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FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Annual Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the
fiscal year ended: June 30, 1997
Commission File Number 0-21147
CD-MAX, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 87-0378128
(State of incorporation) (I.R.S. Employer
Identification Number)
11480 Sunset Hills Road, Suite 110, Reston, VA
20190-5208 (Address of principal executive offices and zip code)
(703) 925-3400
(Issuer's telephone Number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in this form in
response to Item 405 of Regulation S-B [because there are no delinquent filers
of Forms 3 and 4 in the most recent fiscal year], and no disclosure will be
contained, to the best of the issuer's knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for the most recent fiscal year were $47,004.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Common Stock, $.01 par value 4,718,270 shares
(Class) (Outstanding at September 26, 1997)
Redeemable Warrants 2,362,500
(Outstanding at September 26, 1997)
The aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold [or the average bid and asked price of such common equity] as
of 9/26, 1997 [a date within the past 60 days] is 10,418,856. The Closing Price
on 9/26/97 was $3.00 per share.
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Business..............................................................3
Item 2 Properties...........................................................13
Item 3. Legal Proceedings....................................................14
Item 4. Submission of Matters to a Vote of Security Holders..................14
Item 5. Market for Registrant's Common Equity and Related
Stockholders' Matters................................................14
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................14
Item 7. Financial Statements.................................................18
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.............................................18
Item 9. Directors and Executive Officers of the Registrant...................18
Item 10. Executive Compensation...............................................20
Item 11. Security Ownership of Certain Beneficial Owners and
Management...........................................................22
Item 12. Certain Relationships and Related Transactions.......................23
Signatures...........................................................25
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PART I
ITEM 1. BUSINESS
THE COMPANY
CD-MAX, Inc. (which is doing business as Imark Technologies, Inc. and
referred to herein as the "Company" or "Imark" ), a development stage company
with minimal revenues to date, was organized in 1993. The Company is engaged in
the business of serving the electronic information industry by offering a suite
of electronic commerce ("e-commerce") enabling services to information
publishers who use CD-ROMs and/or the Internet as their distribution media.
The Company offers (i) services to publishers which use CD-ROM or
Internet based technologies for the distribution of their information; (ii) a
variety of payment options, including micropayments, credit cards, checks and
purchase orders/invoicing; and (iii) a selection of pricing metrics for the
publisher to use in charging for their information, including subscription
pricing, pay-per-use pricing, "accountless" purchases for occasional users who
don't want to establish an account, and subaccount tracking and billing.
The Company's services enable publishers of business and professional
information to increase the value of their products by offering a full suite
of enabling e-commerce solutions. These services include customer registration,
product authorization, transactional billing, pay-per-use information and
other related services designed specifically to enable electronic information
providers to be paid for information used by users. The Company's mission is to
become the leading provider of such e-commerce solutions for electronic
information distributed via CD-ROM, the Internet and server-push technology.
The Company's core business is usage metering and billing customers for
transactions on behalf of information providers. The Company's back-end
database provides state-of-the-art reporting capabilities. Its automated
billing processes offer a flexible, low-cost alternative to in-house billing.
The Company's two current service offerings, CD-MAX for CD-ROM based
information and NET-MAX for Internet based information, employ proprietary
technology to facilitate the sale of electronically stored information by
tracking usage and facilitating the billing for such usage. The software based
systems feature low licensing and revenue-based service fees for providers and
easy installation and use for customers. The Company is currently developing
an enhanced version of NET-MAX, called NET-MAX+ which will incorporate the use
of server-push technology.
Of particular importance to the Company's customers is its ability to
meter and bill for information usage on a pay-per-use basis. Historically,
electronically stored information has been sold on a subscription basis
(essentially unlimited use for a fixed fee per year), or, in the case of some
online services, on an access time basis (essentially so much per minute of
access to the data base). Imark's proprietary technology enables these
information publishers to change their pricing metrics and charge for
information use based on the value of the information accessed.
INDUSTRY BACKGROUND
The sale of electronic information on the Internet and on CD-ROM is a
significant market. Cowles/Simba Information projects that Intranet/Internet
sales of business and professional online information revenues will top $5.4
billion by the year 2000. The report estimates that the number of Internet
users has increased from 8.0 million in 1995 to 12.0 million in 1996 and will
increase exponentially by the millennium.
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Sales of "business information" in electronic form will outsell print
for the first time in 1997, according to Cowles/Simba. Their numbers project a
total 1997 market of $46.9 billion, with $23.5, or just over 50% coming from
electronic sources. Internet users will jump from 6% of the total information
market today to 38% by 1999, according to the American Management Association.
The sale of electronically-stored information is not new. Online
services, such as CompuServe, Dialog and Lexis-Nexis, have been around for many
years serving the business and professional markets. And, CD-ROM technology has
been used a distribution medium for some time. The sale of information via
online services and CD-ROM is already a multi-billion dollar market.
What has changed is the ease of access to information. The
availability of CD-ROM players has grown significantly over the past few years
to the point that they are now a routine component of personal computers. And,
the Internet has greatly increased the availability of access to remote data
bases. Harnessing these technological advances and making e-commerce a
profitable reality for the information publisher is the focus of Imark's
efforts.
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PRODUCTS
Post-usage billing, the Customer's computer accesses the Company's
billing computer via a standard modem at the end of a billing period. Upon
access, the Company downloads the transaction information and calculates billing
accordingly. If bills are not paid within a predetermined period of time, the
Company will not download new access codes and the CD-MAX System will
automatically terminate access to the CD-ROM until the bill has been paid and
new codes are downloaded to the user's computer. The Company does not assume
liability for unpaid customer invoices.
Pay-in-advance billing is just what it says: the customer pays a
specific amount in advance for use of the publisher's information, and the
Company's software meters usage of the information until the pre-paid amount
has been exhausted. At that point, the Company's software blocks further
access to the information by the user customer until another prepayment.
The primary elements of the CD-MAX System are data encryption,
metering and security.
Data Encryption: The Company's encryption method has been approved by
the U.S. Department of Commerce for an unrestricted export license so that the
CD-MAX System can be exported outside the United States. Once integrated with
the publisher's search and retrieval engine, the CD-MAX System decrypts the
data once the user has either paid for data retrieval or established credit
with the CD-MAX billing center.
Metering: The CD-MAX System measures and records actual data access,
which allows publishers to charge on a "One Chargeable Unit" ("OCU") basis,
giving the publisher pricing flexibility. Each time an OCU is retrieved from
the database, the CD-MAX system automatically calculates the transaction
charges, according to specific base prices and transaction fees established by
the publisher.
Security: The CD-MAX System provides security at many different levels.
Security begins with the proprietary CD-ROM encryption technology employed to
protect CD-ROM information. User login security is provided to prevent
unauthorized users from retrieving data, as well as giving the publisher's
customers the ability to charge departments within their organizations.
Installation security protects publishers from lost revenues since users must
register with the CD-MAX billing center in order to retrieve
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the data. The transaction data cannot be read by ordinary means as it is
encrypted using a special one-way encryption process that is decrypted at the
CD-MAX facility.
THE NET-MAX SYSTEM: The NET-MAX system allows publishers to enable
their Internet-based users to consume content on a pay-per-use basis.
Seamlessly integrated with the metering hooks of a publisher's web site search
engine, the NET-MAX system handles the tedium of customer registration, usage
logging, event authorization, billing, and processing of payment transactions
for the publisher. The system provides a practical way to sell electronic
information on a pay-as-you-go basis. NET-MAX supplies users and publishers
with a variety of reports including billing statements, usage reports and
customized publisher reports.
NET-MAX requires that the user establish an account with the Company
This is done through a Web-based registration process. NET-MAX collects the
necessary registration information and stores it securely at the Company's
facility. With an account, the user can now log into and gain access to the
publisher's content database. While the user views database records, NET-MAX
works in the background logging the document titles and authorizing the
delivery of each piece of protected content.
THE CD-MAX SYSTEM: The CD-ROM Metering and Billing System (CD-MAX) is
a set of software components designed to meter usage of information on CD-ROMs
and use that metered data to generate statistical reports and customer
billings. Using various methods to track and meter the data, the CD-MAX System
becomes aware when specific publisher data is accessed, whether for viewing,
copying, or printing. CD-MAX keeps an accurate database of this usage and
processes the information for billing the user on behalf of the publisher.
The most obvious candidates for the Company's services are almost
exclusively publishers and data warehouse companies that can benefit from
efficient and accurate data retrieval metering and billing on a pay-per-use
basis, statistical reports based on usage, customized billing performed by the
Company's technology platform, or a combination of all three. The Company uses
two functionally distinct sets of software in this connection. The first set
of software tracks and meters usage of electronic data on the customer's own
computer; and using either modem or diskette, transmits the usage data securely
to the Company's billing operations. The second set of software resides at the
Company. Here, the Company processes the customer usage data for statistical
purposes (if the publisher client desires such stastical analysis) and for
purposes of billing the customer for its use of the published information. On
behalf of the client-publisher, the Company bills the user customer, accepts
payment of transaction fees from all users of CD-ROM based information sources
which use the CD-MAX System. The Company currently offers two alternatives for
billing: after-use and pay-in-advance billing.
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NET-MAX+: The Company is currently developing a service using server
push technology. NET-MAX+ will enable the Company to provide its publishing
clients with more control over how content is promoted, and it positions the
Company as a player in the emerging technology of Server Push.
With NET-MAX+, the Company will host the publisher's content as well as
handle the delivery of that content. For content acquisition, the Company will
create a system which simplifies publisher content submission and pricing
specifications. Since the content resides with Imark, the Company is now able
to index the content and compare the results of the indexing process with
users' profiles. NET-MAX+ will push the content using an industry standard
transmitter (BackWeb, Castanet, etc) to the appropriate users, manage
subscriptions and allow pay-per-use consumption for content outside of
subscriptions. Additionally, Imark will make the content available using
traditional pull technology and a natural language search and retrieval system.
The NET-MAX+ System is composed of a content acquisition module, an
indexing component, an indexing module, a profile matching module, a natural
language search and retrieval engine, a subscription manager, a pull-technology
web site and a push technology transmitter.
The content acquisition module is a set of programs that allow
publishers to deliver content they want incorporated in NET-MAX+ to the
Company's site. The indexer (sweeper) system is a set of programs, which build
incremental indices on the new content. The profile matching module matches new
content with an end-user profile maintained on site. The Subscription manager
collects information about a user and maintains databases of channels
subscribed to by different user. The natural language search and retrieval
engine allows users to perform searches on the content. This is done via a web
site. The transmitter then "broadcasts" the content to the appropriate users.
