prospectus without the Representatives'
written consent, except for shares of Common Stock issuable upon exercise of
stock options that have been or may be granted under the Plan and the Formula
Plan.
39
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Coburn &
Meredith, Inc. and Shamrock Partners, Ltd. are acting as Representatives, have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement (the form of which has been filed as an exhibit to the Registration
Statement), to purchase from the Company the respective numbers of Shares and
Redeemable Warrants set forth opposite their names in the table below. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters shall be
obligated to purchase all of the Shares and Redeemable Warrants, if any are
purchased.
NUMBER OF
NUMBER OF REDEEMABLE
NAME SHARES WARRANTS
---- --------- ---------
Coburn & Meredith, Inc. ..........................
Shamrock Partners, Ltd. .......................... --------- ---------
1,000,000 1,000,000
========= =========
Through the Representatives, the several Underwriters have advised the
Company that they propose to offer the Shares and Redeemable Warrants to the
public at the public offering prices set forth on the cover of this Prospectus.
The Representatives have advised the Company that they may allow certain dealers
concessions of not in excess of $.____per share of Common Stock and $____ per
Redeemable Warrant, of which a sum not in excess of $.____per share of Common
Stock and $____ per Redeemable Warrant may in turn be reallowed by such dealers
to other dealers. After the issuance of the Shares and the Redeemable Warrants,
the public offering prices, the concessions and the reallowances may be changed.
The Representatives have further advised the Company that they do not expect
sales to discretionary accounts to exceed five percent of the total number of
Shares and Redeemable Warrants offered hereby.
The Selling Stockholder has granted an option to the Underwriters,
exercisable during the 30-day period following the effective date of the
Underwriting Agreement, to purchase up to 150,000 shares of Common Stock and up
to 150,000 Redeemable Warrants, respectively, at the offering price less
underwriting discounts and the non-accountable expense allowance. The
Underwriters may exercise such option only to satisfy overallotments in the sale
of the Shares and Redeemable Warrants.
In connection with this Offering, the Company has agreed to sell to the
Representatives, for nominal consideration, the Representatives' Warrant, which
confers the right to purchase up to 100,000 shares of Common Stock and up to
100,000 Redeemable Warrants. The Representatives' Warrant is initially
exercisable at the price (the "Exercise Price") of $10.40 per share of Common
Stock and $.26 per Redeemable Warrant for a period of four years commencing one
year from the effective date of this Prospectus. The shares of Common Stock and
Redeemable Warrants issuable upon exercise of the Representatives' Warrant are
identical to those offered hereby except that the Redeemable Warrants underlying
the Representatives' Warrant are exercisable at $10.66 per share and are not
redeemable by the Company. The Representatives' Warrant contains provisions
providing for adjustment of the Exercise Price and the number and type of
securities issuable upon the exercise thereof upon the occurrence of certain
events. The Representatives' Warrant grants to the holders thereof certain
rights of registration of the securities issuable upon the exercise thereof upon
the occurrence of certain events. Upon the exercise of the Redeemable Warrants
more than one year after the date of this Prospectus, and to the extent not
inconsistent with the guidelines of the National Association of Securities
Dealers, Inc., and the Rules and Regulations of the Commission, the Company has
agreed to pay the Representatives a commission equal to five percent of the
exercise price of the Redeemable Warrants in connection with solicitations of
exercises of Redeemable Warrants made by the Representatives. However, no
compensation will be paid to the Representatives in connection with the exercise
of the Redeemable Warrants if (a) the market price of the underlying shares of
Common Stock is lower than the exercise price, (b) the Redeemable Warrants are
exercised in an unsolicited transaction, or (c) the Redeemable Warrants subject
to the Representatives' Warrant are exercised.
40
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
the Registration Statement, including liabilities under the Securities Act. The
Company has agreed with the Representatives that it will not issue additional
shares of Common Stock for a period of 13 months from the date of this
Prospectus (except for shares issuable upon exercise of stock options) without
the Representatives' written consent.
The foregoing is a brief summary of certain provisions of the Underwriting
Agreement and does not purport to be a complete statement of its terms and
conditions. A copy of the Underwriting Agreement is on file with the Commission
as an exhibit to the Registration Statement of which this Prospectus is a part.
See "ADDITIONAL INFORMATION."
Prior to the Offering, there has been no public market for any of the
Company's securities. The initial public offering prices of the Shares and
Redeemable Warrants will be determined by negotiations between the Company and
the Representatives and are not necessarily related to the Company's assets,
earnings, or book value or any other established criteria of value. Factors
considered in determining the Offering price of the Shares included estimates of
business potential, historical earnings, future prospects, gross proceeds to be
raised, percentage of stock owned by officers and Directors on the date hereof,
the type of business in which the Company engages, and an assessment of the
Company's management. The foregoing factors were evaluated in light of the
existing state of the securities market.
LEGAL MATTERS
The validity of the Securities offered hereby and certain other legal
matters will be passed upon for the Company by O'Connor, Broude & Aronson, Bay
Colony Corporate Center, 950 Winter Street, Suite 2300, Waltham, Massachusetts
02154. William M. Prifti, Esquire, Lynnfield Woods Office Park, 220 Broadway,
Suite 204, Lynnfield, Massachusetts 01940, is acting as counsel for the
Representatives in connection with certain legal matters related to the
Offering.
