AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 1997
REGISTRATION NO. 333-15129
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NUMBER 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SCOOP, INC.
(Name of Small Business Issuer in its Charter)
DELAWARE 7375 33-0726608
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) No.)
2540 RED HILL AVE., SUITE 100
SANTA ANA, CALIFORNIA 92705
(714) 225-6000
(Address and Telephone Number
of Principal Executive Offices)
DANIEL L. PELEKOUDAS
GENERAL COUNSEL
2540 RED HILL AVE., SUITE 100
SANTA ANA, CALIFORNIA 92705
(714) 225-6000
(Address and Telephone Number of Agent for Service)
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COPIES TO:
WILLIAM J. CERNIUS, ESQ. STEVEN J. INSEL, ESQ.
Latham & Watkins Jeffer, Mangels, Butler & Marmaro LLP
650 Town Center Drive, 20th Floor 2121 Avenue of the Stars, 10th Floor
Costa Mesa, California 92626 Los Angeles, California 90067
(714) 540-1235 (310) 203-8080
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
(CONTINUED ON NEXT PAGE)
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(CONTINUED FROM PREVIOUS PAGE)
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
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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. / /
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
Pursuant to Rule 416, there are also being registered hereby such additional
indeterminate number of shares of such Common Stock as may become issuable by
reason of stock splits, stock dividends and similar adjustments as set forth in
the provisions of the Representative Warrant and the Consultant Warrants.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
2
EXPLANATORY NOTE
This Registration Statement contains two Prospectuses.
The first Prospectus forming a part of this Registration Statement is to be
used in connection with the underwritten public offering of 1,495,000 shares of
the Registrant's Common Stock (including 195,000 shares of Common Stock subject
to the Underwriters' over-allotment option), and immediately follows this page.
The second Prospectus forming a part of this Registration Statement is to be
used in connection with the sale from time to time by certain selling security
holders of 1,205,152 shares of Common Stock which are currently outstanding and
200,000 shares of Common Stock issuable by the Company upon exercise of the
Consultant Warrants. The second Prospectus will consist of (i) pages SS-1 and
SS-2, the front cover page and inside front cover page of the second Prospectus,
(ii) pages 3 through 57 of the first Prospectus (other than the sections
entitled "Resale of Outstanding Securities" and "Underwriting") and pages F-1
through F-15 of the first Prospectus, (iii) pages SS-3 and SS-4 (which will
appear in place of the section entitled "Resale of Outstanding Securities"),
(iv) page SS-5 (which will appear in place of the section entitled
"Underwriting") and (v) page SS-6, the back cover page of the second Prospectus.
3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 27, 1997
PROSPECTUS 1,300,000 SHARES
SCOOP, INC.
[SCOOP LOGO]
COMMON STOCK
--------------------
All of the shares of common stock, par value $.001 per share (the "Common
Stock"), offered hereby are being offered by Scoop, Inc. (the "Company"). Prior
to this offering (the "Offering"), there has been no public market for the
Common Stock and there can be no assurance that such a market will exist after
the Offering. It is currently estimated that the initial public offering price
will be between $5.00 and $6.00 per share. The initial public offering price of
the shares of Common Stock offered hereby will be determined by negotiation
between the Company and Shamus Group, Inc. (the "Representative"), as
representative of the several underwriters (the "Underwriters"). See
"Underwriting" for information relating to the determination of the initial
public offering price. The Common Stock has been approved for quotation on The
Nasdaq SmallCap Market subject to official notice of issuance under the symbol
"SCPI."
THE COMMON STOCK IS HIGHLY SPECULATIVE AND INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND
"DILUTION" BEGINNING ON PAGES 8 AND 21, RESPECTIVELY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
Per Share..................................... $ $ $
Total(3)...................................... $ $ $
(1) Does not include (a) a non-accountable expense allowance payable to the
Representative, or (b) the value of a five-year warrant granted to the
Representative to purchase up to 130,000 shares of Common Stock at 120% of
the initial public offering price per share of Common Stock (the
"Representative Warrant"). For indemnification and contribution arrangements
with the Underwriters, see "Underwriting."
(2) Before deducting Offering expenses payable by the Company estimated at
$768,000, including the Representative's non-accountable expense allowance.
See "Underwriting."
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to an aggregate of 195,000 additional shares of Common Stock, solely to
cover over-allotments, if any. See "Underwriting." If all such shares of
Common Stock are purchased, the Total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively.
The Common Stock is offered by the several Underwriters in a firm commitment
underwriting when, as and if delivered to and accepted by them and subject to
their right to withdraw, cancel or modify the Offering and reject any order in
whole or in part. It is expected that delivery of the certificates for the
shares of Common Stock will be made on or about , 1997.
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[LOGO]
The date of this Prospectus is , 1997
[GRAPHICS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING SYNDICATE SHORT COVERING TRANSACTIONS, PENALTY BID
PROVISIONS AND OTHER SUCH TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by its independent auditors and such other periodic
reports as the Company may determine to be appropriate or as may be required by
law.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS," AND FINANCIAL STATEMENTS AND RELATED
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED,
ALL INFORMATION IN THIS PROSPECTUS (I) REFLECTS THE MERGER OF THE COMPANY WITH
SCOOP, INC., A CALIFORNIA CORPORATION, ("SCOOP CALIFORNIA") WHICH WILL BE
EFFECTED PRIOR TO THE OFFERING IN ORDER TO REINCORPORATE SCOOP CALIFORNIA IN THE
STATE OF DELAWARE (THE "REINCORPORATION"), (II) REFLECTS THE 1,006.654-FOR-ONE
STOCK SPLIT OF THE COMMON STOCK EFFECTED IN MAY 1996 AND (III) ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, THE REPRESENTATIVE WARRANT
OR ANY OF THE WARRANTS OR OPTIONS OUTSTANDING IMMEDIATELY PRIOR TO THE OFFERING.
SEE "DESCRIPTION OF CAPITAL STOCK--WARRANTS," "MANAGEMENT--STOCK INCENTIVE PLAN"
AND "UNDERWRITING." SINCE THE COMPANY WAS RECENTLY FORMED TO EFFECT THE
REINCORPORATION, REFERENCES IN THIS PROSPECTUS TO THE HISTORICAL ACTIVITIES OF
THE COMPANY ARE REFERENCES TO THE ACTIVITIES OF SCOOP CALIFORNIA AND NEWSMAKERS
INFORMATION SERVICES, INC., ITS WHOLLY-OWNED SUBSIDIARY WHICH WAS MERGED INTO
SCOOP CALIFORNIA IN NOVEMBER 1996.
THE COMPANY
Scoop, Inc. (the "Company") is in the process of developing SCOOP!, an
Internet-delivered business information service designed to enable customers to
efficiently satisfy their daily information needs. SCOOP! customers will have
access to an extensive array of well-recognized news and information sources
which the Company licenses from UMI Company ("UMI"), a wholly-owned subsidiary
of Bell & Howell Operating Company ("Bell & Howell") and one of the world's
leading aggregators of articles from newspapers, periodicals and other
information sources. SCOOP! is designed to provide users with three distinct
information tools: (i) a personalized electronic newspaper feature which
provides current information tailored to the individual user's preferences (the
"Alert" service), (ii) research tools for efficient retrieval of information
from the Company's licensed content databases and (iii) Web navigation tools for
accessing information available on the Internet's World Wide Web (the "Web").
The Company's proprietary Scoop SmartGuide-TM- ("SCOOP SMARTGUIDE")
technology, which is presently being developed, will be the foundation for the
SCOOP! business information service. The SCOOP SMARTGUIDE technology will enable
customers to structure profiles to track industry developments or obtain
information pertaining to companies, products or other topics of interest to the
customers. Based on these customer-defined profiles, the SCOOP SMARTGUIDE
technology will search a variety of dynamic databases and present customers with
customized Alert reports comprised of brief abstracts sorted in order of
relevancy. Customers will be able to skim the article abstracts, select articles
of interest and retrieve full-text versions for immediate review or storage on
their computers for later review. Customers also will be able to perform
additional research on companies or subjects of interest by searching deeper in
the Company's licensed content databases or through hyperlinks established by
the SCOOP SMARTGUIDE technology from the databases to specific information
sources, such as company home pages, publicly available on the Web.
If development is successful, the Company plans to introduce and proliferate
SCOOP! as a branded service to corporate, professional, small office/home office
("SOHO") and other users primarily through alliances with large,
well-established providers of Internet services. The Company intends to obtain
customers by accessing and attracting users from the existing customer bases of
its distribution partners. The Company believes that its partner distribution
strategy will provide the Company with a cost-effective marketing alternative to
the more capital intensive marketing programs aimed at individual users.
Although the Company has initiated discussions with several prospective
strategic distribution partners, to date there are no agreements between the
Company and any such parties. No assurances can be given that the Company will
be successful in entering into any such agreements or implementing its
distribution strategy or that the Company will be successful in its efforts to
attract and retain customers of its distribution partners. See "Risk
Factors--Dependence on Potential Strategic Distribution Partners."
3
Through SCOOP! the Company will offer customers access to content from a
broad range of worldwide news and information sources, including well-recognized
publications such as THE WASHINGTON POST, FORBES, WIRED and THE NEW ENGLAND
JOURNAL OF MEDICINE. The Company anticipates that over 3,000 worldwide news and
information sources will be available through SCOOP!, including national and
regional domestic newspapers, international newspapers, magazines, financial
journals, industry journals, trade publications, general business publications,
newswires and press release services. The SCOOP! information sources will be
comprised of selections from UMI's database, which includes approximately 11
million proprietary abstracts and rights to full text and full image content
from over 7,000 newspapers, 18,000 periodicals and 1.2 million dissertations and
other materials, including company profiles. The Company expects that a
substantial portion of its news sources (e.g., newswires) will be continuously
updated, enabling SCOOP! users to obtain current information on a timely basis
through customized Alert reports.
The Company initially will derive all of its content from its license
agreement with UMI. See "Risk Factors--Dependence on UMI Content." The UMI
license agreement gives the Company the right to resell through SCOOP! the vast
majority of the "current" content (i.e., content less than six months old) which
is available for electronic distribution through UMI and its subsidiaries,
including DataTimes Corporation. The Company has limited exclusive third-party
reselling rights with respect to the distribution of certain UMI content via
specified alert-based Internet delivery systems. The Company intends to explore
additional areas for enhancing its strategic relationship with UMI, including
technology sharing, joint product development and co-marketing efforts. In
connection with entering into the UMI license agreement, the Company issued Bell
& Howell a three-year warrant to acquire a significant interest in the Company.
Under the warrant, Bell & Howell has the right to purchase 550,000 shares of
Common Stock at any time through October 1999 at prices ranging from $6.50 to
$15.00 per share and Bell & Howell may purchase up to an additional 200,000
shares of Common Stock if it exercises part of the warrant by September 1997.
See "Business--UMI Relationship," "Principal Stockholders" and "Description of
Capital Stock--Warrants."
The Company intends to initially launch an electronic mail version of the
SCOOP! information service in the second quarter of 1997. The Company currently
plans to launch the Internet version of SCOOP! in the fall of 1997. Following
commercial launch, the Company expects to generate revenue from SCOOP! primarily
through transaction-based fees, such as fees customers will be charged to obtain
full text versions of articles. The Company believes its transaction-based
pricing structure will encourage corporate decision makers and other
professionals to use the SCOOP! service because customers will be charged only
for the information they select to satisfy their needs. The Company may also
generate revenue in the future by selling advertising targeted to reach
customers based on their individualized search profiles. No assurance can be
given that the Company will be successful in completing development of SCOOP!,
in operating the SCOOP! service or in generating revenue from SCOOP!. Any
significant failure by the Company in developing or marketing SCOOP! in a timely
manner or in operating the SCOOP! service will have a material adverse effect on
the Company's business, results of operations and financial condition. See "Risk
Factors--Lack of Operating History; Unproven Business Strategy," "--Failure to
Develop Service or Obtain Market Acceptance," "--History of Operating Losses;
Anticipation of Continuing Losses" and "--Ability to Continue as a Going
Concern."
As the Company pursues the development and marketing of SCOOP!, the Company
also intends to continue to expand and generate sales from its NewsMakers
business information product line. The NewsMakers product line promotes the
reproduction, re-use and re-sale of articles from newspapers, magazines and
on-line publications. NewsMakers products include customized media reprints,
FAMEFRAME wall displays and lucite NEWSCUBE desk displays of published articles.
NewsMakers has been the exclusive provider of reproduction and reprint services
for Investors Business Daily ("IBD") since August 1995 and recently entered into
an exclusive agreement to provide the same services for The Motley Fool, an
Internet-based investment-oriented publication. The Company's license agreement
with UMI also enables NewsMakers to utilize UMI's content for media reprints and
other NewsMakers products. NewsMakers
4
products generated net sales of approximately $1,395,900 during the year ended
December 31, 1996, a 44.1% increase over the prior year. Currently, the Company
derives all of its sales of business information products through its NewsMakers
department. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The predecessor to the Company, Scoop California, was incorporated in
California in May 1990. The Company was incorporated in the State of Delaware on
October 11, 1996 as part of the Reincorporation to be completed prior to the
Offering. The Company's offices are located at 2540 Red Hill Avenue, Suite 100,
Santa Ana, California 92705 and its telephone number is (714) 225-6000. The
Company's Web site is accessible via "http://www.scoopnews.com" Information on
the Company's Web site is not a part of this Prospectus.
NewsMakers and FAMEFRAME are registered trademarks of the Company. SCOOP!,
SCOOP SMARTGUIDE, SCOOP INFORMATION SERVICES, the SCOOP logo, MEDIAALERT, HEALTH
ALERT, and NEWSCUBE are also trademarks of the Company. All other company or
product names included in this Prospectus are trademarks or registered
trademarks of their respective owners.
5
THE OFFERING
Common Stock Offered by the Company..................... 1,300,000 shares
Common Stock Outstanding After the Offering............. 5,052,497 shares (1)
Use of Proceeds by the Company.......................... For working capital and other general corporate purposes
including product development, sales and marketing
expenses, repayment of debt, capital expenditures,
initiation of SCOOP! operations center and to fund
anticipated operating losses.
Proposed Nasdaq SmallCap Symbol......................... SCPI
Risk Factors............................................ An investment in the Common Stock is highly speculative
and involves a high degree of risk and immediate
substantial dilution. The Company has a history of
operating losses and anticipates continuing losses. See
"Risk Factors" and "Dilution."
Common Stock Being Registered for the Account of Selling
Security Holders...................................... 1,205,152 shares of outstanding Common Stock and 200,000
shares of Common Stock issuable by the Company upon the
exercise of warrants issued to certain consultants of
the Company (the "Consultant Warrants") are being
registered and may be sold by certain selling security
holders (the "Selling Security Holders"). The 1,405,152
shares of Common Stock registered on behalf of the
Selling Security Holders are sometimes collectively
referred to herein as the "Selling Security Holders'
Shares." The Selling Security Holders' Shares are not
being underwritten in this Offering and the Company will
not receive any proceeds from the sale of the Selling
Security Holders' Shares. The Selling Security Holders
have agreed that, except for 28,302 shares subject to a
ninety-day lock-up, none of the Selling Security
Holders' Shares may be sold, pledged or otherwise
transferred during the twelve-month period following the
effective date of this Prospectus without the prior
written consent of the Representative. See
"Underwriting," "Risk Factors--Possible Adverse Effect
of Future Sales of Securities on Market Price," and
"Resale of Outstanding Shares."
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(1) Excludes 622,500 shares of Common Stock issuable upon the exercise of stock
options outstanding at December 31, 1996 under the Company's Stock Incentive
Plan.
6
SUMMARY FINANCIAL DATA
The following Summary Financial Data is derived from and should be read in
conjunction with the Company's financial statements and the related Notes
thereto included elsewhere in this Prospectus.
YEAR ENDED
DECEMBER 31,
-----------------------------------------
1994 1995 1996
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STATEMENTS OF OPERATIONS:
Net Sales(1)........................................................... $ 943,500 $ 968,600 $ 1,395,900
Cost of Sales.......................................................... 412,000 534,100 833,200
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Gross Profit......................................................... 531,500 434,500 562,700
Operating Expenses:
Research and development............................................. 64,300 186,600 601,700
Selling and marketing................................................ 69,600 175,100 396,500
General and administrative........................................... 597,600 637,900 1,710,300
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Total Operating Expenses........................................... 731,500 999,600 2,708,500
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Operating loss......................................................... (200,000) (565,100) (2,145,800)
Interest expense, net.................................................. 18,600 36,000 21,500
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Loss before provision for income taxes................................. (218,600) (601,100) (2,167,300)
Provision for income taxes............................................. 1,600 1,600 1,600
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Net loss............................................................... $ (220,200) $ (602,700) $ (2,168,900)
------------ ------------ -------------
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Net loss applicable to common stock(2)................................. $ (2,283,900)
Net loss per common share(2)......................................... . $ (.04) $ (.12) $ (.62)
------------ ------------ -------------
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Weighted average common shares outstanding(2).......................... 5,492,000 4,863,000 3,673,000
------------ ------------ -------------
------------ ------------ -------------
DECEMBER 31, 1996
------------------------------------------
AS
ACTUAL PRO FORMA(3) ADJUSTED(4)
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BALANCE SHEET DATA:
Cash and cash equivalents............................................. $ 262,400 $ 262,400 $ 5,929,600
Working capital....................................................... (402,600) (402,600) 5,264,600
Total assets.......................................................... 971,800 971,800 6,639,000
Current liabilities................................................... 983,800 983,800 983,800
Long term obligations................................................. 139,000 139,000 139,000
Redeemable Shares..................................................... 2,302,500 -- --
Stockholders' (deficit) equity........................................ (2,453,500) (151,000) 5,516,200
- ------------------------------
(1) The Company currently derives all of its net sales from its NewsMakers
product line. To date, no revenue has been derived from the Company's SCOOP!
service. See "Risk Factors--Lack of Operating History; Unproven Business
Strategy," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 1 of Notes to Financial Statements.
(2) See Note 1 of Notes to Financial Statements for information concerning the
calculation of net loss applicable to common stock and net loss per share.
(3) Adjusted to give effect to (i) the sale of 1,300,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $5.50 per
share, and the application of the net proceeds therefrom as described under
"Use of Proceeds" and (ii) the termination of the mandatory redemption
rights associated with the Redeemable Shares upon the closing of the
Offering. See Note 5 to Notes to Financial Statements.
(4) Adjusted to give effect to (i) the sale of 1,300,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $5.50 per
share, and the application of the net proceeds therefrom as described under
"Use of Proceeds" and (ii) the termination of the mandatory redemption
rights associated with certain shares of Common Stock (the "Redeemable
Shares") upon the closing of the Offering. See Notes 1 and 5 of Notes to
Financial Statements.
7
RISK FACTORS
INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL PURCHASERS IN
EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS OF OPERATIONS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK
FACTORS AND ELSEWHERE IN THIS PROSPECTUS.
LACK OF OPERATING HISTORY; UNPROVEN BUSINESS STRATEGY. Since the Company
commenced business operations in 1990, substantially all of the Company's
revenue has been generated from sales of NewsMakers business information
products. During the past year, the Company has focused considerable time and
effort and expended significant financial resources on developing its SCOOP
SMARTGUIDE technology and the related SCOOP! service. Although the Company
intends to continue to generate revenue from the NewsMakers product line, the
Company's principal business strategy is to pursue the development and marketing
of its SCOOP! service. The Company is not presently generating any revenue from
SCOOP! because it has not yet been commercially released, and no assurances can
be given that the Company will be successful in marketing SCOOP! when it is
commercially released. The Company has no operating history relating to
Internet-delivered business information services upon which an evaluation of the
Company and its prospects in such area of business can be based. The Company and
its prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in the new and rapidly evolving
market for Internet products and services. To address these risks, the Company
must, among other things, complete the development of its SCOOP SMARTGUIDE
technology and SCOOP! service in a timely manner, implement and execute its
principal sales and marketing strategy, attract strategic distribution partners,
attract and motivate qualified personnel, respond to competitive developments,
constantly upgrade its technologies and commercialize products and services
incorporating such technologies. There can be no assurance that the Company will
successfully address such risks or implement its business plan.
HISTORY OF OPERATING LOSSES; ANTICIPATION OF CONTINUING LOSSES. The Company
reported net losses of approximately $602,700 and $2,168,900 for 1995 and 1996,
respectively. See "Selected Financial Data." In addition, at December 31, 1995
and 1996, the Company had an accumulated deficit of approximately $928,900 and
$3,374,100, respectively, and a stockholder deficit of approximately $914,400
and $2,453,500, respectively. The Company also had a working capital deficit of
approximately $955,000 and $402,600 at December 31, 1995 and 1996, respectively.
See the Company's financial statements and related Notes thereto included
elsewhere in this Prospectus. The Company has continued to realize losses since
December 31, 1996 and has significantly increased, and expects to continue to
increase, its operating expenses before it will have any significant increase in
its operating revenue. As a result of the foregoing factors, the Company expects
to continue to incur significant losses unless and until it is able to
successfully launch and market its SCOOP! service. Finally, the Company's cash
flow has been principally the result of financing activities rather than
operating activities. There can be no assurance that the Company will ever
achieve significant revenue or profitable operations. See "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and the Company's Financial Statements and related Notes thereto
included elsewhere in this Prospectus.
ABILITY TO CONTINUE AS A GOING CONCERN. In light of the Company's
continuing losses, the Company's ability to continue as a going concern is
dependant upon future events, including the successful development and market
acceptance of its products and its ability to secure additional sources of
financing. The Company's independent auditor has stated in its opinion that
these factors raise substantial doubt about the Company's ability to continue as
a going concern. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Financial Statements and
related Notes thereto included elsewhere in this Prospectus.
8
NEED FOR FUTURE FINANCING; RISK OF FUTURE DILUTION. The Company estimates
that the net proceeds of the Offering, in conjunction with other financial
resources, will be sufficient to satisfy the Company's anticipated working
capital and capital expenditure requirements for the next nine months. The
Company's operating plan anticipates that at the end of such nine-month period,
the Company will likely require substantial additional capital. Moreover, if the
Company experiences unanticipated cash requirements during the nine-month period
or experiences delays in the development and marketing of its SCOOP! business
information service, the Company will require additional capital to fund its
operations, continue research and development programs, and commercialize any
products that may be developed. Thereafter, the Company may be required from
time to time to seek additional financing to fund operating losses and finance
its business strategy, including product development, expansion of sales and
marketing and capital expenditures. The Company may attempt to meet its capital
requirements by incurring indebtedness, issuing debt or equity securities, or a
combination thereof, any of which could result in substantial dilution to the
Company's existing stockholders. There can be no assurance, however, that funds
will be available on terms favorable to the Company, that such funds will be
available when needed, or that the Company will have adequate cash flows from
operations for such requirements. Incurrence of debt or issuance of equity
securities could have an adverse effect on the price of the Common Stock, could
restrict the Company's ability to pay dividends and could result in further
dilution to existing investors. See "--History of Operating Losses; Anticipation
of Continuing Losses" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
DEPENDENCE ON POTENTIAL STRATEGIC DISTRIBUTION PARTNERS. The Company's
principal marketing strategy is to market its products primarily through
alliances which the Company will attempt to establish with large,
well-established strategic distribution partners with existing customer bases.
The Company has not yet entered into any definitive agreements relating to the
establishment of any strategic distribution relationship and no assurance can be
given that the Company will be able to attract any such prospective strategic
distribution partners. Even if the Company establishes contractual relationships
with one or more strategic distribution partners, the Company will need to
attract users of the SCOOP! service from the existing customer bases of such
strategic distribution partners. The failure of the Company to enter into
strategic distribution partnership relationships or to attract and retain
customers from the existing customer bases of any strategic distribution partner
would materially adversely affect the Company and its financial condition,
results of operation and future prospects. Moreover, if the Company's marketing
arrangements and activities with any company with which it hereafter enters into
an alliance or other strategic distribution partnership arrangement were
subsequently to be lessened, curtailed or otherwise modified, the Company may
not be able to replace or supplement such marketing efforts alone or with other
companies. If any of such companies were to reduce their joint marketing
activities with the Company, develop and market their own business information
service, market business information products developed by competitors of the
Company or cease to jointly market the Company's business information service,
the Company's business, results of operations and financial condition would be
materially adversely effected. See "Business--Sales and Marketing Strategy."
FAILURE TO DEVELOP SERVICE OR OBTAIN MARKET ACCEPTANCE. The Company
believes that its future success will be largely dependent upon its ability to
develop its SCOOP! service and deliver high quality, uninterrupted access to its
service on the Internet. The Company's SCOOP SMARTGUIDE technology, which is the
foundation of the SCOOP! service, is currently being developed and there can be
no assurance that the SCOOP SMARTGUIDE technology will prove to actually perform
as it has been conceptualized and designed. There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
introduction and marketing of its SCOOP! service or that SCOOP! will meet the
requirements of the Internet marketplace and achieve or maintain market
acceptance. If the Company is unable to develop its SCOOP! service as
conceptualized on a timely basis, to operate the service to support any actual
usage, or if its SCOOP! service does not achieve or maintain market acceptance,
the Company's business, operating results and financial condition will be
materially adversely affected.
9
RISK OF SYSTEM FAILURE. In connection with the establishment of the SCOOP!
service, the Company will be required to expand its network, integrate new and
emerging technologies and equipment, and will experience growth in data traffic.
As a result, there will be increased stress placed upon the Company's network
hardware and traffic management systems and therefore an increased risk of
system failure. The Company's network will also be vulnerable to damage from
fire, earthquakes, power loss, telecommunications failures and similar events.
There can be no assurance that the Company will not experience partial or total
failures of its network. Significant or prolonged system failures could damage
the reputation of the Company and result in the loss of customers or its
information content licenses either of which would have a material adverse
effect on the Company.
DEPENDENCE ON UMI CONTENT. The success of the Company's business plan is
dependent on its ability to provide customers with access to a wide variety of
information sources. The Company's right to provide such access will be based on
license agreements between the Company and information content providers. The
Company will initially derive all of its content from UMI. The Company's
agreement with UMI, which presently expires in October 1999, provides for
automatic renewal for one-year periods unless notice of termination is provided
before the end of the term or any extension thereof by either party. The
Company's agreement with UMI may also be terminated if the Company fails to
fulfill its obligations under such agreement. Such obligations include
guaranteed minimum annual royalty payments of approximately $296,000 in 1997,
$570,000 in 1998 and $652,500 in 1999. In addition, in order to maintain the
Company's limited exclusive third-party reselling rights with respect to the
distribution of certain UMI content, the Company must make additional minimum
royalty payments of at least $200,000 in year one, $400,000 in year two, and
$600,000 in year three of the contract. UMI and other content providers compete,
or may in the future compete, with one another and, to some extent, with the
Company for customers. Termination or non-renewal of the Company's license with
UMI, or with any other significant information providers with which the Company
may contract in the future, would significantly decrease the news and
information which the Company could offer its customers and would have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, fees payable to UMI and any other future
information content providers will constitute a significant portion of the
Company's cost of sales. If the Company is required to increase the fees payable
to UMI or any other future information providers, such increased fee payments
would have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--UMI Relationship."
IMMEDIATE SUBSTANTIAL DILUTION. At an assumed initial public offering price
of $5.50 per share, purchasers of the shares of Common Stock offered hereby will
experience immediate substantial dilution of approximately 80.4% or $4.42 per
share of Common Stock from the initial public offering price. New investors in
the Company will have contributed approximately 70.2% of the total consideration
paid for Common Stock of the Company but will own only approximately 25.7% of
the Common Stock outstanding at the consummation of the Offering. As a result,
new investors in the Company will bear most of the risk of loss. See "Dilution."
ESTABLISHED COMPETITORS AND INTENSE COMPETITION. The market for business
information services, including Internet information products and services, is
intensely competitive and rapidly changing. Participants in this market range
from extremely large and well-capitalized companies to smaller competitors as
there are no substantial barriers to entry into such market. The Company's
direct competitors for its Internet and Web-based business information service
will include Individual, Inc., DeskTop Data, and M.A.I.D. Plc. The Company may
also compete, directly or indirectly, for customers and/or information content
sources with the following categories of companies: (i) connectivity providers
of telephone, cable, wireless and/or other means of accessing the Internet, (ii)
large, well-established news and other information providers, such as Dow Jones
& Company, Inc., Knight-Ridder, Inc. ("Knight-Ridder"), Pearson Plc, Reed
Elsevier Plc. ("Lexis/Nexis"), Reuters America, Inc., and Thompson Financial
Networks, Inc., (iii) traditional print media companies that are increasingly
searching for opportunities for providing news online, including through the
establishment of Web sites on the Internet, (iv) providers of network-based
10
software systems such as Lotus Development Corporation and Microsoft
Corporation, which have allied, or may in the future ally, with competing news
and other information providers, (v) third party providers of software which
allows PC users to aggregate and filter a variety of news feeds, (vi) consumer
online services such as America Online, GEnie CompuServe and Prodigy, (vii)
Internet-based news distributors such as ClariNet Communications Corp., Marimba
Inc.'s Castanet and the PointCast Network, (viii) search engine providers such
as Digital Equipment's Alta Vista Corporation, Excite, Inc., Infoseek
Corporation, Lycos, Inc., Verity, Inc. and Yahoo!, Inc., and (ix) companies that
offer space for advertising on the Web, including content Web sites.
