AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 12, 1996
REGISTRATION NO. 333-04361
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INFOSAFE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 13-3645702
(State or other jurisdiction of (I.R.S. employer I.D. number)
Incorporation)
------------------------------------
INFOSAFE SYSTEMS, INC.
342 Madison Avenue
Suite 622
New York, New York 10173
(212) 867-7200
(Address and telephone number of agent for service)
------------------------------------
Thomas H. Lipscomb, President
INFOSAFE SYSTEMS, INC.
342 Madison Avenue
Suite 622
New York, New York 10173
(212) 867-7200
(Address and telephone number of agent for service)
------------------------------------
Copies to:
TINA BAKER, ESQ.
Bachner, Tally, Polevoy & Misher LLP
New York, New York 10017
(212) 687-7000
------------------------------------
APPROXIMATE DATE OF PROPOSED COMMENCEMENT OF SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(c) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
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<PAGE>
SUBJECT TO COMPLETION, July 12, 1996
PROSPECTUS
INFOSAFE SYSTEMS, INC.
84,375 REDEEMABLE CLASS A WARRANTS
521,875 SHARES OF CLASS A COMMON STOCK
84,375 SHARES OF CLASS A COMMON STOCK AND 84,375 REDEEMABLE CLASS B WARRANTS,
ISSUABLE UPON EXERCISE OF REDEEMABLE CLASS A WARRANTS
All of the Redeemable Class A Warrants ("Class A Warrants") of Infosafe
Systems, Inc. (the "Company") are offered by International Development Partners
("IDP"), who received Class A Warrants as a settlement in an arbitration with
the Company. The Company hereby offers: (i) 84,375 shares of Class A Common
Stock, $.01 par value ("Class A Common Stock") and 84,375 Redeemable Class B
Warrants ("Class B Warrants") issuable upon exercise of the Class A Warrants and
(ii) 84,375 shares of Class A Common Stock issuable upon exercise of the Class B
Warrants. The Company issued an aggregate of 2,532,500 Class A Warrants and
1,782,500 Class B Warrants in connection with the Company's initial public
offering in January 1995 ("IPO"). As of July 12, 1996, none of the Class A
Warrants or Class B Warrants had been exercised.
This Prospectus also relates to the offer and sale by certain persons
(the "Selling Securityholders") of up to 521,875 shares of Class A Common Stock
(the "Shares") issued or issuable upon exercise of warrants to purchase Class A
Common Stock received in connection with private placements conducted by the
Company in 1992 ("Private Placement Warrants"). See "Selling Securityholders."
The Shares may be offered and sold by the Selling Securityholders from time to
time in transactions on the Nasdaq SmallCap Market ("Nasdaq") or other exchanges
or markets on which the Shares may be traded, in the over-the-counter market, in
negotiated transactions, through the writing of options on the Shares of a
combination of such methods of sale or through other means. Sales may be
effected at fixed prices that may be changed, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices.
The Selling Securityholders may effect such transactions by selling the
Shares to or through broker-dealers (including broker-dealers which may be
affiliated with any such Selling Securityholder) and such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Securityholders or the purchasers of the Shares for whom such
broker-dealers may act a agent or to whom they sell as principal or both (which
compensation to a particular broker-dealer might be in excess of customer
commissions). See "Selling Securityholders" and "Plan of Distribution."
Each Class A Warrant entitles the registered holder thereof to purchase
for $6.50 one share of Class A Common Stock and one Class B Warrant through
January 18, 2000. Each Class B Warrant entitles the registered holder thereof to
purchase for $8.75 one share of Class A Common Stock from the date of issuance
through January 18, 2000. The exercise prices of the Class A and
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<PAGE>
Class B Warrants (collectively, the "Warrants") are subject to adjustment. The
Class A Warrants and Class B Warrants are subject to redemption by the Company
at $.05 per Warrant on 30 days' prior written notice if the closing bid price of
the Class A Common Stock averages in excess of $9.10 and $12.25 per share,
respectively, for 30 consecutive business days ending within 15 days of the date
of notice of redemption. See "Description of Securities."
The Class A Common Stock and the Company's currently outstanding Class
B Common Stock, $.01 par value ("Class B Common Stock"), Class E-1 Common Stock
("Class E-1 Common Stock") and Class E-2 Common Stock ("Class E-2 Common Stock")
are identical in all respects except that the Class B Common Stock has six votes
per share while the Class A, Class E-1 and Class E-2 Common Stock has one vote
per share. All Class A, Class B, Class E-1 and Class E-2 shares vote together as
a single class. Further, the Class B Common Stock is automatically convertible,
on certain conditions, upon the sale or transfer thereof, into Class A Common
Stock on a share for share basis. See "Description of Securities."
The Class E Shares will automatically convert, on a share-for-share
basis, into Class A Common Stock in the event the Company attains certain
earnings levels or the market price of the Company's Class A Common Stock
achieves certain targets through March 31, 1999. Any Class E Shares not
previously converted will be redeemed by the Company for nominal consideration
on March 31, 1999 if such earnings levels or market price targets are not
attained.
None of the proceeds from the sale of the Shares by the Selling
Securityholders will be received by the Company although the Company will
receive proceeds from any exercise of the Class A Warrants, Class B Warrants or
the Private Placement Warrants. The Company has agreed to bear certain expenses
in connection with the registration and sale of the Shares and Warrants being
offered by the Selling Securityholders and IDP. The Company has agreed to
indemnify certain of the Selling Securityholders against certain liabilities,
including certain liabilities under the Securities Act of 1933, as amended.
The Company's Units, Class A Common Stock, Class A Warrants and Class B
Warrants are traded on Nasdaq under the symbols ISFEU, ISFEA, ISFEW and ISFEZ.
On July 11, 1996 the closing bid prices of these securities on Nasdaq were
$10 1/2, $4 1/8, $3 1/4 and $2.875, respectively.
The Company has agreed to pay a solicitation fee (the "Solicitation
Fee") equal to 5% of the exercise price in connection with the exercise of
Warrants under certain conditions. See "Plan of Distribution." The exercise
prices of the Warrants were determined by negotiation between the Company and
D.H. Blair Investment Banking Corp. ("Blair"), the underwriter of the Company's
IPO, and are not necessarily related to the Company's asset value, net worth or
other established criteria of value.
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Warrant
Warrant Solicitation Proceeds to
EXERCISE PRICE FEE (1) COMPANY (2)(3)
-------------- ------- --------------
Per Class A Warrant $6.50 $.325 $6.175
Total (2) $548,438 $27,422 $521,016
Per Class B Warrant $8.75 $.4375 $8.3125
Total (2) $738,281 $36,914 $701,367
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(1) Represents Solicitation Fees payable to Blair pursuant to the Warrant
Agreement between the Company and Blair under which the Company agreed
to pay Blair a fee of 5% of the aggregate exercise price of each
Warrant exercised solicited by its representatives if: (i) the market
price of the Company's Class A Common Stock on the date the Warrant is
exercised is greater than the then Warrant exercise price; (ii) the
exercise of the Warrant was solicited by a member of the National
Association of Securities Dealers, Inc. as designated in writing on the
Warrant Certificate subscription form; (iii) the Warrant is not held in
a discretionary account; (iv) disclosure of compensation arrangements
was made both at the time of the offering and at the time of the
exercise of the Warrants; and (v) the solicitation of exercise of the
Warrant was not in violation of Rule 10b-6 promulgated under the
Securities Exchange Act of 1934, as amended.
(2) Assumes the exercise of all of the Class A Warrants offered hereby and
that the Solicitation Fee is paid on all Warrants exercised. As of July
12, 1996, none of the Class A Warrants or Class B Warrants had been
exercised. Does not include $20,000 of expenses of issuance and
distribution. There can be no assurance that any of the Warrants will
be exercised.
(3) Does not include any proceeds that may be received by the Company upon
exercise of 188,250 Private Placement Warrants.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD
TO SUSTAIN A TOTAL LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS" AND
"DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JULY 17, 1996.
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<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement on Form S-3 under the
Securities Act of 1933, as amended ("Act") covering the securities offered by
this Prospectus. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance such
statement is qualified by reference to each such contract or document. The
Company is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and in accordance therewith files
reports and other information with the Commission. Reports and other information
filed by the Company with the Commission can be inspected and copies at the
public reference facilities maintained by the Commission at the following
addresses: New York Regional Office, Seven World Trade Center, New York, New
York 10048; and Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 1-25362)
pursuant to the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-KSB for the fiscal year ended
July 31, 1995, including any documents or portions thereof incorporated by
reference therein;
2. The Company's Quarterly Reports on Form 10-QSB for the quarters
ended October 31, 1995, January 31, 1996 and April 30, 1996, including any
documents or portions thereof incorporated by reference therein;
3. Form 8-A dated January 11, 1995 for Registration of Certain Classes
of Securities pursuant to Section 12(b) or (g) of the Securities Exchange Act of
1934.
4. The Company's Report on Form 8-K dated April 21, 1995.
5. The Company's Proxy Statement dated April 8, 1996.
6. All other documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus
and prior to the termination of this offering.
Any statement contained in any document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is
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<PAGE>
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as modified or superseded, to constitute a part of this Prospectus. The
Company will provide without charge to each person to whom this Prospectus is
delivered, upon written or oral request of any such person, a copy of any or all
of the documents incorporated herein by reference (other than exhibits to such
documents which are not specifically incorporated by reference into such
documents). Requests for such documents should be directed to the Company, 342
Madison Avenue, Suite 622, New York, New York 10173, Attention: Chief Financial
Officer, telephone (212) 867-7200.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus does not give effect to the exercise of: (i) the Warrants; (ii)
the Unit Purchase Option received by the underwriter in connection with the IPO
("Unit Purchase Option"); (iii) options granted or available for grant under the
Company's 1992 and 1994 Stock Option Plans ("Plans"), or other outstanding
warrants. The Class A Common Stock, Class B Common Stock, Class E-1 Common Stock
and Class E-2 Common Stock are referred to herein collectively as the "Common
Stock."
THE COMPANY
The Company develops and markets secure electronic distribution systems
for digital information products. The Company's proprietary and patented
hardware and software products and services (the "Infosafe System") enable
publishers and other information providers to produce and distribute digital
information, video, graphics and software (whether transmitted on-line, or in
pre-recorded stored digital format) without risk of compromising and exposing
their information to theft or corruption. The Infosafe System is also capable of
metering and reporting the usage of such information and/or releasing it on a
"pay-per-use" basis, thereby enabling information providers to price their
products more flexibly.