EXPERTS
The financial statements of the Company as of August 31, 1996 and for the
year ended August 31, 1996 and for the periods from July 19, 1995 (inception)
through August 31, 1995 and July 19, 1995 (inception) through August 31, 1996
appearing in this Prospectus and Registration Statement have been audited by BDO
Seidman, LLP, independent certified public accountants, as set forth in their
report thereon appearing elsewhere herein and in the Registration Statement and
have been included herein in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, http://www.sec.gov., a Registration Statement on Form
SB-2 (the "Registration Statement") under the Act, with respect to the
Securities offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement and the exhibits thereto, as permitted
by the Rules and Regulations of the Commission. For further information,
reference is made to the Registration Statement and to the exhibits filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document which has been filed as an exhibit to the
Registration Statement are qualified by reference to such exhibits for a
complete statement of their terms and conditions. The Registration Statement and
exhibits may be inspected without charge at the offices of the Commission and
copies of all or any part thereof may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington D.C., or at certain of
the regional offices of the Commission located at 7 World Trade Center, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, upon payment of the fees prescribed by the Commission. In addition, the
Company has applied for inclusion on the American Stock Exchange. Reports and
other information concerning the Company may be inspected at the American Stock
Exchange, 86 Trinity Place, New York, New York 10006.
41
WEBSECURE, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants ................................... F-2
Financial Statements:
Balance Sheet as of August 31, 1996 ................................................. F-3
Statements of Operations for the year ended August 31, 1996, for the period from
inception (July 19, 1995) to August 31, 1995 and for the cumulative period from
inception (July 19, 1995) to August 31, 1996 ...................................... F-4
Statements of Capital Deficit for the period from inception (July
19, 1995) to August 31, 1996 ...................................................... F-5
Statements of Cash Flows for the year ended August 31, 1996, for the
period from inception (July 19, 1995) to August 31, 1995 and for the
cumulative period from inception (July 19, 1995) to August 31, 1996 ............. F-6
Notes to Financial Statements ........................................................ F-7
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
WEBSECURE, INC.
Saugus, Massachusetts
We have audited the accompanying balance sheet of WebSecure, Inc. (a
Development Stage Company), as of August 31, 1996, and the related statements of
operations, capital deficit and cash flows for the year ended August 31, 1996,
the period from inception (July 19, 1995) to August 31, 1995 and for the
cumulative period from inception (July 19, 1995) to August 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 financial position of WebSecure, Inc. (a
Development Stage Company) at August 31, 1996 and the results of its operations
and its cash flows for the year ended August 31, 1996, the period from inception
(July 19, 1995) to August 31, 1995 and for the cumulative period from inception
(July 19, 1995) to August 31, 1996, in conformity with generally accepted
accounting principles.
The Company is in the development stage, and as such, success of future
operations is subject to a number of risks. The Company has incurred a
cumulative net loss of $7,957,640 through August 31, 1996 and has been primarily
engaged in product development. There is a substantial doubt about the Company's
ability to continue as a going concern. The Company's ability to continue as a
going concern is dependent upon the anticipated net proceeds from a proposed
Initial Public Offering. These matters are further discussed in Note 1. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Boston, Massachusetts
October 11, 1996
F-2
WEBSECURE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
AUGUST 31,
1996
----
ASSETS
Current:
Cash $ 12,832
Accounts receivable 21,797
Inventories 5,971
Due from related parties (Note 3) 59,776
Prepaid expenses and other 6,600
-----
Total current 106,976
-------
Property and equipment:
Computer equipment 833,721
Office equipment 300,646
Furniture and fixtures 137,726
Leasehold improvements 82,621
Software 16,149
------
1,370,863
Less accumulated depreciation and amortization 197,466
-------
Property and equipment, net 1,173,397
---------
Deferred registration costs 424,060
Other assets 41,515
------
$ 1,745,948
===========
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
Accounts payable and accrued expenses (Note 4) $ 679,435
Due to related parties (Note 3) 125,635
Note payable to related party (Note 3) 672,000
Current portion of capital lease obligation (Note 5) 71,763
------
Total current liabilities 1,548,833
Capital lease obligation, less current maturities (Note 5) 300,430
-------
Total liabilities 1,849,263
---------
Commitments and contingencies (Notes 1, 5, 8 and 9)
Capital deficit (Notes 6 and 8):
Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued
and outstanding --
Common stock, $.01 par value; 20,000,000 shares authorized; 2,105,000 shares issued
and outstanding at August 31, 1996 21,050
Class B common stock, $.01 par value; 2,000,000 shares authorized; 625,000 shares
issued and outstanding at August 31, 1996 6,250
Additional paid-in capital 7,827,025
Deficit accumulated during the development stage (7,957,640)
----------
Total capital deficit (103,315)
--------
$ 1,745,948
===========
See accompanying notes to financial statements.
F-3
WEBSECURE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
PERIOD FROM CUMULATIVE
NINE MONTHS INCEPTION FROM INCEPTION
ENDED (JULY 19, 1995) (JULY 19, 1995)
AUGUST 31, 1996 TO AUGUST 31, 1995 TO AUGUST 31, 1996
--------------- ------------------ ------------------
Revenues:
Service revenue $ 78,833 $ -- $ 78,833
Product revenue 18,422 -- 18,422
------ --------- ------
Total revenue 97,255 -- 97,255
------ --------- ------
Cost of revenue:
Service revenue 177,469 -- 177,469
Product revenue 15,971 -- 15,971
------ --------- ------
Total cost of revenues 193,440 -- 193,440
------- --------- -------
Gross margin (96,185) -- (96,185)
------- --------- -------
Operating expenses:
Research and development 577,439 809 578,248
Selling and marketing 298,680 1,946 300,626
General and administrative (Note 3) 1,145,500 30,871 1,176,371
Charge for acquired research and development (Note 6) 5,760,000 -- 5,760,000
--------- --------- ---------
Total operating expenses 7,781,619 33,626 7,815,245
--------- ------ ---------
Loss from operations (7,877,804) (33,626) (7,911,430)
Interest expense, net of interest income of $1,890 (46,210) -- (46,210)
------- --------- -------
Net loss $(7,924,014) $ (33,626) $(7,957,640)
=========== ========== ===========
Net loss per common and common equivalent share $ (1.65) $ (.01) $ (1.66)
=========== ========== ===========
Shares used in computing net loss per common and common
equivalent share 4,805,050 4,805,050 4,805,050
========= ========= =========
See accompanying notes to financial statements.