Substantially all of the Company's potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources and greater name recognition than the Company. Many of these
competitors are already well established in the Internet marketplace and
therefore have a significant competitive advantage. In addition, these
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, and to devote greater resources to the
development, promotion and sale of their information services and products than
the Company. There can be no assurance that the Company's potential competitors
will not develop products and services comparable or superior to those developed
by the Company or adapt more quickly than the Company to new technologies,
evolving industry trends or changing customer requirements.
Some of the Company's potential competitors own all or a substantial part of
the information content in their databases. The Company does not own any of its
content and therefore must license content from providers at substantial cost.
Competitors who own their own information have no license fee obligation on
their own information, and may limit or preclude access by the Company to their
information, which gives such competitors a pricing or other competitive
advantage over the Company.
The Company believes that the overall cost to the consumer of retrieving
useful information through an online service is an important competitive factor.
This cost includes such elements as subscription fees, usage fees, online
charges and other items. The Company could be required to reduce its anticipated
transaction fees or otherwise alter its anticipated pricing structure in
response to competitive pressures.
Increased competition on the basis of price, depth and breadth of services
and data sources or other factors could result in price reductions, reduced
margins or loss of market share, any of which would materially and adversely
affect the Company's future business, results of operations or financial
condition. There can be no assurance that the Company will be able to compete
successfully against its competitors, or that competitive pressures faced by the
Company will not have a material adverse effect on its business, results of
operations and financial condition. If the Company is unable to compete
successfully against its competitors, the Company's business, results of
operations and financial condition will be materially adversely effected.
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET. The Internet, and
particularly the Web, has created a potential market for the Company's business
information service which has only recently begun to develop, are rapidly
evolving and are characterized by an increasing number of market entrants who
have introduced or developed a wide variety of products and services for
communication and commerce. As is typical in the case of a new and rapidly
evolving industry, demand and market acceptance for new products and services
are subject to a high level of uncertainty. Moreover, critical issues concerning
the commercial use of the Internet (including security, reliability, cost,
quality of service and ease of use and access) remain unresolved and may impact
the growth of Internet and Web use. There can be no assurance that commerce over
the Internet will become widespread, or that services developed by the Company
for use on the Internet will become accepted. In particular, enterprises that
have already invested substantial resources in other means of conducting
commerce and exchanging information may be reluctant to adopt a new strategy
that could make their existing products and infrastructure obsolete. In
addition, there can be no assurance that individual business, professional, SOHO
or other potential customers will adopt the Web for online commerce and
communication. If the Internet market fails to develop, develops more slowly
11
than expected or becomes saturated with competitors, the Company's business,
operating results and financial condition could be materially adversely
effected. See "Business--Industry Overview."
RISKS OF TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS. The market
for Internet services and products is characterized by rapidly changing
technology, evolving industry standards, changes in customer needs and frequent
new service and product introductions. The Company's future success will depend,
in large part, on its ability to effectively use leading technologies, to
continue to develop its technical expertise, to finalize the development of its
SCOOP! business information service, to enhance its service, to develop new
services that meet changing customer needs, to advertise and market its business
information services and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis. There can
be no assurance that the Company will be successful in effectively using new
technologies, developing SCOOP! or new business information services or
enhancing its business information services on a timely basis or that such new
technologies or enhancements will achieve market acceptance. The Company
believes that its ability to compete successfully is also dependent upon the
compatibility and interoperability of its business information services with
products, services and architectures offered by various other companies. There
can be no assurance that the Company will be able to effectively address the
compatibility and interoperability issues raised by technological changes or new
industry standards. In addition, there can be no assurance that information
products or technologies developed by others will not render the Company's
business information products or technology uncompetitive or obsolete.
MANAGEMENT OF GROWTH; NEED TO EXPAND RESOURCES AND INFRASTRUCTURE. Upon
completion of this Offering, to the extent the Company is successful in
expanding its business, the resulting growth will place a significant strain on
the Company's financial, management and other resources. As the Company grows
and commences the commercial release of its business information services via
the Internet, there will be additional demands on the Company's customer
support, sales and marketing and administrative resources and network
infrastructure. The Company believes that it will need, both in the short term
and the long term, to hire additional qualified administrative, management and
financial personnel. The Company's ability to manage its growth effectively will
require it to continue to improve its operational, financial and management
information systems, and to attract, train, motivate, manage and retain key
employees. The Company may also make additional investments in capital equipment
to expand its business. No assurances can be given that these new systems will
be implemented successfully or that the Company's management will manage growth
effectively, and the failure to do so could have a material adverse effect on
the Company's business, operating results and financial condition.
SECURITY RISKS. Despite the Company's network security measures, which will
consist primarily of periodic monitoring of the Company's external network and
password-protecting certain administrative functions, the Company's
computer-based infrastructure will be vulnerable to computer viruses, break-ins,
vandalism and similar disruptive problems which may be caused by customers or
other Internet users. Computer viruses, break-ins or other problems caused by
third parties could lead to interruptions, delays or cessation in service to the
Company's customers. Furthermore, inappropriate use of the Internet by third
parties could also potentially jeopardize the security of information stored in
the Company's computer systems, which may deter potential customers. Persistent
security problems continue to plague public and private data networks. Recent
break-ins reported in the press and otherwise have reached computers connected
to the Internet and have included incidents involving "hackers" who bypassed
protective firewalls by posing as trusted computers and then stole, deleted or
altered information. Alleviating problems caused by computer viruses, break-ins
or other problems caused by third parties may require significant expenditures
of capital and resources by the Company, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
Moreover, until more comprehensive security technologies are developed, the
security and privacy concerns of potential customers may inhibit the growth of
the Internet service industry in general and the Company's potential customers
and revenue in particular. See "Business--Security Measures."
12
DEPENDENCE ON PROPRIETARY TECHNOLOGY, TRADEMARKS AND OTHER INTELLECTUAL
PROPERTY RIGHTS; RISKS OF THIRD PARTY CLAIMS FOR INFRINGEMENT. The Company's
ability to effectively compete will largely depend on its ability to protect its
proprietary technology in general and its SCOOP SMARTGUIDE technology, which is
still under development, in particular. The Company does not presently own any
patents and does not have any patent applications pending. The Company relies on
a combination of trademarks, copyrights, trade secret laws, contractual
restrictions and, in the future, possibly patent laws, to establish and protect
its technology and other intellectual property. There can be no assurance that
the steps taken by the Company will be adequate to prevent misappropriation of
its technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. In addition, there can be no assurance that licenses for any
additional intellectual property that might be required for the Company's
business information service to be or remain competitive will be available on
reasonable terms, if at all. Although the Company does not believe that its
technology and business information service infringe the proprietary rights of
any third parties, and no third parties have asserted patent infringement or
other claims against the Company, there can be no assurance that third parties
will not assert such claims against the Company in the future or that such
claims would not be successful. Patents have recently been granted on
fundamental technologies in the communications and multimedia areas, and patents
may issue which relate to fundamental technologies incorporated in the Company's
SCOOP SMARTGUIDE technology. Because patent applications in the United States
are not publicly disclosed until the patents issue, patent applications may have
been filed which, if issued as patents, could relate to the Company's SCOOP
SMARTGUIDE technology. In addition, participants in the Company's industry also
rely upon trade secret law. The Company could incur substantial costs and
diversion of its management's time and energy with respect to the defense of any
claims relating to proprietary rights which, in turn, could have a material
adverse effect on the Company's business, financial condition and result of
operations. Furthermore, parties making such claims could secure a judgment
awarding substantial damages, as well as injunctive or other equitable relief,
which could effectively block the Company's ability to provide its business
information products in the United States or abroad. Any such judgment could
have a material adverse effect on the Company's business, financial condition or
results of operations.
DEPENDENCE UPON INVESTOR'S BUSINESS DAILY. The Company presently derives
approximately 48% of its annual net sales from the sale of NewsMakers business
information products and services through its relationship with Investor's
Business Daily. If the agreement between the Company and Investor's Business
Daily is terminated or the sales generated through such relationship otherwise
materially decrease, there is no assurance that the Company can replace lost
revenue from NewsMakers, which would have a material adverse effect upon the
Company's business, results of operations and financial condition. See
"Business--Pricing and Customers."
RISK OF THREATENED LITIGATION. The Company has been threatened with the
commencement of a lawsuit in connection with a letter executed in August 1995 by
NewsMakers Information Services, Inc., the Company's former subsidiary, and
Immedia Net ("Immedia Net"), a corporation owned and controlled by Michael F.
Arrigo. The letter outlined the mutual understandings regarding the proposed
establishment of a new corporation which was to be owned 50% by the NewsMakers
subsidiary and 50% by Immedia Net and which was to be organized to take
advantage of new business opportunities. Among other things, the letter
contemplated that the new corporation would be a distributor of content obtained
by the Company through one of its licenses in connection with the provision of
online services. Management believes the letter contemplated the negotiation,
execution and delivery of a definitive final written agreement and other
documents by the parties. The relationship between the NewsMakers subsidiary, on
the one hand, and Immedia Net and Mr. Arrigo, on the other hand, deteriorated
soon after the execution of the letter and no definitive final written agreement
was ever executed. In response to a letter sent by the Company's counsel
formally terminating all further negotiations between the NewsMakers subsidiary
and Immedia Net in early 1996, Immedia Net formally took the position that the
letter between it and NewsMakers was a legally binding contract, that NewsMakers
had breached such contract and that Immedia Net intended to
13
take appropriate legal steps to protect its rights if NewsMakers did not abide
by the alleged contract's terms. Although the Company does not believe that a
legally binding contract existed between the NewsMakers subsidiary and Immedia
Net, there can be no assurance that Immedia Net and Mr. Arrigo will not initiate
litigation against the Company as the successor-in-interest to NewsMakers. Since
February 1996, the Company has not taken any further action with respect to this
matter and the Company is not aware that either Immedia Net or Mr. Arrigo has
taken any further action. If litigation is initiated, there can be no assurance
that the Company would prevail. The costs of defending any legal action as well
as the cost of any judgment that Immedia Net and Mr. Arrigo might obtain against
the Company could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Potential Litigation."
DEPENDENCE ON KEY PERSONNEL. The Company believes that its future success
will depend to a significant extent on the performance and continued service of
its key technical services, product development and senior management personnel.
The loss of the services of one or more of these key employees could have a
material adverse effect on the Company. The Company does not presently have or
intend to carry "key man" insurance, and does not presently have written
employment agreements with any of its key employees. Competition for highly
skilled employees with technical, management, marketing, sales, product
development and other specialized training is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. While the Company's employees are required to sign confidentiality
and nondisclosure agreements, there can be no assurance that employees will not
leave the Company or be in a position to compete against the Company. The
Company's failure to attract additional qualified employees or to retain the
services of key personnel could have a material adversely effect on the
Company's business, operating results and financial condition. See
"Management--Executive Officers, Directors and Key Employees."
INFLUENCE ON THE COMPANY BY LARGEST STOCKHOLDER. Upon the consummation of
this Offering, Mr. Karlsson, the Chairman of the Board, will directly or
beneficially own approximately 30% of the outstanding shares of Common Stock. In
addition, Mr. Karlsson and Mr. Craichy, a director of the Company, are related
by marriage. As a result, Mr. Karlsson will be in a position to materially
influence, if not control, the outcome of all matters requiring stockholder or
board approval, including the election of directors. See "Management" and
"Principal Stockholders." Such influence and control is likely to continue for
the foreseeable future and may significantly diminish the control and influence
which future stockholders may have over the Company.
BROAD DISCRETION IN USE OF PROCEEDS. The net proceeds to the Company from
the sale of the Common Stock offered hereby, after deducting underwriting
discounts and commissions and the estimated expenses of this Offering of
$768,000 (including the Representative's non-accountable expense allowance), are
estimated to be approximately $5,667,200 (assuming an Offering price of $5.50).
The Company estimates that $367,000 (approximately 7%) of such net proceeds will
be allocated to working capital. The Company will have broad discretion in the
use of funds allocated to working capital. The Company may use some portion of
the proceeds of the Offering to make unspecified acquisitions of complementary
companies, products or technologies. See "Use of Proceeds" and "--History of
Operating Losses; Anticipation of Continuing Losses."
RISKS INHERENT IN UNSPECIFIED POTENTIAL ACQUISITIONS. As part of its
business strategy, the Company may make acquisitions of, or significant
investments in, complementary companies, products or technologies, although no
such acquisitions or investments are currently pending. See "Use of Proceeds."
Any such future acquisitions would be accompanied by the risks commonly
encountered in acquisitions of companies, products or technologies. Such risks
include, among other things, the difficulty of assimilating the operations and
personnel of the acquired companies, products or technologies, the potential
disruption of the Company's ongoing business, the inability of management to
maximize the financial and strategic position of the Company through the
successful incorporation of acquired companies, products or
14
technologies into the Company's products, additional expense associated with
amortization of acquired intangible assets, the maintenance of uniform
standards, controls, procedures and policies and the impairment of relationships
with employees and customers as a result of any integration of new management
personnel. See "--Management of Growth; Need to Expand Resources and
Infrastructure." There can be no assurance that the Company would be successful
in overcoming these risks or any other problems encountered in connection with
any such acquisitions of other companies, products or technologies.
ABSENCE OF PUBLIC MARKET. Prior to this Offering, there has been no public
market for the Common Stock. While the Common Stock has been approved for
quotation on The Nasdaq SmallCap Market subject to official notice of issuance,
there can be no assurance that an active and liquid public market for the Common
Stock will develop as a result of this Offering or listing on Nasdaq or, if an
active public market does develop, that it will continue. In the absence of such
a market, investors may be unable to liquidate their investment in the Common
Stock.
ARBITRARY DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY OF STOCK
PRICE. The initial public offering price of the Common Stock will be determined
by negotiation between the Company and the Representative and does not
necessarily bear any relationship to the Company's book value, assets, past
operating results, financial condition or any other established criteria of
value. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. There can be no assurance that
the Common Stock will trade at market prices in excess of the initial public
offering price, as prices for the Common Stock in any public market which may
develop will be determined in the marketplace and may be influenced by many
factors, including the depth and liquidity of the market for the Common Stock,
investor perceptions of the Company, quarter-to-quarter variations in operating
results, changes in earnings estimates by analysts following the Company, if
any, and general factors affecting the Internet industry as well as general
economic, political and market conditions. In addition, stock prices of many
companies in the Internet industry fluctuate widely for reasons which may be
unrelated to operating results. Due to analysts' expectations of continued
growth, if any, and the high price/earnings ratio at which the Common Stock may
trade, any shortfall in expectations could have an immediate and significant
adverse effect on the trading price of the Common Stock.
INEXPERIENCED REPRESENTATIVE. The Representative does not have experience
as an underwriter of securities. The Representative has never acted as the
managing underwriter for a public offering or been a member of the underwriting
syndicate for any public offerings. No assurance can be given that the
Representative will be able to successfully complete the Offering or, if
completed, that an active trading market for the Common Stock will develop. See
"Underwriting."
REPRESENTATIVE'S CONTINUING INVOLVEMENT WITH THE COMPANY. Pursuant to the
terms of the underwriting agreement between the Company and the Underwriters,
the Company may not conduct certain securities transactions or take certain
other actions without the prior approval of the Representative. The Company has
also agreed to sell to the Representative a Warrant to purchase up to 130,000
shares of Common Stock. See "Underwriting." As a result of the restrictions
contained in the underwriting agreement and the Representative's right to
acquire a substantial equity interest in the Company through the exercise of
warrants, subsequent to completion of the Offering, the Representative may be in
a position to influence the operation of the Company's business. To the extent
that the interests of the Representative are adverse to or inconsistent with the
interests of the purchasers of Common Stock in this Offering, purchasers of
Common Stock could be adversely affected.
REPRESENTATIVE'S POTENTIAL INFLUENCE ON THE MARKET. It is anticipated that
a significant number of the shares of Common Stock being offered hereby will be
sold to clients of the Representative. In addition, in connection with the
acquisition of the Selling Security Holders' Shares, each of the Selling
Security Holders has agreed not to sell, pledge, assign or otherwise transfer
any shares of Common Stock during the one-year period following the effective
date of this Prospectus. However, such "lock-up" restrictions may
15
be waived by the Representative in its sole discretion. Any sales permitted by
the Representative may be effected through the Representative, which will be
entitled to receive its customary compensation in connection therewith. Although
the Representative does not have any arrangements or understandings with any
Selling Security Holders regarding the waiver of any such lock-ups or engaging
in any transactions during the Offering or in close proximity to the time of the
Offering, any permitted sales by the Selling Security Holders during such
12-month period could adversely affect the price of and any market for the
Common Stock. Although the Representative has advised the Company that it
currently intends to make a market in the Common Stock following this Offering,
it has no legal obligation, contractual or otherwise, to do so. The
Representative, if it becomes a market maker, could be a significant influence
in the market for the Common Stock, if one develops. The prices and the
liquidity of the Common Stock may be significantly affected by the degree, if
any, of the Representative's participation in such market. There is no assurance
that any market activities of the Representative, if commenced, will be
continued. See "Underwriting."
POSSIBLE ADVERSE EFFECT OF FUTURE SALES OF SECURITIES ON MARKET
PRICE. Sales of substantial amounts of Common Stock in the public market
following this Offering as well as the availability for sale of additional
shares could have a materially adverse effect on the market price of the Common
Stock. Upon the completion of this Offering, 5,052,497 shares of Common Stock
will be outstanding, assuming that the Underwriters' over-allotment option to
purchase 195,000 shares is not exercised and excluding 1,470,167 shares
underlying warrants and options outstanding at December 31, 1996. In addition,
although it has no present intention to do so, in connection with future
financing transactions or acquisitions, the Company could issue additional
Common Stock or preferred stock or other securities convertible into Common
Stock which issuance could have a material adverse effect the market price of
the Common Stock. See "Management--Stock Incentive Plan" and "Description of
Capital Stock."
Of the 5,052,497 shares outstanding upon the completion of this Offering,
the 1,300,000 shares offered by the Company and the 1,205,152 shares offered by
the Selling Security Holders (1,405,152 shares upon exercise of the Consultant
Warrants) will be registered under the Securities Act of 1933, as amended (the
"Securities Act"), by the Registration Statement of which this Prospectus is a
part and will therefore be freely tradeable without further registration
following the expiration or termination of any "lock-up" agreements described
below unless owned by an "affiliate" of the Company. The Company has granted
certain registration rights with respect to the Common Stock underlying the
outstanding warrants and intends to register the resale of the Common Stock
underlying the options granted under the Company's Stock Incentive Plan within
one year of the effective date of this Prospectus. The remaining 2,547,345
outstanding shares of Common Stock will be "restricted securities" as defined in
Rule 144 under the Securities Act and may not be sold unless registered under
the Securities Act or sold pursuant to an exemption therefrom. Approximately
2,472,345 of the outstanding shares of Common Stock will have satisfied the
holding periods under Rule 144 at the completion of this Offering. Of these
2,472,345 shares, approximately 523,000 shares will be freely tradeable without
further restriction under Rule 144. Shares beneficially owned by the Company's
officers and directors (other than 50,000 shares beneficially owned by Mr.
Karlsson) are subject to a "lock-up" agreement whereby such officers and
directors have agreed not to directly or indirectly sell, transfer or encumber
any shares of Common Stock owned by them for a period of one year from the
effective date of this Offering without the prior written consent of the
Representative. In addition, all of the Selling Security Holders' Shares and all
but 21,700 shares owned by Stanley Berk are subject to the same one-year
lock-up, other than 28,302 shares being registered for Stephen Grayson which are
subject to a 90-day lock-up. See "Resale of Outstanding Securities," "Shares
Eligible for Future Sale" and "Underwriting."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. The Company is not currently
subject to direct regulation by any government agency, other than regulations
applicable to business generally, and there are currently few laws or
regulations directly applicable to access to, or commerce on, the Internet.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and
16
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 Telecommunications Reform Act of 1996 (the "1996 Telecommunications Act")
imposes criminal penalties on anyone who distributes obscene, lascivious or
indecent communications on the Internet (although a trial court has recently
declared such provisions unconstitutional). The adoption of the 1996
Telecommunications Act or any other such laws or regulations may decrease the
growth of the Internet, which could in turn decrease the demand for the
Company's products and services and increase the Company's cost of doing
business or otherwise have an adverse effect on the Company's business, results
of operations and financial condition. Moreover, the applicability to the
Internet of existing laws governing issues such as property ownership, libel and
personal privacy is uncertain. See "Business--Government Regulation."
CONFLICT OF INTEREST. The Company has from time to time engaged in
transactions with certain of its officers, directors and other affiliates. The
terms of some of these transactions involve conflicts of interest. The Company
has adopted a policy whereby all future transactions between the Company and its
officers, directors and affiliates will be on terms no less favorable to the
Company than could be obtained from unaffiliated third parties and will be
approved by a majority of the disinterested members of the Company's Board of
Directors. See "Certain Transactions."
LIMITATION ON MONETARY LIABILITY OF OFFICERS AND DIRECTORS. The Company's
Certificate of Incorporation provides that the Directors of the Company shall
not be personally liable to the Company or its stockholders for monetary damages
for breach of their fiduciary duties as Directors, other than for engaging in
certain specifically prohibited conduct. The Company's Certificate of
Incorporation and Bylaws also provide that the Company shall indemnify its
Directors and officers to the fullest extent permitted by law, and the Company
has entered into indemnification agreements with its Directors and executive
officers. See "Management--Indemnification and Limitation of Liability" and
"Description of Capital Stock--Governing Law and Certain Charter and Bylaw
Provisions."
POTENTIAL LIABILITY FOR DISSEMINATION OF INFORMATION. Internet product and
service providers face potential liability of uncertain scope for the actions of
subscribers and others using their systems or databases, including liability for
infringement of intellectual property rights, rights of publicity, defamation,
libel and criminal activity under the laws of the United States and foreign
jurisdictions. Litigation is pending in several states seeking to impose
liability upon Internet product and service providers for information, messages
and other materials disseminated across and through their systems and for direct
or vicarious copyright infringement arising out of electronic information
disseminated through an Internet access service. To the extent that the Company
is in the business of dissemination of information from a variety of sources and
in a variety of languages, the Company could incur liabilities which could have
a material adverse effect on the Company's business, results of operations and
financial condition.
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company's Board of
Directors has the authority to issue up to 5,000,000 shares of Preferred Stock
and to determine the price, rights, preferences, qualifications, limitations and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock could have the effect of delaying or preventing a change of control.
Further, Section 203 of the Delaware General Corporation Law prohibits the
Company from engaging in certain business combinations with interested
stockholders. These provisions and certain provisions of the Company's
Certificate of Incorporation and Bylaws, including those related to the
classification of Board members may have the effect of delaying or preventing a
change in control of the Company without action by the stockholders. Therefore,
such provisions could adversely affect the price of the Common Stock and, to the
extent tender offers for shares of the Company's Common Stock are discouraged or
prevented by these provisions, may reduce the likelihood that investors could
receive a premium for their shares of Common Stock. See "Description of Capital
Stock."
17
MAINTENANCE CRITERIA FOR NASDAQ; RISKS OF LOW-PRICED SECURITIES. The Common
Stock has been approved for quotation on The Nasdaq SmallCap Market, subject to
notice of issuance, commencing upon the effective date of this Offering. To
maintain inclusion on The Nasdaq SmallCap Market, the Company's Common Stock
must continue to be registered under Section 12(g) of the Exchange Act, and the
Company must continue to have (i) net tangible assets of at least $2,000,000 or
net income of at least $500,000 in two of the three previous years or market
capitalization of at least $35,000,000, (ii) a public float of at least 500,000
shares with a market value of at least $1,000,000, (iii) at least 300
stockholders, (iv) a minimum bid price of $1.00 per share and (v) at least two
market makers. While the Company expects that it will initially meet these
maintenance standards, there is no assurance that the Company will be able to
maintain the standards for Nasdaq SmallCap Market inclusion with respect to its
Common Stock. If the Company fails to maintain Nasdaq SmallCap Market listing,
the market value of the Common Stock likely would decline and purchasers in this
Offering likely would find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Common Stock.
If the Common Stock ceases to be included on The Nasdaq SmallCap Market, the
Common Stock could become subject to rules adopted by the Securities and
Exchange Commission (the "Commission") regulating broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on Nasdaq,
provided that current price and volume information with respect to transactions
in such securities is provided). The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document in a form prepared by the
Commission which provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from these rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to these penny stock rules. If the
Common Stock becomes subject to the penny stock rules, investors in this
Offering may be unable to readily sell their Common Stock.
NO DIVIDENDS. It is the current policy of the Company that it will retain
earnings, if any, for expansion of its operations and other corporate purposes
and it will not pay any cash dividends in respect of the Common Stock in the
foreseeable future. See "Dividend Policy."
18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered by
the Company hereby at an assumed initial public offering price of $5.50 per
share are estimated to be approximately $5,667,000 ($6,632,000 if the
Underwriters' over-allotment option is exercised in full), after deducting
underwriting discounts and commissions and the other estimated expenses of the
Offering.
The Company currently intends to use approximately $1.5 million of the net
proceeds of this Offering for sales and marketing expenses related to the launch
of the SCOOP! service including joint marketing programs with potential
distribution partners, approximately $0.7 million to initiate the operations
center to run and administer the SCOOP! service, approximately $1.7 million to
develop the SCOOP SMARTGUIDE technology, approximately $1.0 million to acquire
capital equipment including routing equipment, web servers, and client/server
processors to continue development and administer the SCOOP! service, $0.4
million for repayment of debt, and approximately $0.4 million for working
capital and other general corporate purposes including funding anticipated
operating losses. These uses are summarized in the following table:
APPROXIMATE
APPROXIMATE PERCENTAGE
ANTICIPATED USE OF PROCEEDS DOLLAR AMOUNT OF NET PROCEEDS
- -------------------------------------------------------------- -------------- ---------------
Development of SCOOP SMARTGUIDE technology.................... $ 1,700,000 30%
Sales and marketing expenses.................................. 1,500,000 26%
Acquisition of capital equipment.............................. 1,000,000 18%
Initiation of SCOOP! Operations Center........................ 700,000 12%
Repayment of debt(1).......................................... 400,000 7%
Working capital............................................... 367,000 7%
Total..................................................... $ 5,667,000 100%
- ------------------------
(1) Includes the repayment of principal and interest on a loan made to the
Company by an existing stockholder in February 1997. See "Certain
Transactions."
As part of its business strategy, the Company may also seek to acquire
complementary companies, products or technologies. See "Business--Possible
Acquisitions." In the event the Company makes one or more such acquisitions
after the completion of this Offering, the Company may use a portion of the net
proceeds in connection therewith. The Company is not presently a party to any
understandings, agreements or commitments with respect to any such acquisition.
The foregoing represents the Company's best estimate of its use of the net
proceeds of this Offering based upon its present plans, the state of its
business operations and current conditions in the information services industry.
The Company reserves the right to change the use of the net proceeds if
unanticipated developments in the Company's business, business opportunities, or
changes in economic, regulatory or competitive conditions, make shifts in the
allocations of net proceeds necessary or desirable. Pending any uses, the
Company intends to invest the net proceeds of this Offering primarily in
short-term, interest bearing securities or accounts.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on shares of its
Common Stock. The Company currently anticipates that it will retain all
available funds from earnings, if any, for use in the operation of its business,
and does not intend to pay any cash dividends on its Common Stock in the
foreseeable future. Any future determination relating to dividend policy will be
made at the discretion of Board of Directors of the Company and will depend on a
number of factors, including future earnings, capital requirements, financial
condition, future prospects of the Company and such other factors as the Board
of Directors may deem relevant. In addition, the provisions of future
indebtedness of the Company may prohibit or limit the Company's ability to pay
dividends.
19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 (i) on a pro forma basis to reflect the termination of the
mandatory redemption rights associated with the Redeemable Shares and (ii) as
adjusted to reflect the sale of the 1,300,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $5.50 per share and after
deducting the underwriting discounts and commissions and estimated Offering
expenses payable by the Company.
DECEMBER 31, 1996
--------------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED
------------ -------------- --------------
Short-Term Obligations.............................................. $ 119,300 $ 119,300 $ 119,300
Long-Term Obligations............................................... 139,000 139,000 139,000
Redeemable Shares (1)............................................... 2,302,500 -- --
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value, 5,000,000 shares
authorized, none issued and outstanding......................... -- -- --
Common Stock, $.001 par value, 20,000,000 shares authorized;
2,825,833 shares issued and outstanding, actual; 3,752,497
shares issued and outstanding, pro forma; 5,052,497 shares
issued and outstanding, as adjusted(3).......................... 2,800 3,700 5,000
Additional paid-in capital........................................ 725,600 3,027,200 8,693,100
Accumulated Deficit............................................. . (3,374,100) (3,374,100) (3,374,100)
Deferred Compensation........................................... . 192,200 192,200 192,200
Total stockholders' (deficit) equity............................ (2,453,500) (151,000) 5,516,200
Total capitalization............................................ $ (12,000) $ (12,000) $ 5,655,200
- ------------------------
(1) Under certain circumstances, holders of Redeemable Shares are entitled to a
10% return compounded annually. Any and all such return will be canceled
upon termination of the mandatory redemption rights associated with the
Redeemable Shares upon the completion of the Offering. See Note 5 of Notes
to Financial Statements.
(2) Pro forma stockholders' equity assumes the termination of the mandatory
redemption rights associated with the Redeemable Shares upon the closing of
the Offering. See Note 5 of Notes to Financial Statements.