The Company began shipping the Design PaletteTM, its first commercially
available product, in July 1995 to the graphics industry, including advertising
agencies, graphic designers, publishers and desktop publishing resellers and
service bureaus. The Design Palette system, a point-of-sales device
incorporating Infosafe's patented technology, provides "pay-per-use" access to a
CD-ROM library of graphic design product priced at approximately $1.2 million.
The library contains encrypted inventory of over 30,000 separate digital
products from 23 vendors. The Design Palette system includes the Company's Mark
III control unit, an external hardware device which is attached to a user's
personal computer and releases and meters the use of digital information at the
point of use. In most cases, no adaptations or reconfiguration need to be made
to the host computer to accommodate the Design Palette system. The Company
currently is developing a WindowsR1 and a network version of Design Palette for
release in 1996 and expects to sell products over the Internet to existing
Design Palette customers.
In conjunction with refining its marketing strategy and
identifying potential applications for the Company's technology, including the
Mark III units produced by the Company, the Company determined that while the
Mark III can be distributed and placed into service for applications other then
the Design Palette, the quantity of Mark III units held by the Company would
exceed the anticipated demand. In addition, PhotoDisc, the largest supplies of
images for the Design Palette, gave notice to the Company that it wishes to
remove its products from the Design Palette
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1 WindowsR is a registered trademark of Microsoft Corporation, Inc.
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<PAGE>
effective November 30, 1996, which will require replacing the CD-ROMS used in
the Design Palette. The Company expects to replace these products and obtain
other print-oriented products for its
anticipated new markets. Therefore, a write down of assets in the amount of
$470,000 was recorded in the three months ended April 30, 1996, representing
both the full carrying value of the CD-ROMs which will need to be replaced and
the anticipated excess Mark III units produced and held by the Company.
The Company offers and is currently negotiating sales of several
custom-designed software products which provide, on digital networks or as
otherwise required by the customer application, one or more of the functions,
particularly metering and reporting, embodied in the firmware and hardware of
the Design Palette.
The Company believes that existing delivery channels for digital
information: (1) impede information providers' market access through limited
pricing flexibility; (2) fail to protect against unauthorized use and copying of
information; and (3) provide limited data relating to demographics and customer
usage patterns. The Infosafe System is designed to improve upon such existing
delivery channels. The Company believes that the Infosafe System affords
information providers the ability to increase their revenues and market share by
making information available to customers on a "pay-per-use" basis for those
customers who would not otherwise purchase the information in its entirety.
Through the use of the Infosafe System, information providers can also
effectively secure their information against theft through the encryption and
decryption features which limit access to authorized subscribers who purchase
information from such providers. In addition, as a result of the Infosafe
System's metering function, feedback may be provided to information providers
concerning their customers' usage patterns. For the subscriber, the Company
believes the Infosafe System provides lower costs, ease of use, more timely
access to information and the ability to track and allocate costs.
The Company's strategy is to achieve broad market acceptance of the
Infosafe System by marketing the system primarily to publishers and other
providers of high value business and professional information, such as financial
databases, legal publications, compilations of government regulations and data,
graphic images and computer software. These providers generally distribute their
products to such users as accounting firms, banks, law firms, investment banking
firms, design houses, media companies, advertising agencies, business managers
and other professional and commercial entities. The Infosafe technology is
highly flexible and suitable for a wide range of electronic commerce and
information security applications. The Company currently is testing a
proprietary Infosafe solution to meter, audit and protect commercial
transactions over the Internet.
The Infosafe technology can also be tailored for internal and external
security systems for digital information of corporations and institutions. The
system enables companies to control, protect and limit access to valuable and
proprietary information within their organizations, which is an increasing
concern as information moves from traditional paper-based document storage to
digital format. Electronic storage is more convenient and efficient, but also
more difficult to protect. Moreover, companies using the Infosafe System will be
able to efficiently track and allocate the costs associated with acquiring and
using information, internally and externally.
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In addition, the Company is pursuing new digital information
applications for its technology in Internet applications such as electronic data
interchange and document management systems. The amount of traffic in these
systems is expected to increase dramatically over the next decade over open
networks such as the Internet. Infosafe technology can be used to control, audit
and protect digital information as it is transferred within and over these
systems.
The Company commenced operations in January 1992 and is in the
development stage. The Company was incorporated under the laws of the State of
Delaware on November 18, 1991. The Company's executive offices are located at
342 Madison Avenue, New York, New York 10173 and its telephone number is (212)
867-7200.
THE OFFERING
Securities Offered by
the Company............................... 84,375 shares of Class A Common
Stock and 84,375 Class B Warrants
issuable upon exercise of Class A
Warrants; and 84,375 shares of
Class A Common Stock issuable upon
exercise of the Class B Warrants.
Each Class A Warrant entitles the
registered holder to purchase one
share of Class A Common Stock and
one Class B Warrant at $6.50
through January 18, 2000, subject
to earlier redemption by the
Company. Each Class B Warrant
entitles the registered holder to
purchase at $8.75 one share of
Class A Common Stock from the date
of issuance through January 18,
2000, subject to earlier redemption
by the Company. The exercise prices
and number of shares issuable upon
exercise of the Warrants are
subject to adjustment in certain
circumstances. See "Description of
Securities."
Securities Offered by Selling
Securityholders........................... 84,375 Class A Warrants offered by
IDP and 521,875 Shares of Class A
Common Stock offered by the Selling
Securityholders.
Common Stock Outstanding
at July 12, 1996
Class A Common Stock................. 2,889,029
Class B Common Stock................. 1,345,829 (1)
E-1 Common Stock .................... 1,347,372 (2)
Class E-2 Common Stock............... 1,347,372 (2)
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Nasdaq Stock Market Symbols............... Units -ISFEU
Class A Common Stock - ISFEA
Class A Warrants - ISFEW
Class B Warrants - ISFEZ
Use of Proceeds........................... The Company will not receive any
proceeds from the sale of the Class
A Warrants offered by IDP or the
Shares offered by the Selling
Securityholders.
Risk Factors.............................. Investment in the securities
offered hereby involves a high
degree of risk. See "Risk Factors."
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(1) 781,244 shares of Class B Common Stock are being held in escrow (the
"Escrow Shares") and are subject to forfeiture and will be contributed
to the capital of the Company if the Company does not attain certain
earnings levels or the market price of the Company's Class A Common
Stock does not achieve certain targets, by May 1, 1998. See
"Description of Securities -- Escrow Shares."
(2) The Class E-1 and Class E-2 shares of Common Stock are subject to
redemption by the Company for nominal consideration if the Company does
not attain certain earnings levels or the market price of the Company's
Class A Common Stock does not achieve certain targets for any of the
fiscal years ending July 31, 1998. See "Description of Securities --
Class E-1 and Class E-2 Common Stock."
RECENT DEVELOPMENTS
On June 13, 1996, the Supreme Court of the State of New York affirmed
an arbitration award in favor of IDP which was being appealed by the Company. As
a result, on June 25, 1996, the Company satisfied a money judgement totalling
$218,074.49 and issued to IDP the 84,375 Class A Warrants offered hereby.
On April 17, 1996, the New York State Supreme Court issued a ruling in
the action entitled Wave Systems Corp. ("Wave") v. Infosafe Systems, Inc.,
Thomas H. Lipscomb and RAS Securities Corp. that "Infosafe Systems has now shown
that plaintiff's former vice-president and chief scientist and the person who
verified the complain in this action has stated under oath that there were no
trade secrets which were compromised or converted and that at the times that are
set forth in the complaint no trade secrets had yet been developed by the
plaintiff (Wave Systems)." On May 3, 1996, Wave requested permission from the
Court to discontinue its claims against the Company, Mr. Lipscomb, and RAS. In
response, the Company has asked the Court to require that (i) any discontinuance
of Wave's claims be with prejudice to renewal and (ii) Wave be required to pay a
portion of the attorney's fees and costs the Company has incurred in defending
this action.
Wave has also requested leave to file an Amended Complaint against the
Company and Mr. Lipscomb alleging that the Company and Mr. Lipscomb tortiously
interfered with its business relationships with unnamed current and future
customers, as well as with its contractual relationship with Dr. Michener. The
Company believes these proposed claims lack any factual basis and has therefore
opposed Wave's request.
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In March 1996, the Company and Mr. Lipscomb filed counterclaims against
Wave seeking $20 million in damages, attorney's fees, and declaratory and
injunctive relief based on its claims that Wave (i) conducted a predatory
campaign of tortuous interference with the Company's business and financial
relationships, trademarks, and employees, (ii) commenced baseless litigation
against the Company to prevent it from obtaining financing, selling to potential
customers, and entering into favorable business relationships, and (iii) made
material misrepresentations about the nature and characteristics of the
Company's goods and services. Wave's withdrawal of its claims does not affect
the pendency of the Company's counterclaims, which remain pending.
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SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived
from and should be read in conjunction with the more detailed Financial
Statements and notes thereto incorporated herein by reference.
<TABLE>
For the Nine Months Period From
Year Ended Ended November 18, 1991
JULY 31, APRIL 30, (Inception) to
---------------- -----------
1994 1995 1995 1996 APRIL 30, 1996
---- ---- ---- ---- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenue
License fees.................. $ 350,000 -- $ -- $ -- $ 350,000
Other revenues................ $140,572 105,780 51,496 242,068
---------- ------- ----------- ------------- ------------
Total......................... 350,000 140,572 105,780 51,496 592,068
---------- ----------- ----------- ------------- -------
Expenses
Cost of revenues ............. 13,532 109,648 80,405 71,924 195,104
Write down of assets held for
lease (Note C)............. 470,000 470,000
Operating expense............. 1,182,181 2,126,983 1,319,674 2,402,928 7,007,353
---------- ---------- ---------- ---------- ----------
Total......................... 1,195,713 2,236,631 1,400,079 2,944,852 7,672,457
----------- ---------- ---------- ---------- ---------
Operating (loss).................. (845,713) (2,096,059) (1,294,299) (2,893,356) (7,080,389)
Interest income................... 8,356 152,117 82,622 179,004 345,626
Settlement expense (1)............ (340,000) (325,000) (340,000)
Interest expense (including debt
discount and deferred financing
fees)......................... -- (344,841) (344,841) (18,762) (387,525)
--------------- ----------- ----------- ------------ ------------
Net (loss)........................ $(837,357) $(2,628,783) $(1,881,518) $(2,733,114) $(7,426,288)
======== ========== ========== ========== ==========
Net (loss) per common share....... $(.54) $(1.15) $(.94) $(.80)
==== ===== ==== ====
Weighted average number of
common shares and common
shares equivalent............. 1,565,501 2,278,779 2,011,984 3,422,781
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
APRIL 30, 1996
(Unaudited)
BALANCE SHEET DATA:
Working capital $1,096,838
Total assets 2,711,562
Total liabilities 704,215
Stockholders' equity 2,007,347
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(1) On September 24, 1994 the Company received a demand for arbitration by
International Development Partners ("IDP"), an entity with whom it had a prior
contractual relationship, asserting IDP's right to payment of cash and warrants
to purchase shares of the Company's Class A Common Stock. The payment sought was
alleged to be due in connection with financing for the Company. An arbitration
award was issued in favor of IDP for $205,000 cash, the 84,375 Class A Warrants
offered hereby and other expenses and accrued interest. The Company accrued
$340,000, which is an estimated liability as a result of the award, including an
estimated warrant value of $125,000 at the date of the award. The Company
appealed the arbitration award and payment of such award was suspended pending
the Company's appeal. On June 13, 1996, the arbitration award in favor of IDP
was confirmed and the Company paid the money judgement and issued the 84,375
Class A Warrants offered hereby to IDP.