F-4
WEBSECURE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CAPITAL DEFICIT
COMMON STOCK CLASS B COMMON STOCK
------------ --------------------
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE TOTAL
NUMBER $.01 NUMBER $.01 PAID-IN REDEVELOPMENT CAPITAL
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL STAGE DEFICIT
--------- --------- --------- --------- ------- ----- -------
Net loss from inception (July 19, 1995)
to August 31, 1995 -- $ -- -- $ -- $ -- $ (33,626) $ (33,626)
------- ------- -------- ------- ---------- ----------- ------------
Balance, August 31, 1995 -- -- -- -- -- (33,626) (33,626)
Issuance of common stock:
Founders 782,500 7,825 -- -- 6,500 -- 14,325
For professional services 20,000 200 -- -- 79,800 -- 80,000
Private offering 500,000 5,000 -- -- 1,995,000 -- 2,000,000
Issuance of Class B common stock in
connection with the acquisition of
research and development (Note 6) -- -- 625,000 6,250 2,543,750 -- 2,550,000
Issuance of common stock in connection
with the acquisition of research and
development (Note 6) 802,500 8,025 -- -- 3,201,975 -- 3,210,000
Net loss -- -- -- -- -- (7,924,014) (7,924,014)
------- ------- -------- ------- ---------- ----------- ------------
Balance, August 31, 1996 2,105,000 $21,050 625,000 $6,250 $7,827,025 $(7,957,640) $ (103,315)
========= ======= ======= ====== ========== =========== ===========
See accompanying notes to financial statements.
F-5
WEBSECURE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
PERIOD FROM CUMULATIVE
NINE MONTHS INCEPTION FROM INCEPTION
ENDED (JULY 19, 1995) TO (JULY 19, 1995) TO
AUGUST 31, 1996 AUGUST 31, 1995 AUGUST 31, 1996
--------------- --------------- ----------------
Cash flows from operating activities:
Net loss $(7,924,014) $(33,626) $(7,957,640)
Adjustments to reconcile net loss to net cash used in operating
activities:
Charge for acquired research and development 5,760,000 -- 5,760,000
Issuance of common stock for professional services 79,800 -- 79,800
Depreciation and amortization 197,466 -- 197,466
Changes in operating assets and liabilities:
Accounts receivable (21,797) -- (21,797)
Inventories (5,971) -- (5,971)
Prepaid expenses and other 3,400 (10,000) (6,600)
Accounts payable and accrued expenses 669,597 9,838 679,435
------- ----- -------
Net cash used in operating activities (1,241,519) (33,788) (1,275,307)
---------- ------- ----------
Cash flows from investing activities:
Acquisition of property and equipment (1,364,874) (5,989) (1,370,863)
Deferred registration costs (424,060) -- (424,060)
Increase in other assets (32,815) (8,700) (41,515)
------- ------ -------
Net cash used in investing activities (1,821,749) (14,689) (1,836,438)
---------- ------- ----------
Cash flows from financing activities:
Borrowings under capital lease 389,056 -- 389,056
Principal payments on capital lease (16,863) -- (16,863)
Due from related parties (55,910) (3,866) (59,776)
Due to related parties 108,292 17,343 125,635
Proceeds from issuance of common stock 2,014,525 -- 2,014,525
Proceeds from notes payable to related party 1,460,000 35,000 1,495,000
Payments of notes payable to related party (823,000) -- (823,000)
-------- --------
Net cash provided by financing activities 3,076,100 48,477 3,124,577
--------- ------ ---------
Net increase in cash 12,832 -- 12,832
Cash, beginning of period -- -- --
---------- -------- ---------
Cash, end of period $ 12,832 $ -- $ 12,832
=========== ======== =========
Supplemental disclosure of financing information:
Cash paid for interest $ 33,649 $ 7,087 $ 40,736
See accompanying notes to financial statements.
F-6
WEBSECURE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION, BUSINESS AND PROPOSED INITIAL PUBLIC OFFERING
WebSecure, Inc. (the "Company"), which is in the development stage, was
originally incorporated as Netsafe Ltd. ("Netsafe") in Massachusetts on July 19,
1995. On September 12, 1995, Netsafe incorporated in Delaware. On December 21,
1995, Netsafe filed an amendment with the State of Delaware changing the name of
the Company to WebSecure, Inc.
The Company offers Internet access and support services for secure
commercial transactions and communications over the Internet. The Company plans
to provide complete solutions for businesses seeking to market and sell products
and services over the Internet, including establishing (1) a commercial Web site
domain, (2) electronic store design, (3) browsing and purchasing capabilities,
and (4) transaction processing. WebSecure also resells SBT, a prepackaged
accounting software program.
The Company is in the development stage, and as such, success of future
operations is subject to a number of risks similar to those of other companies
in the same stage of development. Principal among these risks are the Company's
limited operating history, history of operating losses, no assurance of
successful operations, early state of market development, competition from
substitute products or larger companies, rapid technological change, dependence
on key personnel and the uncertainty of availability of additional financing.
The Company has incurred a cumulative net loss of $7,957,640 through August
31, 1996 and has been primarily engaged in product development. The Company has
funded these losses through the private placement of equity securities
aggregating approximately $2.0 million, through a note payable to a related
party and financing through a capital lease. There is substantial doubt about
the Company's ability to continue as a going concern. The Company is dependent
upon the anticipated net proceeds (after deducting the underwriters' discount
and offering expenses, and assuming no exercise of the underwriters' over
allotment option) of approximately $6,654,000 from a proposed Initial Public
Offering ("IPO") to fund its operations for at least 12 months from the date of
the Offering. Thereafter, the Company's continued operations and funding of
research and development will depend upon cash flows from operations, if any,
and the Company's ability to raise additional funds through equity or debt
financings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Deferred Registration Costs
As of August 31, 1996, the Company has incurred registration costs of
$424,060 in connection with the proposed IPO. These costs have been deferred and
upon consummation of the proposed IPO, will be charged against the equity raised
or expensed if the Offering is not successful.