NET-MAX+ uses the ECMS system for billing,
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SALES AND MARKETING
The Company's initial target market are the leading 200 to 300
publishers of professional, reference, technical and business information
which, in turn, sell their information to the end-user. The Company earns its
revenues by charging these publishers an initial development fee, transaction
fees for processing bills and payments, and a percentage of the revenue.
The Company's marketing professionals have experience in the
publishing community and with potential publishing clients which can utilize
the Company's services. They make detailed in-person presentations and provide
pricing alternatives to their marketplace, customize the Company's services to
the publisher's search and retrieval engine and its billing requirements.
Since the Company is privy to proprietary information of its clients, the
Company requires both staff and potential clients to sign a nondisclosure
agreement that mutually protects technological developments and trade secrets.
In order to ensure the success of a development project, marketing
personnel continue to work with the client after the service is implemented.
The Company typically works with the client to develop an annual marketing
plan.
MARKETING STRATEGY
The success of the Company's services is directly related to the
success of its publishing clients in selling their information on a metered
basis to end-users.
CD-MAX is marketed to publishers of CD-ROM-based information and
NET-MAX is marketed to publishers using the internet as their distribution
channel. In many instances, publishers use both channels and therefore may be a
client for both services offered by the Company. Some of these publishers will
also be potential clients for the Company's NET-MAX+ service, when it is ready
for commercialization.
The Company has identified a significant number of primary
publishers, secondary publishers, aggregators (CD-ROM and subscription
agencies), and other third parties, who are actively pursuing the Internet as
a distribution channel for their information. Among these are scientific,
technical and medical publications, which generally bear the highest
subscription costs and were among the first publications available
electronically.
The Company has identified several factors that have precipitated
this move: the availability of technology; the ability to make information
available at "pre-publication stage" (prior to binding and mailing), shrinking
subscription budgets in the library market, where 70% of the information is
acquired; and a desire to have access to business-to-business information for
critical decision-making in real time.
These factors, combined with spiraling subscription costs and a
continuing interest by publishers in higher revenues and profits, have created
the need for other economic models. In the past, without appropriate
technologies, publishers have not had the ability to price CD-ROM or Internet
information on a pay-per-use basis. However, the Company's technology gives
electronic publishers a pay-per-use pricing system and the possibility to tap
additional revenue sources.
To reach this growing market, the Company is using a combination of
cost-effective strategies including targeted direct mail to publishers;
exhibitions at major library, information industry, and publishing conferences;
direct selling and high-level informational seminars.
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PROMOTION AND ADVERTISING
The Company retains the services of KSK Communications, Ltd., a
marketing, communications and advertising firm, and RMR, Inc., a public
relations agency. These companies provide communications and public relations
support to the media and to potential investors and the publishing community.
PRINCIPAL CONTRACTS:
At this point the Company is completing its development stage and is
embarking on the commercialization of its services and initiating the revenue
generating process. Management believes that the contracts described below,
which are representative of the types of clients the Company is seeking to
attract, have the greatest potential for initial commercial success.
One of the Company's principal contracts is with SilverPlatter
Information Inc. The contract was entered into in November 1996. Since August
1997 the Company provided SilverPlatter with metering and billing
services for its WebSpirs, Internet-based, information system. This pay-per-use
service, known as "Search by Search", is marketed by SilverPlatter and its
distributors to the library, research, and corporate markets. Via "Search by
Search," the Company is providing billing and metering services to over 30
publishers who license their information to SilverPlatter. These publishers
include the National Library of Medicine, Thomson Financial Publishing, H.W.
Wilson, and the Government Printing Office.
The Company has contracted with Information Handling Services (IHS), a
Colorado-based engineering and reference publisher, in February 1997, that is
the largest publisher of reference CD-ROMs in the world to provide IHS with
metering and usage information for their "Vendor Catalog" product, consisting
of vendor information from over 100,000 vendors on approximately 30 CD-ROMs.
Metering services began in June 1997.
The Company has also contracted with CIVS, Inc., a Rockville, MD based
healthcare information provider in May 1996 to supply metering and billing
services for its CD-ROM based database of physician information. This CD-ROM
has only recently been placed in commercial distribution. The Company also
contracted with the Information Industry Association (IIA) to sell its
Information Industry Contracts on the web on a pay-per-use basis. This project
will give the Company high visibility within the information community and is
scheduled to be commercial in October. The company has also contracted with
NFO Web, Inc. to launch a pay-per-use and subscription web site that allows
legal professionals to view and download Supreme Court rulings and related
information. The site is expected to be commercial in late October.
The Company also has signed joint marketing agreements with Global
Village Inc., Productive Data Group, and Libraxus, Inc., who are all Folio
partners.
These companies provide a variety of services to information
publishers, including web-site development and Internet hosting. Under the
terms of the joint marketing agreements, these companies can market the
Company's NET-MAX services under a revenue sharing arrangement.
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The Company has also established contractual relationships with key
search and retrieval engine providers. These companies, Dataware and Folio,
supply their search and retrieval engines (the database software which
the information consumer uses to search for data on a CD-ROM or web site), to
much of the same customer base as the Company. These relationships call for the
companies to integrate their respective capabilities to facilitate the
comarketing of their respective services. The Company is also actively
working with other software tools providers to the publishing industry to
establish similar relationships.
COMPETITION
There is limited direct competition to the Company in the field of
providing metering and billing services for business, professional and
reference information publishers on CD-ROM and the Internet. Two firms operate
in the general field of metering and encryption. One is Wave Systems Inc.,
which is active primarily in entertainment related software and whose
technology for metering relies on computer manufacturers installing a chip in
their computers at the factory. The other company, Infosafe, Inc., relies on a
hardware-based technology for metering and encryption. By contrast, the
Company's system is software based and requires no special hardware on the
user's computer.
In the Internet field, several firms provide software that perform
some of the function that the Company provides. These software toolkits, such
as Open Market, require substantial levels of skill, time and effort on the
part of publishers. While the Company's system requires no technical expertise
on the part of the publisher client.
Internet micropayment processor services, which permit online payment
by credit card number transmitted over the internet, are sometimes viewed as
competitive to the Company's services. However, micropayment services are
only a small component of the suite of services provided by the Company, and so
the micropayment processor services are not directly competitive with the
Company's services. Indeed, the Company is working with a micropayment
processor to integrate its services into the Company's suite of services as a
alternative to payment by credit card or check.
PROPRIETARY RIGHTS AND INTELLECTUAL PROPERTY
The CD-MAX and NET-MAX systems are based upon software and related
technical data that the Company believes is a "trade secret." The Company
believes that commercial protection of its products will depend primarily upon
the CD-MAX and the NET-MAX Systems proprietary software remaining a trade
secret under copyright protection. In order to protect trade secrets, the
Company is in the process of taking measures, which in its opinion are
appropriate procedures to protect its rights. There can be no assurance,
however, that the Company's technology will remain secret or that others will
not develop similar technology and use such technology to compete with the
Company. While the Company has certain rights with respect to patents (see
discussion below) those patents do not cover the CD-MAX and the NET-MAX Systems
as they are presently configured.
Prior to the formation of the Company, John David Wiedemer, Senior
Vice President, Operations, developed the technology, which led to the creation
of the CD-MAX System. In connection with the development of the CD-MAX System,
he entered into an exclusive, 99 year, worldwide, master license with
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the Company (the "Master License") to certain intellectual property,
technology and patents (the "Intellectual Property").
The Intellectual Property rights assigned under the Master License
includes rights to certain patents, and the following non-patented intellectual
property: a demonstration program (original and subsequent versions), a
hardware card (original and subsequent versions), and software outlines,
including an Overview of Software Components of CD-MAX System (July 15, 1993);
Functional Program Description (August 25, 1993); and Preliminary Notes on
Billing System Design (Sept. 21, 1993). None of the patents have been and none
of the patents can be filed in Europe.
The field of use of the Intellectual Property covered by the Master
License is for text and related multimedia information on any electronic
medium, including the Internet, online and CD-ROM market. The Master License
includes standard default provisions, providing for the reversion of the
license to the licensor (or assigns), should the Company file for bankruptcy or
not protect and defend from infringement any of the intellectual property
covered by the license. The Master License also permits John David Wiedemer to
compete with the Company after 1999, if he is terminated by the Company without
cause and if the Company fails to have gross revenues from sales of products
and services using the Intellectual Property, as adjusted for transaction
related taxes, returns, refunds, bad debts, and direct payments to third
parties for the material being distributed ("Adjusted Gross Revenues"), of at
least $3,000,000 in 1999, $4,000,000 in 2000, and $5,000,000 in 2001, and each
year after 2001 Adjusted Gross Revenues equal to the prior year's Adjusted
Gross Revenues requirement plus 15%, adjusted for inflation. The Master License
provides for a royalty to a Royalty Trust (the beneficiaries of which include
John David Wiedemer, Robert Wiedemer, members of their family, David B. Boelio,
Philip J. Gross and Weldon P. Rackley) of 1.25% of the Adjusted Gross Revenues
of the Company in excess of $15 million but under $100 million per year, and
2.5% of the Adjusted Gross Revenues on amounts over $100 million. However, no
royalties are due or payable unless the closing bid price for the Company's
Common Stock has been at least $52.50, as adjusted for any stock dividends,
stock splits or recapitalization, for a thirty calendar day period, and the
Company's net income during any fiscal year is at least equal to three percent
(3%) of the shareholders' equity after payment of the royalty. See "Certain
Transactions."
The above referenced patents do not cover the CD-MAX or NET-MAX
systems as currently configured, and thus the Company does not currently have
any patent protection for its systems.
RESEARCH AND DEVELOPMENT
The Company's research and development resources consist of a
thirteen person product development staff. Primary projects presently being
undertaken include: product enhancements to the system relating to the user
interface and tracking capabilities; expanding potential computer platforms
that can be used with the system; improving the efficiency and capability of
the back end support software, including improvement in usage reporting and
market research capabilities for publishers, and support for the marketing
efforts, which include improved product demonstration and demonstration support
capabilities. The Company's research and development efforts are concentrated
on the following:
SUB ACCOUNTS: This area involves the ability of a single master
account to assign its available credit to a collection of related accounts
which the master account manages. This system makes the Company's metering and
billing system particularly advantageous for libraries working with individual
researchers or academic departments;
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information distributors working with smaller clients; and corporations where
usage is allocated across multiple departments. This feature is under
development at this time.