(3) Excludes 622,500 shares of Common Stock issuable upon the exercise of stock
options outstanding at December 31, 1996 under the Company's Stock Incentive
Plan with a weighted average exercise price of $2.76 per share. See Notes 7
and 10 of Notes to Financial Statements.
20
DILUTION
The pro forma net tangible book value of the Company as of December 31,
1996, was a deficit of approximately ($228,300) or $(0.06) per share of Common
Stock. Pro forma net tangible book value per share represents the amount of the
Company's net tangible assets less total liabilities divided by the number of
shares of Common Stock outstanding after giving effect to the termination of the
mandatory redemption rights associated with the Redeemable Shares upon
completion of the Offering. After giving effect to the sale by the Company of
the 1,300,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $5.50 per share, and after deducting the underwriting
discounts and commissions and estimated Offering expenses payable by the
Company, the Company's pro forma net tangible book value at December 31, 1996
would have been approximately $5,438,900 or $1.08 per share. This represents an
immediate increase in pro forma net tangible book value of $1.14 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $4.42 per share to new investors purchasing shares of Common Stock in
the Offering. The following table illustrates this dilution on a per share
basis:
Assumed initial public offering price......................... $ 5.50
Pro forma net tangible book value at December 31, 1996...... $ (.06)
Increase attributable to new investors...................... 1.14
---------
Pro forma net tangible book value after Offering.............. $ 1.08
---------
Dilution to new investors..................................... $ 4.42
---------
---------
The following table sets forth the number of shares of Common Stock owned by
the existing stockholders of the Company, the number of shares of Common Stock
to be purchased from the Company offered hereby (at an assumed Offering price of
$5.50 per share) and the respective total consideration paid or to be paid to
the Company and the average price per share of Common Stock paid:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE
AMOUNT PERCENT AMOUNT PERCENT SHARE
---------- ----------- ------------- ----------- -----------
Existing stockholders.................................... 3,752,497 74.3% $ 3,030,900 29.8% $ 0.81
New Investors............................................ 1,300,000 25.7% 7,150,000 70.2% 5.50
---------- ----- ------------- -----
---------- ----- ------------- -----
Total.................................................... 5,052,497 100.0% $ 10,180,000 100.0%
---------- ----- ------------- -----
The foregoing computations assume no exercise of stock options outstanding
at December 31, 1996. At December 31, 1996, there were outstanding stock options
to purchase an aggregate of 622,500 shares of Common Stock at a weighted average
price of $2.76 per share. See Notes 7 and 10 of Notes to Financial Statements.
To the extent the aforementioned options are exercised, there will be further
dilution to new investors.
21
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
statements of operations for each of the two years in the period ended December
31, 1996 and with respect to the balance sheet as of December 31, 1996 are
derived from the financial statements of the Company included elsewhere in this
Prospectus that have been audited by Deloitte & Touche, LLP, independent
auditors, which firm's report includes an explanatory paragraph regarding
substantial doubt about the Company's ability to continue as a going concern.
The income statement data for the year ended December 31, 1994 was derived from
the Company's audited financial statements for such year. The selected financial
data set forth below is qualified in its entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto
included elsewhere in this Prospectus.
YEAR ENDED
DECEMBER 31,
--------------------------------
1994 1995 1996
--------- --------- ----------
STATEMENTS OF OPERATIONS:
Net sales(1).................................................................. $ 943,500 $ 968,600 $1,395,900
Cost of sales................................................................. 412,000 534,100 833,200
--------- --------- ----------
Gross profit.............................................................. 531,500 434,500 562,700
Operating Expenses:
Research and development.................................................... 64,300 186,600 601,700
Selling and marketing....................................................... 69,600 175,100 396,500
General and administrative.................................................. 597,600 637,900 1,710,300
--------- --------- ----------
Total Operating expenses................................................ 731,500 999,600 2,708,500
--------- --------- ----------
Operating loss................................................................ (200,000) (565,100) (2,145,800)
--------- --------- ----------
Interest expense.............................................................. 18,600 36,000 21,500
--------- --------- ----------
Loss before provision for income taxes........................................ (218,600) (601,100) (2,167,300)
Provision for income taxes.................................................... 1,600 1,600 1,600
--------- --------- ----------
Net loss...................................................................... $(220,200) $(602,700) $(2,168,900)
--------- --------- ----------
--------- --------- ----------
Net loss applicable to Common Stock(2)........................................ $(2,283,900)
----------
----------
Net loss per share(2)......................................................... $ (.04) $ (.12) $ (.62)
--------- --------- ----------
Weighted average common shares outstanding(2)................................. 5,492,000 4,863,000 3,673,000
DECEMBER 31, 1996
------------------------------------
AS
ACTUAL PRO FORMA ADJUSTED(3)
---------- ----------- -----------
BALANCE SHEET DATA:
Cash and cash equivalents................................................... $ 262,400 $ 262,400 $5,929,600
Working capital............................................................. (402,600) (402,600) 5,264,600
Total assets................................................................ 971,800 971,800 6,639,000
Current liabilities......................................................... 983,800 983,800 983,800
Long term obligations....................................................... 139,000 139,000 139,000
Redeemable Shares(4)........................................................ 2,302,500 -- --
Stockholders' (deficit) equity(4)........................................... (2,453,500) (151,000) 5,516,200
- ------------------------------
(1) The Company currently derives all of its net sales from its NewsMakers
product line. To date, no revenue has been derived from the Company's SCOOP!
service. See "Risk Factors--Lack of Operating History; Unproven Business
Strategy", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 1 of Notes to Financial Statements.
(2) See Note 1 of Notes to Financial Statements for information concerning the
calculation of net loss applicable to common stock and net loss per share.
(3) Adjusted to give effect to (i) the sale of 1,300,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $5.50 per
share, and the application of the net proceeds therefrom as described under
"Use of Proceeds" and (ii) the termination of the mandatory redemption
rights associated with the Redeemable Shares upon the closing of the
Offering. See Note 5 to Notes to Financial Statements.
(4) Pro forma stockholders' equity assumes the termination of the mandatory
redemption rights associated with the Redeemable Shares upon the closing of
the Offering. See Notes 1 and 5 of Notes to Financial Statements.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND
RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Since the Company began operations in May 1990, it has provided publishing
services while also developing its SCOOP! information service business. The
Company's NewsMakers publishing services business provides printed media
reproductions in hard copy format such as customized reprints, wall displays and
desk displays of newspaper and magazine articles. The Company is in the process
of expanding its information management business with the development of the
SCOOP! information service which will be available over the Internet.
The NewsMakers business information product line has generated substantially
all of the Company's net sales to date. The categories of printed media
reproductions marketed by NewsMakers include article reprints, wall displays and
desk displays. In 1995, the Company focused its sales efforts on the growth of
the reprint business. While reprint margins are lower, due to royalty fees, the
Company believes the overall market for reprints to be substantially larger than
the market for wall displays products. In line with this focus, the Company
entered into a contract with Investors Business Daily ("IBD") to be IBD's
exclusive provider of article reprints and recently entered into a contract to
be the exclusive provider of reprints for The Motley Fool Internet publication.
The Company intends to attempt to further increase the sales of NewsMakers media
reprints through the addition of new contractual relationships.
The Company initiated development of the SCOOP SMARTGUIDE technology in
early 1994. These efforts were principally financed through contributions by the
NewsMakers business in 1994 and 1995. In the first half of 1996, the Company
completed various rounds of private funding. The private placements completed in
April through July 1996 netted the Company approximately $2.5 million and
enabled the Company to accelerate its pace of investment in the SCOOP!
information service business. Since 1994, the Company has invested approximately
$920,000 in the development of the SCOOP SMARTGUIDE technology, including
expenditures in development expenses, capital equipment, and content
acquisition. There can be no assurances that the Company will be successful in
its efforts to develop its SCOOP SMARTGUIDE technology. See "Risk Factors--Lack
of Operating History; Unproven Business Strategy."
The Company intends to complete product development and launch an electronic
mail version of the SCOOP! information service in the second quarter of 1997 and
launch the Internet version of SCOOP! in the fall of 1997.
The Company intends to market SCOOP! through distribution partners with
existing Internet services. The Company believes this distribution strategy will
enable a broad market penetration while minimizing customer acquisition costs.
Although the Company has had discussions with several potential strategic
distribution partners, the Company has not yet entered into any definitive
agreements relating to the establishment of any strategic distribution
relationship and no assurance can be given that the Company will be able to
attract any such prospective strategic distribution partners. See "Risk
Factors--Dependence on Potential Strategic Distribution Partners."
23
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of net sales for the fiscal years ended December 31, 1994,
1995 and 1996.
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
Net sales................................................................... 100.0% 100.0% 100.0%
Cost of sales............................................................... 43.7% 55.1% 59.7%
----------- ----------- -----------
Gross profit............................................................ 56.3% 44.9% 40.3%
Operating expenses:
Research and development.................................................. 6.8% 19.3% 43.1%
Selling and marketing..................................................... 7.4% 18.1% 28.4%
General and administrative................................................ 63.3% 65.8% 122.5%
----------- ----------- -----------
Total Operating Expenses.............................................. 77.5% 103.2% 194.0%
----------- ----------- -----------
Operating Loss.............................................................. (21.2)% (58.3)% (153.7)%
----------- ----------- -----------
Interest Expense............................................................ 2.0% 3.7% 1.4%
----------- ----------- -----------
Loss Before Provision For Income Taxes...................................... (23.2)% (62.0)% (155.3)%
Provision For Income Taxes.................................................. 0.2% 0.2% 0.1%
----------- ----------- -----------
Net Loss.................................................................... (23.4)% (62.2)% (155.4)%
----------- ----------- -----------
----------- ----------- -----------
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales increased 44.1% in the year ended December 31, 1996 to
$1,395,900 from $968,600 in the comparable period in 1995. The growth in net
sales was driven by focused efforts to expand the sale of NewsMakers reprints.
Gross profit margins decreased due to higher royalty fees associated with
reprints and increases in production costs for the FAMEFRAME wall display
products. While reprints generally incur a higher royalty fee, decreasing gross
margins, the Company believes there is a larger market for reprints with a
higher growth potential than the Company's other reproduction products. It is
also believed that the reprint business will effectively compliment the SCOOP!
information service.
Net sales of reprints increased 64.5% in 1996 to $931,300 from $566,200 in
1995. Key to this growth in reprints was the establishment of a relationship
with Investors Business Daily ("IBD") in August 1995 to be the exclusive
provider of IBD content reprints. In January 1997, the Company contracted with
The Motley Fool, an Internet based investment publication, to be the exclusive
provider of content reprints. Also in 1997, the Company has expanded its
relationship with UMI to provide reprint services for the published content
licensed by the Company for use in its SCOOP! service.
Net sales of FAMEFRAME wall displays decreased 9.2% in 1996 to $366,800 from
$403,900 in 1995 as the Company focused its sales efforts largely on reprints.
The FAMEFRAME product line is not viewed by the Company as synergistic with its
progression as an information services company. Due to this view and its low
gross profit contribution, the Company has decided to evaluate options for
selling or discontinuing the FAMEFRAME product line in 1997.
No sales deriving from SCOOP! are expected to occur until after the
anticipated commercial launch of the electronic mail service in the second
quarter of 1997 and of the Internet based service in the fall of 1997. Once
launched, sales for SCOOP! are expected to be booked principally on a per
transaction basis as information is accessed by users.
COST OF SALES. Cost of sales increased 56.0% in 1996 to $833,200 from
$534,100 in 1995. The increase in cost of sales and the related decline in
overall margins was primarily driven by higher royalty fees
24
associated with the growth of reprint sales, and declines in FAMEFRAME margins
as a result of higher production costs. Overall, gross profits from the sale of
NewsMakers' products increased by $128,200 in 1996 as compared to 1995.
Cost of sales consists primarily of the external production costs,
subscriptions, shipping and various usage, permission, and royalty fees arising
from the reproduction of electronic and printed content for the NewsMakers
products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D")
expenses increased 222.5% in 1996 to $601,700 from $186,600 in 1995. Increases
in R&D expense were primarily driven by additional development team staffing,
increased utilization of third party design services, and increases in the cost
of content acquisition all related to the SCOOP SMARTGUIDE technology.
R&D expenses in 1996 and 1995 included the cost of content acquisition from
Information Access Company and UMI for the purpose of developing the SCOOP
SMARTGUIDE technology. Expenses for content acquisition in 1996 were $269,800
versus $150,000 in 1995. In October 1996, the Company signed a content agreement
with UMI. See "Business--UMI Relationship." Costs for UMI content will be
incurred as R&D expense up to the initiation of the SCOOP! service at which
point they will be included as part of costs of sales. The 1997 contractual
minimums with UMI are approximately $296,000.
To date all R&D expenses relate to the development of the SCOOP SMARTGUIDE
technology and have been expensed as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
126.4% in 1996 to $396,500 from $175,100 in 1995 as new sales and sales support
staff were added in late 1995 and 1996 in an effort to capitalize on new
publisher relationships and generate sales growth.
Expenses for SCOOP! sales and marketing, initiated in the fourth quarter of
1996, will increase in 1997 as the Company prepares for the launch of the SCOOP!
information service.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
("G&A") expenses increased 168.1% in 1996 to $1,710,300 from $637,900 in 1995.
The increase in G&A was primarily attributable to compensation expense for which
the Company used warrants and Common Stock as consideration for services
performed, increases in legal and accounting fees, and additional salary
expenses resulting from the expansion of the management team in 1996.
Compensation expense in 1996 resulting from the Company's use of warrants
and Common Stock as consideration for services performed totalled approximately
$324,000. Professional fees for accounting, legal, and other consulting services
in 1996 totalled approximately $416,000. In addition, G&A expenses consist of
all office service expenses, as well as salary and other expenses for internal
G&A functional departments.
INTEREST EXPENSE. Interest expense decreased 40.3% in 1996 to $21,500 from
$36,000 in 1995. Interest earnings from the proceeds of the Company's private
placements during 1996, offset increases in interest expense resulting from
financing of additional capital equipment used in the SCOOP SMARTGUIDE
technology development.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SALES. Net sales increased 2.7% in 1995 to $968,600 from $943,500 in
1994. Substantially all sales were generated from the sale of reprints and
permanent displays of published information. Increases in the sale of reprints
were offset in 1995 by small declines in the sale of permanent wall displays.
The IBD exclusive reprint relationship, initiated in the third quarter of 1995,
helped to drive the increase in reprint sales.
25
COST OF SALES. Cost of sales increased 29.6% in 1995 to $534,100 from
$412,000 in 1994. This increase in cost of sales was driven by higher supplier
production costs for both reprints and permanent displays of $47,300. In
addition, subscription fees increased by approximately $56,400 in 1995 as
compared to 1994. Overall gross margins decreased to 44.9% in 1995 from 56.3% in
1994 as a result of the increase in supplier production costs and subscriptions
and the 2.7% increase in sales.
RESEARCH AND DEVELOPMENT EXPENSES. R&D expenses increased 190.2% in 1995 to
$186,600 from $64,300 in 1994. The increase was entirely driven by the Company's
efforts to develop its SCOOP SMARTGUIDE technology.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
151.6% in 1995 to $175,100 from $69,600 in 1994 as the Company added sales staff
in late 1995. The Company also increased its marketing and promotional efforts
in 1995 as part of its push for sales growth. Expenses in 1995 also increased as
a result of bad debt write-offs in 1995 totalling $41,200.
GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses increased 6.7% in 1995 to
$637,900 from $597,600 in 1994. The increase was primarily due to increases in
legal and accounting administration costs and general business operating
expenses.
INTEREST EXPENSE. Interest expense increased 93.5% in 1995 to $36,000 from
$18,600 in 1994 as the Company increased borrowings to fund its software
development efforts.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through private
sales of Common Stock totalling approximately $2.5 million. At December 31,
1996, the Company had approximately $262,400 in cash and cash equivalents.
Subsequent to December 31, 1996, the Company continued to experience additional
operating losses and, as a result, the Company had approximately $82,500 in cash
and cash equivalents at January 31, 1997.
In 1995 and 1996, the Company used $303,400 and $1,656,200, respectively, in
operating cash flows primarily to fund the SCOOP SMARTGUIDE technology
development activities and additional expenses including the expansion of the
management team in 1996. The Company will incur minimum royalty payments under
its content agreement with UMI of approximately $296,000 in 1997 and $570,000 in
1998.
The Company has also used equipment leases and debt instruments to finance
the majority of its purchases of capital equipment, and at December 31, 1996 had
obligations of approximately $177,700 incurred in connection with these
purchases. Capital requirements for 1997 are currently expected to be
approximately $1,000,000, primarily consisting of computer equipment required to
support development of the SCOOP SMARTGUIDE technology and to run the SCOOP!
information service.
In February 1997, the Company obtained three short-term loans aggregating
$300,000 and bearing interest at 9.75% per annum. Two of the loans aggregating
$150,000 are payable on the earlier of March 31, 1997 or one day after the
closing of the Offering. The third loan for the remaining $150,000 is payable on
April 30, 1997. All three short-term loans may be prepaid without penalty, are
unsecured and will be repaid from the proceeds of the Offering. See "Certain
Transactions."
In February 1997, the Company also established a $150,000 revolving secured
credit line with a commitment term expiring on August 15, 1997. Borrowings under
the line will bear interest at 9.5% per annum and will be due on November 13,
1997. The line is secured by the Company's accounts receivable and may be
prepaid without penalty. The Company anticipates that any borrowings under the
line made prior to the Offering will be repaid from the net proceeds of the
Offering.
The Company's ability to continue as a going concern is dependent upon
future events, including the successful development and market acceptance of its
SCOOP! service and its ability to secure additional sources of financing. These
factors raise substantial doubt about its ability to continue as a going
concern.
26
The Company believes that the net proceeds from the Offering and its existing
cash and cash equivalents will be adequate to meet its capital needs for at
least the next nine months. The Company's current operating plan shows that at
the end of such nine-month period, the Company will require substantial
additional capital. Moreover, if the Company experiences unanticipated cash
requirements during the nine-month period or experiences delays in the
development and marketing of its SCOOP! business information service, the
Company could require additional capital to fund its operations, continue
research and development programs, and commercialize any products that may be
developed. There can be no assurance that additional financing will be available
at all or that, if available, such financing will be obtainable on terms
favorable to the Company and would not be dilutive. See "Risk Factors--Ability
to Continue as Going Concern," "--History of Operating Losses; Anticipation of
Continuing Losses," and "--Possible need for Future Financing; Risk of Future
Dilution."
27
BUSINESS
INTRODUCTION
The Company is in the process of developing SCOOP!, an Internet-delivered
business information service designed to enable customers to efficiently satisfy
their daily information needs. SCOOP! customers will have access to an extensive
array of well-recognized news and information sources which the Company licenses
from UMI, a wholly-owned subsidiary of Bell & Howell and one of the world's
leading aggregators of articles from newspapers, periodicals and other
information sources. The Company believes that SCOOP! also will provide
customers with a combination of information delivery capabilities for accessing
relevant information from the Internet's World Wide Web (the "Web"). SCOOP! is
designed to provide users with three distinct information tools: (i) a
personalized electronic newspaper feature which provides current information
tailored to the individual user's preferences (the "Alert" service), (ii)
research tools for efficient retrieval of information from the Company's
licensed content databases and (iii) navigation tools for accessing information
available on the Internet's Web. The Company believes that through SCOOP! it
will be able to capitalize on the increasing use of Web "push" technologies that
independently seek out and deliver information to customers based on a profile
of their information needs rather than waiting for customers to request
information.
The Company plans to introduce and proliferate SCOOP! as a branded service
to corporate, professional, SOHO and other users primarily through alliances
with large, well-established providers of Internet services with existing
customer bases. The Company also intends to launch the SCOOP! service in a
variety of channels customized for users within a specific market or industry.
The Company intends to initially launch an electronic mail version of the
SCOOP! information service in the second quarter of 1997. The Company currently
plans to launch the Internet version of SCOOP! in the fall of 1997. Following
commercial launch, the Company expects to generate revenue from SCOOP! primarily
through transaction-based fees, such as fees charged for retrieval of full-text
versions of articles. The Company believes its transaction-based pricing
structure will encourage corporate decision makers and other professionals to
use the SCOOP! service because customers will be charged only for the
information that they select to satisfy their needs. The Company may also
generate revenue in the future by selling advertising targeted to reach
customers based on their individualized search profiles. No assurance can be
given that the Company will be successful in completing development of SCOOP!,
in operating the SCOOP! service or in generating revenue from SCOOP!. Any
significant failure by the Company in developing or marketing SCOOP! in a timely
manner or in operating the SCOOP! service will have a material adverse affect on
the Company's business, results of operations and financial condition. See "Risk
Factors--Lack of Operating History; Unproven Business Strategy," "--Failure to
Develop Service or Obtain Market Acceptance," "--History of Operating Losses;
Anticipation of Continuing Losses" and "-- Ability to Continue as a Going
Concern."
As the Company pursues the development and marketing of its SCOOP! business
information service, it also intends to continue to expand and generate sales
from its NewsMakers business information product line. The NewsMakers product
line promotes the reproduction, re-use and re-sale of articles from newspapers,
magazines and on-line publications. NewsMakers products include customized media
reprints, FAMEFRAME wall displays and lucite NEWSCUBE desk displays of published
articles. In the same way that the Company intends to use SCOOP! to add value to
the content licensed from UMI, NewsMakers adds value to content obtained through
the Company's relationships with various content suppliers. NewsMakers has been
the exclusive provider of reproduction and reprint services for IBD since August
1995 and recently entered into an exclusive agreement to provide the same
services for The Motley Fool, an Internet-based investment-oriented publication.
The Company's license agreement with UMI enables NewsMakers to utilize UMI's
content for media reprints and other NewsMakers products. NewsMakers products
generated net sales of approximately $968,900 during 1995 and $1,395,900 during
1996, a 44.1% increase. Currently, the Company derives all of its sales of
business information products from its NewsMakers department. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
28
INDUSTRY OVERVIEW
The Internet is a global collection of computer networks which link public
and private computers throughout the world. The Internet was created beginning
in the late 1960s when the Department of Defense needed a distributed network
system to connect government research computers throughout the country. Over
time, academic institutions started connecting to the network. Until
approximately five years ago, the Internet was primarily used by these
government agencies and academic institutions to exchange information and
transmit and receive electronic mail, or e-mail, messages. The recent
proliferation of communications-enabled PCs, the development of computer
software systems which have extremely sophisticated graphics and which are
increasingly intuitive, the emergence of a healthy network infrastructure and
other factors have resulted in rapidly-declining costs of accessing information
on the Internet which has fueled the Internet's growth. The Internet's growth
has facilitated the emergence of the Web, a client/server system of hyperlinked,
multimedia databases which allows non-technical PC users to access information
on the Internet and enables providers to supply textual, graphical and other
information directly to PC users. PC users can easily access information on the
Web using client software commonly referred to as Web "browsers" such as
Netscape's Navigator and Microsoft's Internet Explorer.
Morgan Stanley's "The Internet Report" (December 1995) (the "Morgan Stanley
Report") estimated that there were approximately 150 million PC users throughout
the world at the end of 1995, of which only 35 million were e-mail users, only
10 million were Internet/Web users and only 8 million were users of online
services such as America Online, CompuServe and Prodigy. The Morgan Stanley
Report further estimated that there will be more than 250 million worldwide PC
users by the year 2000 and that approximately 200 million of such PC users will
utilize e-mail, as many as 170 million of such PC users will utilize the
Internet and the Web and about 30 million of such PC users will subscribe to
online services.
Hambrecht & Quist's "Internet Report" (September 1995) predicted that a wide
variety of products and services will eventually be delivered by means of the
Internet. In its report, Hambrecht & Quist estimated that the information
content delivery segment of the Internet industry alone will grow from
approximately $50 million per annum in 1995 to approximately $10 billion per
annum by the year 2000.
The Morgan Stanley Report estimated that the number of Internet users
doubled each year between 1990 and 1995, and predicted that this growth rate
would continue through the next decade. The Company believes this trend provides
it with an excellent opportunity to market its business information service to a
large and growing number of potential corporate, professional, SOHO and other
users within the next several years if the Company succeeds in implementing its
marketing and sales strategy of selling its business information service through
alliances with large strategic partners.
The Company also believes that PC users will find its products easy to use
and will allow them to move almost instantly from their daily customized Alert
report to other sources of business information on companies and news items of
interest including information contained in the Company's licensed content
database, in the home pages maintained by other companies on the Web, and from
other Internet sources.
THE COMPANY'S HISTORY
The Company commenced business operations in May 1990. The Company's
original business focused on the sale of NewsMaker media products promoting the
re-use or re-sale of articles published in business or financially-oriented
newspapers, trade and consumer magazines and other periodicals. The Company's
NewsMakers products currently include customized media reprints of published
articles, FAMEFRAME wall hangings depicting articles or cover pages from
publications, and NEWSCUBES containing miniaturizations of articles or issues
enclosed in solid plastic cubes.
In late 1993, the Company formed NewsMakers Information Services, Inc. which
introduced the Company's next generation of business information products. This
portion of the Company's business originally involved the distribution of
business information electronically to customers by means of direct
29
broadcast facsimile and a private electronic mail, or e-mail, system. The
Company's first such product, MEDIAALERT, was introduced in late 1993. The
Company introduced a second product, HEALTHALERT, in mid-1994. HEALTHALERT was
primarily focused on medical device manufacturers and the pharmaceutical
industry.
The Company soon realized that its direct broadcast facsimile and private
e-mail delivery systems inevitably led to "information overload" on the part of
its customers and, as a result, ceased providing such earlier generation
business information products and commenced the development of the critical
components of what is now known as the SCOOP SMARTGUIDE technology. The Company
has spent approximately $920,000 since 1994 in developing its SCOOP SMARTGUIDE
software technology. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
Upon completion of the development of its SCOOP SMARTGUIDE technology, the
Company believes it will be capable of reaching its targeted market consisting
of corporate, professional, SOHO and other users of business information with
its Internet and Web-based business information services. The Company further
believes that it will have the potential to introduce other business information
products utilizing the "SCOOP!" name in a variety of vertical markets, such as
the medical, accounting and human resources markets, by customizing information
services for professionals in such markets.
PRODUCTS AND SERVICES
SCOOP! SERVICE. Through SCOOP! the Company will offer customers access to
content from a broad range of worldwide news and information sources, including
well-recognized publications such as THE WASHINGTON POST, FORBES, WIRED and THE
NEW ENGLAND JOURNAL OF MEDICINE. The Company anticipates that over 3,000
worldwide news and information sources will be available through SCOOP!,
including national and regional domestic newspapers, international newspapers,
magazines, financial journals, industry journals, trade publications, general
business publications and newswires and press release services. A selection of
current news and other information will be made available through SCOOP! from
UMI's information database which includes approximately 11 million proprietary
abstracts and rights to full-text and full image content from over 7,000
newspapers, 18,000 periodicals and 1.2 million dissertations and other
materials. The Company expects that a substantial portion of its news sources
(E.G., newswires) will be continuously updated, enabling SCOOP! users to obtain
current information on a timely basis through customized Alert reports. SCOOP!
will also enable customers to obtain specific information concerning various
public and private companies of interest through company intelligence profiles.
In addition, SCOOP! users will be able to hyperlink directly to home pages
maintained by companies mentioned in abstracts and full-text versions of
articles by simply "clicking" on the company name.
The Company intends to complete product development and initially launch an
electronic mail version of the SCOOP! information service in the second quarter
of 1997. The Company currently plans to launch the Internet version of SCOOP! in
the fall of 1997. Scoop! is expected to begin contributing revenue to the
Company shortly after the launch.
SCOOP SMARTGUIDE TECHNOLOGY. The Company's proprietary SCOOP SMARTGUIDE
technology, which is presently being developed, will be the foundation for the
SCOOP! business information service. The SCOOP SMARTGUIDE technology will enable
customers to structure profiles to track industry developments or obtain
information pertaining to companies, products or other topics of interest to the
customers. Based on customer-defined profiles, the SCOOP SMARTGUIDE technology
will present customers with customized Alert reports comprised of brief
abstracts sorted in order of relevancy. The SCOOP SMARTGUIDE technology
30
encompasses Scoop's HEURISTIC PROFILING SYSTEM ("SCOOP HPS") and CONTENT
DISTRIBUTION SYSTEM ("SCOOP CDS") technologies. SCOOP HPS will determine the
relevancy of articles to each customer based on defined key terms and indices
using a context vectoring system, the customer's defined profile, the customer's
article selection history, and the article selection history of the customer's
professional communities. SCOOP CDS will be designed to deliver selected
articles to customers via the delivery medium of their choice such as message
pagers, facsimiles, personal data assistants ("PDAs") and personal communication
systems ("PCSs"). Customers will be able to structure profiles to track industry
developments or obtain information pertaining to companies, products or other
topics of interest to the customer. SCOOP CDS will enable customers to view
lists of articles sorted in order of relevancy, skim through abstracts of the
articles, and retrieve full-text versions of articles for immediate review or
storage on their computers for later review. The SCOOP SMARTGUIDE technology is
designed to enable customers to perform additional research on companies or
subjects of interest by searching deeper in content and corporate intelligence
databases. In addition, the SCOOP SMARTGUIDE technology is designed to enhance
customers' ability to quickly access relevant information which is publicly
available on the Web by enabling customers to hyperlink from the Company's
licensed content databases to specific information sources, such as company home
pages, on the Web. The Company believes that the Alert, research and Web
navigation features of the SCOOP SMARTGUIDE technology comprise a combination of
services and tools which will enable customers to quickly and efficiently meet
their information needs.