Inventories
Inventories consisting of purchased software are stated at the lower of cost
or market determined on the first-in, first-out method.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
WEBSECURE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Revenue Recognition
The Company recognizes product revenue related to prepackaged software when
shipped, as the Company has no subsequent obligations, and service revenue as
the related services are performed.
Cost of product revenue consists of costs to purchase the product, including
the cost of the media on which it is delivered. Cost of service revenue consists
primarily of consulting and support personnel salaries and related expenses.
Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of the
related assets, as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -----------
Computer equipment 3 years
Office equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements Lease term
Software 3 years
Research and Development Expenses for Software Products
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software To Be Sold, Leased or
Otherwise Marketed," the Company will capitalize software development costs
incurred after technological feasibility of the software development projects is
established and the realizability of such capitalized costs through future
operations is expected if such costs become material. To date, all of the
Company's costs for research and development of software have been charged to
operations as incurred, as the amount of software development costs incurred
subsequent to the establishment of technological feasibility has been
immaterial.
Concentration of Credit Risk
SFAS No. 105, "Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk," requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Although collateral is not required, the Company periodically
reviews its accounts and provides estimated reserves for potential credit
losses. Services to related parties for the year ended August 31, 1996
represented approximately 41% of the Company's total revenue (see Note 3).
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets or
liabilities are computed based on the differences between the financial
statement and income tax basis of assets and liabilities using the enacted tax
rates. Deferred income tax expenses or credits are based on changes in the
assets or liability from period to period.
F-8
WEBSECURE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Financial Instruments
The estimated fair value of the Company's financial instruments, which
include accounts receivable, accounts payable and related party accounts
approximate their carrying value.
COMPUTATION OF NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
The net loss per common and common equivalent share is computed by dividing
the net loss by the weighted average number of shares outstanding during each
period presented, as adjusted for the effects of application of Securities and
Exchange Commission Staff Accounting Bulletin No. 83 ("SAB No. 83"). Pursuant to
SAB No. 83, all common stock and common stock equivalents issued within twelve
months prior to the initial filing of the registration statement relating to the
Company's anticipated IPO at a price less than the estimated IPO price have been
treated as outstanding for all reported periods using the treasury stock method.
The shares used in the computation also assumes that each share of outstanding
Class B Common Stock has been converted into four shares of Common Stock (see
Note 8).
New Accounting Standards
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
issued by the Financial Accounting Standards Board ("FASB"), is effective for
financial statements for fiscal years beginning after December 15, 1995. The new
standard establishes new guidelines regarding when impairment losses on
long-lived assets, which include plant and equipment and certain identifiable
intangible assets and goodwill, should be recognized and how impairment losses
should be measured. The Company does not expect the adoption of this standard to
have a material effect on its financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company has determined that it will continue to account for
stock-based compensation for employees under Accounting Principles Board Opinion
No. 25 and elect the disclosure-only alternative under SFAS No. 123. The Company
will be required to disclose the pro forma net income or loss and per share
amounts in the notes to the financial statements using the fair-value-based
method beginning in the year ending August 31, 1997, with comparable disclosures
for the year ended August 31, 1996. The Company has not determined the impact of
these pro forma adjustments.
3. RELATED PARTIES TRANSACTIONS
Discussed below are various related parties and transactions that occurred
during the period from inception (July 19, 1995) through August 31, 1996. As of
October 11, 1996, the Company does not have formal agreements in place with
these related parties.
Employee Resources, Inc. ("ERI")
ERI is an employee leasing firm wholly owned by the Company's president. All
of the individuals who work at the Company are employed by ERI. For the year
ended August 31, 1996, approximately $1,007,000 was billed by ERI to the Company
and charged to operations. The Company owed ERI approximately $99,000 as of
August 31, 1996, which is included in the amount due to related parties in the
accompanying balance sheets. ERI and an affiliate also owed the Company
approximately $46,000, which is included in the amounts due from related parties
in the accompanying August 31, 1996 balance sheet. The amounts due to and due
from related parties do not bear interest and are due upon demand.
F-9
WEBSECURE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. RELATED PARTIES TRANSACTIONS -- (CONTINUED)
Center for Business Planning, Ltd. ("CBP")
CBP was a back room support company founded by the Company's president in
May 1995. CBP provided research and development services to the Company in
connection with developing the Company's products. CBP charged the Company a
management fee for its services of approximately $74,000 for the year ended
August 31, 1996 which was charged to operations. The Company also charged CBP
approximately $15,000 for subletting office space and equipment rental which was
charged to operations. CBP ceased operations in June of 1996.
Centennial Technologies, Inc. ("Centennial")
Centennial is a manufacturer of PCMCIA cards. The Company's president
is a former director of Centennial, and the Company's CFO was also employed by
Centennial. Centennial owns approximately 23% of the Company. Centennial and the
Company have an informal agreement whereby Centennial will fund the Company
through short-term notes payable as funds are needed. Centennial has also
guaranteed the Company's obligation under a capital lease. To date, Centennial
has made loans to the Company totalling $1,495,000 for general operations, of
which $823,000 was repaid. The Company owed Centennial $672,000 as of August 31,
1996, which is shown as note payable to related party in the accompanying
balance sheet. The note payable to Centennial bears interest at 9% per annum and
is due upon demand. Centennial interest expense for the year ended August 31,
1996 amounted to $20,700 of which $14,500 was unpaid and is included in amounts
due to related parties in the accompanying August 31, 1996 balance sheet. The
Company also purchased $371,500 of computer equipment from Centennial during the
year ended August 31, 1996.