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RISK FACTORS
An investment in the securities offered hereby involve a high degree of
risk. Prospective investors, prior to making an investment decision, should give
careful consideration, in addition to the other information contained in this
Prospectus, to the following risk factors.
LIMITED OPERATING HISTORY; LIMITED REVENUES FROM OPERATIONS;
INDEPENDENT AUDITORS' REPORT. The Company commenced operations in January 1992,
is a development stage enterprise and has a very limited operating history. From
inception to April 30, 1996, the Company recognized revenues of approximately
$592,000 and had an accumulated deficit of approximately $7.5 million.
Approximately $455,000 of such revenues were license fees relating to the Design
Palette and revenue recognized on the repurchase of the Design Palette in April
1995 from one customer with which the Company no longer does business. The
Company has continued to operate at a deficit since April, 1996, and it expects
to continue to operate at a deficit until such time, if ever, as operations
generate sufficient revenues to cover its costs. The likelihood of the success
of the Company must be considered in light of the difficulties and risks
inherent in a new business. There can be no assurance that revenues will
increase significantly in the future or that the Company will ever achieve
profitable operations.
The report of the Company's independent auditors on the Company's
financial statements as of July 31, 1995 and for the fiscal year then ended
contains a paragraph regarding the Company's uncertain ability to continue as a
going concern. The Company has incurred substantial losses since inception and,
although shipments of its first product commenced in late July 1995, the Company
anticipates losses to continue at a substantial rate through fiscal 1996 as it
markets its products and develops new applications for its technology. Based on
anticipated expenditures for fiscal 1996, the Company will not have sufficient
financial resources to continue its operations without obtaining additional
financing or without a substantial increase in revenues, neither of which is
assured. Further, the Company is involved in litigation, the outcome of which is
uncertain. These factors raise substantial doubt regarding the ability of the
Company to continue as a going concern.
NEED FOR ADDITIONAL FINANCING. The Company believes that the remaining
net proceeds from the IPO, together with funds expected to be generated from
operations, will be sufficient to finance the Company's working capital
requirements until the end of fiscal 1996. The Company does not expect to
generate sufficient revenues from continuing operations to fund its operations
after such period. Accordingly, the Company is currently seeking additional
financing to meet its working capital requirements subsequent to the end of the
current fiscal year. The Company currently has no commitments from others to
provide additional financing and there can be no assurance that any additional
financing will be available, or, if available, will be on terms acceptable to
the Company. In the event necessary financing is not obtained, the Company will
be materially adversely affected and will have to cease or substantially reduce
operations.
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LIMITED NUMBER OF CUSTOMERS; NEED FOR MARKET ACCEPTANCE. The Company
began shipping its first commercial product, the Design Palette(TM) system, in
July 1995, and has achieved only very limited distribution up to this point in
the AppleR2 MacintoshR* graphics market, and the Company can not predict future
marketplace demand. The product currently is being tested by resellers and
service bureaus, but there can be no assurance that the trial usage will result
in significant commercial installations. A WindowsR version of Design Palette
will be introduced in mid-fiscal year 1996, but the Company is unable to gauge
the market for this new product. The Company also is developing a network
version of Design Palette, which was demonstrated at a trade show in March 1996.
The success of this network application will depend on the Company's ability to
enter into commercial alliances with large network providers and information
vendors, and to achieve market share against competitive technologies and
products. Although the Company is engaged in negotiations and discussions with a
number of other potential customers, there can be no assurance that any such
discussions will lead to sufficient market acceptance to generate revenues.
ASSET WRITE-DOWN; UNCERTAINTY SURROUNDING DESIGN PALETTE. In
conjunction with refining its marketing strategy and identifying potential
applications for the Company's technology, including the Mark III units produced
by the Company, the Company has determined that while the Mark III can be
distributed and placed into service for applications other then the Design
Palette, the quantity of Mark III units held by the Company would exceed the
anticipated demand. In addition, the Company received notice from PhotoDisc, the
largest supplier of images for the Design Palette, that it wishes to terminate
participation in the Design Palette program effective November 30, 1996, which
will require the Company to replace the CD-ROMs contained therein from such
supplier. Although the Company has held discussions with other suppliers of
graphic images suitable for the Design Palette, there can be no assurance that
such discussions will have a successful result or that any negotiations will
provide graphic images and other products for licensing through Design Palette
at least equal in quantity and quality to those previously available from
PhotoDisc. In such event, the commercial acceptability of the Design Palette
could be negatively impacted. A write down of assets to be leased in the amount
of $470,000 in the fiscal quarter ended April 30, 1996 was recorded by the
Company in order to write off the full carrying value of both the CD-ROMs which
will need to be replaced in the Design Palette and the anticipated excess Mark
III units produced and held by the Company.
LIMITED MARKETING CAPABILITIES. The Company's operating results will
depend to a large extent on its ability to successfully market the Infosafe
System to information providers, and, concomitantly, create market acceptance
for this point-of-sales system within corporate and on-line user communities.
The Company currently has limited marketing capabilities and needs to hire
additional sales and marketing personnel, as well as concentrate its limited
resources and personnel on defined, active commercial purchasers and resellers
of information. The Company has very limited marketing experience and there can
be no assurance that any marketing efforts undertaken by the Company will be
successful or will result in any significant sales of the Infosafe System.
- --------
2 Apple and Macintosh are registered trademarks of Apple Corporation, Inc.
-14-
<PAGE>
DEPENDENCE ON KEY PERSONNEL. The Company's success depends upon the
continued contributions of its executive officers, sales and marketing personnel
and technical personnel, particularly Thomas H. Lipscomb, the Company's
President and Robert H. Nagel, Ph.D., the Company's Executive Vice
President-Technology. Although the Company has entered into employment
agreements with Mr. Lipscomb and Dr. Nagel, and has obtained "key-man" life
insurance on each of their lives, competition for qualified personnel is
intense, and the loss of services of Mr. Lipscomb, Dr. Nagel or certain other
key personnel could adversely affect the business of the Company. There can be
no assurance that the Company will be able to retain existing personnel or
attract additional qualified personnel.
UNCERTAIN PATENT PROTECTION. In February 1995, the Company was granted
a patent by the U.S. Patent and Trademark Office for its system to retrieve and
monitor the use of protected information from digital media. This patent, No.
5,394,469, covers the Company's system for protecting, retrieving, and
monitoring the use of information from digital media, such as a CD-ROM or
LAN-server. A second patent was granted during December 1995 and three patent
applications are pending in the United States covering various aspects of its
technology. The Company has filed several international applications under the
"Patent Cooperation Treaty" and intends to file patent applications covering
certain aspects of its technology in Japan and the European Economic Community.
There can be no assurance that any issued patents owned by the Company
will afford adequate protection to the Company or not be challenged,
invalidated, infringed or circumvented, or that patent applications relating to
the Company's products or technologies that it may license in the future or file
itself will result in patents being issued, or that any rights granted
thereunder will provide competitive advantages to the Company. Although the
Company, based on the opinion of special patent counsel, believes that its
technology does not infringe upon the proprietary hardware or software of
others, it is possible that others may have or be granted patents claiming
products or processes that are necessary for or useful to the development of the
Infosafe System and that legal actions could be brought against the Company
claiming infringement. In the event that the Company is unsuccessful against
such a claim, it may be required to obtain licenses to such patents or to other
patents or proprietary technology in order to develop, manufacture or market the
Infosafe System. There can be no assurance that the Company will be able to
obtain such licenses on commercially reasonable terms, if at all. If the Company
is required to and does not obtain such licenses, it would encounter delays in
the development and manufacturing of its products and technologies while it
attempted to design around such patents or other rights and there can be no
assurance that such attempts would be successful. Failure to obtain such
licenses or to design around such patents or other rights would have a material
adverse effect on the Company.
The Company has had a search conducted in the United States that does
not reveal patents that, in the opinion of the Company's special patent counsel,
might be infringed by the Company's technology. There can be no assurance,
however, that all United States and any foreign patents or patent applications
that may pose a risk of infringement have been identified. Patent applications
in the United States are maintained in secrecy until patents issue.
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The Company also believes that commercial protection of its products
will depend primarily upon the Infosafe System proprietary algorithms and
encryption techniques remaining "trade secrets." In order to protect trade
secrets, the Company is taking measures which in its opinion are appropriate
procedures to protect its rights. The Company will continue to evaluate, on a
case-by-case basis, whether applying for additional patents in the future is in
the best interests of the Company. The Company has not obtained, and presently
does not intend to obtain, patents on all of the other designs used in its
products. In any case, there can be no assurance that the Company's technology
will remain a secret or that others will not develop similar technology and use
such technology to compete with the Company.
COMPETITION. The business of distributing textual material and other
forms of digital information through CD-ROMs is intensely competitive and
numerous companies, substantially all of which have greater financial and other
resources than the Company, are currently engaged in the provision of this
service. The Company operates in a highly competitive and fragmented environment
that is characterized by rapidly evolving technology. Although the Company is
unaware of any company actually engaged in the commercial implementation of a
hardware-based encryption/metering system for the distribution of digital
information and software, the Company is aware of other companies, including
Wave Systems Corp., that are attempting to develop metering and encryption
systems functionally similar to that of the Company. The Company anticipates it
will also face competition as publishers and repackagers of information attempt
to develop encrypted digital distribution technology in-house or in conjunction
with others. Although the Company believes it will compete on the basis of the
services it offers, there can be no assurance that the Company will be able to
compete successfully.