NEWSMAKERS MEDIA. The Company also markets printed media reproductions
(article reprints and desk and wall displays) that are customized by the
Company's in-house layout department and printed and/ or manufactured by outside
contractors. NewsMakers media has been the exclusive provider of reproduction
and reprint services for IBD since August 1995 and recently entered into an
exclusive agreement to provide the same services for The Motley Fool, an
Internet-based investment-oriented publication. The Company has also expanded
its content reselling agreement with UMI to allow the Company to market media
reprints from published content received from UMI.
The Company believes that its NewsMakers media reprints product line will be
complementary to its Internet and Web-based business information services. Net
sales of media reprints increased 64.5% in 1996 to $931,300 from $566,200 in
1995.
Net sales of NewsMakers FAMEFRAME wall displays decreased 9.2% for 1996 to
$366,800 from $403,900 in 1995. Unlike media reprints, the Company does not
believe FAMEFRAME to complement the SCOOP! information services. FAMEFRAME
profit contributions have also decreased over the past two years as production
costs have increased. The Company is evaluating options for selling or
discontinuing the FAMEFRAME product line in early 1997.
UMI RELATIONSHIP
LICENSE AGREEMENT. The Company initially will derive all of its content for
SCOOP! from its license agreement with UMI. See "Risk Factors--Dependence on UMI
Content." The UMI license agreement has an initial term of three years expiring
in October 1999, and provides for automatic one year renewals unless notice of
termination is provided before the end of the term or any extensions thereafter.
The Company has the right under the license agreement to resell through SCOOP!
the vast majority of the "current" content (i.e., content less than six months
old) which is available for electronic distribution through UMI and its
subsidiaries, including DataTimes which primarily provides current news and
business information. The Company will pay UMI royalties based on transaction
fees, subscription fees and distribution partner fees received by the Company.
Royalties will be paid at a flat rate for full text versions of articles
purchased by users. Step reductions in the flat rate will become effective if
the Company achieves certain cumulative volumes of full text sales. The Company
will pay fixed percentage royalties on fees generated from sales of summaries of
articles, subscriptions and distribution partners. The license agreement
requires the Company to make guaranteed minimum annual royalty payments of
approximately
31
$20,000 in 1996, $296,000 in 1997, $570,000 in 1998 and $652,500 in 1999. The
Company also has limited exclusive third-party reselling rights with respect to
the distribution of certain UMI content via specified alert-based Internet
delivery systems provided that the Company makes certain minimum annual royalty
payments to UMI of at least $200,000 in year one of the contract, $400,000 in
year two, and $600,000 in year three. Cross-selling arrangements between UMI and
the Company will enable SCOOP! users to access additional information from UMI's
extensive database by hyperlinking from SCOOP! to UMI's ProQuest-TM- Direct Web
service and other UMI premium research services. The Company will receive
referral royalties from UMI in the event SCOOP! users subscribe to and utilize
the UMI services.
ENHANCING RELATIONSHIP. The Company views UMI as an established leader in
the information services industry and intends to explore additional areas for
enhancing its strategic relationship with UMI, including technology sharing,
joint product development, additional co-marketing efforts and overall business
efficiencies. In connection with entering into the UMI license agreement, the
Company issued Bell & Howell, UMI's parent, a three-year warrant to acquire a
significant interest in the Company. Under the warrant, Bell & Howell has the
right to purchase 550,000 shares of Common Stock at any time through October
1999 at prices ranging from $6.50 to $15.00 per share. In the event Bell &
Howell exercises its warrant for at least 300,000 shares by September 15, 1997,
Bell & Howell can either (i) purchase up to an additional 200,000 shares at
$6.50 per share by September 15, 1997, or (ii) purchase up to an additional
50,000 shares at $10.00 per share, and 100,000 shares at $15.00 per share by
October 31, 1999. If Bell & Howell fully exercises its warrant, it will own
approximately 9.8% of the Common Stock of the Company based on the number of
shares expected to be outstanding upon consummation of the Offering. See
"Principal Stockholders" and "Description of Capital Stock--Warrants."
SALES AND MARKETING STRATEGY
The Company expects that a version of SCOOP! will initially be delivered to
customers via electronic mail starting in the second quarter of 1997. The
Company currently plans to launch the Internet version of SCOOP! in the fall of
1997. The Company will then seek to deliver its service via additional delivery
mediums such as cable, telephone, PDAs, PCSs and pagers. The Company's principal
marketing strategy is to proliferate SCOOP! as a "branded" service across
numerous information mediums by distributing SCOOP! primarily through alliances
with large, well-established strategic distribution partners with existing
customer bases. The Company intends to market SCOOP! and obtain customers by
accessing and attracting users from the existing customer bases of distribution
partners. The Company also believes that its partner distribution strategy will
provide the Company with a cost effective marketing alternative to the more
capital intensive marketing programs aimed at individual users. Although the
Company has initiated discussions with several prospective distribution
partners, to date there are no agreements between the Company and any such
parties. No assurances can be given that the Company will be successful in
entering into any such agreements or implementing its distribution strategy or
that the Company will be successful in its efforts to attract and retain
customers of its distribution partners. See "Risk Factors--Dependence on
Potential Strategic Distribution Partners."
The Company believes that the success of its Internet and Web-based business
information services may also result in additional publications seeking to
become future content providers for NewsMakers' media reprint products.
PRICING AND CUSTOMERS
The Company presently has not launched SCOOP! and has no paying customers
for its Internet and Web-based business information service. However, the
Company will attempt to contract with a number of strategic partners to jointly
market the Company's business information service or bundle it with the
strategic partners' own services for sale to large numbers of customers and
potential customers. The Company expects its primary source of revenue from the
SCOOP! service will be from transaction fees
32
generated by the distribution of abstracts, company intelligence profiles and
full-text articles. The Company believes that the importance of advertising
revenues will increase as its customer base grows.
The Company believes one of SCOOP!'S competitive advantages will be that
customers will not be charged for using the service until they locate and
retrieve information they deem relevant. SCOOP! generally will provide the
personalized Alert service for free. Users will not be charged until they
retrieve full-text articles, company intelligence, and other research
information. The Company anticipates marketing full-text articles for under
$3.00 per article while intelligence and research information will be
competitively priced based on the particular reports selected. The Company
believes that SCOOP! users will generally be able to satisfy their information
needs for a cost lower than many of the competitive services offered on a
subscription basis.
The Company's content providers for its NewsMakers media reprint products
include approximately five content providers for which the Company acts as
exclusive outsourcing agent, and a number of content providers for which the
Company acts as agent on a project-by-project basis. One such exclusive content
provider, IBD, presently accounts for approximately 48% of the Company's annual
revenue. The Company anticipates adding additional new publications to its list
of exclusive customers for its publishing products and services, although there
can be no assurance that such additional customers will be added.
COMPETITION
The market for business information services, including Internet information
products and services, is intensely competitive and rapidly changing.
Participants in this market range from extremely large and well-capitalized
companies to smaller competitors as there are no substantial barriers to entry
into such market. The Company's direct competitors for its Internet and
Web-based business information service will include Individual, Inc., DeskTop
Data, and M.A.I.D. Plc. The Company may also compete, directly or indirectly,
for customers and/or information content sources with the following categories
of companies: (i) connectivity providers of telephone, cable, wireless and/or
other means of accessing the Internet, (ii) large, well-established news and
other information providers, such as Dow Jones & Company, Inc., Knight-Ridder,
Inc. ("Knight-Ridder"), Pearson Plc, Reed Elsevier Plc. ("Lexis/Nexis"), Reuters
America, Inc., and Thompson Financial Networks, Inc., (iii) traditional print
media companies that are increasingly searching for opportunities for providing
news online, including through the establishment of Web sites on the Internet,
(iv) providers of network-based software systems such as Lotus Development
Corporation and Microsoft Corporation, which have allied, or may in the future
ally, with competing news and other information providers, (v) third party
providers of software which allows PC users to aggregate and filter a variety of
news feeds, (vi) consumer online services such as America Online, GEnie
CompuServe and Prodigy, (vii) Internet-based news distributors such as ClariNet
Communications Corp., Marimba Inc.'s Castanet and the PointCast Network, (viii)
search engine providers such as Digital Equipment's Alta Vista Corporation,
Excite, Inc., Infoseek Corporation, Lycos, Inc., Verity, Inc. and Yahoo!, Inc.,
and (ix) companies that offer space for advertising on the Web, including
content Web sites.
Substantially all of the Company's potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources and greater name recognition than the Company. Many of these
competitors are already well established in the Internet marketplace and
therefore have a significant competitive advantage. In addition, these
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, and to devote greater resources to the
development, promotion and sale of their information services and products than
the Company. There can be no assurance that the Company's potential competitors
will not develop products and services comparable or superior to those developed
by the Company or adapt more quickly than the Company to new technologies,
evolving industry trends or changing customer requirements.
Some of the Company's potential competitors own all or a substantial part of
the information content in their databases. The Company does not own any of its
content and therefore must license content from
33
providers at substantial cost. Competitors who own their own information have no
license fee obligation on their own information, and may limit or preclude
access by the Company to their information, which gives such competitors a
pricing or other competitive advantage over the Company.
The Company believes that the overall cost to the consumer of retrieving
useful information through an online service is an important competitive factor.
This cost includes such elements as subscription fees, usage fees, online
charges and other items. The Company could be required to reduce its anticipated
subscription or transaction fees or otherwise alter its anticipated pricing
structure in response to competitive pressures.
Increased competition on the basis of price, depth and breadth of services
and data sources or other factors could result in price reductions, reduced
margins or loss of market share, any of which would materially and adversely
affect the Company's future business, results of operations or financial
condition. There can be no assurance that the Company will be able to compete
successfully against its competitors, or that competitive pressures faced by the
Company will not have a material adverse effect on its business, results of
operations and financial condition. If the Company is unable to compete
successfully against its competitors, the Company's business, results of
operations and financial condition will be materially adversely affected.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company regards its SCOOP SMARTGUIDE technology and its other
copyrights, trademarks, trade secrets and intellectual property as critical to
its success, and the Company has relied, and intends to continue to rely, upon
trademark and copyright law and trade secret protection. The Company is also
considering patent protection for certain elements of its SCOOP SMARTGUIDE
technology. In addition, the Company relies on confidentiality and/or license
agreements with its employees, strategic partners and others to protect its
proprietary rights. The Company has registered its NEWSMAKERS and FAMEFRAME
trademarks in the United States and has recently filed trademark applications to
register MEDIAALERT and SCOOP!. The Company is also in the process of pursuing
the registration of certain of its other trademarks and tradenames in the United
States and (based upon anticipated use) internationally. Effective trademark,
copyright, trade secret and possible patent protection may not be available in
every country in which the Company's business information products may be
distributed or made available through the Internet. There can be no assurance
that the steps taken, and anticipated to be taken, by the Company to protect its
intellectual property rights will be adequate or that third parties will not
infringe or misappropriate the Company's copyrights, trademarks, tradenames,
trade secrets, patents (if any) and similar proprietary rights. In addition,
there can be no assurance that other parties will not assert infringement claims
against the Company.
GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to business generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that 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 Telecommunications
Reform Act of 1996 (the "1996 Telecommunications Act") imposes criminal
penalties on anyone who distributes obscene, lascivious or indecent
communications on the Internet (although a trial court recently ruled many of
such prohibitions to be unconstitutional). The adoption of the 1996
Telecommunications Act or any other such laws or regulations may decrease the
growth of the Internet, which could in turn decrease the demand for the
Company's business information products and increase the Company's cost of doing
business or otherwise have an adverse effect on the Company's business, results
of operations and financial condition. Moreover, the applicability to the
Internet of existing laws governing issues such as property ownership, libel and
personal privacy is uncertain.
34
POTENTIAL LITIGATION
In August 1995, the Company's former subsidiary, NewsMakers Information
Services, Inc., and Immedia Net, a corporation owned and controlled by Michael
F. Arrigo, executed a letter outlining their mutual understandings regarding the
proposed establishment of a new corporation which was to be owned 50% by the
NewsMakers subsidiary and 50% by Immedia Net and which was to be organized to
take advantage of new business opportunities. Among other things, such letter
contemplated that such new corporation would be a distributor of the media
information content obtained by the NewsMakers subsidiary through its licenses
in connection with the provision of services on the Internet or other online
services. Management believes such letter contemplated the negotiation,
execution and delivery of a definitive final written agreement and other
documents by the parties. The relationship between the NewsMakers subsidiary, on
the one hand, and Immedia Net and Mr. Arrigo, on the other hand, deteriorated
soon after the execution of such letter and no definitive final written
agreement was ever prepared, executed or delivered by either NewsMakers or
Immedia Net. In response to a letter sent in January 1996 by the Company's
counsel formally terminating all further negotiations between the NewsMakers
subsidiary and Immedia Net, Immedia Net formally took the position that the
letter between it and NewsMakers was a legally binding contract, that NewsMakers
had breached such alleged contract and that Immedia Net intended to take
appropriate legal steps to protect its rights if NewsMakers did not commence to
abide by the contract's terms. Since such response, the Company has not taken
any further action with respect to this matter and the Company is not aware that
either Immedia Net or Mr. Arrigo has taken any further action. Although the
Company does not believe that a legally binding contract existed between the
NewsMakers subsidiary and Immedia Net, there can be no assurance that Immedia
Net and Mr. Arrigo will not initiate litigation against the Company as the
successor-in-interest to NewsMakers. If litigation is initiated, there can be no
assurance that the Company would prevail. The costs of defending any legal
action as well as the cost of any judgment that Immedia Net and Mr. Arrigo might
obtain against the Company could have a material adverse effect on the Company's
business, operating results and financial condition.
EMPLOYEES
As of December 31, 1996, the Company employed a total of 28 persons,
including eight in sales and marketing, five in software development and
technical support, eight in layout and operations and seven in general and
administrative functions, including management. None of the Company's employees
is represented by a labor union or is subject to a collective bargaining
agreement. The Company has never experienced a work stoppage and believes that
its relations with its employees are good.
FACILITIES
The Company presently leases approximately 6,400 square feet of office space
in Santa Ana, California. The lease for the Company's office space is currently
$7,290 per month with certain increases over time. The lease expires in
September 2000. The Company may lease additional space as its needs require,
which additional space the Company believes will be available on acceptable
terms.
POSSIBLE ACQUISITIONS
Subsequent to the completion of this Offering, the Company may pursue
possible acquisitions of complementary companies, products or technologies. The
Company believes that acquisitions may provide diversification of revenue and
enhanced revenue growth. The Company is not presently a party to any
discussions, agreements, arrangements or understandings in connection with any
such possible acquisition. See "Use of Proceeds" and "Risk Factors--Risks
Inherent in Unspecified Potential Acquisitions."
35
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information with respect to the
executive officers, directors and certain key employees of the Company:
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------------------
Karl-Magnus S. Karlsson............ 33 Chairman of the Board
Mark A. Davidson................... 35 President and Chief Financial Officer
Peter Kui.......................... 36 Director of Engineering
Bill O'Connell..................... 32 Director of Marketing
Daniel L. Pelekoudas............... 34 Executive Vice President, General Counsel and Secretary
David Blackman..................... 29 Director of NewsMakers
Michael Baum(1)(3)................. 34 Vice Chairman of the Board and Chief Technical Advisor
John P. Kensey(1)(3)............... 60 Director
K.C. Craichy(2).................... 34 Director
Nils B.A. Andersson(2)............. 43 Director
Michael K. Boone(1)(3)............. 35 Director
- ------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of the Executive Committee
The following sets forth information as to the business experience for at
least the past five years of each executive officer and director and certain key
employees of the Company:
KARL-MAGNUS S. KARLSSON is a co-founder of the Company and has served as a
director of the Company since May 1990 and as the Chairman of the Board of
Directors of the Company since the creation of that position in July 1996. Mr.
Karlsson served as President and Chief Executive Officer from May 1990 through
February 1997. Prior to co-founding the Company, Mr. Karlsson worked for The
Interpublic Group, Inc. and its subsidiary, McCann Erickson Worldwide, in
various executive-level capacities for approximately three years. Mr. Karlsson
holds a B.A. in Communications from California State University at Fullerton and
an M.B.A. from the American Graduate School of International Management
(Thunderbird), Glendale, Arizona. Mr. Karlsson is the brother-in-law of Mr.
Craichy, a director of the Company.
MARK A. DAVIDSON has served as President of the Company since February 1997
and as Chief Financial Officer since July 1996. From February 1995 through March
1996, Mr. Davidson was the controller at USoft where he was responsible for
worldwide accounting, treasury and financial planning activities. He served as
the Controller of the Imaging Products Manufacturing Division of Unisys
Corporation from October 1992 through January 1995 and the Group Finance Manager
of Unisys' Computer Systems Group from January 1990 to September 1992. He
received a B.S. in Business Administration, with an emphasis in accounting, from
Humboldt State University.
PETER KUI joined the Company as Director of Engineering in December 1996.
From August 1995 through November 1996, Mr. Kui was the Director of Software
Development at Quest Software where he architected and led the development of an
Intranet document management system. From April 1994 through August 1995, Mr.
Kui was a Development Manager at Russell Information Sciences where he led the
development of a personal scheduling system. From January 1992 through March
1994, Mr. Kui was a Senior Project Manager at Data General Corporation where he
was a technical consultant for client/server software engineering. From October
1988 through January 1992, Mr. Kui was the Software Development Manager at
Quotron Data Systems for the International Data Collector, the network hub for
collection
36
and normalization of financial information from European and Asian stock
exchanges. Mr. Kui attended the University of California at Berkeley where he
studied Computer Science.
BILL O'CONNELL joined the Company as Director of Marketing in November 1996.
Prior to joining the Company, Mr. O'Connell was an independent consultant
rendering services to firms doing business in electronic commerce. From November
1994 to April 1996, Mr. O'Connell led a $40 million electronic transaction
processing division for First Interstate Bank, where he had responsibility for
strategic planning, marketing, product management and financial activities. From
October 1989 to November 1994, Mr. O'Connell held several positions in
marketing, product development and product management for Wells Fargo Bank. Mr.
O'Connell received his B.A. in Political Science in 1986 and his M.B.A. in 1989,
both from the University of California at Irvine.
DANIEL L. PELEKOUDAS joined the Company as Executive Vice President, General
Counsel and Secretary in June 1996. From August 1994 through June 1996, Mr.
Pelekoudas was a corporate attorney with Latham & Watkins, a national law firm,
where he specialized in public and private financing transactions, securities,
mergers and acquisitions and general corporate matters. From October 1987
through July 1994, Mr. Pelekoudas specialized in the same practice areas as a
corporate attorney with the law firm of Pettis, Tester, Kruse & Krinsky. Mr.
Pelekoudas received B.A. and J.D. degrees from the University of Michigan and is
an active member of the State Bar of California.
DAVID BLACKMAN joined the Company as Director of NewsMakers in October 1996.
Prior to joining the Company, Mr. Blackman served as an assistant platoon
commander and operations officer in the United States Navy from June 1990
through July 1993 and attained the rank of Lieutenant. From August 1993 to
October 1996 Mr. Blackman was the General Manager of Blackman Limited Jewelers.
Mr. Blackman graduated from the United States Naval Academy with a B.S. in Naval
Architecture and is currently pursuing an M.B.A. at the University of California
at Irvine.
MICHAEL J. BAUM has been involved in the Company's product efforts since
September 1995 and was appointed Vice Chairman and Chief Technical Advisor in
July 1996. Mr. Baum co-founded Realty On-Line, Inc. in 1984, which created a
consumer-focused financial on-line service which is now operated by Reuters as
the Reuters Money Network. Mr. Baum is currently President and Chief Executive
of 280, Inc., a San Francisco-based company he co-founded in April 1996 to
develop new Internet/Intranet software technologies and services. From June 1994
through March 1996, Mr. Baum was a principal of Advent International, a venture
capital firm, and was primarily responsible for Advent's Information Technology
investment activities on the West Coast. From February 1993 through April 1994,
he was an entrepreneur in residence at CrossPoint Venture Partners, a seed stage
venture capital fund. Mr. Baum also co-founded and, from July 1990 through
January 1993, served as President and Chief Executive Officer of Pensoft
Corporation, a software company which developed database products for wireless
devices. Mr. Baum received a B.S. in Computer Science from Drexel University in
1985 and an M.B.A. from the Wharton Business School in 1989.
JOHN P. KENSEY has served as a director of the Company since June 1996. In
March 1990, Mr. Kensey founded Avalon Capital Corporation, a privately-held
consulting firm primarily engaged in providing strategic consulting services to
emerging growth companies. Mr. Kensey has served as the President and Chief
Executive Officer of Avalon Capital Corporation since its inception. Mr. Kensey
has held various executive officer and management level positions with The Coca
Cola Bottling Company of Los Angeles, Coast Catamaran Corporation, McKinsey &
Company, Inc., Mattel, Inc. and a number of privately-held companies. Mr. Kensey
holds a B.S. in Industrial Engineering from Stanford University, an M.B.A. from
Harvard University and is a Ph.D. candidate with The Peter F. Drucker Graduate
Management Center at Claremont McKenna College.
K. C. CRAICHY has served as a director of the Company since November 1995.
Since October 1996, Mr. Craichy been Chairman of the Board of Directors of ARZCO
Medical Systems, Inc., a privately-held medical device manufacturer. From June
1994 through October 1996, Mr. Craichy served as the Chairman
37
of the Board of Directors, Chief Executive Officer and President of ARZCO. From
May 1991 through June 1994, Mr. Craichy served as President of Synchrotech
Medical, a company which was merged into ARZCO Medical Systems, Inc. in June
1994. Prior to May 1991, Mr. Craichy served as the President of KCC
International, Inc., a privately-held corporate finance and strategy consulting
firm founded by Mr. Craichy in June 1987. Mr. Craichy is the brother-in-law of
Mr. Karlsson.
NILS B.A. ANDERSSON has served as a director of the Company since December
1993. In 1981, Mr. Andersson founded Nils, Inc., a privately-held skiwear
manufacturer located in Fountain Valley, California. Mr. Andersson has served as
the President and Chief Executive Officer of Nils, Inc. since its inception. Mr.
Andersson graduated from Deutsche Bekleidungs Akademie, a leading clothing
design school located in Munich, Germany, and also attended the University of
Lund in his native Sweden where he studied accounting and political economy.
MICHAEL K. BOONE has served as a director of the Company since December
1993. In 1984, Mr. Boone founded Boone International, Inc., a privately-held
manufacturer of dry erase bulletin boards and other consumer products based in
Corona, California. Mr. Boone has served as the President of Boone
International, Inc. since its inception. Prior to forming Boone International,
Inc., Mr. Boone holds a B.S. in Petroleum Engineering from Stanford University.
The officers of the Company are elected by the directors and, subject to any
employment agreement the Company may enter into with such officers, serve at the
discretion of the Board of Directors. The Company does not have employment
agreements with any of its officers but anticipates entering into agreements
with one or more of its executive officers after the completion of this
Offering.
In 1997, Mr. Davidson assumed the office of President to permit Mr. Karlsson
to concentrate on the strategic focus of the Company as its Chairman of the
Board. The Company has initiated a search for a Chief Executive Officer with
significant experience in the business information service and Internet
industries to complete the Company's management team.
BOARD OF DIRECTORS AND COMMITTEES
The business of the Company's Board of Directors is conducted through full
meetings of the Board, as well as through meetings of its committees. Set forth
below is a description of the committees of the Board.
The Executive Committee advises Mr. Davidson concerning the operation of the
Company and reviews, evaluates and makes recommendations with respect to
specific matters delegated to it by the Board of Directors. The Executive
Committee also is responsible for identifying and screening potential Chief
Executive Officer candidates. The Executive Committee consists of Messrs.
Kensey, Baum and Boone. Mr. Kensey is the Chairman at the Executive Committee.
The Audit Committee makes recommendations to the Board of Directors
regarding the selection of the Company's independent auditors, reviews the
results and scope of the audit and other services provided by the Company's
independent auditors, and reviews and evaluates the Company's audit and control
functions. The Audit Committee consists of Messrs. Andersson and Craichy. Mr.
Andersson is the Chairman of the Audit Committee.
The Compensation Committee determines the salaries and incentive
compensation for employees and consultants of the Company and administers and
determines appropriate awards under the Company's Stock Incentive Plan. See
"--Stock Incentive Plan." The Compensation Committee consists of Messrs. Kensey,
Baum and Boone. Mr. Kensey is the Chairman of the Compensation Committee.
The directors serve until the next annual meeting of stockholders and the
election and qualification of their successors. Upon the satisfaction of certain
aspects of California law, the directors will be divided into three classes,
each having a term of three years and with a term of one class expiring each
year. See "Description of Capital Stock--Governing Law and Certain Charter and
Bylaw Provisions."
38
DIRECTORS' COMPENSATION
Prior to July 1996, directors received no cash compensation for serving on
the Company's Board of Directors. Beginning in July 1996, the Company began
paying fees to its non-officer and non-employee directors for serving on the
Board of Directors and its committees and for their attendance at Board of
Director and committee meetings. The Company pays each non-employee director an
annual fee of $4,000. Non-employee directors are reimbursed for reasonable
expenses incurred by them in attending Board or committee meetings. In addition,
non-employee directors are eligible for the grant of stock options under the
Stock Incentive Plan. As of December 31, 1996, Mr. Baum has been granted options
to purchase 115,000 shares at $2.50 per share, Mr. Kensey has been granted
options to purchase 25,000 shares at $2.00 per share and 25,000 shares at $2.50
per share, and Messrs. Boone, Andersson and Craichy have each been granted
options to purchase 15,000 shares at $2.00 per share. Each non-employee director
will be granted options to purchase 15,000 shares of Common Stock at the fair
market value on the date of grant every fourth year during the term of the Stock
Incentive Plan following the date on which such non-employee director is first
elected or appointed if such non-employee director has continuously served for
such period. See "--Stock Incentive Plan." Mr. Baum and Mr. Kensey have also
received compensation for consulting services provided to the Company. After the
Offering, Mr. Baum will continue to receive compensation for providing
consulting services and Mr. Kensey will receive compensation for chairing the
Executive Committee. See "Certain Transactions."
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of
Karl-Magnus S. Karlsson, the Company's Chairman of the Board, for the fiscal
years ended December 31, 1995 and 1996. No other executive officers of the
Company earned in excess of $100,000 of salary and bonus during the fiscal years
ended December 31, 1995 and 1996.
ANNUAL COMPENSATION
---------------------------------------
ALL OTHER
YEAR SALARY(1) COMPENSATION(2)
--------- ---------- ----------------
Karl-Magnus S. Karlsson
Chairman of the Board.................................................... 1996 $ 126,200 $ 37,150
1995 $ 128,000 $ 4,400
- ------------------------
(1) The $128,000 reported for 1995 includes $76,000 of compensation deferred by
Mr. Karlsson from 1995 which the Company commenced paying to Mr. Karlsson in
July 1996 in 12 monthly installments of $6,333 each.
(2) The amount shown for 1995 represents life insurance premiums paid by the
Company. The amount shown for 1996 represents life, health and disability
insurance premiums plus auto lease and insurance payments.
STOCK INCENTIVE PLAN
The Company's Board of Directors and stockholders adopted the Stock
Incentive Plan to promote and advance the interests of the Company and its
stockholders by (i) enabling the Company to attract, retain and reward executive
officers and other key employees and non-employee directors, and (ii)
strengthening the mutuality of interests between participants in the Stock
Incentive Plan and the stockholders of the Company in its long-term growth,
profitability and financial success by offering stock options and other
stock-based awards. The following summary of the Stock Incentive Plan is
qualified in its entirety by the Stock Incentive Plan filed as an exhibit to the
Registration Statement of which this Prospectus is a part, and is subject to
change following review by applicable state regulatory authorities.
39
ADMINISTRATION. The Stock Incentive Plan empowers the Company to award or
grant from time to time, to executive officers, directors, key employees and key
consultants of the Company and its subsidiaries, incentive stock options
("ISOs") and nonqualified stock options ("NQSOs") (ISOs and NQSOs being
collectively referred to as "Options"), restricted stock, dividend equivalents,
deferred stock, performance awards, and stock appreciation rights ("SARs")
(collectively, "Awards"). The Stock Incentive Plan is administered by the
Compensation Committee which must consist of at least two directors of the
Company who are "non-employee directors" within the meaning of Rule 16b-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Committee has the sole authority to construe and interpret the Stock Incentive
Plan, to make rules and procedures relating to the implementation of the Stock
Incentive Plan, to select participants, to establish the terms and conditions of
Awards and to grant Awards. All executive officers, key employees, non-employee
directors and key consultants of the Company are eligible to receive Awards
under the Stock Incentive Plan. Non-employee directors and key consultants are
only eligible to receive NQSOs under the Stock Incentive Plan.
SHARES SUBJECT TO STOCK INCENTIVE PLAN. The maximum number of shares of
Common Stock in respect of which Options may be granted under the Stock
Incentive Plan is 1,500,000, subject to appropriate equitable adjustment in the
event of a reorganization, stock split, stock dividend, combination of shares,
merger, consolidation or other recapitalization and distribution. For the
purpose of computing the total number of shares of Common Stock available for
Options under the Stock Incentive Plan, the above limitations shall be reduced
by the number of shares of Common Stock subject to issuance upon exercise or
settlement of Options previously granted, determined at the date of the grant of
such Options. However, if any Options previously granted are forfeited,
terminated, settled in cash or exchanged for other Options or expire
unexercised, the shares of Common Stock previously subject to such Options shall
again be available for further grants under the Stock Incentive Plan.