Information Capture Corporation ("ICC")
ICC is developing a data acceptance device which is being built for ERI. The
Company's president is a 20% shareholder of ICC. For the year ended August 31,
1996, approximately $14,000 was billed from the Company to ICC and charged to
operations for the sublet of office space and equipment rental, all of which was
paid at August 31, 1996.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
AUGUST 31,
1996
----
Trade accounts payable $132,133
Registration costs 423,206
Payroll and vacation 99,537
Other accrued expenses 24,559
------
$679,435
========
F-10
WEBSECURE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. OBLIGATION UNDER CAPITAL LEASE
The company has entered into a capital lease agreement for computer and
office equipment. Future minimum lease payments under this capital lease are
approximately as follows:
FISCAL YEAR AMOUNT
----------- ------
1997 107,000
1998 107,000
1999 107,000
2000 107,000
Thereafter 36,000
------
Total minimum lease payments 464,000
Less amount representing interest 91,807
------
Present value of future lease payments 372,193
Less current portion of capital lease obligation 71,763
------
Long-term portion $300,430
========
The related leased assets are included in property and equipment at a cost
of approximately $389,000 less accumulated amortization of $83,000 at August 31,
1996.
6. ACQUIRED RESEARCH AND DEVELOPMENT
On March 29, 1996, the Company entered into a software license agreement
with Manadarin Trading Company Limited, an unrelated Irish corporation, in
exchange for 625,000 shares of the Company's Class B Common Stock. The value
assigned to this transaction ($2,550,000) represents the estimated fair value of
the stock issued based on its value in relation to other transactions occurring
during the period. To bring these software products to technological
feasibility, high-risk development and testing issues need to be resolved, which
will require substantial additional effort and testing. As such, the entire
value of the transaction was allocated to incomplete research and development
projects that had not yet reached technological feasibility and was charged to
expense at the date of the license agreement.
On April 1, 1996, the Company entered into a software license agreement with
International Software Development Limited, an unrelated British Virgin Islands
corporation, for certain technology in exchange for 802,500 shares of the
Company's Common Stock. The value assigned to this transaction ($3,210,000)
represents the estimated fair value of the Common Stock issued as determined by
recent sales of the Company's Common Stock to third parties. The Company expects
to utilize this technology in connection with its existing technology. However,
to bring this software product to technological feasibility and incorporate it
into the Company's existing product, high-risk development and testing issues
need to be resolved, which will require substantial additional effort and
testing. Accordingly, the entire value of the transaction was allocated to
incomplete research and development and was charged to expense at the date of
the license agreement.
F-11
WEBSECURE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The components of the Company's deferred tax asset (liability) are
approximately as follows:
AUGUST 31,
1996
----
Operating loss carryforwards $ 824,000
Amortization of acquired research and development 2,319,000
Tax credit carryforwards 6,000
Depreciation (36,000)
-------
3,113,000
Less valuation allowance 3,113,000
---------
$ --
==========
The Company has incurred net losses since inception and expects to continue
to operate at a loss for the foreseeable future. Accordingly, the Company has
established a valuation allowance equal in amount to the deferred tax asset, as
there is significant doubt about the realizability of the deferred tax assets.
At August 31, 1996, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $2,046,000, which expire
through 2011. The Company also has certain tax credits available to offset
future federal and state income taxes, if any. Net operating loss carryforwards
and credits are subject to review and possible adjustment by the Internal
Revenue Service and may be limited in the event of certain cumulative changes in
the ownership interests of significant stockholders over a three year period in
excess of 50%. The Company may experience an additional change in ownership in
excess of 50% upon completion of the proposed IPO.
8. STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of preferred stock,
$.01 par value per share (the Preferred Stock). The Preferred Stock may be
issued in one or more series, the terms of which may be determined at the time
of issuance by the Board of Directors, without further action by stockholders,
and may include voting rights (including the right to vote as a series on
particular matters), preferences as to dividends and liquidation, conversion
rights, redemption rights and sinking fund provisions.
Common Stock
As of August 31, 1996, the Company's authorized common stock consisted of
20,000,000 shares of Common Stock, $.01 par value per share; and 2,000,000
shares of Class B Common Stock, $.01 par value per share. During the year ended
August 31, 1996, the Company sold 500,000 shares of Common Stock to certain
investors for aggregate proceeds of $2,000,000 and issued 20,000 shares of
Common Stock in exchange for professional services rendered. In addition, on
April 1, 1996, the Company issued 802,500 shares of Common Stock to a British
software company in connection with the acquisition of certain technology (see
Note 6).
F-12
WEBSECURE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT) -- (CONTINUED)
Class B Common Stock
The rights and privileges of the Class B Common Stock are as follows:
VOTING
Except as otherwise provided by law, the Class B Common Stockholders do not
have voting rights. For actions required by law to be subject to a vote, each
share of Class B Common Stock will entitle the holder to one vote.
DIVIDENDS
The Board of Directors may not declare or pay dividends to Class B Common
Stockholders until all of the holders of unclassified Common Stock have received
dividends equal to $10.00 per share in the aggregate, after which time the Class
B Common Stockholders are entitled to share ratably with the holders of
unclassified Common Stock in further declared and paid dividends, if any.
LIQUIDATION
In certain events, including liquidation, dissolution or winding up of the
Company, the Class B Common Stockholders share ratably with the holders of
shares of unclassified Common Stock in distributions up to a maximum of $1.00
per share, but only after holders of unclassified Common Stock have been paid an
amount equal to $8.00 per share in the aggregate.