The Company further believes that it is possible to provide some of the
same benefits the Infosafe System will offer by other means. The Company
believes that its competitors may provide other solutions to problems involving
the distribution of digital information and software in particular market
segments. In the business and professional information market, the Company will
continue to experience competition from paper-based systems such as loose-leaf
information services, newsletters and books; conventional on-line services that
connect directly to PCs or through LANs, such as Lexis, Westlaw and Dialog; and
Internet document transmission. Alternative methods for the delivery of CD-ROMs,
such as unlimited usage CD-ROM products and CD-ROM products delivered in
closed-end systems with usage monitoring capability, will also be competitive
with the Infosafe System. Other methods of protecting software, such as dongles,
may be considered as alternatives to the Infosafe System. A dongle is a device
that attaches to an I/O port of a computer. Dongle designs vary, but they
typically contain a number of security locks, general purpose registers, and an
access counter.
There are other companies, including those listed in the markets above,
that have developed or are in the process of developing technologies that are,
or in the future may be, the basis for competitive products in the field of
electronic information and software distribution or other applications the
Company intends to develop for its technology. Some of those technologies may
have an entirely different approach or means of accomplishing the desired
effects of the products being developed by the Company. There can be no
assurance that the Company's competitors will
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not succeed in developing technologies and products that are more effective or
more affordable than those being developed by the Company.
The Company does not believe that its intellectual property rights
present a significant barrier to potential competitors, and it is possible that
potential competitors may develop similar technologies. See "- Uncertain Patent
Protection."
RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT INTRODUCTIONS. The market for
the Company's technology is characterized by rapidly changing technology and
frequent new product introductions. Even if the Company's technology gains
initial acceptance, the Company's success will depend, among other things, upon
its ability to enhance its product and to develop and introduce new products and
services that keep pace with technological developments, respond to evolving
customer requirements and achieve continued market acceptance. There can be no
assurance that the Company will be able to identify, develop, manufacture,
market or support new products or deploy new services successfully, that such
new products or services will gain market acceptance, or that the Company will
be able to respond effectively to technological changes or product announcements
by competitors. Any failure by the Company to anticipate or respond adequately
to technological developments and customer requirements or any significant
delays in product development or introductions could result in a loss of market
share or revenues. The Company has devoted a substantial amount of its efforts
to adapting its technology to the CD-ROM medium. There can be no assurance that
CD-ROM technology will not be replaced by other distribution and access
technologies or that any such replacement will not involve substantial time and
expense by the Company to adopt its technology, if at all possible.
CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROW SHARES OR CONVERSION
OF CLASS E SHARES. In the event any shares of Class B Common Stock held in
escrow (the "Escrow Shares") or Class E shares held by the stockholders of the
Company who are officers, directors, employees or consultants of the Company are
released from escrow or converted, compensation expense will be recorded for
financial reporting purposes. Therefore, in the event the Company attains any of
the earnings thresholds or the Company's Class A Common Stock meets certain
minimum bid prices required for the release of the Escrow Shares or conversion
of the Class E Shares, such release or conversion will be deemed additional
compensation expense of the Company. Such charge is not deductible for income
tax purposes. Accordingly, the Company will, in the event of the release of the
Escrow Shares or conversion of the Class E Shares, recognize during the period
in which the reportable earnings thresholds are met or such minimum bid prices
obtained, what could be a substantial charge which would have the effect of
substantially increasing the Company's reportable loss or reducing or
eliminating reportable earnings, if any, at such time. Although the amount of
compensation expense recognized by the Company will not affect the Company's
total stockholders' equity, it may have a depressive effect on the market price
of the Company's securities.
CONTROL BY INSIDERS. As of the date of this Prospectus, the executive
officers and directors of the Company beneficially owned approximately 33% of
the outstanding Class A and Class B Common Stock (including the Escrow Shares)
and Class E Shares of the Company, representing approximately 54.2% of the
voting power and will be able to elect all the Company's directors and
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thereby direct the policies of the Company. Furthermore, the disproportionate
vote afforded the Class B Common Stock could also serve to impede or prevent a
change of control of the Company. As a result, potential acquirors may be
discouraged from seeking to acquire control of the Company through the purchase
of Class A Common Stock, which could have a depressive effect on the price of
the Company's securities.
FUTURE SALES OF COMMON STOCK. Of the Company's 2,889,029 shares of
Class A Common Stock outstanding at July 12, 1996, less than 100,000 of such
shares were "restricted securities" as that term is defined in Rule 144
promulgated under the Act and under certain circumstances may be sold without
registration pursuant to such rule. All of the Company's 1,345,829 shares of
Class B Common Stock are restricted securities, 781,244 shares of which are
subject to escrow and are not transferable except upon the Company's meeting
certain earnings levels or market price targets. See "Description of Securities
- -- Escrow Shares." Additionally, all of the Company's shares of Class E-1 Common
Stock and Class E-2 Common Stock are "restricted securities." These shares are
also not transferable except upon the Company's meeting certain earnings levels
or market price targets. See "Description of Securities -- Class E-1 and Class
E-2 Common Stock."
The Company is unable to predict the effect that sales made under Rule
144, or otherwise, may have on the then prevailing market price of the Company's
securities although any future sales of substantial amounts of securities
pursuant to Rule 144 could adversely affect prevailing market prices.
DIVIDENDS UNLIKELY. The Company has not paid any cash dividends on its
Common Stock and does not intend to declare or pay cash dividends in the
foreseeable future. The Company expects that it will retain all available
earnings, if any, to finance and expand its business. See "Dividend Policy."
ARBITRARY DETERMINATION OF EXERCISE PRICES; POSSIBLE VOLATILITY OF
STOCK PRICE. The exercise prices of the Warrants have been determined by
negotiation between the Company and the Underwriter in connection with the IPO
and are not necessarily related to the Company's asset value, net worth or other
established criteria of value. Market prices for the securities are influenced
by a number of factors, including quarterly variations in the financial results
of the Company and any competitors, changes in earnings, estimates by analysts,
conditions in the digital information market, the overall economy and the
financial markets.
NON-REGISTRATION IN CERTAIN JURISDICTIONS OF SHARES UNDERLYING THE
WARRANTS; NEED FOR CURRENT PROSPECTUS. The Company will be unable to sell the
securities upon exercise of the Warrants to holders residing in jurisdictions
where such securities are not presently qualified for sale. In such event, the
Company would be unable to issue shares and/or Class B Warrants to those persons
desiring to exercise their Warrants unless and until the underlying securities
could be qualified for sale in jurisdictions in which such purchasers reside, or
an exemption to such qualification exists in such jurisdiction. In addition, the
Class A Warrants and Class B Warrants will not be exercisable unless at the time
of exercise the Company has a current prospectus covering the securities
underlying the Warrants. No assurances can be given that the Company will be
able to effect any required registration or qualification or maintain a current
prospectus.
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<PAGE>
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants may be
redeemed by the Company at any time at a redemption price of $.05 per Warrant
upon 30 days' notice provided the average closing bid price (as defined herein)
of the Class A Common Stock for any 30 consecutive trading days ending within 15
days of the notice of redemption exceeds $9.10, in the case of the Class A
Warrants, or $12.25, in the case of the Class B Warrants (subject to adjustment
in each case). Redemption of the Warrants could force the holders to exercise
the Warrants and pay the exercise price at a time when it may be disadvantageous
for the holders to do so, to sell the Warrants at the then current market price
when they might otherwise wish to hold the Warrants, or to accept the redemption
price, which is likely to be substantially less than the market value of the
Warrants at the time of redemption. See "Description of Securities - Redeemable
Warrants."
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. The Company has
outstanding: (i) 2,616,875 Class A Warrants including the 84,375 Class A
Warrants offered hereby (and 2,616,875 Class B Warrants issuable upon the
exercise of these Class A Warrants); (ii) 1,782,500 Class B Warrants; (iii) a
Unit Purchase Option issued to the underwriter and its designees in connection
with company's IPO to purchase an aggregate of 155,000 shares of Class A Common
Stock, 155,000 Class A Warrants (including 155,000 the Class B Warrants
underlying the Class A Warrants), and 155,000 Class B Warrants; (iv) options to
purchase 664,000 shares of Class A Common Stock under the Company's 1994 Stock
Option Plan; (v) options to purchase 60,000 shares of Class A Common Stock,
30,000 shares of Class E-1 Common Stock and 30,000 shares of Class E-2 Common
Stock under the 1992 Stock Option Plan and (vi) 188,250 other warrants to
purchase 188,250 shares of Class A Common Stock, 94,125 shares of Class E-1
Common Stock and 94,125 shares of Class E-2 Common Stock. For the respective
terms of such securities, the holders thereof are given an opportunity to profit
from a rise in the market price of the Company's Class A Common Stock with a
resulting dilution in the interests of the other stockholders. Further, the
terms on which the Company may obtain additional financing during that period
may be adversely affected by the existence of such options and warrants. The
holders of the Warrants may exercise them at a time when the Company might be
able to obtain additional capital through a new offering of securities on terms
more favorable than those provided by therein. In addition, holders of the Unit
Purchase Option have registration rights with respect to such option and the
underlying securities. Exercise of the registration rights may involve
substantial expense to the Company.
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK;
ANTI-TAKEOVER PROVISIONS. The Company's Certificate of Incorporation authorizes
the issuance of 4,950,000 shares of "blank check" preferred stock with such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval (but subject to applicable government regulatory
restrictions), to issue preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Company's Common Stock. In the event of issuance,
the preferred stock could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change in control of the Company.
Although the Company has no present intention to issue any shares of its
preferred stock, there can be no assurance that the Company will not do so in
the future. The issuance of such preferred stock could make the possible
takeover of the Company or the removal of management of the Company more
difficult, discourage
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<PAGE>
hostile bids for control of the Company in which stockholders may receive
premiums for their shares of Class A Common Stock or otherwise dilute the rights
of holders of Class A Common Stock and the market price of the Class A Common
Stock. The Company is subject to the Delaware General Corporation Law provisions
that may have the effect of discouraging persons from pursuing a non-negotiated
takeover of the Company and preventing certain changes of control. The
disproportionate vote afforded the shares of Class B Common Stock could also
serve to impede or prevent a change of control of the Company. As a result,
potential acquirors may be discouraged from seeking to acquire control of the
Company through the purchase of Class A Common Stock, which could have a
negative effect on the price of the Company's securities.