TRANSFERABILITY. No Option granted under the Stock Incentive Plan, and no
right or interest therein, shall be assignable or transferable by a participant
except by will or the laws of descent and distribution.
TERM, AMENDMENT AND TERMINATION. The Stock Incentive Plan will terminate in
April 2006, except with respect to Options then outstanding. The Board of
Directors may amend or terminate the Stock Incentive Plan at any time, except
that, to the extent restricted by Rule 16b-3 promulgated under the Exchange Act,
the Board of Directors may not, without approval of the stockholders of the
Company, make any amendment that would increase the total number of shares
covered by the Stock Incentive Plan, change the class of persons eligible to
receive Awards granted under the Stock Incentive Plan, reduce the exercise price
of Awards granted under the Stock Incentive Plan or extend the latest date upon
which Options may be exercised.
INCENTIVE STOCK OPTIONS. Options designated as ISOs, within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), may
be granted under the Stock Incentive Plan. The number of shares of Common Stock
in respect of which ISOs are first exercisable by any participant in the Stock
Incentive Plan during any calendar year shall not have a fair market value
(determined at the date of grant) in excess of $100,000 (or such other limit as
may be imposed by the Code). To the extent the fair market value of the shares
for which options are designated as ISOs that are first exercisable by any
optionee during any calendar year exceed $100,000, the excess amount shall be
treated as NQSOs. ISOs are exercisable for such period or periods, not in excess
of ten years after the date of grant, as shall be determined by the Compensation
Committee.
NONQUALIFIED STOCK OPTIONS. NQSOs may be granted for such number of shares
of Common Stock and will be exercisable for such period or periods as the
Compensation Committee shall determine.
OPTION EXERCISE PRICES. The exercise price of any Option granted under the
Stock Incentive Plan shall be at least 100% of the fair market value of the
Common Stock on the date of grant. Fair market value per share of Common Stock
shall be determined as the average of the closing bid and asked prices per share
40
quoted by the Nasdaq Small Cap Market or the Nasdaq National Market, or as the
amount determined in good faith by the Compensation Committee.
EXERCISE OF OPTIONS. No Options may be exercised, except as provided below,
unless the holder thereof remains in the continuous employ or service of the
Company. Options shall be exercisable upon the payment in full of the applicable
option exercise price in cash or, if approved by the Compensation Committee, by
instruction to a broker directing the broker to sell the Common Stock for which
such Option is exercised and remit to the Company the aggregate exercise price
of the Option or, in the discretion of the Committee, upon such terms as the
Committee shall approve, in shares of Common Stock then owned by the optionee
(at the fair market value thereof at the exercise date).
RESTRICTED STOCK may be sold to participants at various prices (but not
below par value) and made subject to such restrictions as may be determined by
the Compensation Committee. Restricted stock, typically, may be repurchased by
the Company at the original purchase price if the conditions or restrictions are
not met. In general, restricted stock may not be sold, or otherwise transferred
or hypothecated, until restrictions are removed or expire. Purchasers of
restricted stock, unlike recipients of options, will have voting rights and will
receive dividends prior to the time when the restrictions lapse.
DEFERRED STOCK may be awarded to participants, typically without payment of
consideration, but subject to vesting conditions based on continued employment
or on performance criteria established by the Committee. Like restricted stock,
deferred stock may not be sold, or otherwise transferred or hypothecated, until
vesting conditions are removed or expire. Unlike restricted stock, deferred
stock will not be issued until the deferred stock award has vested, and
recipients of deferred stock generally will have no voting or dividend rights
prior to the time when vesting conditions are satisfied.
SARS may be granted in connection with stock options or other Awards, or
separately. SARs granted by the Compensation Committee in connection with stock
options or other awards typically will provide for payments to the holder based
upon increases in the price of the Common Stock over the exercise price of the
related option or other Awards, but alternatively may be based upon criteria
such as book value. Except as required by Section 162(m) of the Code with
respect to an SAR intended to quality as performance-based compensation as
described in Section 162(m)(4)(C) of the Code, there are no restrictions
specified in the Equity Plan on the exercise of SARs or the amount of gain
realizable therefrom, although restrictions may be imposed by the Compensation
Committee in the SAR agreements. The Compensation Committee may elect to pay
SARs in cash or in Common Stock or in a combination of both.
DIVIDEND EQUIVALENTS represent the value of the dividends per share paid by
the Company, calculated with the reference to the number of shares covered by
the stock options, SARs or other Awards held by the participant.
PERFORMANCE AWARDS may be granted by the Compensation Committee on an
individual or group basis. Generally these Awards will be based upon specific
performance targets and may be paid in cash or in Common Stock or in a
combination of both. Performance Awards may include "phantom" stock Awards that
provide for payments based upon increases in the price of the Common Stock over
a predetermined period. Performance Awards may also include bonuses which may be
granted by the Compensation Committee on an individual or group basis and which
may be payable in cash or in Common Stock, or in a combination of both.
STOCK PAYMENTS may be authorized by the Compensation Committee in the form
of shares of Common Stock or an option or other right to purchase Common Stock
as party of a deferred compensation arrangement in lieu of all or any part of
compensation, including bonuses, that would otherwise be payable in cash to the
employee or consultant.
DIRECTOR OPTIONS. NQSOs are granted to non-employee directors of the
Company pursuant to a formula (the "Director Options"). Under the formula, when
a director is initially elected to the Board and
41
is at that time a non-employee director, he or she automatically shall be
granted an NQSO to purchase 15,000 shares of Common Stock. During the term of
the Stock Incentive Plan, each then current non-employee director shall
automatically be granted an NQSO to purchase 15,000 shares of Common Stock
during the fourth year from the prior grant on the date of the annual meeting at
which he or she is reelected to the Board. The exercise price of the Director
Options shall be the fair market value of a share of Common Stock on the date of
grant. Each Director Option becomes exercisable in cumulative annual
installments of one-third on each of the first, second and third annual meeting
of shareholders that are subsequent to the date of grant, subject to the
director's continued service as a director; provided, however, to the extent
permitted by Rule 16b-3, the Board may accelerate the exercisability of the
Options upon the occurrence of certain specified extraordinary corporate
transactions or events and provided further, that in any event, upon the
occurrence of a "Change in Control" of the Company (as defined in the Stock
Incentive Plan) all outstanding Director Options shall become immediately
exercisable. No portion of a Director Option shall be exercisable after the
tenth anniversary of the date of grant and no portion of a Director Option shall
be exercisable upon the expiration of one year following the director's
termination of services as a director of the Company.
AWARDS GRANTED. As of December 31, 1996, the Company has granted an
aggregate of 622,500 Options to the executive officers, non-employee directors,
key employees and consultants of the Company. Such Options generally have ten
year terms and vest as to 25% of the shares of Common Stock covered thereby at
the end of each of the first four years after their date of grant. Of such
Options, 155,000 are currently exercisable. No other Awards have been granted.
The Company anticipates granting Options exercisable into approximately 230,000
shares of Common Stock at the Offering Price to the Company's employees at or
immediately prior to the effective date of this Offering.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Company's Certificate of Incorporation (the "Certificate") and Bylaws
include provisions that eliminate the directors' personal liability for monetary
damages to the fullest extent possible under Delaware Law or other applicable
law (the "Director Liability Provision"). The Director Liability Provision
eliminates the liability of directors to the Company and its stockholders for
monetary damages arising out of any violation by a director of his fiduciary
duty of due care. Under Delaware Law, however, the Director Liability Provision
does not eliminate the personal liability of a director for (i) breach of the
director's duty of loyalty, (ii) acts or omissions not in good faith or
involving intentional misconduct or knowing violation of law, (iii) payment of
dividends or repurchases or redemptions of stock other than from lawfully
available funds, or any transaction from which the director derived an improper
benefit. The Director Liability Provision also does not affect a director's
liability under the federal securities laws or the recovery of damages by third
parties. Furthermore, pursuant to Delaware Law, the limitation on liability
afforded by the Director Liability Provision does not eliminate a director's
personal liability for breach of the director's duty of due care. Although the
directors would not be liable for monetary damages to the corporation or its
stockholders for negligent acts or omissions in exercising their duty of due
care, the directors remain subject to equitable remedies, such as actions for
injunction or rescission, although these remedies, whether as a result of
timeliness or otherwise, may not be effective in all situations. With regard to
directors who also are officers of the Company, these persons would be insulated
from liability only with respect to their conduct as directors and would not be
insulated from liability for acts or omissions in their capacity as officers.
Delaware Law provides a detailed statutory framework covering
indemnification of directors, officers, employees or agents of the Company
against liabilities and expenses arising out of legal proceedings brought
against them by reason of their status or service as directors, officers,
employees or agents. Section 145 of the Delaware General Corporation Law
("Section 145") provides that a director, officer, employee or agent of a
corporation (i) shall be indemnified by the corporation for expenses actually
and reasonably incurred in defense of any action or proceeding if such person is
sued by reason of his service to the
42
corporation, to the extent that such person has been successful in defense of
such action or proceeding, or in defense of any claim, issue or matter raised in
such litigation, (ii) may, in actions other than actions by or in the right of
the corporation (such as derivative actions), be indemnified for expenses
actually and reasonably incurred, judgments, fines and amounts paid in
settlement of such litigation, even if he is not successful on the merits, if he
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 a criminal proceeding,
if he did not have reasonable cause to believe his conduct was unlawful), and
(iii) may be indemnified by the corporation for expenses actually and reasonably
incurred (but not judgments or settlements) of any action by the corporation or
of a derivative action (such as a suit by a stockholder alleging a breach by the
director or officer of a duty owed to the corporation), even if he is not
successful, provided that he acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation,
provided that no indemnification is permitted without court approval if the
director has been adjudged liable to the corporation.
Delaware Law also permits a corporation to elect to indemnify its officers,
directors, employees and agents under a broader range of circumstances than that
provided under Section 145. The Certificate contains a provision that takes full
advantage of the permissive Delaware indemnification laws (the "Indemnification
Provision") and provides that the Company is required to indemnify its officers,
directors, employees and agents to the fullest extent permitted by law,
including those circumstances in which indemnification would otherwise be
discretionary, provided, however, that prior to making such discretionary
indemnification, the Company must determine that the person acted in good faith
and in a manner he or she believed to be in the best interests of the Company
and, in the case of any criminal action or proceeding, the person had no reason
to believe his or her conduct was unlawful.
In furtherance of the objectives of the Indemnification Provision, the
Company has also entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in the
Company's Certificate and Bylaws (the "Indemnification Agreements"). The Company
believes that the Indemnification Agreements are necessary to attract and retain
qualified directors and executive officers. Pursuant to the Indemnification
Agreements, an indemnitee will be entitled to indemnification to the extent
permitted by Section 145 or other applicable law. In addition, to the maximum
extent permitted by applicable law, an indemnitee will be entitled to
indemnification for any amount or expense which the indemnitee actually and
reasonably incurs as a result of or in connection with prosecuting, defending,
preparing to prosecute or defend, investigating, preparing to be a witness, or
otherwise participating in any threatened, pending or completed claim, suit,
arbitration, inquiry or other proceeding (a "Proceeding") in which the
indemnitee is threatened to be made or is made a party or participant as a
result of his or her position with the Company, provided that the indemnitee
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the Company and had no reasonable cause to
believe his or her conduct was unlawful. If the Proceeding is brought by or in
the right of the Company and applicable law so provides, the Indemnification
Agreements provide that no indemnification against expenses shall be made in
respect of any claim, issue or matter in the Proceeding as to which the
indemnitee shall have been adjudged liable to the Company.
The provisions eliminating personal liability and affording indemnification
described above are, and for some period following the consummation of this
Offering will be, limited in certain respects by California law. See
"Description of Capital Stock--Governing Law and Certain Charter and Bylaw
Provisions."
The California General Corporation Law provides that a corporation governed
by California law may include provisions in its charter relieving directors of
monetary liability for breach of their fiduciary duty as directors, except for
the liability of a director resulting from (i) any transaction from which the
director derives an improper personal benefit, (ii) acts or omissions involving
intentional misconduct or a knowing and culpable violation of law, (iii) acts or
omissions that a director believes to be contrary to the best interests of the
Company or its stockholders or that involves the absence of good faith on the
part of the
43
director, (iv) acts or omissions constituting an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the Company
or its stockholders, (v) acts or omissions showing a reckless disregard for the
director's duty to the Company or its stockholders in circumstances in which the
director was aware or should have been aware, in the ordinary course of
performing a director's duties, of a risk of serious injury to the Company or
its stockholders, (vi) any improper transaction between a director and the
Company in which the director has a material financial interest, or (vii) the
making of an illegal distribution to stockholders or an illegal loan or
guaranty.
The inclusion of provisions limiting liability of the Company's officers and
directors may have the effect of reducing the likelihood of derivative
litigation against the officers and directors and may discourage or deter
stockholders or management from bringing a lawsuit against the officers and
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefitted the Company and its stockholders.
The Company maintains directors' and officers' liability insurance in favor
of its directors and executive officers.
44
CERTAIN TRANSACTIONS
In November 1995, the Company redeemed all of the shares of common stock of
the Company's predecessor owned by Mr. Michael Del Rey, a co-founder and former
officer of the Company, for $12,000 in cash and an unsecured noninterest-bearing
promissory note for $88,000. Pursuant to the written agreement governing the
redemption, the Company issued 64,527 shares of Common Stock to Mr. Del Rey for
nominal consideration in July 1996. In connection with such transactions, Mr.
Del Rey agreed not to compete with the business of the Company and its
NewsMakers subsidiary for a period of five years in consideration of payments of
$2,000 per month during such time period. The Company also appointed Mr. Del Rey
to serve as an independent sales representative for a minimum term of 12 months
and reimbursed Mr. Del Rey an aggregate of $7,500 for certain office and
equipment lease expenses incurred by him in establishing himself as an
independent sales representative.
In November and December 1995, Stanley Berk and Associates ("SBA"), a
general partnership comprised of Stanley Berk and Stephen Grayson, principal
stockholders of the Company, loaned the Company an aggregate of $150,000 in
exchange for an 8% convertible promissory note issued by the Company. In June
1996, the Company exercised its right to redeem the note in exchange for 71,760
shares of Common Stock. In February 1997, in settlement of various disputes
arising between the Company and Mr. Karlsson, on the one hand, and SBA and
Messrs. Berk and Grayson, on the other hand, the Company agreed to pay to each
of these stockholders $30,000 in twelve monthly payments of $2,500, the Company
granted a warrant to Mr. Grayson exercisable into 11,250 shares of Common Stock,
and Mr. Karlsson granted an option to Mr. Berk exercisable into 11,250 shares of
Common Stock. Both the option and the warrant have exercise prices set at 120%
of the initial public offering price of the Common Stock. The Company granted
certain registration rights with respect to the shares of Common Stock issuable
upon exercise of the warrant and option and also agreed to register 28,302
shares owned by Mr. Grayson by including them in the Registration Statement of
which this Prospectus is a part. See "Resale of Outstanding Shares."
In December 1995, Mr. Karlsson and his spouse collectively gifted 25,168
shares of Common Stock to Mr. Craichy, his spouse and two minor children. In the
same month, Mr. Karlsson also granted Mr. Craichy an option to purchase 25,168
additional shares of Common Stock owned by Mr. Karlsson at $1.99 per share. The
option expires in June 1997. Mr. Craichy is a director of the Company and Mr.
Karlsson's brother-in-law.
In March 1996, Mr. Karlsson gifted 5,033 shares of Common Stock to Mr.
Michael Boone and 5,033 shares of Common Stock to Mr. Nils Andersson. Messrs.
Boone and Andersson are directors of the Company.
In April 1996 and July 1996, the Company issued an aggregate of 34,663 and
5,000 shares, respectively, of Common Stock as stock bonuses to an aggregate of
fourteen executive officers, non-employee directors and key employees of the
Company for services rendered at a deemed issuance price equal to $2.00 per
share.
Concurrently with a private placement of Common Stock and cancelable
warrants conducted by the Company during June and July 1996, Mr. Karlsson
privately sold to certain of the Selling Security Holders an aggregate of
150,000 shares of Common Stock for total cash consideration of $448,500.
Purchasers of such shares of Common Stock have received registration and other
rights identical to those received by investors in the Company's private
placement and such shares have been included in the Registration Statement of
which this Prospectus is a part. See "Resale of Outstanding Shares."
In July 1996, the Company granted options to certain consultants
periodically utilized by the Company to render advice concerning various
business, financial and strategic matters. Options to purchase 5,000 shares of
Common Stock exercisable at $2.50 per share were granted to each of Mr. Cliff
Friedman and Mr. Pete Peterson. Mr. Karlsson also gifted 5,000 shares to Mr.
Peterson in May 1996.
In October 1996, the Company issued a warrant to Bell & Howell in connection
with entering into a license agreement with UMI. The warrant gives Bell & Howell
the right to purchase 550,000 shares of
45
Common Stock of the Company and is exercisable for a period of three years. The
warrant is exercisable at the following exercise prices: 300,000 shares at $6.50
per share, 150,000 shares at $10.00 per share, and 100,000 shares at $15.00 per
share. In the event Bell & Howell exercises its warrant for at least 300,000
shares by September 15, 1997, Bell & Howell can either (i) purchase up to an
additional 200,000 shares at $6.50 per share by September 15, 1997, or (ii)
purchase up to an additional 50,000 shares at $10.00 per share, and 100,000
shares at $15.00 per share by October 31, 1999. If Bell & Howell fully exercises
its warrant, it will own approximately 9.8% of the Common Stock of the Company
based on the number of shares expected to be outstanding upon consummation of
the Offering. See "Business UMI Relationship," "Principal Stockholders" and
"Description of Capital Stock--Warrants."
Messrs. Baum and Kensey, directors of the Company, perform certain
consulting services on behalf of the Company. Mr. Baum has been granted stock
options to acquire 115,000 shares of Common Stock at $2.50 per share and, since
June 1996, has received $5,000 per month for assisting the Company in its
development of products, technology and strategic partnerships and participating
in engineering reviews and recruitment. Mr. Baum may also be entitled to receive
a cash bonus of $20,000 at the discretion of the Board of Directors. At the
request of the Company, Mr. Kensey provides consulting services on an hourly fee
basis. As of December 31, 1996, the Company had paid Mr. Kensey $32,900 for
consulting services including assisting in the development of the Company's
operating plan, establishing the relationship with UMI and providing financial
and accounting advice. The compensation was based on Mr. Kensey's customary
consulting fees for providing similar services. Mr. Kensey has also been granted
stock options to acquire 10,000 shares of Common Stock at $2.00 per share and
25,000 shares at $2.50 per share in consideration of consulting services
provided to the Company.
In February 1997, the Company borrowed $150,000 from Gabriel Kaplan, a
principal stockholder of the Company. The loans were made at 9.75% simple
interest payable together with principal on April 30, 1997. The principal amount
of this loan can be increased to up to $350,000 by endorsement by the Company
and Mr. Kaplan. The Company intends to repay the loan from the proceeds of the
Offering. As additional consideration for the loan, the Company issued a warrant
exercisable into 15,000 shares of Common Stock at $4.50 per share. In the event
the principal amount of the loan is increased, Mr. Kaplan would be entitled to
receive additional warrants. The warrants are not exercisable until February
1998 and expire in February 2002. The Company has granted certain registration
rights with respect to the shares of Common Stock issuable on exercise of the
warrant.
In February 1997, the Company borrowed $75,000 from each of two individuals
who have pre-existing business relationships with the Representative. The
Representative did not receive any renumeration for bringing these lenders and
the Company together.
The terms of some of these transactions involve conflicts between the
interests of the related parties and the Company. The Company believes, however,
that the consideration exchanged reflects fair value in all of the transactions
set forth above. The Company has adopted a policy whereby all future
transactions between the Company and its officers, directors and affiliates will
be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties and will be approved by a majority of the
disinterested members of the Company's Board of Directors.
46
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, both prior to the Offering and
immediately following completion of the Offering, by (i) each person who
beneficially owns 5% or more of the outstanding shares of Common Stock, (ii)
each of the Company's directors, and (iii) all directors and executive officers
of the Company as a group:
SHARES BENEFICIALLY OWNED(1)
------------------------------------------------
PERCENT OWNED
IMMEDIATELY PRIOR PERCENT OWNED
NUMBER OF TO THE IMMEDIATELY AFTER
NAME AND ADDRESS(2) SHARES OFFERING(3) THE OFFERING(3)
- --------------------------------------------------------------------- ---------- ----------------- -----------------
Karl-Magnus S. Karlsson(4)........................................... 1,471,116 39.2% 29.1%
Bell & Howell(5)..................................................... 550,000 14.7% 9.8%
Stanley Berk(6)...................................................... 231,077 6.2% 4.6%
Gabriel Kaplan (7)................................................... 206,666 5.5% 4.1%
Stephen Grayson(8)................................................... 206,064 5.5% 4.1%
Larry R. Gordon(9)................................................... 193,333 5.2% 3.8%
K. C. Craichy(10)(11)................................................ 54,086 1.4% *
Michael Baum(12)..................................................... 50,000 1.3% *
John P. Kensey(13)(14)............................................... 45,000 1.2% *
Nils B.A. Andersson(11).............................................. 8,753 * *
Michael K. Boone(11)................................................. 8,753 * *
All directors and executive officers as a group 1,682,540 43.0% 32.3%
(10 persons)(15)...................................................
- ------------------------
* Less than one percent.
(1) The persons named in the table, to the Company's knowledge, have sole voting
and sole dispositive power with respect to all shares of Common Stock shown
as beneficially owned by them, subject to community property laws where
applicable and the information contained in the footnotes hereunder.
(2) Except as noted in these footnotes, the stockholders' address is at the
Company's executive offices.
(3) Shares of Common Stock which a person had the right to acquire within 60
days are deemed outstanding in calculating the percentage ownership of the
person, but are not deemed outstanding as to any other person. The Percent
Owned Immediately Prior to the Offering is calculated based on 3,752,497
shares of Common Stock outstanding as of the date of this Prospectus and the
Percent Owned Immediately After the Offering is calculated based upon
5,052,497 shares of Common Stock outstanding assuming the issuance and sale
of the 1,300,000 shares of Common Stock offered hereby by the Company.
(4) Includes an aggregate of 10,066 shares owned of record by Mr. Karlsson's two
minor children and 503,327 shares owned of record by AMKEK Limited
Partnership, a family limited partnership ("AMKEK"). Mr. Karlsson has voting
power with respect to the shares held by AMKEK and his spouse has sole
dispositive power with respect to such shares. Also includes an aggregate of
69,394 shares which are subject to options Mr. Karlsson has granted to
various third parties.
(5) Represents shares subject to a warrant which is currently exercisable. Bell
& Howell's address is 5215 Old Orchard Road, Skokie, Illinois 60077. Does
not include shares underlying additional warrants that may be granted to
Bell & Howell under certain circumstances. See "Business--UMI Relationship"
and "Certain Transactions."
(6) Includes 11,250 shares subject to an option granted by Mr. Karlsson which is
currently exercisable.
(7) Mr. Kaplan's business address is c/o City National Bank, 400 N. Roxbury Dr.,
Beverly Hills, California 90210. Includes 83,333 shares owned by Mr. Kaplan
as plan administrator for Rotunda Productions, Inc. MPO.
(8) Includes 121,385 shares owned by Mr. Grayson, 73,429 shares owned by the
Stephen P. Grayson Profit Sharing Plan, and 11,250 shares subject to a
warrant granted by the Company which is currently exercisable.
47
(9) Includes 66,667 shares subject to Mr. Gordon's Consultant Warrant, which is
currently exercisable, 98,333 shares owned by Mr. Gordon and 28,333 shares
owned by Lexington Ventures, Inc., of which Mr. Gordon is a principal.
(10) Includes an aggregate of 15,101 shares owned of record by Mr. Craichy's
spouse and two minor children. Also includes 25,168 shares owned by Mr.
Karlsson which are subject to an option granted by Mr. Karlsson to Mr.
Craichy.
(11) Includes 3,750 shares subject to Options that are currently exercisable and
excludes 11,250 shares subject to Options that are not exercisable within 60
days.
(12) Includes 40,000 shares subject to Options that are currently exercisable
and excludes 75,000 shares subject to Options that are not exercisable
within 60 days.
(13) Excludes 15,000 shares subject to Options that are not exercisable within
60 days.
(14) Includes 35,000 shares subject to Options that are currently exercisable.
Also includes 10,000 shares owned by the John P. and Susan S. Kensey Family
Trust, of which Mr. Kensey is a trustee.
(15) Includes 156,250 shares subject to Options that are currently exercisable
and excludes 293,750 shares subject to Options that are not exercisable
within 60 days.
RESALE OF OUTSTANDING SHARES
This Prospectus relates to the sale by the Company of 1,300,000 shares of
Common Stock. A separate Prospectus is being filed with the Registration
Statement of which this Prospectus is a part which relates to the sale by the
Selling Security Holders of the Selling Security Holders' Shares. None of the
Selling Security Holders' Shares being offered for resale by the Selling
Security Holders is being underwritten by the Underwriters.
The Company will not receive any of the proceeds of the sale of the Selling
Security Holders' Shares by the Selling Security Holders, although it will
receive the exercise price for the Consultant Warrants when and if they are
exercised. None of the Selling Security Holders had any position, office or
material relationship with the Company or its affiliates during the last three
years except for: (i) the three holders of the Consultant Warrants, each of whom
received his portion of the Consultant Warrants in exchange for agreeing to
provide certain corporate development consulting services to the Company during
1996; (ii) Gabriel Kaplan, who made a loan of $150,000 to the Company in
February 1997 in exchange for a promissory note and the warrants to purchase
Common Stock; and Mr. Grayson, who entered into a settlement agreement with the
Company in February 1997. See "Certain Transactions" and "Description of Capital
Stock--Warrants" and "Certain Transactions."
Prior to this Offering, the Selling Security Holders collectively held
1,657,322 shares of Common Stock (including the 200,000 shares of Common Stock
issuable upon the full exercise of the Consultant Warrants). Assuming the sale
of all of the Selling Security Holders' Shares pursuant to the separate
Prospectus referred to above, the Selling Security Holders will collectively own
252,170 shares of Common Stock.
Each of the Selling Security Holders has agreed not to sell, pledge, assign
or otherwise transfer any shares of Common Stock during the one-year period
following the effective date of this Prospectus; provided, however, that 28,302
of the shares owned by Mr. Grayson are subject to a 90-day restriction. Such
"lock-up" restrictions may be waived by the Representative in its sole
discretion. In such event, any sales permitted by the Representative may be
effected through the Representative and the Representative will be entitled to
receive its customary compensation in connection therewith. Although the
Representative does not have any arrangements or understandings with any Selling
Security Holders regarding the waiver of any such lock-ups, any permitted sales
by the Selling Security Holders during such twelve-month period could adversely
affect the price of and any market for the Common Stock. See "Risk Factors--
Possible Adverse Effect of Future Sales of Securities on Market Price."
48
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, $0.001 par value, and 5,000,000 shares of Preferred Stock, $0.001
par value. The following description of the Company's capital stock does not
purport to be complete and is subject in all respects to applicable Delaware and
California law and to the provisions of the Company's Certificate of
Incorporation and Bylaws, copies of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
As of December 31, 1996, there were 3,752,497 shares of Common Stock held of
record by 108 stockholders. There will be 5,052,497 shares of Common Stock
outstanding after completion of this Offering. Each share of Common Stock
entitles the holder to one vote on all matters submitted to a vote of the
stockholders. The holders of Common Stock are entitled to receive dividends,
when, as and if declared by the Board of Directors, in its discretion, from
funds legally available therefor. The Company does not currently intend to
declare or pay cash dividends on the Common Stock in the foreseeable future, but
rather intends to retain any future earnings to finance the expansion of its
businesses. See "Dividend Policy." Upon liquidation or dissolution of the
Company, the holders of Common Stock are entitled to share ratably in the assets
of the Company, if any, legally available for distribution to stockholders after
the payment of all debts and liabilities of the Company and the liquidation
preference of any outstanding preferred stock.
The Common Stock has no preemptive rights and no subscription, redemption or
conversion privileges. The Common Stock does not have cumulative voting rights,
which means that the holders of a majority of the outstanding shares of Common
Stock voting for the election of directors can elect all members of the Board of
Directors. A majority vote is also sufficient for other actions that require the
vote or concurrence of stockholders. All of the outstanding shares of Common
Stock are, and the shares to be sold in this Offering will be, when issued and
paid for, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders of the Company, to issue up to 5,000,000 shares of preferred stock
in one or more series and to fix the rights, preferences and privileges thereof,
including the dividend rights, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of the series. Although it presently has no intention to do so, the Board of
Directors, without stockholder approval, could issue preferred stock with voting
and conversion rights that could adversely affect the voting powers of the
holders of the Common Stock and the market price of the Common Stock. Issuance
of preferred stock may also have the effect of delaying, deferring or preventing
a change of control of the Company without further action by the stockholders
and may discourage bids for the Common Stock at a premium over the market price.