CONVERSION
Each share of Class B Common Stock shall convert automatically into four
shares of the Company's Common Stock upon the occurrence of one of the following
events: (i) the declaration of effectiveness by the Securities and Exchange
Commission of a registration statement for a firm commitment underwriting of the
Company's securities for gross proceeds equal to or greater than $5,000,000; or
(ii) the sale of all or substantially all of the assets of the Company in a
transaction under which the value of the Company is reasonably determined to be
equal to or greater than $30,000,000. The conversion rate of the shares of Class
B Common Stock shall be proportionally adjusted in the event of stock splits,
stock dividends, recapitalization or stock reclassifications.
1996 Stock Option Plan
In February 1996, the Company's Board of Directors and stockholders approved
the 1996 Stock Option Plan (the Plan). The Plan allows for the issuance of up to
800,000 shares of Common Stock or options to purchase Common Stock under the
Plan, and the Company has reserved all shares of Common Stock necessary for
issuance under the Plan. Under the terms of the Plan, the Board of Directors may
grant incentive stock options or nonqualified stock options to purchase shares
of the Company's Common Stock. The exercise price of stock options granted under
the Plan will be not less than the fair value of the Common Stock on the date of
grant. The purchase price and vesting schedule applicable to each option grant
are determined by the Board of Directors. Options generally vest annually over a
four-year period and expire 10 years from the date of grant.
1996 Formula Stock Option Plan
In February 1996, the Company's Board of Directors and stockholders approved
the 1996 Formula Stock Option Plan (the Formula Plan). The Formula Plan allows
for the issuance of up to 60,000 shares of Common Stock or options to purchase
Common Stock. The Company has reserved all shares
F-13
WEBSECURE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT) -- (CONTINUED)
necessary for issuance under the Formula Plan. Under the terms of the Formula
Plan, beginning on June 1, 1996, and annually thereafter on the business day
immediately following the Company's annual meeting of the stockholders, options
shall be granted without approval or discretion on the part of the Board, to
nonemployee directors. Each nonemployee director who has not been a director on
such date for at least one year will receive options to purchase 5,000 shares of
Common Stock, which vest fully one year from the date of grant. Each nonemployee
director who has been a director of the Company for at least one year as of such
date will receive options to purchase 1,000 shares of Common Stock, which will
vest fully on the date of grant. The exercise price of all options granted will
be the fair market value of the Company's Common Stock on the date of grant, and
the options will be exercisable subject to the individual's continued service as
a director of the Company on such date. Options must be granted within 10 years
from the effective date of the Formula Plan, and options granted cannot be
exercised more than 10 years from the date of grant.
The following is a summary of the stock option activity for all plans for
the period from inception (July 19, 1995) to August 31, 1996:
1996 STOCK 1996 FORMULA STOCK
OPTION PLAN OPTION PLAN
----------- -----------
NUMBER EXERCISE NUMBER EXERCISE PRICE
OF SHARES PRICE PER SHARE OF SHARES PER SHARE
--------- --------------- --------- ---------
Outstanding, August 31, 1995 -- $ -- -- $ --
Granted 374,400 4.00 5,000 4.00
Terminated -- -- -- --
Exercised -- -- -- --
-------- ----- ----- -----
Outstanding, August 31, 1996 374,400 $4.00 5,000 $4.00
======= ===== ===== =====
Exercisable, August 31, 1996 -- $ -- -- $ --
======= ===== ===== =====
Subsequent to August 31, 1996, the Company granted an additional 27,800
options under the 1996 Stock Option Plan at an exercise price of $4.00 per
share.
9. COMMITMENTS
Operating Leases
The Company leases its facilities under operating leases that expire through
August 2000. The future minimum lease commitments at August 31, 1996 are
approximately as follows:
YEAR ENDING AUGUST 31, AMOUNT
---------------------- ------
1997 58,000
1998 60,000
1999 63,000
2000 65,000
---- ------
$246,000
========
F-14
WEBSECURE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS -- (CONTINUED)
Rent expense included in the accompanying statements of operations was
approximately $95,000 for the year ended August 31, 1996 and for the period from
inception (July 19, 1995) to August 31, 1996.
Employment Agreements
The Company has entered into employment agreements with three executive
officers which provide for bonus and severance benefits for up to twelve months
upon termination of employment under certain circumstances. The agreements also
provide for minimum base annual compensation aggregating approximately $337,000
through 1999.
F-15
================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATES AS OF WHICH SUCH INFORMATION IS FURNISHED.
---------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary 3
Risk Factors 6
Use of Proceeds 15
Dilution 17
Capitalization 18
Dividend Policy 18
Selected Financial Data 19
Plan of Operations 20
Business 22
Management 29
Principal and Selling Stockholders 34
Certain Transactions 35
Description of Securities 36
Shares Eligible for Future Sale 39
Underwriting 40
Legal Matters 41
Experts 41
Additional Information 41
Financial Statements F-1
UNTIL ________ , 1996 (25 DAYS AFTER THE LATER OF THE EFFECTIVE DATE OF THE
REGISTRATION STATEMENT OR THE FIRST DATE ON WHICH THE COMMON STOCK WAS OFFERED
TO THE PUBLIC) ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THE 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.
================================================================================
================================================================================
[LOGO]
WEBSECURE, INC.
1,000,000 SHARES OF COMMON STOCK AND
1,000,000 REDEEMABLE COMMON STOCK
PURCHASE WARRANTS
--------------
PROSPECTUS
--------------
COBURN & MEREDITH, INC.
SHAMROCK PARTNERS, LTD.
, 1996
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware General Corporation Law, Section 102(b)(7), enables a corporation
in its original certificate of incorporation or an amendment thereto validly
approved by stockholders to eliminate or limit personal liability of members of
its Board of Directors for violations of a director's fiduciary duty of care.
However, the elimination or limitation shall not apply where there has been a
breach of the duty of loyalty, failure to act in good faith, engaging in
intentional misconduct or knowingly violating a law, paying a dividend or
approving a stock repurchase which is deemed illegal or obtaining an improper
personal benefit. The Company's Certificate of Incorporation includes the
following language:
"The personal liability of the Directors of the Corporation is hereby
eliminated to the fullest extent permitted by paragraph (7) of Subsection
(b) of Section 102 of the General Corporation Law of the State of Delaware
as the same may be amended and supplemented."