LEGAL PROCEEDINGS. The Company, its President and Chief Executive
Officer, Thomas H. Lipscomb and RAS Securities Corp., which acted as the
"qualified independent underwriter" of the IPO (engaged by D.H. Blair to deliver
an opinion as to the fairness of the public offering price and with no other
role in the IPO), are defendants in an action entitled Wave Systems Corp.
("Wave") v. Infosafe Systems, Inc., Thomas H. Lipscomb and RAS Securities Corp.,
filed on November 25, 1994 in the Supreme Court of the State of New York for New
York County. Mr. Lipscomb was co-founder and the former President of Wave, a
competitor of the Company, until July 1991. Wave alleges, among other things,
that (i) Mr. Lipscomb and the Company misappropriated trade secrets and
proprietary and confidential business information belonging to Wave, breached a
confidentiality agreement with Wave and have engaged in unfair competition with
Wave; and (ii) that it will be irreparably damaged by such wrongful
appropriation and unfair competition. Wave also alleges that RAS, the "qualified
independent underwriter" of the Company's initial public offering, who in 1993
acted as Wave's investment banker, breached its fiduciary duties to Wave and
assisted the Company and Mr. Lipscomb in unlawfully competing with Wave. The
complaint makes a demand for damages in excess of $10 million, plus attorneys'
fees against all three defendants, and injunctive relief against the Company and
Mr. Lipscomb barring the alleged misappropriation and unfair competition.
In December 1994, a Motion to Dismiss the complaint on behalf of the
defendants was filed and oral arguments were held on June 12, 1995. Certain of
the claims advanced by Wave were dismissed by the Court on February 6, 1996. In
April 1996, the Company presented to the court an affidavit from Dr. John
Michener, Wave's former Chief Scientist and the Wave officer who verified Wave's
complaint, stating Dr. Michener's belief that the Company had not
misappropriated any
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<PAGE>
proprietary technical information or trade secrets belonging to Wave. On May 3,
1996, Wave requested permission from the Court to discontinue its claims against
the Company, Mr. Lipscomb, and RAS. In response, the Company has asked the Court
to require that (i) any discontinuance of Wave's claims be with prejudice to
renewal, and (ii) Wave be required to pay a portion of the attorney's fees and
costs the Company has incurred in defending this action.
Wave has also requested leave to file an Amended Complaint against the
Company and Mr. Lipscomb alleging that the Company and Mr. Lipscomb tortiously
interfered with its business relationship with unnamed current and future
customers, as well as with its contractual relationship with Dr. Michener. The
Company believes these proposed claims lack any factual basis and has therefore
opposed Wave's request. The Company intends to vigorously defend this action,
although it is unable to predict its outcome. An unfavorable outcome in this
litigation would likely have a material adverse effect on the Company's business
and financial condition. In any event, the Company is unable to determine the
amount of liability, if any, it may incur and has thus not set up any reserve
for such claim. In addition, future costs which may be incurred in connection
with this litigation could have an adverse effect on the Company's prospects,
business and financial condition.
In March 1996 the Company and Mr. Lipscomb filed a counter suit against
Wave seeking an award of $20 million for damages and attorneys fees as well as
declaratory and injunctive relief. The complaint alleges that Wave: (i)
conducted a predatory campaign of tortious interference against the Company's
business and financial relationships, trademarks and employees; (ii) commenced
baseless litigation against the Company to prevent it from obtaining financing,
selling to potential customers and entering into favorable business
relationships; and (iii) made material misrepresentations about the nature and
characteristics of the Company's goods and services. Wave's withdrawal of its
claims does not affect the pendency of the Company's counterclaim, which remains
pending.
POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ STOCK MARKET. While
the Company's Units, Class A Common Stock, Class A Warrants and Class B Warrants
meet the current Nasdaq requirements for continued listing, there can be no
assurance that the Company will meet these criteria. Continued inclusion on
Nasdaq generally requires that: (i) the Company maintain at least $2,000,000 in
total assets and $1,000,000 in capital and surplus; (ii) the minimum bid price
of the Class A Common Stock be $1.00 per share; (iii) there be at least 100,000
shares in the public float valued at $1,000,000 or more; (iv) the Class A Common
Stock have at least two active markets makers; and (v) the Common Stock be held
by at least 300 holders.
If the Company is unable to satisfy Nasdaq's maintenance requirements,
its securities may be delisted from Nasdaq. In such event, trading, if any, in
the Units, Class A Common Stock and Warrants would thereafter be conducted in
the over-the-counter market in the so-called "pink sheets" or the NASD's
"Electronic Bulletin Board." Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of transactions,
reduction in security analysts' and the news media's coverage of the Company and
lower prices for the Company's securities than might otherwise be attained.
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<PAGE>
RISK OF LOW-PRICED STOCK. If the Company's securities were delisted
from Nasdaq (See " Possible Delisting of Securities from the Nasdaq Stock
Market"), they could become subject to Rule 15g-9 under the 1934 Act, which
imposes additional sales practice requirements on broker-dealers which sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with net worths in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule may
adversely affect the ability of broker-dealers to sell the Company's securities
and may adversely affect the ability of purchasers in this offering to sell any
of the securities acquired hereby in the secondary market.
Securities and Exchange Commission (the "Commission") regulations
generally define a "penny stock" to be any non-Nasdaq equity security that has a
market price (as therein defined) of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the Commission relating to the penny stock market. Disclosure is
also required to be made about commissions payable to both the broker-dealer and
the registered representative and current quotations for the securities.
Finally, monthly statements are required to be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on Nasdaq and have certain
price and volume information provided on a current and continuing basis or meet
certain minimum net tangible assets or average revenue criteria. There can be no
assurance that the Company's securities will qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, it would remain subject to Section 15(b)(6) of the Exchange
Act, which gives the Commission the authority to prohibit any person that is
engaged in unlawful conduct while participating in a distribution of a penny
stock from associating with a broker-dealer or participating in a distribution
of a penny stock, if the Commission finds that such a restriction would be in
the public interest.
If the Company's securities were subject to the existing or proposed
rules on penny stocks, the market liquidity for the Company's securities could
be severely adversely affected.
DIVIDEND POLICY
The Company does not anticipate the payment of cash dividends on its
Common Stock in the foreseeable future as earnings are expected to be retained
to finance the Company's growth. Declaration of dividends in the future will be
at the discretion of the Company's Board of Directors, which will review its
dividend policy from time to time.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
April 30, 1996.
APRIL 30, 1996
(unaudited)
-----------
Stockholders' Equity:
Class A Common Stock, $.01 par value 20,000,000 shares
authorized; 2,734,975 shares issued and
outstanding (1) $ 27,350
Class B Common Stock; $.01 par value
2,000,000 shares authorized; 1,469,050
shares issued and outstanding(2) 1,297
Class E-1 Common Stock, $.01 par value,
2,000,000 shares authorized, 1,347,372
shares issued and outstanding 13,473
Class E-2 Common Stock, $.01 par value,
2,000,000 shares authorized, 1,347,372
shares issued and outstanding 13,473
Additional Paid-in capital 9,404,252
(Deficit) accumulated during the
development stage (7,470,688)
Unrealized gain on marketable
securities 18,190
Total Stockholders' Equity $ 2,007,347
==========
- -------------------------------
(1) Does not include: (i) 2,616,875 shares issuable upon exercise of the
Class A Warrants or 4,399,375 shares issuable upon exercise of the
Class B Warrants; (ii) 155,000 shares included in the Units subject to
the Unit Purchase Option or the 465,000 shares issuable upon exercise
of the Class A and Class B Warrants included in or underlying such
Units; or (iii) 60,000 shares issuable upon exercise of options
outstanding pursuant to the Company's 1992 Stock Option Plan; (iv)
664,000 shares issuable upon exercise of options outstanding or
available for grant pursuant to the Company's 1994 Stock Option Plan;
(v) 188,250 shares of Class A
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Common Stock issuable upon exercise of other outstanding warrants; or
(vi) 2,694,744 shares issuable upon conversion of the Class E-1 and
Class E-2 Shares.
(2) Includes the 781,244 Escrow Shares which are shares of Class B Common
Stock.
SELLING SECURITYHOLDERS
An aggregate of up to (i) 84,375 Class A Warrants may be offered by IDP
who may receive the Class A Warrants in connection with an arbitration and (ii)
521,875 shares of Class A Common Stock may be offered by the Selling
Securityholders. An aggregate of 84,375 shares of Class A Common Stock and
84,375 Class B Warrants are issuable upon exercise of the Class A Warrants being
offered by IDP and an additional 84,375 shares of Class A Common Stock are
issuable upon exercise of the Class B Warrants underlying such Class A Warrants.
See "Description of Securities-- Redeemable Warrants."
The following table sets forth the names of each Selling Securityholder
and for each, the number of Shares or Class A Warrants beneficially owned at the
commencement of the offering and the number of Shares or Class A Warrants
offered for sale, based on information provided to the Company by such Selling
Securityholders. The Shares and Class A Warrants are being registered to permit
public secondary trading of the Shares and/or Class A Warrants, and IDP and the
Selling Securityholders may offer the Shares and Class A Warrants for resale
from time to time. See "Plan of Distribution."
The Company has filed with the Commission under the Act a Registration
Statement on Form S-3, of which this Prospectus forms a part, with respect to
the resale of the Shares and/or Warrants. The Company has agreed, among other
things, to bear certain expenses in connection with the registration and sale of
the Shares and Warrants being offered by IDP and the Selling Securityholders.
See "Plan of Distribution."
Certain of the Selling Securityholders hold Private Placement Warrants
issued by the Company which, upon exercise, allow such Selling Securityholder to
purchase shares of Class A Common Stock. Such Selling Securityholders are
expected to exercise their warrants and pay for their shares of Class A Common
Stock immediately prior to offering such Shares pursuant to this Prospectus.
None of the Selling Securityholders are officers or directors of the
Company. Each of the Selling Securityholders listed below with a reference to
footnote (3) is either an officer, director or employee of either D.H. Blair
Investment Banking Corp. ("Blair"), an investment banking firm which acted as
underwriter of the Company's IPO in January 1995 and placement agent for private
placements of securities by the Company in 1992, 1993 and 1994, or D.H. Blair &
Co., Inc. ("Blair & Co."), which was a selected dealer in these offerings.