INTEGRATION WITH SEARCH AND RETRIEVAL ENGINES: Work is continuing on
enhancing the ease with which the Company can integrate with leading industry
search and retrieval engines, such as Verity 97, Dataware's NetAnswer, and
Folio's siteDirector products with whom the Company has contracts as well as
keeping our product interfaces current with the latest versions of their
products. In addition, the Company will be working with other search and
retrieval developers to the publishing industry to integrate our system with
their systems as appropriate contracts are reached with these search and
retrieval developers.
INTEGRATION WITH PAYMENT MECHANISMS: The Company will be working
to integrate its billing systems with proprietary and non-proprietary
payment standards as they evolve on the Internet. This would include, but is
not limited to proprietary standards such as Cybercash and non-proprietary
standards such as SET being developed by VISA and Mastercard.
INTERNATIONALIZATION OF PAYMENT MECHANISMS: The Company is focusing on
expansion into the international markets, and is negotiating an agreement (not
yet reached) with SilverPlatter for providing services in Canada and Australia.
Any such agreements, if reached, necessitate the development of software
systems to handle transactions in international currencies and with
international banking systems. The Company will be working with other
organizations, such as Cybercash, to more quickly develop these capabilities.
EMPLOYEES
The Company has twenty-three (23) full time employees. Four (4)
employees are in marketing, six (6) are in management and administrative
positions, and thirteen (13) are in product research and development.
Management considers its employee relations to be satisfactory.
ITEM 2. PROPERTIES
The Company leases office space in Murray Hill, New Jersey
(approximately 1,650 square feet) on a five (5) year lease expiring in January,
2000 and in Reston, Virginia (approximately 7,900 square feet) on a lease, which
expires January, 1998. The annual rent for the first year is approximately
$200,000 with customary escalations. The Company has signed a five (5) year
lease for office space in
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Herndon, Virginia (approximately 11,805 square feet) to replace the Reston,
Virginia space, which begins November 1, 1997. The Company also owns or leases
office equipment and personal computers.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the
Company, through the solicitation of proxies or otherwise during the fiscal
year ended June 30, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal U.S. market in which the Company's Common Stock, $.01
par value, is traded is the Nasdaq Small-Cap market. The Company's common stock
was first listed for trading on August 16, 1996 under the symbol "MAXX". The
following table shows the high and low sales prices as reported on Nasdaq for
the periods indicated below. These quotations have been obtained from Nasdaq
Quotations through June 30, 1997 and reflect last sales prices for the
Company's Common Stock ($.01 Par Value).
<TABLE>
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Calendar year 1996 High Low
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Third Quarter..... 6.000 4.000
Fourth Quarter.... 6.000 3.750
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Calendar year 1997
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First Quarter..... 4.500 3.625
Second Quarter.... 4.125 2.875
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As of September 26, 1997, there were 343 holders of record of the
Company's common stock.
The Company has issued and outstanding 2,362,500 Redeemable Warrants.
Each of these warrants expires on August 16, 2001 and entitles the holder to
purchase one share of Common Stock for $4.59 per share, subject to adjustment
in certain events. The Redeemable Warrants are redeemable by the Company with
the prior written consent of Joseph Stevens & Company, L.P., the underwriter
for the Company's securities, at a price of $.05 per Redeemable Warrant
commencing August 16, 1997, provided that (i) 30 days written notice is given
to holders of the Redeemable Warrants (the "Warrantholders") and (ii) the
closing bid price per share of the Common Stock as reported on NASDAQ (or the
last sale price, if quoted on a national securities exchange) for any 20
trading days within a period of 30 consecutive trading days, ending on the
fifth day prior to the date of the notice of redemption, has been at least
150% of the then exercise price, subject to adjustment in certain events. The
Warrantholders shall have exercise rights until the close of the business day
immediately preceding the date fixed for redemption.
The Warrants provide for adjustment of the exercise price and for a
change in the number of shares issuable upon exercise to protect holders
against dilution in the event of a stock dividend, stock split, combination or
reclassification of the Common Stock. The Warrants do not confer upon the
Warrantholder any voting or other rights of a stockholder of the Company.
The warrants have traded since August 19, 1996. Since that time, the
closing price for the warrants on NASDAQ has ranged from a low of 3/8 to a high
of 2 3/8. The closing price on September 26, 1997 was 1 3/8.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Report contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties and represent
management's judgment as of the date of this Form 10-KSB. The Company's actual
results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed under the caption "Risk Factors" in the
Company's Prospectus, dated August 16, 1996, issued in conjunction with the
Company's registration statement on Form SB-2, on file with the Securities and
Exchange Commission. The Company disclaims any intent or obligation to update
these forward-looking statements.
OVERVIEW
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<PAGE> 14
The Company is a development stage company engaged in the development
and marketing of the CD-MAX and NET-MAX technologies to publishers of digitally
stored information. The Company commenced operations in July 1993. Prior
thereto, the principals of the Company were involved in the development of the
Company's technology, development of the business plan and arrangement for the
initial capitalization of the Company.
From July 1, 1993 (inception) through June 30, 1997, the Company
recognized revenues from operations of $62,898 and as of June 30, 1997 had an
accumulated deficit of $6,287,211. The Company has continued to operate at a
loss since inception and expects to incur significant additional operating
losses until the Company generates significant revenues from operations which
are sufficient to cover its monthly operating expenses.
The Company's strategy is to achieve market acceptance of the CD-MAX
and NET-MAX Systems with publishers of professional, general corporate, library
and educational materials who use CD-ROMs and the Internet as the method of
information distribution. The Company has entered into agreements with seven
information publishers pursuant to which it will receive product development,
transaction and licensing fees (which represent a percentage of the revenue
billed by the Company on behalf of the publisher), provided that the publishers
are successful in marketing their information. The first commercial use of the
CD-MAX System began in August 1995, and to date, a total of $62,898 in revenues
have been generated from all uses of the system. The first commercial use of
the NET-MAX system was in September 1997 and to date no revenue has been
received by the Company.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1996 COMPARED WITH YEAR ENDED JUNE 30, 1995
REVENUES
For the year ended June, 1996, the Company recognized revenues of
$13,394 as license fee income pursuant to its agreements with publishers. For
the year ending June 30, 1995, the Company recognized revenues of $2,500 from
operations.
OPERATING EXPENSES
The Company's operating expenses were $1,673,030 for the year ended
June 30, 1996, compared to $1,087,002 for the year ended June 30, 1995. This
increase of $586,028 or 54% was attributable primarily to the following
factors:
Sales and Marketing. Selling expenses were $208,757 for the year ended
June 30, 1996, compared to $120,285 for the year ended June 30, 1995. This
increase of $88,472 or 74% was attributable primarily to increased expenses
associated with the design and production of marketing materials and an
increase in public relations expenses.
General and Administrative. General and administrative expenses were
$725,748 for the year ended June 30, 1996, compared to $689,597 for the year
ended June 30, 1995. This increase of $36,151 or 5% was primarily due to a
$37,239 increase in administrative salaries (annual salary increase for key
employees, additional staff
15
<PAGE> 15
and temporary services); a $18,656 increase in Virginia office rent (twelve
months rent versus five months rent in the prior twelve months); a $11,277
increase due to an increase in travel (finance related activities); a $43,243
increase in legal expenses; and a $53,666 increase in general office expenses
offset by a decrease of $127,930 in investors' and financial relations expense.
Research and Development. Research and development expenses were
$655,124 for the year ended June 30, 1996, compared to $277,120 for the year
ended June 30, 1995. This increase of $378,004 or 136% was primarily attributed
to the increase of nine additional personnel in software development and
operations. This increase in staff also resulted in an increase of equipment
and related expenses.
Depreciation and Amortization expense was $83,401 for the year ended
June 30, 1996, compared to $0 for the year ended June 30, 1995. This increase
of $83,401 was primarily attributed to the capitalization of equipment leases
and the capitalization of debt issuance costs associated with the second bridge
financing.
Due to the above, the Company had a net loss of $1,715,333 for the
year ended June 30, 1996, compared to a net loss of $1,082,415 for the year
ended June 30, 1995.
YEAR ENDED JUNE 30, 1997 COMPARED WITH YEAR ENDED JUNE 30, 1996
REVENUES
For the year ended June 30, 1997, the Company recognized revenues of
$47,004 as license fee income pursuant to its agreements with publishers. For
the year ended June 30, 1996, the Company recognized revenues of $13,394 from
license fees pursuant to its agreements with publishers. These revenues
consisted primarily of software development and licensing fees.
OPERATING EXPENSES
The Company's operating expenses were $2,739,029 for the year ended
June 30, 1997, compared to $1,673,030 for the year ended June 30, 1996. This
increase of $1,065,999 or 64% was attributable primarily to the following
factors:
Sales and Marketing. Selling expenses were $578,136 for the year ended
June 30, 1997, compared to $208,757 for the year ended June 30, 1996. This
increase of $369,379 or 177% was attributable primarily to increased expenses
for two additional marketing professionals and new marketing literature. Salary
and fringe benefits increased $144,655. Marketing literature and advertising
increased $172,197 from the prior fiscal year. The Company retained KSK
Communications, Ltd. to design new marketing literature and materials and
advertising for the new name of Imark Technologies, Inc. Office rent for the
New Jersey office had been expensed to general and administrative in fiscal
year 1996, but since the move of all administrative functions to Virginia in
fiscal year 1997 the rent expense has been transferred to Sales and Marketing.
For this reason, rent increased $41,572 from the previous year. The remaining
increase is due to increased travel and public relations expenses.
General and Administrative. General and administrative expenses were
$1,066,485 for the year ended June 30, 1997, compared to $725,748 for the year
ended June 30, 1996. This increase of $340,737 or 47% was primarily due to
increased salary and fringe benefits. Administrative salaries increased $95,817
with the addition of two new administrative managers and executive salary
increases. Employee life, medical and dental insurance increased $40,312 for
all employees due to increased rates and greater employee participation.
Employer 401k contributions for all departments increased $14,508 with
increased employee participation. Accounting fees increased $19,609 as a result
of the Company's public offering in August, 1996 and the additional financial
16
<PAGE> 16
reporting requirements. Financial public relations and consulting expenses
increased $95,698 from the prior fiscal year. Consultants were retained in
fiscal year 1997 in an effort to increase profitability and investor awareness
of the Company. Financial filing fees increased $19,773 as a result of the
public offering in fiscal year 1997 and the Securities and Exchange Commission
quarterly reporting requirements. Insurance expenses increased $57,770 from the
prior fiscal year as the company acquired additional E&O, D&O, and business
liability insurance.