Delaware General Corporation Law, Section 145, permits a corporation
organized under Delaware law to indemnify directors and officers with respect to
any matter in which the director or officer acted in good faith and in a manner
he reasonably believed to be not opposed to the best interests of the Company,
and, with respect to any criminal action, had reasonable cause to believe his
conduct was lawful. The Bylaws of the Company include the following provision:
"Reference is made to Section 145 and any other relevant provisions of
the General Corporation Law of the State of Delaware. Particular reference
is made to the class of persons, hereinafter called "Indemnitees", who may
be indemnified by a Delaware corporation pursuant to the provisions of such
Section 145, namely, any person, or the heirs, executors, or administrators
of such person, who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, by reason of the fact
that such person is or was a director, officer, employee, or agent of such
corporation or is or was serving at the request of such corporation as a
director, officer, employee, or agent of such corporation or is or was
serving at the request of such corporation as a director, officer, employee,
or agent of another corporation, partnership, joint venture, trust, or other
enterprise. The Corporation shall, and is hereby obligated to, indemnify the
Indemnitees, and each of them, in each and every situation where the
Corporation is obligated to make such indemnification pursuant to the
aforesaid statutory provisions. The Corporation shall indemnify the
Indemnitees, and each of them, in each and every situation where, under the
aforesaid statutory provisions, the Corporation is not obligated, but is
nevertheless permitted or empowered, to make such indemnification, it being
understood that, before making such indemnification with respect to any
situation covered under this sentence, (i) the Corporation shall promptly
make or cause to be made, by any of the methods referred to in Subsection
(d) of such Section 145, a determination as to whether each Indemnitee acted
in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, in the case of any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was unlawful, and (ii) that no such indemnification shall be made
unless it is determined that such Indemnitee acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best
interests of the Corporation, and, in the case of any criminal action or
proceeding, had no reasonable cause to believe that his conduct was
unlawful."
Reference is made to "Underwriting" in the Prospectus for information
relating to certain indemnification of the directors and officers of the Company
by the Representative in connection with the Offering to which this Registration
Statement relates.
II-1
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by the Company in connection
with the issuance and distribution of the securities being offered hereby other
than underwriting discounts and commissions (items marked with an asterisk (*)
represent estimated expenses);
Registration Fee $ 7,713.14
NASD Filing Fee $ 2,778.41
NASDAQ Listing Fee* $ 10,000.00
Boston Stock Exchange Listing Fee* $ 5,000.00
Blue Sky Filing Fees and Expenses* $ 5,000.00
Printing and Engraving Cost* $ 50,000.00
Transfer Agent Fees* $ 1,000.00
Legal Fees* $ 250,000.00
Accounting Fees* $ 50,000.00
Miscellaneous* $ 99,508.45
-------------
TOTAL* $ 481,000.00
=============
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below in chronological order is information regarding the numbers
of shares of Common Stock sold by the Company since its inception, the
consideration received by the Company for such shares, options and debt
instruments and information relating to the section of the Securities Act of
1933, as amended (the "Securities Act"), or rule of the Securities and Exchange
Commission under which exemption from registration was claimed. None of these
securities was registered under the Act. Except as otherwise indicated, no sales
of securities involved the use of an underwriter and no commissions were paid in
connection with the sale of any securities.
1. From December 1995 through April 1996 the Company sold 500,000 shares of
Common Stock to 27 investors at a price of $4.00 per share in a private
offering. The following is a list of investors in the offering:
Number
Name of Shares
---- ---------
George and Margaret Asprakis, JTRWOS 12,500
Joyce M. Byrwa 7,000
Centennial Technologies 138,750
Richard C. Crown 5,000
John DiRico 12,500
Helmut F. Gfatter 20,000
Catherine F. Giblin 37,500
Frances E. Hills 6,250
Geoffiey O. Hills 6,250
G. David Hopper Living Trust 5,000
Richard Lewin 13,000
Dennis M. and Janet M. Miller, JTWROS 16,250
David and Ester Mann, JTWROS 12,500
Bryan L. Omey 2,500
Arthur C. Reichstetter 50,000
Sac and Co. 6,250
Marie Senecal-Trembley 10,000
Sigler and Co., NES Limited 18,750
Sigler and Co., Q Settlement 12,500
Sigler and Co., Valleydale Investments 25,000
Joseph L. Sirois, Jr. 7,500
II-2
Number
Name of Shares
---- ---------
Stuart and Diane Sklar 7,500
Adele Wasserstrom 25,000
Joseph Wasserstrom 25,000
Mark Zyndorf 12,500
Sam Zyndorf 5,000
2. In April 1996, the Company issued 625,000 shares of Class B Common Stock
to MTCL in connection with the license of certain software programs.
3. In April 1996, the Company issued 802,500 shares of Common Stock to ISDL
in connection with the Company's license of certain software.
Each of the foregoing transactions was exempt from registration under the Act by
virtue of the provisions of Section 4(2) and/or Section 3(b) of the Securities
Act. Each purchaser of the securities described above has represented or will
represent prior to the purchase of the securities that he understands that the
securities acquired may not be sold or otherwise transferred absent registration
under the Securities Act or the availability of an exemption from the
registration requirements of the Securities Act, and each certificate evidencing
the securities owned by each purchaser bears or will bear upon issuance a legend
to that effect.
ITEM 27. EXHIBITS
(a) The following exhibits are filed herewith.
EXHIBIT
NO. TITLE
--- -----
*1a -- Agreement among Underwriters between the Company, Coburn & Meredith, Inc. and
Shamrock Partners, Ltd. (the "Representatives")
*1b -- Form of Underwriting Agreement between the Company and the Representatives.