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In connection with the Company's IPO in January and February 1995,
Blair received an aggregate of $891,250 in underwriting discounts and
commissions and a non-accountable expense allowance of $267,375, and Blair and
its designees were issued Unit Purchase Options to purchase up to 155,000 Units
(which options and their underlying securities are not transferable until
January 18, 1998). In connection with a private placement in September 1994,
Blair served as placement agent and received an aggregate of $195,000 from the
Company as commissions (including a non-accounting expense allowance).
Except as noted below, none of the Selling Securityholders hold any
other securities of the Company.
<TABLE>
Amount
Beneficially Percentage
Amount Owned Beneficially
being Prior To Owned Prior
SELLING SECURITYHOLDERS OFFERED OFFERING(1) TO OFFERING
- ----------------------- ------- ----------- -----------
<S> <C> <C> <C>
IDP 84,375 (2) 84,375(2) 2.99
Kenton Wood(3) 4,500(4) 11,250(4) *
Rivki Rosenwald(3) 44,100(5) 44,100(5) 1.61
Ruki Renov(3) 75,600(6) 75,600(6) 2.76
Esther Stahler(3) 69,300(7) 69,300(7) 2.53
Laya Perlysky(3) 31,500 31,500 1.15
Martin A. Bell(3) 50,000 50,000 1.82
Evan Novak(3) 18,500 18,500 *
Dominic Cavagnulo(3) 18,500 18,500 *
Darren Orlando(3) 18,500 18,500 *
David Lerner (3) 57,000(8) 57,000(8) 2.00
Al Palagonia (3) 112,500(8) 112,500(8) 3.95
Charles Wilhelm 3,125 3,125 *
William L. Cameron 3,125(8) 3,125(8) *
Donald Softness Family Trust 3,125(8) 3,125(8) *
Fred Kassner 12,500(8) 12,500(8) *
----------
TOTAL 606,250
- ------------------------
</TABLE>
(1) Does not include shares of Class E-1 Common Stock and Class E-2 Common
Stock held or shares of Class A Common Stock and warrants underlying
Unit Purchase Options not exercisable within 60 days of the date
hereof.
(2) Consists of Class A Warrants.
(3) Each individual is an officer, director or employee of Blair or Blair &
Co.
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(4) Includes 6,750 shares of Class A Common Stock issuable upon exercise of
Class A Warrants and Class B Warrants.
(5) Includes 6,300 shares of Class A Common Stock owned by each of Rivki
Rosenwald C/F Doni Rosenwald and Rivki Rosenwald C/F Joshy Rosenwald.
(6) Includes 6,300 shares of Class A Common Stock beneficially owned by
each of Ruki Renov C/F Ari Renov, Ruki Renov C/F Yarel Renov, Ruki
Renov C/F Yoni Renov, Ruki Renov C/F Tova Renov, Ruki Renov C/F Tani
Renov, Ruki Renov C/F Eli Renov and Ruki Renov C/F Emily Renov.
(7) Includes 6,300 shares of Class A Common Stock beneficially owned by
each of Esther Stahler C/F Jamie Stahler, Esther Stahler C/F Daniel
Stahler, Esther Stahler C/F David Stahler, Esther Stahler C/F Lisa
Stahler, Esther Stahler C/F Avi Stahler and Esther Stahler C/F Eli
Stahler.
(8) Upon exercise of Private Placement Warrants.
The sale of the securities by IDP and the Selling Securityholders may
be effected from time to time in transactions (which may include block
transactions by or for the account of IDP or the Selling Securityholders) in the
over-the-counter market or in negotiated transactions, through the writing of
options on the securities, a combination of such methods of sale or otherwise.
Sales may be made at fixed prices which may be charged, at market prices
prevailing at the time of sale, or at negotiated prices.
IDP and the Selling Securityholders may effect such transactions by
selling their securities directly to purchasers, through broker-dealers acting
as agents for IDP and the Selling Securityholders or to broker-dealers who may
purchase shares as principals and thereafter sell the securities from time to
time in the over-the-counter market, in negotiated transactions or otherwise.
Such broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers for whom such broker-dealers may act as agents or to whom they may
sell as principals or otherwise (which compensation as to a particular
broker-dealer may exceed customary commissions).
The Selling Securityholders, IDP and broker-dealers, if any, in
connection with such sale might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Act and any commission received by them and any
profit on the resale of the securities might be deemed to be underwriting
discounts and commissions under the Act.
Sales of Class A Warrants or the underlying securities by IDP or sales
of shares of Class A Common Stock by the Selling Securityholders or even the
potential of such sales could have an adverse effect on the market prices of the
Units, Class A Common Stock and the Warrants.
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<PAGE>
DESCRIPTION OF SECURITIES
UNITS
Each Unit consists of one share of Class A Common Stock, one redeemable
Class A Warrant and one redeemable Class B Warrant. Each Class A Warrant
entitles the holder to purchase one share of Class A Common Stock and one
redeemable Class B Warrant. Each Class B Warrant entitles the holder to purchase
one share of Class A Common Stock. The Class A Common Stock and Warrants
comprising the Units are transferable separately immediately upon issuance.
COMMON STOCK
CLASS A COMMON STOCK
The Company is authorized to issue 20,000,000 shares of Class A Common
Stock, $.01 par value, 2,889,029 of which are issued and outstanding as of July
12, 1996 and held by approximately 314 holders of record. The Company believes
that there are in excess of 400 beneficial owners of its Class A Common Stock.
Holders of Class A Common Stock have the right to cast one vote for
each share held of record on all matters submitted to a vote of holders of Class
A Common Stock, including the election of directors. The Class A, Class B, Class
E-1 and Class E-2 Common Stock vote together as a single class on all matters on
which stockholders may vote, except when class voting is required by applicable
law.
Holders of Class A Common Stock are entitled to receive such dividends,
together with the holders of Class B, Class E-1 and Class E-2 Common Stock, pro
rata based on the number of shares held, when, as and if declared by the Board
of Directors, from funds legally available therefor, subject to the rights of
holders of any outstanding preferred stock. In the case of dividends or other
distributions payable in stock of the Company, including distributions pursuant
to stock splits or division of stock of the Company, only shares of Class A
Common Stock will be distributed with respect to Class A Common Stock. In the
event of the liquidation, dissolution or winding up of the affairs of the
Company, all assets and funds of the Company remaining after the payment of all
debts and other liabilities, subject to the rights of the holders of any
outstanding preferred stock, shall be distributed, pro rata, among the holders
of the Class A, Class B, Class E-1 and Class E-2 Common Stock. Holders of Class
A Common Stock are not entitled to preemptive, subscription, cumulative voting
or conversion rights, and there are no redemption or sinking fund provisions
applicable to the Class A Common Stock. All outstanding shares of Class A Common
Stock are, and the shares of Class A Common Stock offered hereby will be when
issued, fully paid and non-assessable.
CLASS B COMMON STOCK
The Company is authorized to issue 2,000,000 shares of Class B Common
Stock, $.01 par value, 1,345,829 of which are issued and outstanding and held by
approximately 22 holders of record.
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<PAGE>
Each share of Class B Common Stock is entitled to six votes on all
matters on which stockholders may vote, including the election of directors. The
Class A, Class B, Class E-1 and Class E-2 Common Stock vote together as a single
class on all matters on which stockholders may vote, except when class voting is
required by applicable law.
Holders of Class B Common Stock are entitled to participate together
with the holders of Class A, Class E-1 and Class E-2 Common Stock, pro rata
based on the number of shares held, in the payment of cash dividends and in the
liquidation, dissolution and winding up of the Company, subject to the rights of
holders of any outstanding preferred stock. In the case of dividends, or other
distributions payable in stock of the Company, including distributions pursuant
to stock splits or divisions of stock of the Company, only shares of Class A
Common Stock shall be distributed with respect to Class B Common Stock.
Shares of Class B Common Stock are automatically convertible into an
equivalent number of fully paid and non-assessable shares of Class A Common
Stock upon the sale or transfer of such shares by the original record holder
thereof except to another holder of Class B Common Stock. Each share of Class B
Common Stock also is convertible at any time upon the option of the holder into
one share of Class A Common Stock. There are no preemptive, subscription,
redemption, conversion or cumulative voting rights applicable to the Class B
Common Stock.
CLASS E-1 AND E-2 COMMON STOCK
The Company is authorized to issue 2,000,000 shares of Class E-1 Common
Stock, $.01 par value, 1,347,372 of which are issued and outstanding and held by
101 holders of record and 2,000,000 shares of Class E-2 Common Stock, $.01 par
value, 1,347,372 of which are issued and outstanding and held by 98 holders of
record. Each share of Class E-1 and E-2 Common Stock is entitled to one vote on
all matters on which stockholders may vote, including the election of directors.
The Class A, Class B, Class E-1 and Class E-2 Common Stock vote together as a
single class on all matters on which stockholders may vote, except when class
voting is required by applicable law.
Holders of Class E-1 and E-2 Common Stock are entitled to participate
together with the holders of Class A and Class B Common Stock, pro rata based on
the number of shares held, in the payment of cash dividends and in the
liquidation, dissolution and winding up of the Company, subject to the rights of
holders of any outstanding preferred stock. In the case of dividends, or other
distributions payable in stock of the Company, including distributions pursuant
to stock splits or divisions of stock of the Company, only shares of Class A
Common Stock shall be distributed with respect to Class E-1 and E-2 Common
Stock.
The Class E-1 shares will be automatically converted into Class A
Common Stock, if, and only if, one or more of the following conditions is met:
(i) the Company's net income before provision for income taxes and exclusive of
any extraordinary earnings (all as audited by the Company's independent public
accountants) (the "Minimum Pretax Income") amounts to at least $4.4 million for
the fiscal year ending July 31, 1996; (ii) the Minimum Pretax Income amounts to
at least $6.6 million for the fiscal year ending July 31, 1997; (iii) the
Minimum Pretax Income amounts
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<PAGE>
to at least $8.8 million for the fiscal year ending July 31, 1998; (iv) the Bid
Price of the Company's Class A Common Stock averages in excess of $12.50 per
share for 30 consecutive business days during the 18 month period commencing on
January 18, 1995; (v) the Bid Price of the Company's Class A Common Stock
averages in excess of $16.50 per share for 30 consecutive business days during
the 18 month period commencing 18 months from January 18, 1995; (vi) the Company
is acquired by or merged into another entity for which stockholders of the
Company receive per share consideration equal to or greater than the levels set
forth in (iv) and (v) above.