Research and Development. Research and development expenses were
$1,021,576 for the year ended June 30, 1997, compared to $655,124 for the year
ended June 30, 1996. This increase of $366,452 or 56% was attributed to an
increase in labor and fringe expenses. Research and development personnel
received significant salary increases based on salary statistics for
comparable positions in the industry. These increases combined with four
additional employees resulted in increased labor and fringe benefit expenses of
$345,450 or 72% from the prior fiscal year.
Due to the above, the Company had a net loss of $2,559,468 for the
year ended June 30, 1997, compared to a net loss of $1,715,333 for the year
ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced net losses from operations since its
inception and at June 30, 1997 had an accumulated deficit of $6,287,211. Other
than routine trade payables, at June 30, 1997 the Company's primary liabilities
are accrued expenses of $66,898 which represents employee benefit accruals.
The Company has no external sources of liquidity and the Company has
no knowledge of any trends, events, or uncertainties that are likely to impact
short-term or long-term liquidity.
The Company is currently spending approximately $225,000 per month
and, as of June 30, 1997, had cash, cash equivalents and short-term investments
of approximately $2.9 million.
Unless revenues increase significantly, the Company anticipates that it
will have to raise additional funds during fiscal year 1998. There is no
certainty that the Company will be able to raise such funds. Should the Company
be unable to raise the additional Capital, the Company must significantly
reduce its operating expense and/or redeem its redeemable warrants.
The Company has financed its operations primarily through funds
obtained from the sale of Common Stock. On August 16, 1996 the Company
completed a Public Offering of 1,322,500 Units, each unit consisting of two
shares of Common Stock and one Redeemable Warrant. The gross proceeds to the
Company were approximately $8.1 million; as of June 30, 1997, $1,454,726 of the
total offering proceeds were used to pay off private placement notes payable
and related party notes payable and related offering expenses. The net proceeds
from this offering are being used to support continuing operations and research
and development. As of June 30, 1997 an additional $1,783,701 of the proceeds
have been used to purchase short-term certificates of deposit. The Company
expects the proceeds from the offering to be sufficient to fund its operations
for at least twelve months.
The Company has no material commitments other than its facility,
equipment leases, and employment agreements with four of its senior executives
which call for annual salaries of approximately $64,000 to $89,500 per year per
individual.
CERTAIN BUSINESS RISKS
There can be no assurance that the Company's services will be accepted
by the marketplace in a successful and timely manner; that the Company will
achieve positive cashflow to fund its operations prior to exhausting its
capital resources; or that the Company will be able to raise additional
capital, should it be required.
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<PAGE> 17
A description of these and other risks relating to the Company's
business is set forth under the caption "Risk Factors" in the Company's
Prospectus, dated August 16, 1996, issued in conjunction with the Company's
registration statement on Form SB-2, on file with the Securities and Exchange
Commission
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS FORM 10-KSB
<S> <C>
Independent Auditors' Report F-2
Balance Sheet as of
June 30, 1997 F-3
Statements of Operations for the years
ended June 30, 1996 and 1997 and for the period
from July 1, 1993 (inception) through June 30, 1997 F-4
Statements of Stockholders' Equity (Deficit) for the years
ended June 30, 1996 and 1997 and for the period from
July 1, 1993 (inception) through June 30, 1997 F-5
Statements of Cash Flows for the years ended June 30, 1996
and 1997 and for the period from July 1, 1993 (inception)
through June 30, 1997 F-6
Notes to Financial Statements F-8
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position with Company
---- --- ----------------------------------------------------
<S> <C> <C>
Robert A. Wiedemer 38 President, Chief Executive Officer, Chairman of
the Board
Philip J. Gross 45 Secretary, Treasurer, Vice President, Chief Financial
Officer
John David Wiedemer, Ph.D. 46 Senior Vice President, Operations, Director
David B. Boelio 43 Executive Vice President, Marketing and Sales
Steven P. Schnipper 26 Director
Weldon P. Rackley 61 Director
</TABLE>
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<PAGE> 18
Robert A. Wiedemer, Co-founder and Chairman of the Board since 1995,
President, Chief Executive Officer and a Director of the Company since 1993.
From March 1990 until June 1993, he worked with Dr. Wiedemer in the development
of the CD-MAX technology. Mr. Wiedemer received his B.A. from the University of
Texas and a Master's Degree in Business from the University of
Wisconsin-Madison with a specialty in Marketing.
Philip J. Gross, Co-founder, Secretary/Treasurer, Chief Financial
Officer, and Director since 1993. From 1986 until 1989 Mr. Gross was Chief
Financial Officer, Treasurer and Secretary of America Online. From 1985 until
May, 1994, he was a director of National Digital Corporation of McLean,
Virginia, a digital photo transmission company. From 1990 through June, 1993,
Mr. Gross was chief financial officer of Phone Base Systems of Vienna,
Virginia, a telecommunications firm. From 1991 to the June, 1997, he was the
chief operating officer and a director of CIVS, Inc. of Rockville, Maryland, a
health care information company. Subsequent to CIVS's acquisition by Medirisk,
Inc., in June, 1997, he has been Vice-President of Operations. Mr. Gross is a
Certified Public Accountant. He holds AB and MBA degrees from Syracuse
University.
John David Wiedemer, Ph.D., Co-founder, Director, and Senior Vice
President--Operations since 1993. From March 1990 until June 1993, Dr. Wiedemer
was involved in efforts to develop the CD-MAX technology. Dr. Wiedemer holds
Ph.D. and Masters degrees in economics from the University of Wisconsin-Madison,
and a Bachelor of Arts degree (Magna cum laude) from the University of
Pennsylvania.
David B. Boelio, Executive Vice President, Marketing and Sales since
July, 1993. From 1990 until June, 1992 he was vice-president, editor in chief
at Macmillan Publishing of New York City. From June, 1992 through July, 1993,
he was a self employed consultant to the publishing industry. He holds a BA
degree from the University of Michigan.
Steven P. Schnipper, Director since 1995. Since 1992, he has been a
financial consultant, working with individual and corporate clients. From 1993
to November, 1994, Mr. Schnipper was employed by the City of Elizabeth, NJ
designing, implementing and troubleshooting computerized systems and
applications. Mr. Schnipper holds BA and MBA degrees from Rutgers University.
Prior to 1992, Mr. Schnipper was a student.
Weldon P. Rackley, Director since May 1996. From 1991 to November 1994
he was executive director of AMACOM Books, the book publishing division of the
American Management Association, located in New York City, and from November
1994 to the present he has been the managing director of publications for the
American Management Association.
ADVISORY BOARD
The CD-MAX Advisory Board consists of the persons set forth below. The
Advisory Board members serve one year terms from the date of their appointment
and receive options to purchase the Company's Common Stock in consideration of
their service on the Advisory Board. The Company policy is to annually grant
stock options to members of the Advisory Board. The number of options to be
granted is at the discretion of the Company's Board of Directors.
John H. Davis, the former chairman and chief executive officer of The
Thomson Corporation's Book/Reference Group, retired from Thomson in 1993.
Previously he held executive positions with Simon &
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<PAGE> 19
Schuster, Inc. and its subsidiary, Prentice-Hall, Inc., including president of
the Simon & Schuster Higher Education Group and president of the Prentice-Hall
College Division. Until 1993, Mr. Davis served as treasurer of the Board of
Directors of the Association of American Publishers ("AAP") and as a member of
its Executive Committee. In May, 1994, he received the AAP's James F. Leisy
Achievement Award in recognition of the positive influence he has exerted on
the careers of many publishing industry executives.
James D. Ramsey, III is president and chief executive officer of Evoke,
Inc., a new venture serving the information needs of various professional and
corporate markets. From 1991 to 1994, Mr. Ramsey was senior vice president of
Research Institute of America ("RIA"), a publisher of tax information owned by
The Thomson Corporation. As general manager of RIA's electronic publishing unit,
he bore primary responsibility for planning and executing the company's move
from print into CD-ROM-based distribution of information.
William Saffady, Ph.D. is a Professor in the School of Information
Science and Policy, State University of New York at Albany. As the author of
over 30 books and dozens of articles, Dr. Saffady is a recognized authority on
many aspects of information management, including the use of optical discs and
the cost of online search services. Fraser P. Seitel is managing partner of
Emerald Partners, communications counselors, and senior counselor to
Burston-Marsteller. For 21 years, Mr. Seitel was a communications executive of
the Chase Manhattan Bank, resigning in 1992 after 10 years as senior vice
president and director of public affairs. Mr. Seitel teaches and lectures
extensively on the field of public relations. He is the author of the
Prentice-Hall textbook, The Practice of Public Relations.
William E. Strum served until July, 1995 as Vice President of Advanced
Products and Tools at America Online, Inc., where he developed future strategies
for enhanced browser, server and Internet server products. Previously, Mr. Strum
was president and chief technical officer of Media Cybernetics, Inc., a producer
and marketer of imaging and multimedia software products. Mr. Strum is currently
providing business development consulting services to companies involved in
Internet and interactive technologies and serves as the Product Manager for the
Company's NET-MAX product.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during the fiscal
year ended June 30, 1997, to the Company's Chief Executive Officer. No other
officer, director, or employee earned more than $100,000 for the fiscal year
ended June 30, 1997.
<TABLE>
<CAPTION>
Name and
Other Annual
Principal Position Salary Bonus Compensation Options
- ------------------ ------ ----- ------------ -------
<S> <C> <C> <C> <C>
Robert A. Wiedemer, President,
Chief Executive Officer $89,500 $5,000 - -
</TABLE>
EMPLOYMENT CONTRACTS
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<PAGE> 20
The Company has entered into employment agreements with Messrs.
Boelio, Gross, J.D. Wiedemer, and R. Wiedemer which terminate on October 1,
1998. Each employment agreement provides for automatic one-year renewals
subject to earlier termination by either party with or without cause on certain
terms and conditions. Each agreement is terminable by either the employee or
the Company by notice at least 90 days prior to the end of the term or any
renewal term. If the agreement is terminated by the Company prior to the end of
the term or any renewal thereof without cause, as such term is defined in the
agreement, the Company must pay the employee his base salary for six (6) months
thereafter as severance pay. In addition, the Company may terminate the
agreement for breach of the agreement, including neglect of duty, malfeasance
or misfeasance, or inability to perform specified duties upon 30 days prior
notice. Each employee has agreed with the Company that the employee shall not,
directly or indirectly, in the United States in geographical locations in which
the Company does or is in the process of extending its capability to market and
sell its products, for a period of 18 months after termination, engage in any
competitive business, or solicit customers of the Company in competition with
the Company.