*1c -- Form of Selected Dealers Agreement.
*3a -- Certificate of Incorporation of the Company, dated September 1995 with Amendments
thereto dated September 1995, December 1995 and March 1996
and a Certificate of Correction dated June 1996.
*3b -- Bylaws.
*3c -- Agreement of Merger between the Company and WebSecure, Inc.
*4a -- Included in Exhibits 3a and 3b.
4b -- Specimen Common Stock Certificate.
*4c -- Form of Representative's Warrant Agreement with Form of Representative's Warrant
attached thereto.
4d -- Form of Warrant Agreement between the Company and American Securities Transfer
& Trust, Incorporated (includes Specimen Redeemable Warrant Certificate).
*5 -- Opinion Letter of O'Connor, Broude & Aronson as to legality of shares being registered.
*10a -- License Agreement with International Software Development Limited, dated April
1, 1996.
*10b -- License Agreement with Manadarin Trading Company Limited, dated March 29, 1996.
*+10c -- 1996 Stock Option Plan.
*+10d -- 1996 Formula Stock Option Plan.
*+10e -- Employment Agreement with Robert Kuzara.
*10f -- Form of Subscription Agreement dated November 27, 1995 between the Company and
several private investors.
10g -- Promissory Note dated October 1, 1996 to KeyCorp Leasing Ltd.
10h -- Master Equipment Lease Agreement dated as of December 21, 1995 with KeyCorp Leasing Ltd.
10i -- Form of Lock-up Agreement.
+10j -- Employment Agreement with William Blocher.
II-3
+10k -- Employment Agreement with Carole Ouellette.
11 -- Computation of shares used in the computation of pro forma net loss per common
and common equivalent share.
23a -- Consent of BDO Seidman, LLP.
*23b -- Consent of O'Connor, Broude & Aronson (contained in Opinion filed as Exhibit 5).
27 -- Financial Data Schedule
- -----------
* Filed with the Commission on September 11, 1996.
+ Relates to Management Compensation.
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant 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 of 1933;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and
(iii) To include any additional or changed material information on
the plan of distribution.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be treated
as 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.
(b) The undersigned Registrant hereby undertakes to provide to the
Representative at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Representative to permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer,
or controlling person of the small business issuer in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the small
business issuer will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(d) The small business issuer hereby undertakes that it will:
(1) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of a registration
statement in reliance upon Rule 430A and contained in the form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Act as part of the registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time as the initial bona fide offering
thereof.
II-4
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND HAS AUTHORIZED THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, IN THE CITY OF SAUGUS, COMMONWEALTH OF MASSACHUSETTS ON OCTOBER 23,
1996.
WEBSECURE, INC.
By: /s/ ROBERT KUZARA
--------------------------------
ROBERT KUZARA
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES STATED.
NAME CAPACITY DATE
---- -------- ----
/s/ JOHN J. SHIELDS CHAIRMAN OF THE BOARD OF OCTOBER 23, 1996
- --------------------------- DIRECTORS
JOHN J. SHIELDS
/S/ ROBERT KUZARA PRESIDENT, CHIEF EXECUTIVE OCTOBER 23, 1996
- --------------------------- OFFICER AND DIRECTOR
ROBERT KUZARA (PRINCIPAL EXECUTIVE OFFICER)
/S/ MICHAEL APPE DIRECTOR OCTOBER 23, 1996
- ---------------------------
MICHAEL APPE
/S/ CAROLE OUELLETTE CHIEF FINANCIAL OFFICER, OCTOBER 23, 1996
- --------------------------- TREASURER AND DIRECTOR
CAROLE OUELLETTE (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
II-5
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
*1a -- Agreement among Underwriters between the Company, Coburn & Meredith, Inc. and
Shamrock Partners, Ltd. (the "Representatives")
*1b -- Form of Underwriting Agreement between the Company and the Representatives
*1c -- Form of Selected Dealers Agreement
*3a -- Certificate of Incorporation of the Company, dated September 1995 with Amendments
thereto dated September 1995, December 1995 and March 1996 and a Certificate of
Correction dated June 1996
*3b -- Bylaws
*3c -- Agreement of Merger between the Company and WebSecure, Inc.
*4a -- Included in Exhibits 3a and 3b
4b -- Specimen Common Stock Certificate
*4c -- Form of Representative's Warrant Agreement with Form of Representative's Warrant
attached thereto
4d -- Form of Warrant Agreement between the Company and American Securities Transfer
& Trust, Incorporated (includes Specimen Redeemable Warrant Certificate)
*5 -- Opinion Letter of O'Connor, Broude & Aronson as to legality of shares being registered
*10a -- License Agreement with International Software Development Limited, dated April
1, 1996
*10b -- License Agreement with Manadarin Trading Company Limited, dated March 29, 1996
*+10c -- 1996 Stock Option Plan
*+10d -- 1996 Formula Stock Option Plan
*+10e -- Employment Agreement with Robert Kuzara
*10f -- Form of Subscription Agreement dated November 27, 1995 between the Company and
several private investors
10g -- Promissory Note dated October 1, 1996 to KeyCorp Leasing Ltd.
10h -- Master Equipment Lease Agreement with KeyCorp Leasing Ltd., dated as of
December 21, 1995, and Promissory Note dated October 1, 1996.
10i -- Form of Lock-up Agreement
+10j -- Employment Agreement with William Blocher
+10k -- Employment Agreement with Carole Ouellette
11 -- Computation of shares used in the computation of pro forma net loss per common
and common equivalent share
23a -- Consent of BDO Seidman, LLP
*23b -- Consent of O'Connor, Broude & Aronson (contained in Opinion filed as Exhibit 5)
27 -- Financial Data Schedule
- ----------
* Filed with the Commission on September 11, 1996.
+ Relates to Management Compensation.