WARRANTS
In June 1996, the Company issued The Boston Group, L.P. (the "Dealer
Manager") warrants to purchase 92,667 shares of Common Stock exercisable at a
price equal to $3.30 per share (the "Dealer Manager Warrants") in consideration
for its services as dealer manager in two private placements of Common Stock and
cancelable warrants. The Dealer Manager Warrants are exercisable for a period of
three years commencing December 1997. The Company has granted certain
registration rights to the Dealer Manager with respect to the shares of Common
Stock issuable upon exercise of these warrants.
In June 1996, the Company issued the Consultant Warrants to Larry Gordon,
Steven Eagon and Henry Wilf, none of whom was an affiliate of the Company, in
consideration of their agreement to provide
49
certain corporate development services to the Company. The Consultant Warrants
are exercisable into an aggregate of 200,000 shares of Common Stock for a period
of five years at an exercise price equal to $2.55 per share. The shares of
Common Stock issuable upon exercise of the Consultant Warrants have been
included in the Registration Statement of which this Prospectus is a part and
comprise a portion of the Selling Security Holders' Shares. See "Resale of
Outstanding Shares." The holders of the Consultant Warrants have agreed not to
offer, sell, grant an option, transfer, assign, pledge, hypothecate or otherwise
encumber the Consultant Warrants or any shares of stock received upon exercise
of the Consultant Warrants for 12 months from the effective date of this
Offering without the prior written consent of the Representative.
In October 1996, the Company issued a warrant to Bell & Howell in connection
with entering into a license agreement with Bell & Howell. The warrant gives
Bell & Howell the right to purchase 550,000 shares of Common Stock of the
Company and is exercisable for a period of three years. The warrant is
exercisable at the following exercise prices: 300,000 shares at $6.50 per share,
150,000 shares at $10.00 per share, and 100,000 shares at $15.00 per share. In
the event Bell & Howell exercises its warrant for at least 300,000 shares by
September 15, 1997, Bell & Howell can either (i) purchase up to an additional
200,000 shares at $6.50 per share by September 15, 1997, or (ii) purchase up to
an additional 50,000 shares at $10.00 per share, and 100,000 shares at $15.00
per share by October 31, 1999. The warrant also gives Bell & Howell the right,
subject to certain limitations, to require the Company to register for public
resale the shares of Common stock underlying the warrant.
In February 1997, the Company issued a warrant to Mr. Grayson in connection
with a settlement agreement. This warrant gives Mr. Grayson the right to
purchase up to 11,250 shares of Common Stock at a price per share equal to 120%
of the initial public offering price of the Common Stock, subject to adjustment.
The warrant expires in February 2000.
In connection with a loan obtained by the Company in February 1997, the
Company issued a warrant to Mr. Kaplan exercisable into 15,000 shares of Common
Stock at $4.50 per share one year after issuance and expiring five years after
issuance (the "Bridge Warrant"). In the event Mr. Kaplan agrees to increase the
principal amount of the loan to the Company, he will receive additional Bridge
Warrants exercisable into 200 shares of Common Stock for each $1,000 additional
principal amount loaned to the Company, up to a maximum of 40,000 additional
shares, each on the same terms as the initial Bridge Warrant. The Company has
granted certain registration rights with respect to the shares of Common Stock
issuable upon exercise of the Bridge Warrants.
In connection with a $150,000 line of credit established by the Company in
February 1997, the Company issued a warrant to the lender exercisable into 7,500
shares of Common Stock at $5.50 per share thirteen months after issuance and
expiring five years after issuance (the "LOC Warrant"). The lender will receive
another 50 warrants for every $1,000 of principal drawn on the line of credit up
to $120,000 and 75 warrants for every $1,000 of principal drawn above $120,000
to $150,000, up to a maximum aggregate of 15,750 shares, on the same terms as
the initial LOC Warrant. The Company granted certain registration rights with
respect to the shares of Common Stock issuable upon exercise of the LOC
Warrants.
Concurrent with the consummation of this Offering, the Company has agreed to
sell to the Representative for an aggregate of $50 the Representative Warrant to
purchase up to 130,000 shares of Common Stock at an exercise price equal to 120%
of the initial public offering price per share of Common Stock. See
"Underwriting."
As of December 31, 1996, none of the warrants described above had been
exercised.
50
GOVERNING LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The Company is subject to the laws of the states of Delaware and California
because the Company is incorporated in Delaware but is domiciled and transacts
most of its business in California. Set forth below is a description of certain
provisions of Delaware and California law applicable to the Company.
DELAWARE LAW. Upon the consummation of this Offering, the Company will be
subject to the provisions of Section 203 of the Delaware General Corporation Law
(Section 203"), an anti-takeover law. In general, Section 203 prohibits a
publicly-held 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 unless such
transaction was approved in the manner prescribed by law or another prescribed
exception applies. For purposes of Section 203, a "business combination" is
defined broadly to include a merger, asset sale or other transaction resulting
in a financial benefit to the interested stockholder, and subject to certain
exceptions, an "interested stockholder" is a person who, together with
affiliates and associates owns (or within three years prior, did own) 15% or
more of the corporation's voting stock.
The Company's Bylaws provide for a Board of Directors classified into three
classes, with the Directors elected at the Company's first annual meeting at
which the classification provision is enabled divided into three classes and
serving initial terms expiring at each of the next three annual stockholders'
meetings, respectively. Thereafter, Directors in each class will be elected for
three year terms. All directors elected to the Company's classified Board of
Directors will serve until the election and qualification of their successors or
their earlier resignation or removal. The Board of Directors is authorized to
create new directorships and to fill such positions so created and is permitted
to specify the class to which such new position is assigned, and the person
filling such position would serve for the term applicable to that class. The
Board of Directors (or its remaining members, even though less than a quorum) is
also empowered to fill vacancies on the Board of Directors occurring for any
reason for the remainder of the term of the class of Directors in which the
vacancy occurred. After classification of the Board of Directors, Directors may
only be removed for cause. These provisions are likely to increase the time
required for stockholders to change the composition of the Board of Directors.
The Company's Bylaws also provide that, for nomination to the Board of
Directors or for other business to be properly brought by a stockholder before a
meeting of stockholders, the stockholder must first have given timely notice
thereof in writing to the Secretary of the Company. To be timely, a
stockholder's notice generally must be delivered not less than sixty days nor
more than ninety days prior to the annual meeting. If the meeting is not an
annual meeting, the notice must generally be delivered not more than ninety days
prior to the special meeting and not less than the later of sixty days prior to
the special meeting and ten days following the day on which public announcement
of the meeting is first made by the Company. Only such business shall be
conducted at a special meeting of stockholders as is brought before the meeting
pursuant to the Company's notice of meeting. The notice by a stockholder must
contain, among other things, certain information about the stockholder
delivering the notice, and, as applicable, background information about the
nominee or a description of the proposed business to be brought before the
meeting. Special meetings of stockholders may be called only by the Chairman of
the Board or the President of the Company or by the majority of the whole Board
of Directors.
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or bylaws, unless the
corporation's certificate of incorporation or bylaws, as the case may be,
requires the affirmative vote of the holders of at least 66 2/3% of the
outstanding voting stock of the The Bylaws require a 66 2/3% vote for any
amendment to or repeal of the Company's Bylaws by the stockholder. Such 66 2/3%
stockholder vote would be in addition to any separate class vote that might in
the future by required pursuant to the terms of any Preferred Stock that might
then be outstanding. The Bylaws may also be amended or repealed by a majority
vote of the Board of Directors.
51
The provisions of the Company's Bylaws discussed above could make more
difficult or discourage a proxy contest or other change in the management of the
Company or the acquisition or attempted acquisition of control by a holder of a
substantial block of the Company's stock. It is possible that such provisions
could make it more difficult to accomplish, or could deter, transactions which
stockholders may otherwise consider to be in their best interests.
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation provides that Directors of the Company shall not be
personally liable to the Company or its stockholders for monetary damages for
breach of their fiduciary duties as Directors, except for liability (i) for any
breach of their duty of loyalty to the Company and its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends of unlawful
stock repurchases or redemptions, as provided in Section 174 of the Delaware
General Corporation Law or (iv) for any transaction from which the Director
derives an improper personal benefit. The Company's Certificate of Incorporation
and Bylaws provide that the Company shall indemnify its Directors and officers
to the fullest extent permitted by Delaware law and advance expenses to such
Directors and officers to defend any action for which rights of indemnification
are provided. See "Management--Indemnification and Limitation of Liability."
CALIFORNIA LAW. Section 2115 of the California General Corporation Law
("Section 2115") provides that certain provisions of the California General
Corporation Law shall be applicable to a corporation organized under the laws of
another state to the exclusion of the law of the state in which it is
incorporated, if the corporation meets certain tests regarding the business done
in California and the number of its California stockholders.
An entity such as the Company is subject to Section 2115 if, on a
consolidated basis, the average of the property factor, payroll factor and sales
factor (as those terms are defined by the California Revenue and Taxation Code)
is more than 50 percent deemed to be in California during its latest full income
year and more than one-half of its outstanding voting securities are held of
record by persons having addresses in California. Section 2115 does not apply to
a corporation with outstanding securities listed on the New York or American
Stock Exchange, or with outstanding securities designated as qualified for
trading as a national market security on NASDAQ, if such corporation has at
least 800 beneficial holders of its equity securities. Since the Company
currently would be deemed to meet the factors discussed above and does not
currently qualify as a national market security on NASDAQ, it is subject to
Section 2115.
During the period that the Company is subject to Section 2115, the
provisions of the California General Corporation Law regarding the following
matters are made applicable to the exclusion of the law of the State of
Delaware: (i) general provisions and definitions; (ii) annual election of
directors; (iii) removal of directors without cause; (iv) removal of directors
by court proceedings; (v) filling of director vacancies where less than a
majority in office elected by shareholders; (vi) directors' standard of care;
(vii) liability of directors for unlawful distributions; (viii) indemnification
of directors, officers and others; (ix) limitations on corporate distributions
of cash or property; (x) liability of a stockholder who receives an unlawful
distribution; (xi) requirements for annual stockholders meetings; (xii)
stockholders' right to cumulate votes at any election of directors; (xiii)
supermajority vote requirements; (xiv) limitations on sales of assets; (xv)
limitations on mergers; (xvi) reorganizations; (xvii) dissenters' rights in
connection with reorganizations; (xviii) required records and papers; (xix)
actions by the California Attorney General; and (xx) rights of inspection.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is .
52
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this Offering, 5,052,497 shares of Common Stock will
be outstanding, assuming that the Underwriters' over-allotment option to
purchase 195,000 shares is not exercised and excluding (i) the 130,000 shares
underlying the Representative Warrant, (ii) the 200,000 shares underlying the
Consultant Warrants, (iii) up to 750,000 shares underlying the warrant to Bell &
Howell, (iv) the 11,250 shares underlying the warrant to Mr. Grayson, (v) up to
55,000 shares underlying the Bridge Warrants, (vi) up to 15,750 shares
underlying the LOC Warrants, (vii) the 92,667 shares underlying the Dealer
Manager Warrants, (viii) the 622,500 shares of Common Stock underlying Options
granted pursuant to the Company's Stock Incentive Plan as of December 31, 1996,
and (ix) up to 877,500 shares of Common Stock underlying Options which may be
granted in the future pursuant to the Company's Stock Incentive Plan. In
addition, although it has no present intention to do so, the Company could issue
additional Common Stock or preferred stock or other securities convertible into
Common Stock. See "Management--Stock Incentive Plan" and "Description of Capital
Stock."
Of the 5,052,497 shares outstanding upon the completion of this Offering,
the 1,300,000 shares offered by the Company and the 1,205,152 shares offered by
the Selling Security Holders (1,405,152 shares upon exercise of the Consultant
Warrants) will be registered under the Securities Act by the Registration
Statement of which this Prospectus is a part and will therefore be freely
tradeable following the expiration or termination of any "lock-up" agreement
described below without further registration unless purchased by an "affiliate"
of the Company. See "Resales of Outstanding Securities." The Company has granted
certain registration rights with respect to the Common Stock underlying the
outstanding warrants and intends to file a registration statement on Form S-8
under the Securities Act registering the resale of the Common Stock underlying
the Options and available for issuance under the Stock Incentive Plan. The
remaining 2,547,345 outstanding shares of Common Stock will be "restricted
securities" as defined in Rule 144 under the Securities Act and may not be sold
unless registered under the Securities Act or pursuant to an exemption
therefrom.
In general, under recent changes to Rule 144 which will be in effect not
later than 60 days after the date of this Prospectus, a person (or persons whose
shares are required to be aggregated) who has satisfied a one-year holding
period may, under certain circumstances, commencing 90 days after the date of
this Prospectus, sell within any three-month period, in ordinary brokerage
transactions or in transactions directly with a market maker, a number of shares
of Common Stock equal to the aggregate of one percent of the then outstanding
Common Stock or the average weekly trading volume during the four calendar weeks
prior to such sale. Rule 144 also permits the sale of shares of Common Stock
without any quantity limitations by a person who is not an "affiliate" of the
Company and who has owned the shares for at least two years.
Approximately 2,472,345 of the outstanding shares of Common Stock will have
satisfied the holding periods under Rule 144 at the completion of this Offering.
Of these 2,472,345 shares, approximately 523,000 shares will be freely tradeable
without restriction under Rule 144. Shares of Common Stock beneficially owned by
the Company's officers and directors (other than 50,000 shares beneficially
owned by Mr. Karlsson) are subject to a "lock-up" agreement whereby such
officers and directors have agreed not to directly or indirectly sell, transfer
or encumber any shares of Common Stock owned by them for a period of one year
from the effective date of this Offering without the prior written consent of
the Representative. In addition, all of the Selling Security Holders' Shares and
all but 21,700 shares owned by Mr. Berk are subject to the same one-year
lock-up, other than the 28,302 shares being registered for Mr. Grayson which are
subject to a 90-day lock-up. See "Underwriting." The Company intends to make a
public announcement in the event that a material amount of securities subject to
the lock-up arrangement are released prior to the expiration of the term of such
arrangement if such announcement is required by the federal securities laws.
Prior to the Offering, there has been no public market for the Common Stock.
Future sales of Common Stock made pursuant to this Prospectus, Rule 144 or
otherwise, or the availability of Common Stock for sale, could adversely effect
prevailing market prices for the Common Stock. See "Risk Factors-- Possible
Adverse Effect of Future Sales of Securities on Market Price."
53
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the form of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part), the Underwriters named below, represented by
the Representative, have severally but not jointly agreed, subject to the terms
and conditions contained in the Underwriting Agreement, to purchase from the
Company the respective number of shares of Common Stock indicated below opposite
their names at the initial public offering price less the underwriting discounts
and commissions set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent and that the Underwriters are committed to purchase
all of the 1,300,000 shares of Common Stock being offered hereby, if any are
purchased.
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ----------
Shamus Group, Inc................................................................
----------
Total........................................................................
The Representative's principal business is to underwrite and sell securities
and to operate as a full-service brokerage firm. This is the first public
offering which the Representative will underwrite. See "Risk
Factors--Inexperienced Representative."
The Boston Group, L.P. (the "Dealer Manager"), an NASD member firm, acted as
Dealer Manager in connection with certain private placements of securities
conducted by the Company in May through July 1996. In connection with such
private placements, the Dealer Manager received a ten percent commission and a
three percent non-accountable expense allowance, was reimbursed for certain
expenses and received Dealer Manager Warrants to purchase 92,667 shares of
Common Stock at $3.30 per share. See "Description of Capital Stock--Warrants."
The Company initially retained the Dealer Manager to act as the managing
underwriter in connection with the Offering. In January 1997, the Company
elected to retain the Representative to act as managing underwriter of the
Offering. The decision to retain the Representative was made because the Company
believes that the Representative is familiar with the Company and its business
and was better able to complete the Offering within the timeframe required by
the Company's business plan. In consideration of the expenditures made and
services performed by the Dealer Manager in connection with the structuring of
the Offering as well as the preparation and filing of the Registration Statement
of which this Prospectus is a part, the Representative has agreed to pay the
Dealer Manager, out of the non-accountable expense allowance payable to the
Representative, a fee equal to one and one-half percent of the gross proceeds
from the sale of all shares of Common Stock offered hereby. To date, the Company
has paid the Representative $15,000 of such fee.
The Company has been advised by the Representative that the Underwriters
propose to offer shares to the public at the initial public offering set forth
on the cover page of this Prospectus, and to certain securities dealers at such
price less a concession of not more than $ per share, and that the
Underwriters and such dealers may reallot to other dealers, including the
Underwriters, at a discount not in excess of $ per share. After the initial
public offering, the public offering price and concessions
54
and discounts may be changed by the Representative. No reduction in such terms
shall change the amount of proceeds to be received by the Company as set forth
on the cover page of this Prospectus.
The Company has granted the Underwriters an option, exercisable within 45
days after the date of the Prospectus, to purchase up to an aggregate of an
additional 195,000 shares of Common Stock, solely to cover over-allotments, if
any, at the same price per share of Common Stock being paid by the Underwriters
for the 1,300,000 shares of Common Stock being offered by the Company hereby.
The Company has agreed to pay to the Representative a non-accountable
expense allowance equal to three percent of the gross proceeds from the sale of
all shares of Common Stock offered hereby, one half of which will be paid to the
Dealer Manager as described above, $15,000 of which has been advanced to the
Dealer Manager. The Representative's expenses in excess of the non-accountable
expense allowance, including its legal expenses, will be borne by the
Representative. To the extent that the expenses of the Representative are less
than the non-accountable expense allowance, the excess shall be deemed to be
compensation to the Representative.
The Underwriters have informed the Company that they do not expect any sales
or shares of Common Stock offered hereby to be made by the Underwriters to any
accounts over which they exercise discretionary authority.
The Company has agreed to sell to the Representative and/or, at the option
of the Representative, any of the Underwriters, for an aggregate of $50 the
Representative Warrant to purchase up to 130,000 shares of Common Stock at an
exercise price equal to 120% of the initial public offering price per share of
Common Stock. The Representative Warrant may not be transferred prior to
exercise and is exercisable during the four-year period commencing one year from
the date of this Prospectus.
Except as described below, each of the Company's executive officers,
directors, and certain other principal stockholders, have agreed not to,
directly or indirectly, offer, offer to sell, sell, grant an option to purchase
or sell, transfer, assign, pledge, hypothecate or otherwise encumber any shares
of Common Stock owned by them for a period of one year from the completion of
the Offering without the prior written consent of the Representative. In
addition, each of the Selling Security Holders has agreed not to sell, pledge,
assign or otherwise transfer any shares of Common Stock during the one-year
period following the effective date of this Prospectus; provided that one
Selling Security Holder has agreed to a 90 day "lock-up" with respect to 28,302
shares of Common Stock. However, any of such "lock-up" restrictions may be
waived by the Representative in its sole discretion. In such event, the
Representative may require any such sales to be effected through the
Representative or such other broker dealer(s) as the Representative may allow
and the Representative (or such other broker-dealer(s)) will be entitled to
receive its customary compensation in connection therewith. Although the
Representative does not have any plans, proposals, arrangements or
understandings with any Selling Security Holders regarding the waiver of any
such lock-ups, any permitted sales by the Selling Security Holders during such
12-month period could adversely affect the price of and any market for the
Common Stock. Notwithstanding the foregoing, Mr. Karlsson and Stanley Berk hold
50,000 and 21,700 shares, respectively, which are not registered and are not
covered by their respective lock-up agreements.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities under the Securities Act or will
contribute to payments the Underwriters may be required to make in respect
thereof. 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.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the shares of Common Stock offered hereby
and the exercise price and other terms of the Representative Warrant have been
determined by negotiations between the Company and the Representative. The major
factors considered in determining the initial public offering price of the
Common Stock
55
were the prevailing market conditions, the market price relative to earnings,
cash flow and assets for publicly traded common stock of comparable companies,
the sales and earnings of the Company and comparable companies in recent
periods, the Company's earning potential, the experience of its management and
the position of the Company in the industry. The initial public offering price
set forth on the cover page of this Prospectus should not be considered an
indication of the actual value of the Common Stock. Such price is subject to
change as a result of market conditions and other factors and no assurance can
be given that the Common Stock can be resold at the initial public offering
price.
The Company has agreed that the Representative shall have the right, from
time to time, for a period not to exceed three years after completion of the
Offering, to have an individual selected by the Representative attend all
meetings of the Board of Directors of the Company as a non-voting observer. In
addition, pursuant to the Underwriting Agreement, for a period not to exceed
three years following completion of the Offering the Company has agreed not to
conduct certain securities and other transactions without the prior consent of
the Representative.
The foregoing sets forth the material terms and conditions of the
Underwriting Agreement, but does not purport to be a complete statement of the
terms and conditions thereof, copies of which are on file at the offices of the
Representative, the Company and the Securities and Exchange Commission. See
"Additional Information."
The Representative and/or any other persons participating in the Offering
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock offered hereby. Such transactions may take a variety
of forms including syndicate short covering transactions and penalty bid
provisions requiring the forfeiture of commissions or discounts by
broker-dealers who participate in the Offering in the event that shares allotted
to such broker-dealers in the Offering are resold within a specified period of
time following the Offering.
ABC Capital Markets Group ("ABC"), which is controlled by Pete Peterson, has
provided financial advisory and other services to the Company as a consultant
beginning in the fourth quarter of 1995. Mr. Peterson is an affiliate of L.H.
Friend, Weinress, Frankson & Presson, Inc., a member of the NASD. As
compensation for services rendered by Mr. Peterson in July 1996 the Company
issued Mr. Peterson an option to purchase 5,000 shares at the fair market value
of the Common Stock at such time ($2.50 per share). In addition, through
December 31, 1996, the Company had paid ABC an aggregate of $19,800 for advisory
services rendered in 1996. It is anticipated that additional fees of no more
than $18,000 will be paid to ABC for services rendered in 1996 and in the first
quarter of 1997.
In appreciation of advisory services provided by Mr. Peterson to the Company
during the fourth quarter of 1995 and the first quarter of 1996, in May 1996 Mr.
Karlsson gifted 5,000 shares of his personally-held Common Stock to Mr.
Peterson, which resulted in a compensation charge to the Company of
approximately $10,000.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Latham & Watkins, Costa Mesa, California. Certain
legal matters will be passed upon for the Underwriters by Jeffer, Mangels,
Butler & Marmaro LLP, Los Angeles, California.
EXPERTS
The financial statements as of December 31, 1996 and for the years ended
December 31, 1995 and 1996 included in this Prospectus, have been audited by
Deloitte & Touche, LLP, independent auditors, as stated in their report, which
includes an explanatory paragraph regarding substantial doubt about the
Company's ability to continue as a going concern, appearing herein, and have
been included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
56
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a registration statement on Form SB-2 (the
"Registration Statement") under the Securities Act with respect to the shares of
Common Stock registered hereby. This Prospectus omits certain information
contained in the Registration Statement as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the shares of Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits thereto. Statements contained
herein concerning the contents of any contract or any other document are not
necessarily complete, and in each instance, reference is made to such contract
or other document filed with the Commission as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement, including exhibits and schedules thereto,
may be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at the
New York Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048 and at the Chicago Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. This information also can be obtained from the
Commission's Web site at http://www.sec.gov.
57
SCOOP, INC.
TABLE OF CONTENTS
PAGE
---------
INDEPENDENT AUDITORS' REPORT............................................................................... F-2
FINANCIAL STATEMENTS:
Balance sheet.............................................................................................. F-3
Statements of operations................................................................................... F-4
Statements of stockholders' deficit........................................................................ F-5
Statements of cash flows................................................................................... F-6
Notes to financial statements.............................................................................. F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Scoop, Inc.:
We have audited the accompanying balance sheet of Scoop, Inc. (the Company)
as of December 31, 1996 and the related statements of operations, stockholders'
deficit and cash flows for each of the two years in the period ended December
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 and 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 Scoop, Inc. as of December
31, 1996 and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming Scoop,
Inc. will continue as a going concern. As more fully described in Note 1 to the
financial statements, the Company has incurred recurring operating losses and
has an accumulated deficit of $3,374,100 at December 31, 1996. The Company's
ability to continue as a going concern is dependent upon future events,
including the successful development and market acceptance of its service and
its ability to secure sufficient additional sources of financing to complete its
development program and generate revenues sufficient to cover its cost
structure. These factors raise substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Costa Mesa, California
February 17, 1997 (except for information
in Note 11, for which the date is February 25, 1997 and
information pertaining to the reincorporation
described in Note 1 as to which the date
is , 1997)
The accompanying financial statements include the effects of the
reincorporation of the Company in the State of Delaware which is anticipated to
be consummated prior to the closing of this offering and will result in an
increase in the number of shares of common and preferred stock authorized. The
above opinion is in the form which will be signed by Deloitte & Touche LLP upon
consummation of the reincorporation, which is described in Note 1 of the notes
to financial statements and assuming that from February 17 1996 to the date of
such reincorporation no other events will have occurred that would effect the
accompanying financial statements and notes thereto.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 26, 1996
F-2
SCOOP, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1996
ASSETS
PRO FORMA
1996
1996 (NOTE 1)
----------- -----------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents.............................................................. $ 262,400
Accounts receivable, net of allowance for doubtful accounts $100,900................... 115,900
Prepaid expenses....................................................................... 187,500
Income tax refund receivable (Note 8).................................................. 15,400
-----------
Total current assets................................................................. 581,200
EQUIPMENT, at cost, net of accumulated depreciation and amortization (Notes 2 and 9)... 305,100
COVENANT NOT-TO-COMPETE, net of amortization (Note 10)................................. 77,300
OTHER ASSETS........................................................................... 8,200
-----------
$ 971,800
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................................................... $ 415,000 $ 415,000
Accrued payroll........................................................................ 133,000 133,000
Accrued royalty (Note 9)............................................................... 284,200 284,200
Other accrued liabilities.............................................................. 32,300 32,300
Current portion of capital lease obligations........................................... 100,900 100,900
Current portion of covenant not-to-compete obligation.................................. 18,400 18,400
----------- -----------
Total current liabilities............................................................ 983,800 983,800
CAPITAL LEASE OBLIGATIONS, net of current portion (Note 9)............................. 76,800 76,800
COVENANT-NOT-TO-COMPETE OBLIGATION, net of current portion (Note 10)................... 62,200 62,200
COMMITMENTS AND CONTINGENCIES (Note 9)
MANDATORILY REDEEMABLE COMMON STOCK, 926,664 issued and outstanding--actual; none
issued and outstanding--pro forma (Note 5)........................................... 2,302,500
STOCKHOLDERS' DEFICIT (Notes 5, 6, 7 and 10):
Preferred stock $.001 par value; 5,000,000 shares authorized; no shares issued or
outstanding
Common stock, $.001 par value; 20,000,000 shares authorized; 2,825,833 (December 31,
1996) shares issued and outstanding--actual; 3,752,497 shares issued and
outstanding--pro forma............................................................... $ 2,800 $ 3,700
Additional paid-in capital............................................................. 725,600 3,027,200
Accumulated deficit.................................................................... (3,374,100) (3,374,100)
Deferred compensation.................................................................. 192,200 192,200
----------- -----------
Total stockholders' deficit.......................................................... (2,453,500) (151,000)
----------- -----------
$ 971,800 $ 971,800
----------- -----------
----------- -----------
See independent auditor's report and notes to financial statements.
F-3
SCOOP, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
----------- -------------
Net sales............................................................................. $ 968,600 $ 1,395,900
Cost of sales......................................................................... 534,100 833,200
----------- -------------
Gross profit...................................................................... 434,500 562,700
Operating expenses:
Research and development............................................................ 186,600 601,700
Selling and marketing............................................................... 175,100 396,500
General and administrative (Note 6)................................................. 637,900 1,710,300
----------- -------------
999,600 2,708,500
----------- -------------
Operating loss........................................................................ (565,100) (2,145,800)
Interest expense, net................................................................. 36,000 21,500
----------- -------------
Loss before provision for income taxes................................................ (601,100) (2,167,300)
Provision for income taxes (Note 8)................................................... 1,600 1,600
----------- -------------
Net loss.............................................................................. $ (602,700) $ (2,168,900)
----------- -------------
----------- -------------
Net loss applicable to common stock (Note 1).......................................... $ (2,283,900)
-------------
-------------
Net loss per common share (Note 1).................................................... $ (0.12) $ (0.62)
----------- -------------
----------- -------------
Weighted average common shares outstanding (Note 1)................................... 4,863,000 3,673,000
----------- -------------
----------- -------------
See independent auditor's report and notes to financial statements.
F-4
SCOOP, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED DEFERRED
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
---------- --------- ----------- ------------ ------------- -----------
BALANCE, January 1, 1995............ 5,033,270 $ 5,000 $ -- $ (228,700) $ -- $ (223,700)
Repurchase of shares (Note 10)...... (2,516,635) (2,500) (97,500) (100,000)
Ascribed value of transferred shares
(Note 6).......................... 12,000 12,000
Net loss............................ (602,700) (602,700)
---------- --------- ----------- ------------ ------------- -----------
BALANCE, December 31, 1995.......... 2,516,635 2,500 12,000 (928,900) (914,400)
Issuance of shares in repayment of
debt (Note 10).................... 71,760 100 154,900 155,000
Net proceeds from issuance of common
stock (Note 6).................... 113,248 100 224,900 225,000
Proceeds from issuance of common
stock (Note 10)................... 20,000 40,000 40,000
Stock bonus (Note 6)................ 39,663 81,800 81,800
Ascribed value of transferred shares
(Note 6).......................... 50,800 50,800
Issuance of shares (Note 10)........ 64,527 100 161,200 (161,300)
Increase in redemption value of
redeemable shares of common stock
(Note 5).......................... (115,000) (115,000)
Net loss............................ (2,168,900) (2,168,900)
Deferred compensation (Note 6)...... 192,200 192,200
---------- --------- ----------- ------------ ------------- -----------
BALANCE, December 31, 1996.......... 2,825,833 $ 2,800 $ 725,600 $(3,374,100) $ 192,200 $(2,453,500)
---------- --------- ----------- ------------ ------------- -----------
---------- --------- ----------- ------------ ------------- -----------
See independent auditor's report and notes to financial statements.