Robert A. Wiedemer is employed as President and Chief Executive
Officer, is in charge of all operations, and entrusted with the direction,
administration, and implementation of the Company's plans and policies. John
David Wiedemer is employed as Senior Vice President of Operations and is
responsible for supervising and managing the Company's product development.
David B. Boelio is the Executive Vice President, Marketing and Sales and is
responsible for supervising and managing the Company's marketing and sales
activities. Philip J. Gross is employed as Chief Financial Officer and is
responsible for all accounting records, all other economic and financial
information and systems of the Company, and for apprising the President and the
Board of Directors of all corporate financial information relevant to their
determinations. Mr. Gross is also employed as Vice President of a health care
information company. There can be no assurance that the demands upon Mr. Gross
from his employment by the Company and the other company will not create a
conflict of interest between Mr. Gross and the Company, or that such demands
may not result in the Company having less availability of Mr. Gross' services.
STOCK INCENTIVE PLAN
In September, 1993, the Board of Directors adopted, and in December,
1993, the stockholders approved, the 1993 Stock Incentive Option Plan (the
"Plan"), which provides for the grant of options to purchase an aggregate of
200,000 shares of the Company's Common Stock. The Plan provides for the grant to
key employees of incentive stock options within the meaning of Section 422 of
the Code, and for the grant of non-qualified stock options, and restricted stock
awards to eligible executive officers, directors, consultants and key employees
of the Company. The Plan, which expires in 2003, is administered by the Board of
Directors or a committee designated by the Board of Directors. The purposes of
the Plan are to ensure the retention of existing executive personnel, key
employees and consultants of the Company, to attract and retain new executive
personnel, key employees and consultants and to provide additional incentive by
permitting such individuals to participate in the ownership of the Company. The
criteria to be utilized by the Board of Directors or committee in granting
options pursuant to the Plan will be consistent with these purposes. Senior
management of the Company is not expected to participate in this Plan; however,
they have been granted Management Warrants which are described below.
Incentive stock options granted under the Plan may be exercisable for
a period of up to 10 years or from the date of grant at an exercise price which
is not less than the fair market value of the Common Stock on the date of the
grant, except that the term of an incentive stock option granted under the Plan
to a stockholder owning more than 10% of the outstanding Common Stock may not
exceed five years and its
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<PAGE> 21
exercise price may not be less than 110% of the fair market value of the Common
Stock on the date of the grant. To the extent that the aggregate fair market
value, as of the date of grant, of the shares of which incentive stock options
become exercisable for the first time by an optionee during the calendar year
exceeds $100,000, the portion of such option which is in excess of the $100,000
limitation will be treated as a non-qualified stock option. Upon the exercise
of an option, payment may be made by cash, check or any other means that the
Board or the committee determines. No option may be granted under the Plan
after December 2003.
To date the Company has issued 198,660 stock options to its
non-management directors, key employees, and consultants exercisable at a
prices ranging from $3.50 to $15.00 per share. The Company has not issued any
restricted stock awards.
MANAGEMENT WARRANTS
In April, 1996, the Company issued to its senior management an
aggregate of 990,000 ten year, common stock purchase warrants that are
exercisable after October 1, 1996 and only at such time as the Common Stock has
traded for twenty days in any thirty business day period at a closing bid price
equal to or greater than $9.19, as adjusted for any stock splits or
recapitalizations. The exercise price of these Warrants is $9.19 per share,
subject to adjustment for stock splits or recapitalizations.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS AND INDEMNIFICATION
The Certificate of Incorporation limits, to the fullest extent now or
hereafter permitted by the Delaware General Corporation Law, liability of the
Company's directors to the Company or its stockholders for monetary damages
arising from a breach of their fiduciary duties as directors in certain
circumstances. This provision presently limits a director's liability except
where a director (i) breaches his or her duty of loyalty to the Company or its
stockholders, (ii) fails to act in good faith or engages in intentional
misconduct or a knowing violation of law, (iii) authorizes payment of an
unlawful dividend or stock purchase or redemption or (iv) obtains an improper
personal benefit. This provision does not prevent the Company or its
stockholders from seeking equitable remedies, such as injunctive relief or
recision. If equitable remedies are found not to be available to stockholders
in any particular case, stockholders may not have any effective remedy against
actions taken by directors that constitute negligence or gross negligence.
The Certificate of Incorporation also authorizes the Company to
indemnify its directors, officers or other persons serving at the request of
the Company against liabilities arising from their services in such capacities
to the fullest extent permitted by law, including payment in advance of a final
disposition of a director's or officer's expenses or attorneys' fees incurred
in defending any action, suit or proceeding, other than in the case of an
action, suit or proceeding brought by the Company on its own behalf against an
officer. Presently, the Delaware General Corporation Law provides that to be
entitled to indemnification an individual shall have acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the Company's
best interests.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the beneficial
ownership of Common Stock as of September 15, 1997 by (i) each stockholder
known by the Company to own beneficially five percent or more of the
outstanding Common Stock, (ii) each director, (iii) each "Named Executive"
officer, and (iv) all executive officers and directors of the Company as a
group.
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<PAGE> 22
<TABLE>
<CAPTION>
Name and Addresses of Shares Beneficially Percentage of Outstanding
Beneficial Owners Owned(1) Shares of Common Stock
--------------------- ------------------- --------------------------
<S> <C> <C>
David B. Boelio 470,987(2) 9.48%
Philip J. Gross 435,486(2) 8.75%
John D. Wiedemer(2) 724,562(3) 14.59%
Robert A. Wiedemer(3) 435,450(4) 8.77%
Wiedemer Charitable Trust(4) 230,050(5) 4.88%
c/o John D. Wiedemer, Trustee
Steven P. Schnipper 266,367(6) 5.44%
Weldon P. Rackley 70,575 1.50%
Suan Investments(11) 487,567(7) 9.89%
c/o Ernest Gottdiener
911 Sterner Road
Hillside, NJ 07205
All Executive Officers and
Directors as a group
(six persons) 2,403,923(8) 40.97%
</TABLE>
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
of the Securities Exchange Act of 1934, as amended. Generally, a person is
deemed to be the beneficial owner of a security if he has the right to acquire
voting or investment power within 60 days. Except as otherwise noted, each
individual or entity has sole voting and investment power over the securities
listed.
(2) Includes 247,500 ten year, common stock purchase warrants that are
exercisable at such time as the Common Stock has traded for twenty days in any
thirty business day period at a closing bid price equal to or greater than
$9.19 for the exercise price of $9.19 per share.
(3) Robert A. Wiedemer and John D. Wiedemer are brothers. Includes 230,050
shares owned by the Wiedemer Charitable Residual Trust over which John David
Wiedemer exercises voting control, and in which he has a beneficial interest.
(4) Robert A. Wiedemer and John D. Wiedemer are brothers. Does not include
any shares owned by the Wiedemer Charitable Residual Trust in which Robert
Wiedemer has a beneficial interest but does not exercise any voting or
investment control.
(5) John D. Wiedemer is the trustee of this trust and he and Robert A.
Wiedemer have a beneficial interest in the trust.
(6) Includes 19,152 shares subject to Common Stock options exercisable at
$9.00 per share, 37,397 shares subject to Common Stock warrants that are
immediately exercisable at prices ranging from $.30 to $6.00 per share, and
97,056 shares of Common Stock issuable upon exercise of Redeemable Warrants.
(7) Includes 47,408 shares subject to Common Stock warrants that are
immediately exercisable at $6.00 per share, and 265,944 shares of Common Stock
issuable upon exercise of Redeemable Warrants.
(8) Includes 19,152 shares subject to Common Stock options exercisable at
$9.00 per share, 84,805 shares subject to Common Stock warrants that are
immediately exercisable at prices ranging from $.30 to $6.00 per share.
363,000 shares of Common Stock issuable upon exercise of Redeemable Warrants,
and 990,000 ten year, Common Stock purchase warrants that are exercisable at
such time as the Common Stock had traded for twenty days in any thirty business
day period at a closing bid price equal to or greater than $9.19 for the
exercise price of $9.19 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July, 1993, John David Wiedemer and Robert Wiedemer formed CD-MAX
for the purpose of developing the CD-MAX System. Prior to that time they had
engaged in limited development efforts through a number of different entities
owned entirely by Messrs. Wiedemer and members of their family.
The Company entered into the Master License Agreement with John David
Wiedemer which agreement gave CD-MAX rights in certain specified Intellectual
Property. The Master License includes standard license provisions, such as the
reversion of the license to the licensor (or assigns), should CD-MAX file for
bankruptcy or not protect and defend from infringement any of the intellectual
property covered by the
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<PAGE> 23
license. The Master License provides for a royalty to a Royalty Trust of 1.25%
of the adjusted gross revenues of CD-MAX in excess of $15 million, but under
$100 million per year, and 2.5% of the adjusted gross revenues on amounts over
$100 million. However, no royalties are due or payable until such time as the
closing bid price for the Company's Common Stock is at least $52.50, as adjusted
for any stock dividends, stock splits or recapitalization, for a thirty calendar
day period, and the Company's net income during any fiscal year after payment of
the royalty is at least equal to three percent (3%) of the shareholders' equity
after payment of the royalty. The Master License also permits John David
Wiedemer to compete with the Company after 1999, if he is terminated by the
Company without cause and if the Company fails to have adjusted gross revenues
from sales of products and services using the Intellectual Property of at least
$3,000,000 in 1999, $4,000,000 in 2000, and $5,000,000 in 2001 (the "Minimum
Revenue Goal"), and each year after 2001 adjusted gross revenues equal to the
prior year's Minimum Revenue Goal plus 15%, adjusted for inflation. See
"Business - Proprietary Rights and Intellectual Property."
In December, 1995, the Company issued 80,825 shares of Common Stock and
80,825 warrants to purchase Common Stock with an exercise price of $6.60 per
share to Steven P. Schnipper, a director of the Company, and two other existing
shareholders of the Company, Suan Investments and Stourbridge Investments, Ltd.,
in return for their guarantee to provide interim financing of up to $300,000 to
the Company. The stock and warrant issuance was the result of negotiations
between the Company and the investors and represents the repricing of the
investors' earlier equity investments in the Company. Pursuant to their
guarantees, in February, March and April 1996, Steven P. Schnipper, and the two
principal stockholders of the Company, advanced an aggregate of $300,000 to the
Company. In exchange for the initial $100,000 advance of the First Bridge
Financing, the Company issued 50,000 Bridge Warrants and a one-year, 10%
promissory note that was repaid from the net proceeds of the Second Bridge
Financing. For the remaining $200,000 the Company issued an aggregate of (i)
$180,000 principal amount of promissory notes which bear interest at the rate of
10% per annum and are due and payable upon the earlier of (a) the consummation
of a public financing of the Company through the sale of equity securities from
which the Company receives gross proceeds of at least $3,000,000 or (b) May 16,
1997, and (ii) 120,000 Bridge Warrants.