The Class E-2 Shares will be automatically converted into Class A
Common Stock basis if, and only if, one or more of the following conditions is
met: (i) the Minimum Pretax Income amounts to at least $5.4 million for the
fiscal year ending July 31, 1996; (ii) the Minimum Pretax Income amounts to at
least $8.1 million for the fiscal year ending July 31, 1997; (iii) the Minimum
Pretax Income amounts to at least $10.8 million for the fiscal year ending July
31, 1998; (iv) the Bid Price of the Company's Class A Common Stock averages in
excess of $18.00 per share for 30 consecutive business days during the 18 month
period commencing on January 18, 1995; (v) the Bid Price of the Company's Class
A Common Stock averages in excess of $22.00 per share for 30 consecutive
business days during the 18 month period commencing January 18, 1995; (vi) the
Company is acquired by or merged into another entity for which stockholders of
the Company receive per share consideration equal to or greater than the levels
set forth in (iv) and (v) above.
Any Class E Shares not previously converted will be redeemed by the
Company for nominal consideration if such earnings levels or market price
targets are not attained.
ESCROW SHARES
In connection with a private placement completed in September 1993, the
present holders of the Company's Class B Common Stock placed into escrow on a
pro rata basis, an aggregate of 781,244 of their shares. Such stockholders will
continue to vote the Escrow Shares; however, the Escrow Shares are not
assignable or transferable. The following sets forth the number of Escrow Shares
owned by the executive officers, directors and principal stockholders of the
Company:
NAME NUMBER OF SHARES
Thomas H. Lipscomb 427,409
Alan N. Alpern 94,591
Robert H. Nagel 59,557
William N. Walker 10,510
Frank Schwab, Jr. 10,510
The Escrow Shares will be released to the stockholders in the event
that: (i) the Minimum Pretax Income amounts to at least $4,100,000 for the
twelve months ending December 31, 1996; (ii) the Minimum Pretax Income amounts
to at least $7,400,000 for the twelve months ending December 31, 1997; (iii) the
Bid Price of the Company's Class A Common Stock shall average in excess of
$10.00 for 30 consecutive business days during the 18 month period commencing on
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<PAGE>
January 18, 1995; (iv) the Bid Price of the Company's Class A Common Stock shall
average in excess of $13.35 for 30 consecutive business days during the 18 month
period commencing 18 months from January 18, 1995.
The Minimum Pretax Income amounts set forth above shall be increased
proportionately, with certain limitations, in the event additional shares of
Common Stock or securities convertible into, exchangeable for or exercisable
into Common Stock are issued after completion of this offering. The Bid Price
amounts set forth above are subject to adjustment in the event of any stock
splits, reverse stock splits or other similar events.
Any money, securities, rights or property distributed in respect of the
Escrow Shares or the Class E Shares, including any property distributed as
dividends or pursuant to any stock split, merger, recapitalization, dissolution,
or total or partial liquidation of the Company, shall be held in escrow until
release of the Escrow Shares or conversion of the Class E Shares. If none of the
applicable earnings or market price levels set forth above have been met by May
1, 1998, the Escrow Shares, as well as any dividends or other distributions made
with respect thereto, will be contributed to the capital of the Company and the
Class E Shares, as well as any dividends or other disbursements made with
respect thereto, will be redeemed by the Company for nominal consideration and
cancelled. The Company expects that the release of the Escrow Shares to, or
conversion of Class E Shares held by, officers, directors, employees and
consultants of the Company will be deemed compensatory and, accordingly, will
result in a substantial charge to reportable earnings, which would equal the
fair market value of such shares on the date of release. Such charge could
substantially increase the loss or reduce or eliminate the Company's net income
for financial reporting purposes for the period(s) during which such shares are,
or become probable of being, released from escrow connected to Class A Common
Stock. Although the amount of compensation expense recognized by the Company
will not affect the Company's total stockholders' equity, it may have a negative
effect on the market price of the Company's securities.
The earnings and market price levels set forth above were determined by
negotiation between the Company and the Underwriter and should not be construed
to imply or predict any future earnings by the Company or any increase in the
market price of its securities.
POTENTIAL FUTURE SALES OF COMMON STOCK PURSUANT TO RULE 144
Of the Company's 4,234,858 shares of Class A and Class B Common Stock
outstanding as of July 12, 1996 (of which 781,244 shares of Class B Common Stock
are Escrow Shares), approximately 1,445,829 are "restricted securities" as that
term is defined in Rule 144 promulgated under the Act and may be sold only in
compliance with such Rule (subject to restrictions on transfer with respect to
the Escrow Shares), pursuant to registration under the Act or pursuant to
exemption therefrom and the remaining 2,789,029 are freely transferable without
restriction or further registration under the Act. Generally, under Rule 144,
each person holding restricted securities for a period of two years may, every
three months after such two-year holding period, sell in ordinary brokerage
transactions or to market makers an amount of shares equal to the greater of one
percent of the Company's then outstanding Class A Common Stock or the average
weekly trading volume
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<PAGE>
during the four weeks prior to the proposed sale. This limitation on the number
of shares which may be sold under the Rule does not apply to restricted
securities sold for the account of a person who is not and has not been an
affiliate of the Company during the three months prior to the proposed sale and
who has beneficially owned the securities for at least three years.
REDEEMABLE WARRANTS
CLASS A WARRANTS
At July 12, 996, the Company had 2,532,500 Class A Warrants
outstanding. Each Class A Warrant entitles the registered holder to purchase one
share of Class A Common Stock and one Class B Warrant at an exercise price of
$6.50 at any time until 5:00 P.M., New York City time, on January 18, 2000. The
Class A Warrants are redeemable by the Company on 30 days' written notice at a
redemption price of $.05 per Class A Warrant if the "closing price" of the
Company's Class A Common Stock for any 30 consecutive trading days ending within
15 days of the notice of redemption averages in excess of $9.10 per share.
"Closing price" shall mean the closing bid price if listed in the
over-the-counter market on Nasdaq or otherwise or the closing sale price if
listed on the Nasdaq National Market or a national securities exchange. All
Class A Warrants must be redeemed if any are redeemed.
CLASS B WARRANTS
At July 12, 1996, the Company had 1,782,500 Class B Warrants
outstanding. Each Class B Warrant entitles the registered holder to purchase one
share of Class A Common Stock at an exercise price of $8.75 at any time after
issuance until 5:00 P.M. New York City Time, on January 18, 2000. The Class B
Warrants are redeemable by the Company on 30 days' written notice at a
redemption price of $.05 per Class B Warrant, if the closing price of the
Company's Class A Common Stock for any 30 consecutive trading days ending within
15 days of the notice of redemption averages in excess of $12.25 per share. All
Class B Warrants must be redeemed if any are redeemed.
GENERAL
The Class A Warrants and Class B Warrants were issued pursuant to a
warrant agreement (the "Warrant Agreement") among the Company, Blair and
American Stock Transfer & Trust Company, New York, New York, as warrant agent,
and are evidenced by warrant certificates in registered form. 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 or upon issuance of shares of Common Stock at prices lower than the
Warrant exercise price then in effect other than issuances upon exercise of
options granted to employees, directors and consultants to the Company, or
options to be granted under the Company's stock option plan.
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<PAGE>
The exercise prices of the Warrants were determined by negotiation
between the Company and Blair and should not be construed to be predictive of or
to imply that any price increases in the Company's securities will occur.
A Warrant may be exercised upon surrender of the Warrant certificate on
or prior to its expiration date (or earlier redemption date) at the offices of
American Stock Transfer & Trust Company, New York, New York, the warrant agent,
with the form of "Election to Purchase" on the reverse side of the Warrant
certificate completed and executed as indicated, accompanied by payment of the
full exercise price (by certified or bank check payable to the order of the
Company) for the number of shares with respect to which the Warrant is being
exercised. Shares issued upon exercise of Warrants and payment in accordance
with the terms of the Warrants will be fully paid and non-assessable.
The Warrants do not confer upon the Warrantholder any voting or other
rights of a stockholder of the Company. Upon notice to the holders of Warrants,
the Company has the right to reduce the exercise price or extend the expiration
date of the Warrants.
OTHER WARRANTS
At July 12, 1996, the Company had outstanding warrants to purchase an
aggregate of 188,250 shares of Class A Common Stock, which are exercisable
through September 10, 2002 at an exercise price of $.50 to $2.50 per share and
which contain antidilution provisions and demand and "piggyback" registration
rights. The underlying shares of Class A Common Stock of all such warrants are
being registered for resale hereby.
UNIT PURCHASE OPTIONS
The Company has outstanding Underwriter's Options to purchase 155,000
shares of Class A Common Stock, 155,000 Class A Warrants and 155,000 Class A
Warrants, exercisable until January 18, 2000 at an exercise price of $6.75 per
share of Class A Common Stock, $.10 per Class A Warrant and $.10 per Class B
Warrant, subject to adjustment in certain limited events to protect against
dilution. The Class A Warrants and Class B Warrants underlying the Unit Purchase
Options are exercisable on the same terms and conditions as the Class A and
Class B Warrants except that they are not subject to redemption by the Company
unless, on the redemption date, the Unit Purchase Option has been exercised and
the underlying Warrants are outstanding. The holders of the Unit Purchase
Options have demand and piggy-back registration rights with respect to the
securities underlying the Unit Purchase Options.
PREFERRED STOCK
GENERAL
The Certificate of Incorporation of the Company authorizes the issuance
of 4,950,000 additional shares of preferred stock, none of which are currently
outstanding. The Board of
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Directors, within the limitations and restrictions contained in the Certificate
of Incorporation and without further action by the Company's stockholders, has
the authority to issue shares of preferred stock from time to time in one or
more series and to fix the number of shares and the relative rights, conversion
rights, voting rights, and terms of redemption, liquidation preferences and any
other preferences, special rights and qualifications of any such series. Any
issuance of preferred stock could, under certain circumstances, have the effect
of delaying or preventing a change in control of the Company and may adversely
affect the rights of holders of Common Stock. The Company has no present plans
to issue any shares of preferred stock.
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer & Trust Company, New York, New York serves as
transfer agent for the Common Stock and warrant agent for the Warrants.
PLAN OF DISTRIBUTION
The securities offered hereby by the Company are being offered directly
by the Company pursuant to the terms of the Warrants. The securities offered
hereby by IDP and the Selling Securityholders may be sold by such holder or by
its transferees or other successors in interest. The distribution of all
securities offered hereby may be effected in one or more transactions that may
take place on the over-the-counter market, including ordinary broker's
transactions, privately-negotiated transactions or through sales to one or more
broker/dealers for resale of such securities as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by these holders in connection with
such sales. No underwriter is being utilized in connection with this offering.