F-5
SCOOP, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................................. $(602,700) $(2,168,900)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................................... 35,800 105,400
Stock bonus (Note 6).................................................................... 81,800
Ascribed value of transferred shares (Note 6)........................................... 12,000 50,800
Deferred compensation................................................................... 192,200
Changes in:
Accounts receivable................................................................... 900 (93,800)
Publishing materials.................................................................. (1,800) 14,600
Prepaid expenses...................................................................... (187,500)
Income tax refund receivable.......................................................... (17,200) 1,800
Other assets.......................................................................... (8,200)
Accounts payable...................................................................... 143,500 187,000
Accrued payroll....................................................................... 60,400 36,000
Accrued royalty....................................................................... 100,000 134,200
Other accrued liabilities............................................................. (34,300) (1,600)
--------- -----------
Net cash used in operating activities............................................... (303,400) (1,656,200)
CASH FLOWS FROM INVESTING ACTIVITIES--Purchase of equipment............................... (166,700)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit............................................. 136,000 (150,000)
Proceeds from convertible note payable.................................................... 150,000
Repayment of note payable to stockholder.................................................. (88,000)
Proceeds from note payable--Other (Note 4)................................................ 57,500
Repayment of note payable--Other (Note 4)................................................. (57,500)
Repayment of capital lease obligations.................................................... (27,100) (56,300)
Repayment of covenant not-to-compete obligation........................................... (16,700)
Proceeds from issuance of common stock (Notes 6 and 10)................................... 265,000
Proceeds from bridge notes................................................................ 400,000
Repayment of bridge notes................................................................. (400,000)
Proceeds from issuance of redeemable common stock (Note 5)................................ 2,187,500
Redemption of common stock (Note 10)...................................................... (12,000)
--------- -----------
Net cash provided by financing activities........................................... 304,400 2,084,000
--------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS..................................................... 1,000 261,100
CASH AND CASH EQUIVALENTS:
Beginning of year....................................................................... 300 1,300
--------- -----------
End of year............................................................................. $ 1,300 $ 262,400
--------- -----------
--------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--Cash paid during the year for:
Interest................................................................................ $ 11,500 $ 32,200
--------- -----------
--------- -----------
Income taxes............................................................................ $ 17,200 $ 3,200
--------- -----------
--------- -----------
SCHEDULE OF NONCASH INVESTING AND FINANCING TRANSACTIONS:
Contractual obligations incurred for the acquisition of equipment......................... $ 125,000
-----------
-----------
Note payable exchanged for common stock (Note 10)......................................... $ 88,000
---------
---------
Contractual obligation incurred in exchange for noncompetition agreement.................. $ 97,000
---------
---------
Increase in redemption value of redeemable shares of common stock (Note 5)................ $ 115,000
-----------
-----------
Common stock issued in repayment of debt and accrued interest (Note 10)................... $ 155,000
-----------
-----------
See independent auditor's report and notes to financial statements.
F-6
SCOOP, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--Scoop, Inc. (the Company), formerly Karlsson-DelRey
Communications, Inc., was incorporated in California in May 1990. On November 5,
1993, the Company formed a wholly-owned subsidiary, Newsmakers Information
Services, Inc. (Newsmakers or the subsidiary). In May 1996, the Company changed
its corporate name to Scoop, Inc. In November 1996, the Company merged the
subsidiary into itself. The accompanying financial statements have been restated
to reflect this reorganization, which has been accounted for on a basis similar
to a pooling of interests.
DESCRIPTION OF BUSINESS--The Company is principally engaged in developing
SCOOP!, an internet delivered business information service, and marketing
printed media reproductions. The Company plans to use SCOOP! and the Company's
proprietary SCOOP SMARTGUIDE-TM- technology which is under development, to
provide customers with a combination of information delivering capabilities for
accessing information from a variety of databases and the Internet's World Wide
Web. The market for the Company's business information services is highly
competitive and may be affected by technology changes. Changes in technology and
other market conditions could adversely impact future operating results of the
Company. Additionally, the Company's future operating success is largely
dependent on its ability to successfully complete the development of SCOOP! and
market its proprietary technology, including its SCOOP SMARTGUIDE-TM-
technology.
GOING CONCERN AND MANAGEMENT'S PLANS--Through December 31, 1996, the Company
has incurred significant operating losses and expects significant additional
losses in the future. The Company plans to finance its operations primarily
through the proceeds from the Company's proposed initial public offering. The
Company believes that the estimated net proceeds of such offering, existing cash
and cash equivalents and bridge financing obtained from certain investors (Note
11) will satisfy its budgeted cash requirements for the nine months subsequent
to completion of the offering, based on the Company's current operating plan.
The Company's current operating plan shows that at the end of such period, the
Company will require substantial additional capital. Moreover, if the Company is
unsuccessful in raising the full estimated net proceeds of the offering or
experiences unanticipated cash requirements during the nine-month period or
experiences delays in the development and marketing of its SCOOP! business
information service, the Company could require additional capital to fund its
operations, continue research and development programs, and commercialize any
products that may be developed. The Company may seek such additional funding
through public or private financings or collaborative or other arrangements with
third parties. There can be no assurance that additional funds will be available
on acceptable terms, if at all. The accompanying financial statements have been
prepared assuming the Company will continue as a going concern and do not
include any adjustments that might result from the outcome of this uncertainty.
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 years. Actual results could differ from those estimates.
CONCENTRATION OF CONTENT PROVIDERS--The Company's content providers for its
NewsMakers services include approximately four content providers for which the
Company acts on an exclusive outsourcing agency basis, and approximately 20
additional content providers for which the Company acts as outsourcing agent on
a nonexclusive basis and a smaller number of content providers for which the
Company acts
F-7
SCOOP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
on a project-by-project basis. One exclusive content provider presently provides
the content for approximately 48% of the Company's annual revenue. The Company
anticipates adding additional new publications to its list of exclusive content
providers for its publishing products and services, although there can be no
assurance that such additional content providers will be added.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash on hand
and investments purchased with original maturities of three months or less.
EQUIPMENT--Equipment is stated at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method over a four-year period
for computer and office equipment. Leasehold improvements are amortized over the
term of the related lease if less than the estimated service life.
The Company accounts for long-lived assets (primarily equipment) under
Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
This statement requires impairment losses to be recognized for long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows are not sufficient to recover the assets' carrying
amount. The statement also requires that assets to be disposed of should be
written down to fair value less selling costs.
REVENUE RECOGNITION--Revenues from product sales are recognized upon
shipment of product to customers who principally consist of corporate and
professional entities. The Company offers credit to its customers, performs
ongoing credit evaluations and generally does not require collateral.
INCOME TAXES--Income taxes are recorded in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. This statement requires the recognition of deferred
tax assets and liabilities to reflect the future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Measurement of the deferred items is based on enacted tax laws. In the event the
future consequences of differences between financial reporting basis and tax
basis of the Company's assets and liabilities result in a deferred tax asset,
SFAS No. 109 requires an evaluation of the probability of being able to realize
the future benefits indicated by such asset. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion
or all of the deferred tax asset will not be realized.
SOFTWARE DEVELOPMENT COSTS--Development costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
costs would be capitalized in accordance with SFAS No. 86, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. Through
December 31, 1996, software development has been substantially completed
concurrently with the establishment of technological feasibility, and
accordingly, no costs have been capitalized to date.
FAIR VALUE OF FINANCIAL INSTRUMENTS--SFAS No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, requires management to disclose the estimated
fair value of certain assets and liabilities defined by SFAS No. 107 as
financial instruments. Financial instruments are generally defined by SFAS No.
107 as cash, evidence of ownership interest in equity, or a contractual
obligation that both conveys to one entity a right to receive cash or other
financial instruments from another entity and imposes on the other entity the
obligation to deliver cash or other financial instruments to the first entity.
At December 31, 1995 and 1996, management believes that the carrying amount of
cash and cash equivalents, accounts receivable, accounts
F-8
SCOOP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
payable and accrued liabilities approximate fair value because of the short
maturity of these financial instruments. The carrying value of the Company's
capital leases is considered to approximate fair value based upon current
borrowing rates offered to the Company.
STOCK SPLIT--In May 1996, the Company effected a 1,006.654-for-1 stock split
of its then outstanding common stock. All share and per share amounts included
in the accompanying financial statements have been restated to reflect the stock
split.
REINCORPORATION--The Company is preparing for an initial public offering.
Prior to the consummation of this offering, the Company will reincorporate in
the State of Delaware. The accompanying financial statements include the effects
of the reincorporation and resulting increase in the number of common stock
authorized to 20,000,000 shares and the authorization of 5,000,000 shares of
preferred stock.
NET LOSS APPLICABLE TO COMMON STOCK--Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin Topic 6b, net loss applicable to common
stock for the period presented has been calculated by adding to the net loss the
increase in the redemption value of redeemable shares of common stock.
NET LOSS PER COMMON SHARE--Net loss per common share has been computed by
dividing the net loss by the weighted average number of common shares and
redeemable common shares outstanding during the period. Additionally, pursuant
to Securities and Exchange Commission Staff Accounting Bulletin Topic 4d, stock
options and warrants granted during the twelve months prior to the date of the
initial filing of the Company's Form SB-2 Registration Statement have been
included in the calculation of common equivalent shares using the treasury stock
method, as if they were outstanding as of the beginning of each period net loss
per share is presented.
PRO FORMA LIABILITIES AND STOCKHOLDERS' EQUITY--In September 1996, the
Company began preparing for an initial public offering of its common stock. Upon
the completion of an initial public offering, the mandatory redemption rights
associated with certain shares of common stock will terminate (Note 5). The
accompanying pro forma information as of December 31, 1996 gives effect to the
termination of such redemption rights.
2. EQUIPMENT
Equipment consists of the following at December 31, 1996:
Computer equipment............................................... $ 379,600
Furniture and fixtures........................................... 54,700
Leasehold improvements........................................... 38,300
---------
472,600
Accumulated despreciation and amortization....................... (167,500)
---------
$ 305,100
---------
---------
Included in equipment as of December 31, 1996 is $274,600 of equipment held
under capital leases. The related accumulated amortization amounted to $128,700
at December 31, 1996.
F-9
SCOOP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
3. LINE OF CREDIT
Outstanding borrowings under the line of credit agreement were repaid in
June 1996 at which time the credit facility was terminated.
4. NOTE PAYABLE--OTHER
Note payable--other consisted of a 10% unsecured demand note payable to a
financing institution. The principal sum of $57,500, plus accrued interest of
$2,150, was repaid in full in June 1996.
5. REDEEMABLE SHARES OF COMMON STOCK
In July 1996, the Company completed two separate private placements (the May
and June Private Placements) aggregating 926,664 shares of common stock (the
Redeemable Shares) for $2,178,200 (net of offering costs of $592,400). Holders
of the Redeemable Shares have cumulative voting rights and are entitled to share
ratably in dividends, if any. The Redeemable Shares must be redeemed by the
Company in the event that the Company fails to complete an initial public
offering of its common stock and to have its common stock quoted for trading on
a national securities exchange or NASDAQ by December 1998. The redemption price
is equal to the greater of the issuance price plus a return of 10% compounded
annually, or the aggregate fair market value. During the year ended December 31,
1996, the Company increased the mandatorily redeemable common stock and
accumulated deficit by $115,000 to increase the carrying value of the Redeemable
Shares to approximate redemption value. In the event the Company completes an
initial public offering of its common stock and the common stock is quoted for
trading on a national securities exchange or NASDAQ by December 1998, the
redemption rights associated with the Redeemable Shares will terminate.
In connection with the May and June Private Placements, the Company issued
to each purchaser of redeemable common stock an equal number of cancelable
warrants for aggregate consideration of $9,300, the deemed value of the
warrants. Each cancelable warrant entitles the holder to purchase one share of
common stock at either $2.50 (May Private Placement) or $3.00 (June Private
Placement) per share. The cancelable warrants will become exercisable in July
1998, unless the Company either consummates an initial public offering of its
stock or offers to redeem all Redeemable Shares issued in the May and June
Private Placements for $6.00 per share. In either case, the cancelable warrants
become null and void. Holders of cancelable warrants are not entitled to receive
dividends, vote, consent, exercise any preemptive right or receive notice as
stockholders of the Company in respect of any meeting of stockholders for the
election of directors of the Company or any other matter.
6. STOCKHOLDERS' DEFICIT
STOCK BONUS--In April 1996, the Company issued an aggregate of 34,663 shares
of the Company's common stock at a deemed fair market value of $2.00 per share
as a stock bonus to 14 key employees or consultants of the Company. Compensation
expense of $69,300 was recorded in connection with this stock bonus.
In July 1996, the Company issued 5,000 shares of the Company's common stock
as a stock bonus to an employee. Compensation expense of $12,500 ($2.50 per
share) was recorded concurrent with the issuance of the common stock, which the
Company's Board of Directors deemed to be the fair value of the stock at the
date of grant.
F-10
SCOOP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
6. STOCKHOLDERS' DEFICIT (CONTINUED)
PRIVATE PLACEMENT OF STOCK--In April 1996, the Company completed the private
placement of 113,248 shares of its common stock, yielding net proceeds of
$225,000.
OTHER--During the years ended December 31, 1995 and 1996, the Company's
president and majority stockholder gifted certain shares of his personally-held
common stock to various directors, consultants and employees of the Company.
These transactions resulted in the Company's recording an increase to general
and administrative expense and additional paid-in capital of $12,000 and
$50,800, respectively, which the Company deemed the fair value of the gifted
stock at the dates of the transactions.
7. STOCK OPTION PLAN
STOCK OPTION PLAN--In April 1996, the Company adopted its 1996 Stock
Incentive Plan (the 1996 Plan), as subsequently amended in October 1996, which
provides for the grant of stock options and other awards to certain officers,
key employees, consultants or other persons affiliated with the Company. The
maximum number of shares of common stock that may be issued pursuant to the 1996
Plan is 1,500,000. Following the adoption of such plan, the Company granted
options to purchase an aggregate of 402,500 shares of the Company's common stock
at prices ranging from $2.00 to $5.00 per share, which the Company's Board of
Directors deemed to be equal to, or in excess of, fair market value of the
common stock at the dates of grants, to employees of the Company. Additionally,
options were granted for the purchase of up to 220,000 common shares at prices
ranging from $2.00 to $5.00 per share to certain nonemployees of the Company.
The Company will record compensation expense equivalent to the fair value of the
options granted to nonemployees, totaling approximately $91,000. As options to
purchase 75,000 shares vested upon grant, the Company recorded $32,300 at the
date of grant. The remaining amount will be recorded ratably over the four-year
vesting periods of the respective options. At December 31, 1996, the Company had
recorded $41,000 of deferred compensation expense associated with these stock
option grants.
CONSULTANT WARRANTS--In June 1996, the Company granted warrants to purchase
up to 200,000 shares of the Company's common stock at a price of $2.55 per
share, which the Company deemed to be equal to the fair market value of the
stock at the date of grant, to certain consultants of the Company. As these
warrants vested upon grant, the Company recorded compensation expense equivalent
to the fair value of these warrants, totaling $119,200. In connection with the
May and June Private Placements, the Company granted warrants to purchase up to
92,667 shares of common stock at a price of $3.30 to its underwriter.
CONTENT PROVIDER WARRANTS--In October 1996, the Company entered into an
agreement with a third party giving the Company the right to access and resell
certain proprietary database information. Pursuant to such agreement, the
Company granted warrants to purchase up to 550,000 shares of the Company's
common stock with exercise prices of $6.50 (300,000 shares), $10.00 (150,000
shares), and $15.00 (100,000 shares) to a third party. As these warrants vest
immediately, the Company recorded compensation expense equivalent to the fair
value of the warrants totaling approximately $32,000. Additionally, the third
party will be granted additional warrants to purchase shares of the Company's
common stock (the additional warrants) if they exercise 300,000 warrants by
September 1997. If the third party elects to exercise the additional warrants by
September 1997, the additional warrants will total 200,000 and have an exercise
price of $6.50 per share. If the third party exercises the warrants subsequent
to September 1997, the additional warrants will aggregate 150,000 with exercise
prices of $10.00 per share (50,000 shares) and $15 per share (100,000 shares).
F-11
SCOOP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
7. STOCK OPTION PLAN (CONTINUED)
The following table summarizes the activity under the 1996 Plan along with
common stock warrant activity for the periods indicated:
WEIGHTED WEIGHTED
PRICE OF AVERAGE PRICE RANGE AVERAGE
OPTIONS OPTION EXERCISE OF WARRANT EXERCISE
OUTSTANDING GRANTS PRICE WARRANTS GRANTS PRICE
----------- ----------- ----------- --------- ----------- -----------
Outstanding at December 31, 1995................ -- --
1996 grants..................................... 242,500 $ 2.00 200,000 $ 2.55
245,000 2.50 92,667 3.30
20,000 3.00 300,000 6.50
14,000 4.00 150,000 10.00
101,000 5.00 100,000 15.00
----------- ---------
Outstanding at December 31, 1996................ 622,500 $ 2.76 842,667 $ 6.84
----------- ---------
----------- ---------
At December 31, 1996, 155,000 options and 200,000 warrants to purchase
shares were exercisable. The weighted average exercise price of the exercisable
options and warrants is $2.63 and $2.55, respectively.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages but does
not require companies to record compensation cost for employee stock option
grants. The Company has chosen to continue to account for employee option grants
using Accounting Principles Board (APB) No. 25. Accordingly, no compensation
expense has been recognized for employee stock option grants. Had compensation
expense for the employee stock option grants been determined based on the fair
value at the grant dates consistent with SFAS No. 123, the Company's net loss
and net loss per share for the year ended December 31, 1996 would have been
reduced to the pro forma amounts indicated below:
Net loss applicable to common stock:
As reported................................................... $(2,283,900)
Pro forma..................................................... $(2,425,100)
Net loss per common share:
As reported................................................... $ (0.62)
Pro forma..................................................... $ (0.67)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996: zero dividend yield, expected volatility of
1%, risk-free interest rate of 5.2% and expected lives of ten years.
F-12
SCOOP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
8. INCOME TAXES
The reconciliation of income tax expense computed at U.S. federal statutory
rates to income tax expense for each of the two years in the period ended
December 31, 1996 is as follows:
1995 1996
----------- -----------
Tax at U.S. federal statutory rates................................. $ (206,200) $ (759,000)
State income taxes.................................................. (16,000) (107,200)
Other............................................................... 5,600 10,300
Change in valuation allowance....................................... 218,200 857,500
----------- -----------
Total income tax expense........................................ $ 1,600 $ 1,600
----------- -----------
----------- -----------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows at December 31,
1996:
Deferred tax assets:
State income taxes............................................ $ 600
Depreciation.................................................. (17,700)
Accruals not currently deductible............................. 103,500
Net operating losses.......................................... 1,075,100
----------
1,161,500
Valuation allowance........................................... (1,161,500)
----------
Total net deferred tax assets............................... $ --
----------
----------
At December 31, 1996, the Company has federal and state tax loss
carryforwards of approximately $2,700,000 and $1,300,000 which expire in 2011
and 2001, respectively. Utilization of these federal and state loss
carryforwards is limited to approximately $300,000 annually as a result of
Internal Revenue Code Section 382 change of ownership rules.
9. COMMITMENTS AND CONTINGENCIES
LEASES--The Company leases its main operating facility on a month-to-month
basis. The Company leases certain equipment under both capital and operating
lease agreements. Rent expense for the years ended December 31, 1995 and 1996
was $84,700 and $39,400, respectively.
F-13
SCOOP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Minimum annual payments under these agreements as of December 31, 1996 are
as follows:
CAPITAL OPERATING
LEASES LEASES
----------- ----------
Year ending December 31:
1997............................................................... $ 112,600 $ 88,400
1998............................................................... 62,300 92,200
1999............................................................... 23,100 96,000
2000............................................................... 5,200 74,100
----------- ----------
Total minimum lease payments......................................... 203,200 $ 350,700
----------
----------
Amount representing interest......................................... (25,500)
-----------
Present value of future minimum lease payments....................... 177,700
Current portion...................................................... (100,900)
-----------
Long-term portion.................................................... $ 76,800
-----------
-----------
CONTRACTUAL AGREEMENTS--As discussed in Note 7, the Company has entered into
an agreement with a third party enabling the Company to access and resell
certain proprietary database information. The terms of the agreement provide for
minimum royalty payments of $296,000 (1997), $570,000 (1998) and $652,500 (1999)
during the initial term of this agreement.
LITIGATION--The Company is currently involved in litigation incidental to
its business. In the opinion of management, the ultimate resolution of such
litigation will not have a significant effect on the accompanying financial
statements. Additionally, the Company has been threatened with the commencement
of litigation related to a business venture the Company chose not to pursue.
Whether the threatened litigation will actually commence and the potential
impact on the financial condition of the Company is presently unknown.
10. RELATED PARTY TRANSACTIONS
CONVERTIBLE NOTE PAYABLE--In October 1995, a current stockholder of the
Company loaned the Company $150,000 in exchange for an 8% promissory note
convertible into 71,760 shares of the Company's common stock. In June 1996, the
Company exercised its right of redemption and issued to this stockholder 71,760
shares of common stock.
REPURCHASE OF STOCK--Pursuant to an agreement dated October 5, 1995, as
subsequently amended, the Company repurchased all of the shares that were then
owned by a co-founder and former officer of the Company in exchange for a
$12,000 cash payment and a $88,000 promissory note. This stock repurchase
resulted in a decrease in capital of $2,500 and an increase of $97,500 in
accumulated deficit. In addition, the Company agreed to issue to this former
officer 64,527 shares of the Company's common stock. In July 1996, the Company
issued these shares and recorded an addition to common stock and paid-in capital
and a reduction to accumulated deficit of $161,300 ($2.50 per share) which the
Company's Board of Directors deemed to be the fair value of the stock at the
date of issuance. Such shares of common stock have registration rights in an
initial public offering or subsequent offering.
F-14
SCOOP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
10. RELATED PARTY TRANSACTIONS (CONTINUED)
The unsecured noninterest-bearing $88,000 note payable issued in connection
with the stock repurchase from the co-founder was repaid in full in January
1996.
The Company also entered into a noncompetition agreement with the former
officer. Under the terms of the agreement, payments of $2,000 will be made in
monthly installments over a term of five years, beginning December 1995. The
Company has established the related asset and liability associated with this
agreement, based upon an imputed interest rate of 8%. The covenant
not-to-compete is being amortized over the five-year term of the covenant.
Amortization expense of $2,000 and $19,700 was recorded for the years ended
December 31, 1995 and 1996, respectively.
OTHER--In April 1996, the Company entered into an agreement with its former
counsel to issue 20,000 shares of common stock for $2.00 per share, which the
Company's Board of Directors deemed to be the fair value of the stock at the
date of the agreement. The Company issued the shares in June 1996, yielding net
proceeds of $40,000.
11. SUBSEQUENT EVENTS
OPTIONS--In February 1997, in settlement of various disputes arising between
the Company, the Company's chairman and two stockholders of the Company, the
Company agreed to pay to these stockholders a total of $60,000 in twelve equal
monthly payments of $5,000 and granted to one stockholder a warrant to purchase
11,250 shares of the Company's common stock. Additionally, the chairman has
granted to the other stockholder an option to purchase 11,250 shares of his
personally-held stock. Both the option and the warrant expire in three years,
vest at the earlier of July 1997 or upon the completion of an initial public
offering and have exercise prices set at 120% of the initial public offering
price of the Company's common stock or, if the Company does not complete an
initial public offering by June 30, 1997, $7.20 per share.
BRIDGE NOTES--In February 1997, two separate individuals each loaned $75,000
to the Company in exchange for the Company's promissory notes. The borrowings
are unsecured, bear interest at 9.75% and mature at the earlier of March 31,
1997, or upon the completion of an initial public offering.
In February 1997, the Company borrowed $150,000 from a shareholder of the
Company. The loan is unsecured, bears interest at 9.75% and matures April 30,
1997. As additional consideration of the loan, the Company granted to this
shareholder a warrant to purchase 15,000 shares of the Company's common stock at
$4.50 per share, which the Company believed to be below the fair market price at
the date of grant. The estimated fair value (determined using an option pricing
model) of the warrants, $30,100, will be recorded as an increase to paid-in
capital and expense over the term of the two-month loan. The warrants become
exercisable in February 1998.
LINE OF CREDIT--In February 1997, the Company entered into a credit
agreement with an independent third party, which provides for maximum borrowings
of $150,000. The line of credit is collateralized by accounts receivable, bears
interest at 9.5% and has a commitment term expiring in August 1997. Any
borrowings outstanding are payable in full in November 1997. In lieu of paying a
loan processing fee, the Company granted to this individual a warrant to
purchase up to 15,750 shares of the Company's common stock at $5.50 per share,
which the Company believed to be equal to the fair market value at the date of
grant. The Company will record expense equivalent to the fair value of the
warrants (determined using an option pricing model) totaling approximately
$19,400. The warrants become exercisable in March 1998.
F-15
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN ITS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR AND THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS NOT QUALIFIED TO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN 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 DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary............................. 3
Risk Factors................................... 8
Use of Proceeds................................ 19
Dividend Policy................................ 19
Capitalization................................. 20
Dilution....................................... 21
Selected Financial Data........................ 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 23
Business....................................... 28
Management..................................... 36
Certain Transactions........................... 45
Principal Stockholders......................... 47
Resale of Outstanding Shares................... 48
Description of Capital Stock................... 49
Shares Eligible for Future Sale................ 53
Underwriting................................... 54
Legal Matters.................................. 56
Experts........................................ 56
Additional Information......................... 57
Index to Financial Statements.................. F-1
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
1,300,000 SHARES OF COMMON STOCK
[SCOOP LOGO]
SCOOP, INC.
----------------
PROSPECTUS
------------------
SHAMUS GROUP, INC.
, 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY , 1997
PROSPECTUS
[LOGO]
1,205,152 SHARES OF COMMON STOCK AND
200,000 SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF CONSULTANT WARRANTS
------------------
This Prospectus relates to the registration by Scoop, Inc. (the "Company"),
at its expense, for the account of certain non-affiliated security holders (the
"Selling Security Holders") of 1,205,152 shares of Common Stock, par value $.001
per share (the "Common Stock"), and 200,000 shares of Common Stock issuable by
the Company upon exercise of certain consultant warrants previously issued by
the Company to three of the Selling Security Holders (the "Consultant Warrants")
(the 1,205,152 shares of Common Stock and the 200,000 shares of Common Stock
issuable upon exercise of the Consultant Warrants offered by the Selling
Security Holders being sometimes collectively referred to herein as the "Selling
Security Holders' Shares"). The Selling Security Holders' Shares are not being
underwritten in this Offering and the Company will not receive any proceeds from
the sale of the Selling Security Holders' Shares. See "Selling Security
Holders." Subject to certain contractual restrictions, an aggregate of 1,205,152
of the Selling Security Holders' Shares may be sold by the Selling Security
Holders or their respective transferees commencing on the date of this
Prospectus. The remaining 200,000 of the Selling Security Holders' Shares may be
sold by the Selling Security Holders or their respective transferees only after
the Consultant Warrants have been exercised. Sales of the Selling Security
Holders' Shares may depress the price of the Common Stock in any market that may
develop therefor. See "Prospectus Summary--The Offering," "Selling Security
Holders," "Dilution" and "Risk Factors--Possible Adverse Effect of Future Sales
of Securities on Market Price."
This Prospectus also relates to the registration by the Company for its own
account of 1,300,000 shares of Common Stock issued by the Company pursuant to a
separate Prospectus (the "Primary Offering Prospectus") filed with the
Registration Statement of which this Prospectus is a part. This Prospectus,
except for this Cover Page, the back Cover Page and the information contained
herein under the headings "Selling Security Holders" and "Plan of Distribution"
is identical to the Primary Offering Prospectus. This Prospectus includes
certain information that may not be pertinent to the sale of the Selling
Security Holders' Shares by the Selling Security Holders.
Prior to this Offering, there has been no public market for the Common Stock
and there can be no assurance that such a market will exist after this Offering.
------------------------
THE COMMON STOCK IS HIGHLY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND
"DILUTION" BEGINNING ON PAGES 8 AND 21,
RESPECTIVELY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
The date of this Prospectus is , 1997
The sale of the Selling Security Holders' Shares may be effected from time
to time in transactions (which may include block transactions by or for the
account of the Selling Security Holders) in the over-the-counter market or in
negotiated transactions, through the writing of options on the Selling Security
Holders' Shares, through a combination of such methods of sale or otherwise. See
"Plan of Distribution." Sales may be made at fixed prices which may be changed,
at market prices prevailing at the time of sale, or at negotiated prices. If any
Selling Security Holder sells his, her or its Selling Security Holders' Shares
pursuant to this Prospectus at a fixed price or at a negotiated price which is,
in either case, other than the prevailing market price or in a block transaction
to a purchaser who resells, or if any Selling Security Holder pays compensation
to a broker-dealer that is other than the usual and customary discounts,
concessions or commissions, or if there are any arrangements either individually
or in the aggregate that would constitute a distribution of the Selling Security
Holders' Shares, a post-effective amendment to the Registration Statement of
which this Prospectus is a part would need to be filed and declared effective by
the Securities and Exchange Commission before such Selling Security Holder could
make such sale, pay such compensation or make such a distribution. The Company
is under no obligation to file a post-effective amendment to the Registration
Statement of which this Prospectus is a part under such circumstances.