Some of the Company's officers, directors and principal shareholders
(or their family members) purchased an aggregate of $200,000 of the Second
Bridge Financing on terms identical to the other investors in that offering.
The above referenced promissory notes from the First and Second
Bridge Financings were repaid from the proceeds of the Company's public
offering in August 1996.
24
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CD-MAX, Inc.
--------------------------------
(Registrant)
Date: September 28, 1997 /s/ ROBERT WIEDEMER
--------------------------------
Robert A. Wiedemer
President, Chief Executive Officer,
and Chairman of Board
(Principal Executive Officer)
Date: September 28, 1997 /s/ PHILIP J. GROSS
---------------------------------
Philip J. Gross,
Secretary Treasurer, Vice President-
Chief Financial Officer, and Director
(Principal Accounting Officer)
25
<PAGE> 25
CD-MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................................... F-2
Balance Sheet as of June 30, 1997 ......................................................... F-3
Statements of Operations for the years ended June 30, 1996 and 1997
and for the period from July 1, 1993 (inception) through June 30, 1997.................. F-4
Statements of Stockholders' Equity (Deficit) for the years ended June 30, 1996
and 1997 and for the period from July 1, 1993 (inception) through June 30, 1997......... F-5
Statements of Cash Flows for the years ended June 30, 1996 and 1997
and for period from July 1, 1993 (inception) through June 30, 1997 ..................... F-6
Notes to Financial Statements.............................................................. F-8
</TABLE>
F-1
<PAGE> 26
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
CD-MAX, Inc.
We have audited the accompanying balance sheet of CD-MAX, Inc., d/b/a Imark
Technologies, Inc., (a development stage company) as of June 30, 1997, and the
related statements of operations, stockholders' equity (deficit), and cash
flows for the years ended June 30, 1996 and 1997 and for the period July 1,
1993 (inception) to June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CD-MAX, Inc., d/b/a Imark
Technologies, Inc., at June 30, 1997, and the results of its operations and its
cash flows for the years ended June 30, 1996 and 1997 and for the period July
1, 1993 (inception) to June 30, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
September 22, 1997
F-2
<PAGE> 27
CD-MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
1997
------------
<S> <C>
Current assets:
Cash and cash equivalents ........................................ $ 1,119,242
Accounts receivable .............................................. 20,250
Short-term investments ........................................... 1,803,701
Prepaid expenses and other current assets ........................ 50,295
------------
Total current assets ................................................ 2,993,488
Computer equipment .................................................. 368,775
Less accumulated depreciation and amortization ...................... (84,822)
------------
283,953
Deposits ............................................................ 11,829
------------
Total assets ........................................................ $ 3,289,270
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 83,989
Accrued expenses ................................................. 66,898
Unearned royalties ............................................... 17,180
Current portion of capital lease obligations ..................... 33,325
------------
Total current liabilities ........................................... 201,392
Capital lease obligations, net of current portion ................... 23,803
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized;
no shares issued and outstanding ............................... --
Common stock, $.01 par value; 10,000,000 shares authorized;
4,718,270 shares issued and outstanding ........................ 47,183
Capital in excess of par value ................................... 9,304,103
Deficit accumulated during the development stage ................. (6,287,211)
------------
Total stockholders' equity........................................... 3,064,075
============
Total liabilities and stockholders' equity........................... $ 3,289,270
============
</TABLE>
See accompanying notes.
F-3
<PAGE> 28
CD-MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1993
(INCEPTION) TO
YEAR ENDED JUNE 30, JUNE 30,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues .................... $ 13,394 $ 47,004 $ 62,898
Costs and expenses:
Selling .................. 208,757 578,136 1,019,631
General and administrative 725,748 1,066,485 3,192,782
Research and development . 655,124 1,021,576 2,060,956
Depreciation and
amortization ........... 83,401 72,832 156,234
------------ ------------ ------------
Total costs and expenses .... 1,673,030 2,739,029 6,429,603
Loss from operations ........ (1,659,636) (2,692,025) (6,366,705)
Other income (expense):
Interest income .......... 13,586 179,039 197,134
Interest expense ......... (69,283) (46,482) (117,640)
------------ ------------ ------------
Net loss .................... $(1,715,333) $(2,559,468) $(6,287,211)
============ ============ ============
Net loss per share .......... $ (.88) $ (.59)
============ ============
Weighted average number of
common shares outstanding 1,954,255 4,362,751
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 29
CD-MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
Statements of Stockholders' Equity (Deficit)
Period from July 1, 1993 (inception) through June 30, 1997
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
CAPITAL IN EXCESS DURING THE TOTAL
COMMON STOCK DEVELOPMENT STOCKHOLDERS'
SHARES PAR VALUE OF PAR VALUE STAGE (DEFICIT) EQUITY
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1993 34 $ -- $ 100 $ -- $ 100
Entries to record reverse acquisition,
December 29, 1993:
Issuance of common stock 701,566 7,015 (7,015) -- --
Adjustment to record existing
capitalization of public shell company 330,403 3,304 (3,304) -- --
Conversion of debt to equity, December 31,
1993 200 2 2,998 -- 3,000
Conversion of debt to equity, December 31,
1993 30,769 308 170,281 -- 170,589
Issuance of compensatory stock options,
December, 1993 -- -- 171,000 -- 171,000
Conversion of debt to equity, June 30,
1994 4,861 49 437,451 -- 437,500
Net loss -- -- -- (929,995) (929,995)
--------------------------------------------------------------------------
Balance at June 30, 1994 1,067,833 10,678 771,511 (929,995) (147,806)
Issuance of common stock, November 14,
1994 11,494 115 49,885 -- 50,000
Conversion of debt to equity, December
15, 1994 13,333 133 450,367 -- 450,500
Conversion of debt to equity, February
21, 1995 6,226 62 27,021 -- 27,083
Issuance of common stock, March 31, 1995 2,299 23 9,977 -- 10,000
Issuance of common stock, April 28, 1995 5,747 58 24,942 -- 25,000
Issuance of common stock, June 30, 1995 143 2 7,498 -- 7,500
Issuance of common stock, June 30, 1995 333,590 3,336 (3,336) -- --
Issuance of common stock, June 30, 1995 133,333 1,333 578,667 -- 580,000
Compensatory stock options earned during
1995 -- -- 71,452 -- 71,452
Net loss -- -- -- (1,082,415) (1,082,415)
--------------------------------------------------------------------------
Balance at June 30, 1995 1,573,998 15,740 1,987,984 (2,012,410) (8,686)
Issuance of common stock, August 5, 1995 120,690 1,207 523,793 -- 525,000
Issuance of common stock, August 5, 1995 217,242 2,172 (2,172) -- --
Issuance of common stock, December 15, 1995 80,825 808 (808) -- --
Issuance of common stock, December 15, 1995 54,545 546 (546) -- --
Issuance of warrants in connection with
the Bridge Loan Agreement, March 31, 1996 -- -- 20,000 -- 20,000
Allocation of interest in connection with
the Bridge Loan Agreement, March 31, 1996 -- -- 29,167 -- 29,167
Issuance of warrants in connection with
the Private Placement, May 16, 1996 -- -- 84,455 -- 84,455
Additional interest expense associated
with warrants issued during 1996 -- -- 50,000 -- 50,000
Net loss -- -- -- (1,715,333) (1,715,333)
--------------------------------------------------------------------------
Balance at June 30, 1996 2,047,300 20,473 2,691,873 (3,727,743) (1,015,397)
Issuance of Common Stock, including
issuance of antidilutive shares, net of
expenses, August 16, 1996 2,300,000 23,000 5,696,730 -- 5,719,730
Issuance of Common Stock to satisfy
antidilutive provision 25,970 260 (260) -- --
Issuance of Common Stock pursuant to
underwriters exercise of
over-allotment, net of expenses, 345,000 3,450 915,760 -- 919,210
September 5, 1996
Net loss -- -- -- (2,559,468) (2,559,468)
--------------------------------------------------------------------------
Balance at June 30, 1997 4,718,270 $ 47,183 $ 9,304,103 $(6,287,211) $ 3,064,075
==========================================================================
</TABLE>
See accompanying notes
F-5
<PAGE> 30
CD-MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1993
YEAR ENDED (INCEPTION) TO
JUNE 30, JUNE 30,
1996 1997 1997
------------------ ------------------ -------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,715,333) $ (2,559,468) $ (6,287,211)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 13,446 72,832 86,278
Amortization of debt issuance costs 69,955 69,954 139,909
Issuance of compensatory stock options - - 242,452
Interest expense associated with warrants issued in
connection with the Bridge Loan Agreement 20,833 8,334 29,167
Interest expense associated with warrants issued in
connection with the Private Placement 25,000 25,000 50,000
Changes in operating assets and liabilities:
Accounts receivable (5,994) (14,256) (20,250)
Prepaid expenses and other current assets (20,251) (25,032) (50,295)
Deposits (11,829) - (11,829)
Debt issuance costs (139,909) - (139,909)
Accounts payable (26,613) 35,128 83,989
Accrued expenses 98,640 (274,322) 68,981
Unearned royalties (320) - 17,180
------------------ ------------------ -------------------
Net cash used in operating activities (1,692,375) (2,661,830) (5,791,538)
INVESTING ACTIVITIES
Purchases of property and equipment (1,085) (208,944) (210,029)
Purchases of short-term investments - (1,783,701) (1,803,701)
------------------ ------------------ -------------------
Net cash used in investing activities (1,085) (1,992,645) (2,013,730)
FINANCING ACTIVITIES
Net proceeds from notes payable 1,180,000 - 1,655,500
Net proceeds from issuance of warrants 104,455 - 104,455
Principal payments on notes payable (100,000) (900,000) (1,000,000)
Principal payments on notes payable to related parties - (180,000) (180,000)
Principal payments on capital lease obligations (21,839) (81,235) (103,074)
Net cash proceeds from issuance of common stock 525,000 6,638,940 8,447,629
------------------ ------------------ -------------------
Net cash provided by financing activities 1,687,616 5,477,705 8,924,510
------------------ ------------------ -------------------
Net increase (decrease) in cash and cash equivalents (5,844) 823,230 1,119,242
Cash and cash equivalents at beginning of period 301,856 296,012 -
------------------ ------------------ -------------------
Cash and cash equivalents at end of period $ 296,012 $ 1,119,242 $ 1,119,242
================== ================== ===================
</TABLE>
F-6
<PAGE> 31
CD-MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
STATEMENTS OF CASH FLOWS (continued)
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
During the year ended June 30, 1997, the Company capitalized $93,769 of
equipment under capital leases.