The Company has been advised that IDP and the Selling
Securityholders may sell Shares or Class A Warrants from time to time in
transactions on Nasdaq or on other exchanges on which the Shares and/or Class A
Warrants may be traded, in the over-the-counter market, in negotiated
transactions, through the writing of options on the Shares or a combination of
such methods of sale, or through other means. Sales may be effected at fixed
prices which may be changed, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices.
IDP and the Selling Securityholders may effect such transactions by
selling the Shares or Class A Warrants to or through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from IDP and the Selling Securityholders or the purchasers of the
Shares or Class A Warrants for whom such broker-dealers may act as agent or to
whom they sell as principal, or both (which compensation to a particular
broker-dealer might be in excess of customary commissions). The Selling
Securityholders, IDP and any broker-dealers or agents who participate in the
distribution of Shares or Class A Warrants hereunder may be deemed to be
"underwriters" as that term is defined in the Act, and any commissions received
by them and
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<PAGE>
profit on any resale of the Shares as principal might be deemed to be
underwriting discounts and commissions under the Act.
The Company has agreed to pay the expenses of registration in
connection with this Offering and to indemnify certain of the Selling
Securityholders against certain liabilities, including certain liabilities under
the Act.
At the time a particular offer of Shares or Class A Warrants is made,
to the extent required, a supplement to this Prospectus will be distributed
which will identify and set forth the aggregate amount of Shares or Class A
Warrants being offered and the terms of the offering.
The Selling Securityholders are not restricted as to the price or
prices at which they may sell their Shares or Class A Warrants. Sales of Shares
or Class A Warrants may depress the market price of the Company's Common Stock
or Class A Warrants. The Selling Securityholders are subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including without limitation rules 10b-6 and 10b-7, which provisions may limit
the timing of purchases and sales of the Shares or Class A Warrants by the
Selling Securityholders.
In order to comply with certain states' securities laws, if applicable,
the Shares or Class A Warrants may be sold in such jurisdictions only through
registered or licensed brokers or dealers. In certain states the Shares or Class
B Warrants may not be sold unless the Shares or Class A Warrants have been
registered or qualified for sale in such state, or unless an exemption from
registration or qualification is available and is obtained.
The Company has agreed not to solicit Warrant exercises other than
through Blair. Upon any exercise of the Warrants, the Company will pay Blair a
fee of 5% of the aggregate exercise price if: (i) the market price of the
Company's Class A Common Stock on the date the Warrant is exercised is greater
than the then exercise price of the Warrants; (ii) the exercise of the Warrant
was solicited by a member of the National Association of Securities Dealers,
Inc. as designated in writing on the Warrant certificate subscription form;
(iii) the Warrant is not held in a discretionary account; (iv) disclosure of
compensation arrangements was made both at the time of the offering and at the
time of exercise of the Warrants; and (v) the solicitation of exercise of the
Warrant was not in violation of Rule 10b-6 promulgated under the Exchange Act.
Blair acted as underwriter of the Company's IPO. Blair and Blair & Co.,
a selling group member in the IPO which is substantially owned by family members
of J. Morton Davis, the sole stockholder of Blair, beneficially own securities
underlying the Unit Purchase Option and certain officers, directors and
employees of Blair and Blair & Co. are offering securities for resale pursuant
to this Prospectus. See "Selling Securityholders."
The Company is aware that Blair & Co. is currently making a market in
the Company's securities. Unless granted an exemption by the Commission from
Rule 10b-6 promulgated under the Exchange Act, Blair & Co. will be prohibited
from engaging in any market making activities with regard to the Company's
securities for the period from two to nine business days (or such other
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<PAGE>
applicable period as Rule 10b-6 may provide) prior to any solicitation by Blair
of the exercise of Warrants until the later of the termination of such
solicitation activity or the termination (by waiver or otherwise) of any right
that Blair may have to receive a fee for the exercise of Warrants following such
solicitation. As a result, Blair & Co. may be unable to provide a market for the
Company's securities during certain periods while the Warrants are exercisable.
Blair has informed the Company that the Commission is conducting an
investigation concerning various business activities of Blair and Blair & Co.
The investigation appears to be broad in scope, involving numerous aspects of
Blair and Blair & Co.'s compliance with the Federal securities laws and
compliance with the Federal securities laws by issuers whose securities were
underwritten by Blair or Blair & Co. or in which Blair or Blair & Co. made
over-the-counter markets, persons associated with Blair or Blair & Co., such
issuers and other persons. The Company has been advised by Blair that the
investigation has been ongoing since at least 1989 and that it is cooperating
with the investigation. Blair cannot predict whether this investigation will
ever result in any type of formal enforcement action against Blair or Blair &
Co., or, if so, whether any such action might have an adverse effect on Blair or
the securities offered hereby. An unfavorable resolution of the Commission's
investigation could have the effect of limiting such firm's ability to solicit
the Company's Warrants.
LEGAL MATTERS
The validity of the securities offered hereby have been passed upon for
the Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York.
EXPERTS
The balance sheet as of July 31, 1995, and the related statements of
operations, cash flows and stockholders' equity for the years ended July 31,
1994 and July 31, 1995 and for the period from November 18, 1991 (inception) to
July 31, 1995, incorporated by reference in this registration statement, have
been incorporated herein in reliance on the report of Richard A. Eisner &
Company, LLP independent auditors, given on the authority of that firm as
experts in accounting and auditing. Their report includes a modification
relating to an uncertainty regarding the Company's ability to continue as a
going concern.
No dealer, salesman or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus in
connection with the Offering herein contained, and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or any underwriter. This Prospectus does not constitute an offer
to sell or a solicitation of any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such an
offer or solicitation in such jurisdiction. Neither the delivery of this
Prospectus nor any sale hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the Company since
any of the dates as of which information is furnished herein or since the date
hereof.
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TABLE OF CONTENTS
PAGE
Available Information...............................................4
Incorporation of Certain Documents by Reference.....................4
Prospectus Summary..................................................6
Risk Factors.......................................................13
Dividend Policy....................................................22
Capitalization.....................................................23
Selling Securityholders............................................24
Description of Securities..........................................27
Plan of Distribution...............................................33
Legal Matters......................................................35
Experts............................................................35
-36-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by the Registrant in connection
with the issuance and distribution of the securities being registered are as
follows:
Accounting Fees and Expenses........................ $5,000
Legal Fees and Expenses, including Blue Sky
Fees and Expenses................................ 10,000
Miscellaneous Expenses.............................. 5,000
-----
Total.......................................... $20,000
======
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law which
covers the indemnification of directors, officers, employees and agents of a
corporation is hereby incorporated herein by reference. Reference is made to
Article Ninth of Registrant's Articles of Incorporation and Article V of
Registrant's By-Laws which provide for indemnification by the Registrant in the
manner and to the full extent permitted by Delaware law.
The Company has obtained a directors and officers insurance
policy.
Item 16. EXHIBITS.
(a) 3.1(1) Certificate of Incorporation
3.2(1) Certificate of Amendment to Certificate of Incorporation
3.4(1) By-laws
4.2(1) Form of Underwriter's Option
4.3(1) Form of Warrant Agreement
4.5(1) Escrow agreement, as amended
4.6(1) Form of warrant expiring September 10, 2002
4.7(3) Amendment to Warrant Agreement
5.1 Opinion of Bachner, Tally, Polevoy & Misher LLP*
10.1(1) 1992 Stock Option Plan
10.2(1) 1994 Stock Option Plan
10.3(1) Employment Agreement with Thomas H. Lipscomb, as amended
10.4(1) Consulting agreement with Alan N. Alpern, as amended
10.5(1) Lease for Executive Offices, as supplemented
II-1
<PAGE>
10.6(1) License and Option Agreement dated February 9, 1994 between
the Registrant and International Typeface Corporation **
10.7(1) Employment agreement with Charlton Calhoun III, as amended
10.8(2) Agreement between International Typeface Corporation and
the Company dated April 21, 1995
23.1 Consent of Richard Eisner & Company, LLP (included on page
II-4)
23.2 Consent of Bachner, Tally, Polevoy & Misher LLP (included in
Exhibit 5.1)
25.1 Power of Attorney (included on page II-5)
(1) Incorporated by reference from the Company's Registration
Statement on form SB-2 (File No. 33-83940)
(2) Incorporated by reference to the Company's Report on Form 8-K
dated April 21, 1995
(3) Incorporated by reference from the Company's Post-Effective
Amendment on Form S-3 to its Registration Statement on Form SB-2
(File No. 33-83940)
* Previously filed.
** Confidential treatment has been granted for portions of this
Exhibit.
Item 17. UNDERTAKINGS
Undertaking Required by Regulation S-B, Item 512(a).
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any material information with respect
to the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering therein, and the
offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
Undertaking required by Regulation S-B, Item 512(e).
II-2
<PAGE>
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or controlling
persons pursuant to the foregoing provisions, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Undertakings required by Regulation S-B, Item 512(f).
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, as amended, the information omitted from
the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part
of this Registration Statement as of the time it was declared
effective.
(2) For purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Registration
Statement on Form S-3 (Registration No. 333-04361) of our report dated October
27, 1995 which appears in the annual report on Form 10-KSB of Infosafe Systems,
Inc. for the year ended July 31, 1995 and to the reference to our Firm under
caption "Experts" in the prospectus.
Richard A. Eisner & Company, LLP
July 11, 1996
II-4
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing Form S-3 and has duly caused this Registration
Statement or amendment thereto to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on the
12th day of July, 1996.
INFOSAFE SYSTEMS, INC.
By: /S/ THOMAS H. LIPSCOMB
--------------------------------
Thomas H. Lipscomb, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below under the heading "Signatures" constitutes and appoints each of
Thomas H. Lipscomb and Alan N. Alpern his true and lawful attorney-in-fact and
agent, each with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities to sign any or all
amendments to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and for
all intends and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agents or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
post effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
NAME TITLE DATE
/S/THOMAS H. LIPSCOMB President, Chief Executive July 12, 1996
- --------------------------- Officer, Director (Principal
Thomas H. Lipscomb Executive Officer)
/S/ ALAN N. ALPERN Director and Chief July 12, 1996
- ---------------------------
Alan N. Alpern Financial Officer
/S/ PATRICK BROSNAN Controller and Secretary July 12, 1996
- --------------------------- (Principal Accounting Officer)
Patrick Brosnan
/S/ WILLIAM N. WALKER Director July 12, 1996
- ---------------------------
William N. Walker
/S/ FRANK SCHWAB, JR. Director July 12, 1996
- ---------------------------
Frank Schwab, Jr.
II-4