SS-2
SELLING SECURITY HOLDERS
An aggregate of 1,205,152 shares of Common Stock and 200,000 shares of
Common Stock issuable by the Company upon the exercise in full of the Consultant
Warrants are being registered in this Offering for the account of the Selling
Security Holders. All of the Selling Security Holders' Shares (other than the
200,000 shares of Common Stock issuable by the Company upon exercise of the
Consultant Warrants) may be sold by the Selling Security Holders or their
respective transferees commencing on the date of this Prospectus. The 200,000
shares of Common Stock issuable by the Company upon exercise of the Consultant
Warrants may be sold by the applicable Selling Security Holders or their
respective transferees only after the Consultant Warrants have been exercised by
such Selling Security Holders in accordance with their terms. Sales of shares of
Common Stock by the Selling Security Holders or their respective transferees may
depress the price of the Common Stock in any market that may develop therefor.
See "Risk Factors--Possible Adverse Effect of Future Sales of Securities on
Market Price."
The following table sets forth certain information with respect to persons
for whom the Company is registering such shares of Common Stock for resale to
the public. The Company will not receive any of the proceeds from the sale of
such shares of Common Stock by the Selling Security Holders, although the
Company will receive the proceeds from the exercise, if any, of the Consultant
Warrants. None of the Selling Security Holders has had any position, office or
material relationship with the Company or its affiliates during the last three
years except for: (i) the three holders of the Consultant Warrants, each of whom
provided the Company with certain corporate development consulting services
during 1996 as consideration for the Company's issuance of the Consultant
Warrants to him; (ii) Gabriel Kaplan, who made a loan of $150,000 to the Company
in February 1997 in exchange for a promissory note and the warrants to purchase
Common Stock; and (iii) and Mr. Grayson, who entered into a settlement agreement
with the Company in February 1997. See "Description of Capital Stock--Warrants"
and "Certain Transactions." The Selling Security Holders' Shares are not being
underwritten by the Underwriters.
NUMBER OF NUMBER OF
SHARES OWNED NUMBER OF SHARES OWNED
NAME OF SELLING BEFORE SHARES BEING AFTER
SECURITY HOLDER(1) OFFERING REGISTERED OFFERING(2)
- ------------------------------------------------------------------ -------------- ------------ ---------------
Stanley S. Arkin.................................................. 33,333 33,333 0
Lestor C. Aroh.................................................... 16,667 16,667 0
Cold Spring Ventures, Inc.(3)..................................... 11,073 5,537 5,536
Toby Costen(4).................................................... 8,333 8,333 0
Michael Del Rey................................................... 64,527 64,527 0
Steven Eagon...................................................... 70,833(5) 70,833 0
Gerald F. Edelstein............................................... 4,167 4,167 0
Nathan Eisen...................................................... 8,333 8,333 0
John Ellison, Jr. and Mia C. Ellison.............................. 33,333 33,333 0
Carl Engdahl...................................................... 30,000 15,000 15,000
Robert A. Finkelstein............................................. 40,000 40,000 0
Robert Gault & Thelma Gault....................................... 33,333 33,333 0
Larry R. Gordon................................................... 165,000(6) 165,000 0
Stephen P. Grayson(7)............................................. 121,385 15,094 106,291
Stephen P. Grayson Profit Sharing Plan(7)......................... 73,429 13,208 60,221
International Venture Capital Advisors Technology Inc............. 42,078 21,039 21,039
The Jonathan Stanton Co., Inc.(8)................................. 33,333 33,333 0
Gabriel Kaplan.................................................... 123,333(9) 123,333 0
Gabriel Kaplan, P/ADM City National Bank C/F Rotunda Productions,
Inc. MPD........................................................ 83,333(9) 83,333 0
Martin Katz....................................................... 16,667 16,667 0
Mildred Koenigsberg............................................... 8,333 8,333 0
Benjamin Lehrer................................................... 8,333 8,333 0
SS-3
NUMBER OF NUMBER OF
SHARES OWNED NUMBER OF SHARES OWNED
NAME OF SELLING BEFORE SHARES BEING AFTER
SECURITY HOLDER(1) OFFERING REGISTERED OFFERING(2)
- ------------------------------------------------------------------ -------------- ------------ ---------------
Marc Levin........................................................ 16,667 16,667 0
Lexington Ventures, Inc.(10)...................................... 28,333 28,333 0
Staffan Lofgren................................................... 12,000 6,000 6,000
Fred and Barbara Martell.......................................... 16,667 16,667 0
Henri Mastey...................................................... 25,000 25,000 0
Jean Yves Mastey.................................................. 25,000 25,000 0
Dylan McDermott................................................... 8,333 8,333 0
Dr. Brian McLean.................................................. 58,190 29,095 29,095
DeLane E. Matthews................................................ 8,333 8,333 0
L.A. Moore........................................................ 16,667 16,667 0
Jon Peters........................................................ 66,666 66,666 0
Gordon Rausser.................................................... 50,000 50,000 0
Mark L. Saginor, M.D.............................................. 36,667 36,667 0
Stanley Schneider................................................. 8,333 8,333 0
Stephen Schmidt................................................... 16,667 16,667 0
David G. Shell.................................................... 17,976 8,988 8,988
Arnold H. Simon................................................... 66,666 66,666 0
Michael Srednick.................................................. 16,667 16,667 0
Arthur Steinberg.................................................. 16,667 16,667 0
James E. Upshaw................................................... 16,667 16,667 0
Henry Wilf........................................................ 66,667(11) 66,667 0
A.V. Zehenni...................................................... 33,333 33,333 0
- ------------------------
(1) Information set forth in the table regarding the Selling Security Holders'
Shares is provided to the best knowledge of the Company based on information
furnished to the Company by the respective Selling Security Holders and/or
available to the Company through its securities ledgers.
(2) Assumes that each Selling Security Holder sells all of the Selling Security
Holders' Shares held by such Selling Security Holder or purchasable by such
Selling Security Holder upon exercise in full of his Consultant Warrant.
(3) Cliff Friedman and spouse, principals.
(4) As trustee.
(5) Includes 66,666 shares issuable upon the exercise of Mr. Eagon's Consultant
Warrant.
(6) Includes 66,667 shares issuable upon the exercise of Mr. Gordon's
Consultant Warrant and excludes 28,333 shares owned by Lexington Ventures,
Inc. of which Mr. Gordon is the principal.
(7) Excludes 11,250 shares issuable upon the exercise of Mr. Grayson's Warrant
from the Company.
(8) Jonathan Alexrod is the principal of the listed Selling Security Holder.
(9) Excludes 15,000 shares issuable upon the exercise of Mr. Kaplan's Bridge
Warrant.
(10) Larry R. Gordon is the principal of the listed Selling Security Holder.
(11) Shares issuable upon the exercise of Mr. Wilf's Consultant Warrant.
SS-4
PLAN OF DISTRIBUTION
The sale of the Selling Security Holders' Shares may be effected from time
to time in transactions (which may include block transactions by or for the
account of the Selling Security Holders) in the over-the-counter market or in
negotiated transactions, through a combination of such methods of sale, or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices prevailing at the time of sale, or at negotiated prices. If any Selling
Security Holder sells his, her or its Selling Security Holders' Shares, pursuant
to this Prospectus at a fixed price or at a negotiated price which is, in either
case, other than the prevailing market price or in a block transaction to a
purchaser who resells, or if any Selling Security Holder pays compensation to a
broker-dealer that is other than the usual and customary discounts, concessions
or commissions, or if there are any arrangements either individually or in the
aggregate that would constitute a distribution of the Selling Security Holders'
Shares, a post-effective amendment to the Registration Statement of which this
Prospectus is a part would need to be filed and declared effective by the
Securities and Exchange Commission before such Selling Security Holder could
make such sale, pay such compensation or make such a distribution. The Company
is under no obligation to file a post-effective amendment to the Registration
Statement of which this Prospectus is a part under such circumstances.
The Selling Security Holders may effect transactions in their Selling
Security Holders' Shares by selling such securities directly to purchasers,
through broker-dealers acting as agents for the Selling Security Holders or to
broker-dealers who may purchase the Selling Security Holders' Shares as
principals and thereafter sell such securities from time to time in the
over-the-counter market, in negotiated transactions, or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Security Holders and/or the
purchasers for whom such broker-dealers may act as agents or to whom they may
sell as principals or both.
The Selling Security Holders have been advised that during the time each is
engaged in a "distribution" (as defined under Regulation M under the Securities
Exchange Act of 1934, as amended) of the securities covered by this Prospectus,
each must comply with Regulation M under the Securities Exchange Act of 1934, as
amended, and pursuant thereto: (i) shall not engage in any stabilization
activity in connection with the Company's securities; and (ii) shall not bid for
or purchase any securities of the Company or attempt to induce any person to
purchase any of the Company's securities other than as permitted under the
Securities Exchange Act of 1934, as amended. Any Selling Security Holders who
may be "affiliated purchasers" of the Company as defined in Regulation M have
been further advised that they must coordinate their sales under this Prospectus
with each other and the Company for purposes of Regulation M. Each Selling
Security Holder must also furnish copies of this Prospectus to each broker
through which the securities registered hereby are sold.
In connection with the acquisition of the Selling Security Holders' Shares,
each of the Selling Security Holders has agreed not to sell, pledge, assign or
otherwise transfer any shares of Common Stock during the one-year period
following the effective date of this Prospectus; provided that one Selling
Security Holder has agreed to a 90 day "lock-up" with respect to 28,302 shares
of Common Stock. However, any of such "lock-up" restrictions may be waived by
the Representative in its sole discretion. In such event, the Representative may
require any such sales to be effected through the Representative or such other
broker-dealer(s) as the Representative may allow and the Representative (or such
other broker-dealer) will be entitled to receive its customary compensation in
connection therewith. Although the Representative does not have any plans,
proposals, arrangements or understandings with any Selling Security Holders
regarding the waiver of any such lock-ups, any permitted sales by the Selling
Security Holders during such 12-month period could adversely affect the price of
and any market for the Common Stock.
The Selling Security Holders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of such securities might be deemed to be
underwriting discounts and commissions under the Securities Act.
SS-5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN ITS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS 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 SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANY PERSON TO WHOM IT IS NOT QUALIFIED TO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
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 DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
---------
Prospectus Summary.............................
Risk Factors...................................
Use of Proceeds................................
Dividend Policy................................
Capitalization.................................
Dilution.......................................
Selected Financial Data........................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...................................
Business.......................................
Certain Transactions...........................
Management.....................................
Principal Stockholders.........................
Selling Security Holders.......................
Description of Capital Stock...................
Shares Eligible for Future Sale................
Plan of Distribution...........................
Legal Matters..................................
Experts........................................
Additional Information.........................
Index to Financial Statements.................. F-1
1,205,152 Shares of Common Stock and 200,000 Shares of
Common Stock Issuable Upon
Exercise of Consultant Warrants
[SCOOP LOGO]
SCOOP, INC.
----------------
PROSPECTUS
------------------
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24: INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation (the "Certificate") and Bylaws
include provisions which eliminate the directors' personal liability for
monetary damages to the fullest extent permitted by Delaware Law or other
applicable law (the "Director Liability Provision"). The Director Liability
Provision eliminates the liability of Directors to the Registrant and its
stockholders for monetary damages arising out of any violation by a director of
his fiduciary duty of due care. Under Delaware Law, however, the Director
Liability Provision does not eliminate the personal liability of a director for
(i) breach of the director's duty of loyalty, (ii) acts or omissions not in good
faith or involving intentional misconduct or knowing violation of law, (iii)
payment of dividends or repurchases or redemptions of stock other than from
lawfully available funds, or (iv) any transaction from which the director
derived an improper benefit. The Director Liability Provision also does not
affect a director's liability under the federal securities laws or the recovery
of damages by third parties. Furthermore, pursuant to Delaware Law, the
limitation on liability afforded by the Director Liability Provision does not
eliminate a director's personal liability for breach of the director's duty of
due care. Although the directors would not be liable for monetary damages to the
corporation or its stockholders for negligent acts or omissions in exercising
their duty of due care, the Directors remain subject to equitable remedies, such
as actions for injunction or rescission, although such remedies, whether as a
result of timeliness or otherwise, may not be effective in all situations. With
regard to directors who also are officers of the Registrant, these persons would
be insulated from liability only with respect to their conduct as directors and
would not be insulated from liability for acts or omissions in their capacity as
officers.
Delaware Law provides a detailed statutory framework covering
indemnification of directors, officers, employees or agents of the Registrant
against liabilities and expenses arising out of legal proceedings brought
against them by reason of their status or service as directors, officers,
employees or agents. Section 145 of the Delaware General Corporation Law
("Section 145") provides that a director, officer, employee or agent of a
corporation (i) shall be indemnified by the corporation for expenses actually
and reasonably incurred in defense of any action or proceeding if such person is
sued by reason of his service to the corporation, to the extent that such person
has been successful in defense of such action or proceeding, or in defense of
any claim, issue or matter raised in such litigation, (ii) may, in actions other
than actions by or in the right of the corporation (such as derivative actions),
be indemnified for expenses actually and reasonably incurred, judgments, fines
and amounts paid in settlement of such litigation, even if he is not successful
on the merits, if he 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 a
criminal proceeding, if he did not have reasonable cause to believe his conduct
was unlawful), and (iii) may be indemnified by the corporation for expenses
actually and reasonably incurred (but not judgments or settlements) of any
action by the corporation or of a derivative action (such as a suit by a
stockholder alleging a breach by the director or officer of a duty owed to the
corporation), even if he is not successful, provided that he acted in good faith
and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, provided that no indemnification is permitted
without court approval if the director has been adjudged liable to the
corporation.
Delaware Law also permits a corporation to elect to indemnify its officers,
directors, employees and agents under a broader range of circumstances than that
provided under Section 145. The Certificate contains a provision that takes full
advantage of the permissive Delaware indemnification laws (the "Indemnification
Provision") and provides that the Registrant is required to indemnify its
officers, directors, employees and agents to the full extent permitted by law,
including those circumstances in which indemnification would otherwise be
discretionary, provided, however, that prior to making such discretionary
indemnification, the Company must determine that such person acted in good faith
and in a manner he
II-1
or she believed to be in the best interests of the Company and, in the case of
any criminal action or proceeding, such person had no reason to believe his or
her conduct was unlawful.
In furtherance of the objectives of the Indemnification Provision, the
Registrant has also entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in the
Registrant's Certificate and Bylaws (the "Indemnification Agreement"). The
Registrant believes that the Indemnification Agreements are necessary to attract
and retain qualified directors and executive officers. Pursuant to the
Indemnification Agreements, an indemnitee will be entitled to indemnification to
the extent permitted by Section 145 or other applicable law. In addition, to the
maximum extent permitted by applicable law, an indemnitee will be entitled to
indemnification for any amount or expense which the indemnitee actually and
reasonably incurs as a result of or in connection with prosecuting, defending,
preparing to prosecute or defend, investigating, preparing to be a witness, or
otherwise participating in any threatened, pending or completed claim, suit,
arbitration, inquiry or other proceeding (a "Proceeding") in which the
indemnitee is threatened to be made or is made a party or participant as a
result of his or her position with the Registrant, provided that the indemnitee
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the Registrant and had no reasonable cause
to believe his or her conduct was unlawful. If the Proceeding is brought by or
in the right of the Registrant and applicable law so provides, the
Indemnification Agreement provides that no indemnification against expenses
shall be made in respect of any claim, issue or matter in the Proceeding as to
which the indemnitee shall have been adjudged liable to the Registrant.
The provisions eliminating personal liability and affording indemnification
described above are, and for some period following the consummation of this
Offering will be, limited in certain respects by California law. See
"Description of Capital Stock--Governing Law and Certain Charter and Bylaw
Provisions."
The Company maintains directors' and officers' liability insurance in favor
of its directors and executive officers.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following tables sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions and non-accountable expense allowance.
All of the amounts shown are estimates except the Securities and Exchange
Commission registration and NASD filing fees.
Securities and Exchange Commission registration fee............... $ 5,525
NASD fees and expenses............................................ 2,325
NASDAQ listing fee................................................ 10,000
Representative's non-accountable expense allowance................ 214,500
Accounting fees and expenses...................................... 110,000
Printing and engraving expenses................................... 70,000
Transfer agent and registrar fees and expenses.................... 10,000
Blue Sky fees and expenses (including counsel fees)............... 60,000
Other legal fees and legal expenses............................... 250,000
Miscellaneous expenses............................................ 35,650
Total............................................................. $ 768,000
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In October 1995, the Registrant entered into a written agreement with
Stanley Berk and Associates ("SBA"), a partnership comprised of two principal
stockholders of the Company, pursuant to which SBA agreed to establish a
$400,000 revolving line of credit in favor of the Registrant in exchange for the
II-2
Registrant's 8% convertible promissory note (the "1995 Note"). Upon delivery of
the 1995 Note, SBA loaned the Registrant the principal sum of $150,000. In June
1996, $155,000 in principal and accrued interest then due on the 1995 Note was
converted into 71,760 shares of Common Stock pursuant to the terms of the 1995
Note. The 1995 Note was placed on a private basis to SBA as an "accredited
investor" as defined in Securities Act Rule 501(a). The issuance of the 1995
Note and shares of Common Stock to SBA was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof. In February
1997, in settlement of various disputes arising between the Registrant and Berk,
the Registrant granted a warrant to one of the partners of SBA exercisable into
11,250 shares of the Registrant's common stock at an exercise price equal to
120% of the price of the Company's Common Stock in the Company's initial public
offering (or $7.20 if there is no public offering by March 31, 1997). The
issuance of this warrant was exempt from the registration requirements of the
Securities Act pursuant to Sections 3(a)(11) and 4(2) thereof.
Effective as of November 1995, the Company redeemed all of the shares of the
Company's outstanding Common Stock then owned by Mr. Michael Del Rey, a
California resident and co-founder of the Company, for $100,000 pursuant to a
written agreement. Pursuant to the terms of such agreement, the Company issued
64,527 shares of Common Stock to Mr. Del Rey for $100 in cash in July, 1996. The
issuance of such shares of Common Stock was exempt from the registration
requirements of the Securities Act pursuant to Sections 3(a)(9), 3(a)(11) and
4(2) of the Securities Act.
Between February and April 1996, the Registrant conducted a private offering
of its Common Stock (the "February 1996 Private Placement"). Pursuant to the
February 1996 Private Placement, the Registrant issued a total of 113,248 shares
of Common Stock for total cash consideration of $225,000. The February 1996
Private Placement was made on a private basis only to an aggregate of seven
persons who were "accredited investors" as defined in Securities Act Rule
501(a). The issuance of Common Stock to such seven persons was exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof.
In April 1996, the Registrant conducted a private offering of its short-term
10% promissory notes (the "April 1996 Bridge Financing"). Pursuant to the April
1996 Bridge Financing, the Registrant issued $400,000 in principal amount of
such notes for total cash consideration of $400,000. The April 1996 Bridge
Financing was made on a private basis only to an aggregate of five persons who
were "accredited investors" as defined in Securities Act Rule 501(a). The
issuance of such notes to such five persons was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof.
In April 1996, the Registrant issued an aggregate of 34,663 shares of Common
Stock as stock bonuses to an aggregate of fourteen officers and key employees
of, or consultants to, the Registrant for past services rendered at a deemed
issuance price equal to $2.00 per share (the "Stock Bonus Awards"). All of such
fourteen persons were California residents. The issuance of Common Stock
pursuant to the Stock Bonus Awards to such fourteen persons was exempt from the
registration requirements of the Securities Act pursuant to Sections 3(a)(11)
and 4(2) thereof.
From April 1996 through January 1997, the Company granted an aggregate of
812,500 Options at exercise prices per share ranging from $2.00 to the public
offering price of the Common Stock to its directors, key employees and
consultants pursuant to the Stock Incentive Plan. The issuance of such Options
was exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) and Rule 701 thereof.
During June 1996, the Registrant issued an aggregate of 20,000 shares of
Common Stock to an aggregate of nine of the stockholders of the Company's former
general outside legal counsel, for total cash consideration of $40,000. All of
such nine persons were California residents. The issuance of Common Stock to
such nine persons was exempt from the registration requirements of the
Securities Act pursuant to Sections 3(a)(11) and 4(2) thereof.
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During May and June 1996, the Registrant conducted a private offering of its
equity securities (the "May 1996 Private Placement"). Pursuant to the May 1996
Private Placement, a total of four Units were sold at a price equal to $100,000
per Unit. Each Unit consisted of 40,000 shares of Common Stock and Cancelable
Warrants to purchase 40,000 additional shares of Common Stock at an exercise
price equal to $2.50 per share of Common Stock covered thereby. Upon the
effectiveness of this Registration Statement, all of the Cancelable Warrants
issued in the May 1996 Private Placement will automatically become null and void
in accordance with their terms. The May 1996 Private Placement was made on a
private basis only to an aggregate of five persons who were the investors in the
April 1996 Bridge Financing and who were "accredited investors" as defined in
Securities Act Rule 501(a). The five investors in the May 1996 Financing
cancelled the principal amount of their notes issued in the Bridge Financing as
consideration for the Units. The issuance of the Units in the May 1996 Private
Placement to such persons was exempt from the registration requirements of the
Securities Act pursuant to Sections 4(2) and 4(6) thereof and Rule 506 of
Regulation D thereunder. In consideration for its services as dealer manager for
the May 1996 Private Placement, the Registrant paid The Boston Group, L.P. (the
"Dealer Manager") aggregate commissions and fees of $52,000. The Registrant also
issued to the Dealer Manager warrants to purchase 16,000 shares of Common Stock.
Such warrants have the same basic terms as the Cancelable Warrants issued in the
May 1996 Private Placement except that they are not cancelable, are exercisable
at a price equal to $3.30 for each share of Common Stock covered thereby and may
be exercised on a cashless basis. The issuance of these warrants to the Dealer
Manager was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof.
During June and July 1996, the Registrant conducted a private offering of
its equity securities (the "June 1996 Private Placement"). Pursuant to the June
1996 Private Placement, a total of 23 Units were sold at a cash price equal to
$100,000 per Unit or an aggregate of $2,300,000. Each Unit consisted of 33,333
shares of Common Stock and Cancelable Warrants to purchase 33,333 additional
shares of Common Stock at an exercise price equal to $3.00 per share of Common
Stock covered thereby. Upon the effectiveness of this Registration Statement,
all of the Cancelable Warrants issued in the June 1996 Private Placement will
automatically become null and void in accordance with their terms. The June 1996
Private Placement was made on a private basis only to persons who were
"accredited investors" as defined in Securities Act Rule 501(a). The issuance of
the Units in the June 1996 Private Placement to such persons was exempt from the
registration requirements of the Securities Act pursuant to Sections 4(2) and
4(6) thereof and Rule 506 of Regulation D thereunder. In consideration for its
services as dealer manager for the June 1996 Private Placement, the Registrant
paid the Dealer Manager aggregate commissions and fees of $299,000. The
Registrant also issued to the Dealer Manager warrants to purchase 76,667 shares
of Common Stock. Such warrants have the same basic terms as the Cancelable
Warrants issued in the June 1996 Private Placement except that they are not
cancelable, are exercisable at a price equal to $3.30 for each share of Common
Stock covered thereby, may be exercised on a cashless basis. The issuance of
these warrants to the Dealer Manager was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof.
In July 1996, the Registrant issued the Consultant Warrants to three
consultants to the Company in consideration of such consultant agreements to
provide certain corporate development services to the Company. The Consultant
Warrants are exercisable for a period of five years at an exercise price equal
to $2.55 per share of Common Stock covered thereby. All three consultants were
California residents. The issuance of the Consultant Warrants to such three
consultants was exempt from the registration requirements of the Securities Act
pursuant to Sections 3(a)(11) and 4(2) thereof.
In July 1996, the Registrant issued 5,000 shares of Common Stock as a stock
bonus to an employee for past services rendered at a deemed issuance price equal
to $2.50 per share. The employee was a California resident. The issuance of
Common Stock pursuant to the stock bonus to such employee was exempt from the
registration requirements of the Securities Act pursuant to Sections 3(a)(11)
and 4(2) thereof.
II-4
In October 1996, Registrant issued a warrant to Bell & Howell in connection
with entering into a license agreement with UMI. The warrant gives Bell & Howell
the right to purchase 550,000 shares of Common Stock and is exercisable for a
period of three years. The warrant is exercisable at the following exercise
prices: 300,000 shares at $6.50 per share, 150,000 shares at $10.00 per share,
and 100,000 shares at $15.00 per share. Bell & Howell also will have the right
to purchase up to an additional 200,000 shares if it exercises the warrant for
the first 300,000 shares by September 1997. The issuance of the warrant to Bell
& Howell was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof.
In February 1997, Registrant borrowed $150,000 from a shareholder of
Registrant. The loan was made at 9.75% simple interest payable together with
principal on April 30, 1997. The principal amount of the loan can be increased
up to $350,000 by endorsement by Registrant and the lender. As additional
consideration for the loan, Registrant issued warrants to the lender exercisable
into 15,000 shares of Registrant's Common Stock at $4.50 per share. In the event
the lender increases the principal amount of the loan, the lender will receive
200 additional warrants for every $1,000 in additional principal amount. These
warrants are not exercisable until February 1998 and expire in February 2002 if
not previously exercised. Registrant has granted certain registration rights
with respect to the shares of Common Stock issuable on exercise of the warrants.
The lender is an "accredited investor" as defined in Securities Act Rule 501(a).
The issuance of these warrants was exempt from the registration requirements of
the Securities Act pursuant to Section 4(2) thereof.
In February 1997, Registrant established a $150,000 line of credit. As
additional consideration for the line of credit, Registrant issued a warrant to
the lender exercisable into 7,500 shares of Common Stock at $5.50 per share
thirteen months after issuance and expiring five years after issuance. The
lender will receive another 50 warrants for every $1,000 of principal drawn on
the line of credit up to $120,000 and 75 warrants for every $1,000 of principal
drawn above $120,000 to $150,000, up to a maximum aggregate of 15,750 shares, on
the same terms as the initial 7,500 Warrants. The lender is an "accredited
investor" as defined in Securities Act Rule 501(a). The issuance of these
warrants was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof.
See "Certain Transactions" for additional information concerning the
Registrant's issuances of securities for the past three years.
II-5
ITEM 27. EXHIBITS.
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of Scoop, Inc.*
3.2 Bylaws of Scoop, Inc.*
4.1 Form of Common Stock Certificate*
4.2 Form of Representative Warrant*
4.3 Form of Consultant Warrant*
4.4 Warrant dated October 18, 1996 issued to Bell & Howell
4.5 Form of Subscription Supplement and Registration Rights Agreement
5.1 Opinion of Latham & Watkins*
10.1 1996 Stock Incentive Plan of Scoop, Inc. dated April 23, 1996*
10.2 [intentionally omitted]
10.3 [intentionally omitted]
10.4 [intentionally omitted]
10.5 Lease Agreement between Scoop, Inc. and Village Plaza Associates, LLC dated September 9, 1996
10.6 Agreement between the Company and UMI Company dated October 17, 1996
10.7 Form of Indemnification Agreement*
10.8 Consulting Agreement with Michael Baum*
11.1 Computation of Pro Forma Net Loss Per Share
23.1 Consent of Latham & Watkins (included in Exhibit 5.1)*
23.2 Consent of Deloitte & Touche LLP*
24.1 Power of Attorney+
27.1 Financial Data Schedule
- ------------------------
* To be filed by amendment
+ Previously filed
ITEM 28. UNDERTAKINGS.
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.
(ii) To reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
Registration Statement; and
(iii) To include any material additional or changed material information
with respect to the plan of distribution.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the
II-6
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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or Rule 497(h) under the Securities Act shall be deemed
to be part of this Registration Statement as of the time it was declared
effective.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of Prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be initial bona
fide offering thereof.
II-7
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned, in
the City of Santa Ana, State of California, on February 26, 1997.
SCOOP, INC.
By:/s/ MARK A. DAVIDSON
------------------------------------------
Mark A. Davidson, President
In accordance with 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 described below on February 26 , 1997.
SIGNATURE TITLE
- ------------------------------------------------------ ------------------------------------------------------
/s/ KARL-MAGNUS S. KARLSSON Director, Chairman of the Board
- -------------------------------------------
Karl-Magnus S. Karlsson
/s/ MARK A. DAVIDSON President and Chief Financial Officer
- -------------------------------------------
Mark A. Davidson
* Director and Vice Chairman of the Board
- -------------------------------------------
Michael Baum
* Director
- -------------------------------------------
K.C. Craichy
* Director
- -------------------------------------------
Nils B.A. Andersson
* Director
- -------------------------------------------
Michael K. Boone
/s/ JOHN P. KENSEY Director
- -------------------------------------------
John P. Kensey
*By: /s/ MARK A. DAVIDSON
---------------------------------------
Mark A. Davidson
Attorney-in-Fact
II-8