During the year ended June 30, 1996, $79,167 of the notes payable (bridge loan
and private placement) proceeds were allocated to capital in excess of par and
will be charged to interest expense over the term of the related notes payable.
In addition, the Company capitalized $66,433 of equipment under capital leases.
During the year ended June 30, 1995, two loans were converted into 19,559
shares of common stock. The principal balances of the loans amounted to
$450,500 and $25,000. Accrued interest of $2,083 related to the $25,000 note
payable was also converted to equity.
During the year ended June 30, 1994, three loans were converted into 35,830
shares of common stock. The principal balances of the loans amounted to
$437,500, $3,000 and $170,589.
See accompanying notes.
F-7
<PAGE> 32
CD-MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
Notes to Financial Statements
1. ORGANIZATION
CD-MAX, Inc. (the "Company") is a development stage company engaged in the
business of developing and marketing the CD-MAX (TM), NET-MAX and NET-MAX+
systems, based upon its proprietary technology, which is designed to allow
publishers of professional, corporate, library and educational information to
sell their information to end-users on a usage basis. The Company's systems
consist of proprietary metering and encryption software and billing services.
The Company believes that these systems have the potential to increase revenues
of electronic publishers by reducing copyright and license abuse and by
enabling them to expand into new markets.
On December 29, 1993, CD-MAX, Inc., (formerly InfoServe, Inc.), a public shell
company incorporated in Montana, acquired the outstanding stock of Signal
Security Technologies Inc. ("Sigtek") in exchange for 701,566 shares of common
stock. Sigtek was a privately held company formed on July 1, 1993. For
accounting purposes the acquisition was treated as a recapitalization of Sigtek
with Sigtek as the acquirer (a reverse acquisition). The historical financial
statements prior to December 29, 1993 are those of Sigtek. Effective December
29, 1993, Sigtek merged with CD-MAX, Inc., (formerly InfoServe, Inc.).
In March 1996, the Board of Directors and stockholders of InfoServe, Inc., a
Montana corporation, approved the mergers of InfoServe, Inc. and its
wholly-owned subsidiary, CD-MAX, Inc., into a new Delaware corporation, CDMII,
Inc. ("CDMII"). Subsequently, the name of the Delaware Corporation, CDMII, was
changed to CD-MAX, Inc. As part of the merger, the Board of Directors and
stockholders approved a 1 for 30 stock exchange under which the holders of
InfoServe, Inc. stock would receive one share of stock in CDMII for each of the
30 shares of stock in InfoServe, Inc. All references in the accompanying
financial statements to the number of shares of common stock and per share
amounts have been restated to reflect the stock exchange.
In May 1997, the Company began doing business as Imark Technologies, Inc. The
change is in name only and is anticipated to become a legal name change in
January 1998 following the Company's Annual Stockholders' Meeting.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE> 33
CD-MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
For the purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time
of purchase to be cash equivalents.
SHORT-TERM INVESTMENTS
The short-term investments are stated at cost, which as of June 30, 1997
approximate market, and consist of certificates of deposit.
COMPUTER EQUIPMENT
Computer equipment, including equipment held under capital leases, is recorded
at cost. Depreciation and amortization is calculated using the straight-line
method over the lesser of the estimated useful life of three years or the lease
term.
F-9
<PAGE> 34
CD-MAX, INC
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes license revenue upon completion of each event specified
in the Company's contract with a publisher. The Company records transaction and
transaction related revenues in the month in which the services are provided.
During the years ended June 30, 1996 and 1997, $13,394 and $43,000 of the
Company's total revenues were derived from one and three customers,
respectively.
RESEARCH AND DEVELOPMENT
All research and development costs are charged to expense as incurred.
INCOME TAXES
The Company provides for income taxes in accordance with the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
NET LOSS PER SHARE
The Company's net loss per share calculations are based upon the weighted
average number of shares of Common Stock outstanding. Other shares of common
stock issuable upon the exercise of stock options or warrants have been
excluded from the computation because the effect of their inclusion would be
antidulitive. In subsequent periods, stock options and warrants under the
treasury stock method will be included to the extent they are dilutive.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS No. 123"), "Accounting for Stock-Based
Compensation," which is effective for the Company's June 30, 1997 financial
statements. SFAS No. 123 allows companies to account for stock-based
compensation under either the provisions of SFAS No. 123 or under the provisions
of Accounting Principles Board No. 25 ("APB No. 25"), but requires pro forma
disclosure in the footnotes to the financial statements as if the measurement
provisions of SFAS No. 123 had been adopted. The Company intends to account for
its stock-based compensation in accordance with the provisions of APB No. 25. As
such, the implementation of SFAS No. 123 will not impact the financial position
or results of operations of the Company.
RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share",
which is required to be adopted for the Company's June 30, 1998 financial
statements. At that time, the Company will be required to change the
F-10
<PAGE> 35
CD-MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT PRONOUNCEMENTS (CONTINUED)
method currently used to compute net loss per share and to restate all prior
periods. Under the new requirements for calculating primary net loss per share,
the dilutive effect of stock options will be excluded. The impact of SFAS No.
128 on the calculation of primary and fully diluted net loss per share on the
June 30, 1997 financial statements is not expected to be material.
3. STOCKHOLDERS' EQUITY (DEFICIT)
FINANCING TRANSACTIONS
In August and September 1996, the Company sold in a public offering 1,322,500
Units, each unit consisting of two shares of Common Stock and one Redeemable
Warrant. The public offering generated net proceeds to the Company of
approximately $6,639,000. In conjunction with the Company's public offering,
the Company issued 25,970 shares of common stock to current stockholders to
satisfy certain previously granted antidilution provisions.
On May 16, 1996, the Company completed a private placement (the "Private
Placement") to raise approximately $1,000,000 from current and new investors.
The Company sold 20 units of which each unit consisted of a $45,000 unsecured
promissory note and 30,000 warrants. The $45,000 promissory note bore interest
at an annual rate of 10% and the principal balance plus accrued interest was due
and repaid upon the closing of the Company's public offeringe. Each warrant is
exercisable to purchase one share of common stock at a price equal to $3.37
commencing May 16, 1997. Upon the closing of the ??? offering, the warrants
converted to redeemable warrants. The Company allocated approximately $50,000
of the promissory note proceeds to the warrants issued. The $50,000 allocated
to the warrants will be amortized to interest expense using the effective
interest method over the period (three months) the related debt was expected to
be outstanding. The effect of this allocation results in an effective interest
rate of 35%. During the years ended June 30, 1996 and 1997, the Company
recognized $25,000 and $25,000 of interest expense, respectively.
On December 15, 1995, the Company executed an agreement (the "Bridge Loan
Agreement") with a group of existing stockholders to provide up to $300,000 of
interim financing prior to the completion of the Private Placement of
$1,000,000. In conjunction with this interim financing, the existing
stockholders received a total of 170,000 warrants to purchase common stock at a
price of $3.37 per share (See Warrants). In addition, the investors
renegotiated the price of their earlier investments in the Company, which
occurred in August, 1995. This renegotiation was based on management's estimate
of the fair market value of the common stock expected to be sold in the
anticipated public offering. As a result of this re-negotiation and to effect
the negotiated decrease in price per share to $3.30, the investors were issued
80,825 shares of common stock and warrants to purchase 80,825 shares of common
stock (currently exercisable at $6.60 per share). The investors provided this
interim financing to the Company between February and April 1996. The warrants
were exchanged for warrants sold in the public offering. The Company repaid the
total amount of the notes with the proceeds from the Private Placement and the
Company's public offering.
F-11
<PAGE> 36
CD-MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
Notes to Financial Statements (continued)
3. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
FINANCING TRANSACTIONS (CONTINUED)
In August 1995, the Company issued warrants to purchase 120,690 shares of
common stock in connection with the private placement of $525,000 to certain
existing stockholders. In connection with this private placement, 22,444
warrants were also issued as payment for finders' fees. The warrants are
currently exercisable, and the exercise price for the warrants ranges from $.30
to $8.70 per share.
During June 1995, the Company issued 143 shares of common stock to a financial
advisory firm in lieu of a $7,500 retainer.
During the years ended June 30, 1995 and 1996, the Company issued 333,590 and
271,242 shares, respectively of common stock to Class B stockholders in
accordance with the anti-dilution provision related to the Sigtek transaction.
(See Note 1). These issued shares related to all equity issuances during the
years ended June 30, 1995 and 1996, respectively. All Class B stockholders,
which consisted of employees of the Company and outside stockholders, were
afforded the identical anti-dilution right. In March, 1996, all shares of Class
B common stock were converted to common stock, pursuant to the merger
transactions discussed in Note 1.
Common stock was issued to the founders of Sigtek on the reverse acquisition
date. Additionally, at the reverse acquisition date, the issued and outstanding
common shares of the public shell company became common shares of CD-MAX, Inc.
(d/b/a Imark Technologies, Inc.).
COMMON STOCK OPTIONS
The Company adopted the CD-MAX, Inc. Stock Incentive Plan (the "Plan") in
1993. The Plan provides for the issuance of incentive stock options,
nonqualified options and restricted stock to key employees, consultants and
directors. Exercise prices for incentive stock options may not be less than
fair market value on the date of grant. The vesting period of the options is
determined by the Board of Directors and is generally four years. Two-hundred
thousand shares (200,000) of common stock have been reserved for possible
issuance under the Plan.
In August 1996, the Company decided to reduce the exercise price to $3.50 per
share, of certain stock options previously granted to former and current
directors, employees and advisors to the Company. The new exercise price of
$3.50 per share was deemed to be fair market value and as such, no compensation
expense was recognized.
F-12
<PAGE> 37
CD-MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
Notes to Financial Statements (continued)
3. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
COMMON STOCK OPTIONS (CONTINUED)
Common stock options activity is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------------------
1996 1997
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------------ -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 130,679 $14.85 86,345 $11.15
Options granted 55,666 9.36 117,789 4.24
Options canceled (100,000) 15.00 (5,474) 7.98
------------ ------------
Outstanding at end of year 86,345 11.15 198,660 7.10
============ ============
Options exercisable at year-end 37,251 $13.83 120,075 $8.52
============ ============
</TABLE>
The following table summarizes information about fixed-price stock options
outstanding at June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
EXERCISE PRICES JUNE 30, 1997 LIFE PRICE JUNE 30, 1997 PRICE
- ------------------ ------------------ ---------------- --------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
$3.50 - $4.00 91,049 9.10 $3.88 43,241 $3.92
$4.13 - $7.00 26,123 9.27 5.26 9,951 5.90
$9.00 - $10.50 46,544 8.24 9.14 32,076 9.20
$12.30 - $15.00 34,944 5.52 13.64 34,807 14.35
================== =============== ================== ==============
198,660 $7.10 120,075 $8.52
================== =============== ================== ==============
</TABLE>
During fiscal 1997, the Company adopted the disclosure-only provisions of SFAS
No. 123. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under the
plans consistent with the methodology prescribed under SFAS No. 123, the
Company's net loss in fiscal 1996 and 1997 would have been approximately
$1,824,000 and $2,778,000, or $0.93 per share and $0.64 per share, respectively.
The effect of applying SFAS No. 123 on 1996 and 1997 pro forma net loss as
stated above is not necessarily representative of the effects on reported net
loss for future years due to, among other things, (1) the vesting period of the
stock options and the (2) fair value of additional stock options in future
years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing fair value model with the following
weighted-average assumptions used for grants in 1996: dividend yield of 0%;
expected volatility of 102.7%; risk-free interest rate of 6.00%; and expected
life of the option term of 10 years. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing fair value
model with the following weighted-average assumptions used for grants in 1997:
F-14
<PAGE> 38
CD-MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
Notes to Financial Statements (continued)
3. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK OPTIONS (CONTINUED)
dividend yield of 0%; expected volatility of 73.6%; risk-free interest rate of
6.5%; and expected life of the option term of 5 years. The weighted average
fair values of the options granted in 1996 with a stock price equal to the
exercise price is $7.98 and with a stock price greater than the exercise price
is $11.50. The weighted average fair values of the options granted in 1997 with
a stock price equal to the exercise price is $2.60, with a stock price greater
than the exercise price is $2.84 and with a stock price less than the exercise
price is $3.70.
WARRANTS
In connection with the Company's public offering, the Company issued redeemable
warrants to purchase 1,322,500 shares of the Company's common stock. The
warrants expire five years from the date of issuance (August 16, 1996) and are
exercisable at 75% of the public offering price. The warrants are redeemable
by the Company at $.05 per warrant commencing August 16, 1997 provided that (1)
thirty days written notice is given to the holders and (2) the closing bid
price per share of the Company's common stock for any 20 of the previous 30
consecutive trading days has been 150% of the exercise price. However,
management may also elect to reduce the exercise price based on today's market
price, in order to redeem the warrants today. Should this occur, warrant
holders would have the option to either sell the warrants to the Company at
$.05 per warrant or exercise the warrants for the newly established exercise
price.
In connection with the closing of the Private Placement (See Financing
Transactions), the Company issued warrants to purchase 600,000 shares of common
stock at a price of $3.37 per share. The purchase price of these warrants was
$100,000. In addition, the Company allocated $50,000 of the notes payable
proceeds to the warrants issued. The $50,000 allocated to the warrants is being
amortized to interest expense using the effective interest method over the
period (three months) the related debt is expected to be outstanding. The
effect of this allocation results in an effective interest rate of 35%. During
the years ended June 30, 1996 and 1997, the Company recognized additional
interest expense of $25,000 and $25,000, respectively, related to this
allocation.
On April 17, 1996, the Company issued warrants to purchase 990,000 shares of
common stock to four employees. The warrants are exercisable after October 1,
1996 and only at such time as the Common Stock has traded for twenty days in
any thirty business day period at a closing bid equal to or greater than $9.19.
The warrants are exercisable at $9.19 per share. Additionally, 100,000 options
to purchase Common Stock which had previously been granted to these four
employees, were canceled.
In connection with the execution of the Bridge Loan Agreement in December
1995, (See Financing Transactions), the Company issued warrants to purchase
170,000 shares of common stock at a price of $3.37 per share. The purchase
price of these warrants was $20,000. In addition, the Company allocated $29,167
of the interim bridge loan proceeds to the warrants issued. The $29,167
allocated to the warrants is being amortized to interest expense using the
effective interest method over the period (four to five months) the related
debt is expected to be outstanding. The effect of this allocation results in an
effective interest rate of 35%. During the years ended June 30, 1996 and 1997,
the Company recognized interest expense of $20,833 and $8,334, respectively,
related to this allocation.
In July 1995, the Company issued 1,200 warrants to a software development firm
in connection with a settlement of a contract. In September 1995, the Company
issued 609 warrants to a vendor in lieu of fees owed to this vendor. These
warrants are currently exercisable at a price of $0.30 per share. The expenses
associated with the contract settlement and fees to the vendor are considered
immaterial to the financial statements.
F-15
<PAGE> 39
CD-MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
Notes to Financial Statements (continued)
3. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
During 1995, the Company received $1,142,583 in additional capital from private
investors through the sale of 172,432 shares of common stock. In conjunction
with these equity placements, the Company issued warrants for the purchase of
172,432 shares of common stock. The warrants are currently exercisable at prices
ranging from $8.70 to $22.50 per share. Also, the Company granted warrants to
purchase 26,667 shares of common stock to certain individuals for assisting in
these equity placements. The warrants are currently exercisable at prices
ranging from $0.30 to $8.70 per share.
4. COMMITMENTS
The Company leases offices in Murray Hill, New Jersey pursuant to an operating
lease which terminates in December, 2000; and in Reston, Virginia, the Company
leases office space under a lease which terminates in December, 1997. The
Company has signed a new lease for space in Herndon, Virginia which commences
November, 1997 and terminates in October, 2002. This office space will replace
the current Reston, Virginia space. These leases contain various renewal
options. Additionally, the Company leases various office and computer equipment
under noncancelable operating and capital leases.
At June 30, 1997, there was $160,202 of computer equipment held under capital
leases. Accumulated amortization of the equipment amounted to $61,393 at June
30, 1997. Amortization expense related to capital leases is classified as
depreciation and amortization in the statements of cash flows. The non-cash
portions of these transactions have been excluded from the statements of cash
flows.
Rent expense for the years ended June 30, 1996 and 1997 and for the period
from July 1, 1993 (inception) to June 30, 1997 was $66,663, $110,459 and
$246,155, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows as of June 30, 1997:
<TABLE>
<S> <C>
Year ending June 30:
--------------------
1998 $ 197,918
1999 217,635
2000 223,067
2001 204,278
2002 197,850
Thereafter 49,825
==============
$ 1,090,573
==============
</TABLE>
Future minimum lease payments under noncancelable capital leases as of June
30, 1997 are $33,325 in 1998, $22,112 in 1999, and $1,691 in 2000, net of $8,571
in interest.
F-15
<PAGE> 40
CD-MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
Notes to Financial Statements (continued)
5. ACCRUED EXPENSES
The Company partially funded its operations through the deferral of
compensation by management. As of June 30, 1996, the Company owed four of its
executives a total of $258,497 in accrued compensation, which is classified
under accrued expenses on the balance sheet. The executives were repaid during
fiscal 1997.
6. INCOME TAXES
Net deferred income tax assets are as follows:
<TABLE>
<CAPTION>
June 30,
1997
-----------------
<S> <C>
Start-up costs $ 100,000
Operating loss carryforwards 2,238,000
Accrued expenses 26,000
Other 4,000
-----------------
Deferred tax assets 2,368,000
Valuation allowance (2,368,000)
=================
Net deferred tax assets $ --
=================
</TABLE>
At June 30, 1997, the Company has net operating loss carryforwards amounting to
approximately $5,595,000. Operating loss carryforwards expire in 2008 through
2012. In August 1996, the Company experienced a change in ownership pursuant
to section 382 of the Internal Revenue Code, which may cause the utilization of
pre-change losses to be limited.
7. RELATED PARTY TRANSACTIONS
An officer of CD-MAX, Inc. granted a license to the Company under which the
Company has been assigned certain proprietary and intellectual property rights
to certain U.S. patents and other business and technological know-how related
to the Company's CD-MAX(TM) business. Under the terms of the license agreement,
the Company will pay specified royalties to a royalty trust, the beneficiaries
of which include that officer, certain other members of his family, and certain
other officers and directors of the Company. No amounts are currently due or
have been paid pursuant to the agreement.
As part of the merger agreement between Sigtek and CD-MAX, Inc. (formerly
InfoServe, Inc.), the Company assumed a $3,000 loan made by an officer to
Sigtek. This loan was satisfied in 1993 in return for the issuance of 200
shares of common stock to the officer. In 1994, a family member of an officer
of CD-MAX, Inc. (formerly InfoServe, Inc.), loaned the Company $25,000. During
1995, the loan and accrued interest of $2,083 were converted into 6,226 shares
of common stock.
F-16
<PAGE> 41
CD-MAX, INC.
(d/b/a Imark Technologies, Inc.)
(A Development Stage Company)
Notes to Financial Statements (continued)
8. 401(K) PLAN
On July 1, 1995, the Company adopted a 401(k) Plan (the "Plan"). The Plan, which
covers all employees who have completed six months of service, stipulates that
employees may elect an amount between 1% and 15% of their total compensation to
contribute to the Plan. Contributions were made by the Company in the amount of
$6,404 and $20,912 during the years ended June 30, 1996 and 1997, respectively.
9. MANAGEMENT'S PLANS
The Company recognizes that it must generate additional capital in order to
continue its operations and meet its business development initiatives. The
Company is currently pursuing plans to raise additional capital through the
sale of equity securities. Should the Company be unable to raise the
additional capital, the Company must obtain financing through other sources,
significantly reduce its operating expenses, and/or redeem its redeemable
warrants, which may result in proceeds to the Company depending on the warrant
holder's option (See Note 3).
F-17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10K-SB FILED WITH THE SECURITIES & EXCHANGE COMMISSION
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,119,242
<SECURITIES> 1,803,701
<RECEIVABLES> 20,250
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,993,488
<PP&E> 368,775
<DEPRECIATION> 84,822
<TOTAL-ASSETS> 3,289,270
<CURRENT-LIABILITIES> 201,392
<BONDS> 0
0
0
<COMMON> 47,183
<OTHER-SE> 3,016,892
<TOTAL-LIABILITY-AND-EQUITY> 3,289,270
<SALES> 47,004
<TOTAL-REVENUES> 47,004
<CGS> 0
<TOTAL-COSTS> 2,739,029
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,482
<INCOME-PRETAX> (2,559,468)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,559,468)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,559,468)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> 0
</TABLE>
