SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
-------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended April 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____
Commission File No. 1-25362
INFOSAFE SYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3645702
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
342 Madison Avenue
Suite 622
New York, NY 10173
(Address of Principal Executive Offices)
(212) 867-7200
(Issuer's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
Class Outstanding at June 10, 1996:
Class A Common Stock, $.01 par value 2,734,975 shares
Class B Common Stock, $.01 par value 1,469,050 shares
Traditional Small Business Disclosure Format
Yes X No
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INFOSAFE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FORM 10-QSB
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of July 31, 1995
and April 30,1996 (unaudited).................................. 3
Condensed Statements of Operations for the Three
and Nine Months ended April 30, 1995 and April
30, 1996
(unaudited) and for the period November 18, 1991
(inception) to April 30, 1996(unaudited)....................... 4
Condensed Statements of Cash Flows for the Nine
Months ended April 30, 1995 and April 30, 1996
(unaudited) and for the period November 18, 1991
(inception) to April 30, 1996 (unaudited)....................... 5
Notes to Condensed Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 12
Item 5. Other Information........................................... 14
Item 6. Exhibits and Reports on Form 8-K............................ 16
SIGNATURES........................................................... 17
0050095.01
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PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
INFOSAFE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
July 31, April 30,
A S S E T S 1995 1996
----------- ------------- ----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $ 154,726 $ 67,747
Marketable securities - available for sale................................. 3,743,281 1,500,145
Other current assets....................................................... 317,506 220.895
---------- ----------
Total current assets.............................................. 4,215,513 1,788,787
Equipment held for lease (Note C)............................................... 772,603 426,397
Noncurrent assets............................................................... 563,091 496,378
------------ ------------
T O T A L......................................................... $ 5,551,207 $2,711,562
========== =========
L I A B I L I T I E S
Current liabilities:
Accounts payable and accrued liabilities................................... $ 409,042 $ 402,894
Settlement payable (NoteD)................................................. 340,000 229,055
Due to stockholder......................................................... 60,000 60,000
-------- -----------
Total current liabilities......................................... 809,042 691,949
Non current liabilities......................................................... 114,888 12,266
------- ------
Total liabilities................................................. 923,930 704,215
---------- ----------
Commitments and contingencies (Note D)
STOCKHOLDERS' EQUITY
Common Stock:
Class A - par value $.01 per share, 20,000,000 shares authorized, one
vote per share; 2,420,913 and 2,734,975
(unaudited) shares issued and outstanding, respectively.......... 24,209 27,350
Class B - par value $.01 per share, 2,000,000 shares
authorized, six votes per share; 1,494,987 and 1,469,050 shares
issued and outstanding, respectively including 781,244 shares
held in escrow.................................................... 1,556 1,297
Class E-1 - par value $.01 per share, 2,000,000 shares
authorized, one vote per share; 1,347,372 shares
issued and to be issued, redemption value $.0001 per share....... 13,473 13,473
Class E-2 - par value $.01 per share, 2,000,000 shares
authorized, one vote per share; 1,347,372 shares
issued and to be issued, redemption value $.0001 per share........ 13,473 13,473
Additional paid-in capital...................................................... 9,221,820 9,404,252
(Deficit) accumulated during the development stage.............................. (4,737,574) (7,470,688)
Unrealized gain on marketable securities........................................ 90,320 18,190
------------- -------------
Total stockholders' equity...................................................... 4,627,277 2,007,347
------------ ----------
T O T A L.........................................................$ 5,551,207 $ 2,711,562
============== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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INFOSAFE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
Period From
Three Months Ended Nine Months Ended November 18, 1991
APRIL 30, APRIL 30, (Inception) to
------------------------ --------------------
1995 1996 1995 1996 APRIL 30, 1996
---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C>
Revenue
License fees............................ -- -- -- -- $ 350,000
Other revenues.......................... $105,780 $ 15,625 $ 105,780 $51,496 242,068
--------- ---------- --------- ------- -------
T o t a l............................... 105,780 15,625 105,780 51,496 592,068
------- ------- ------- ------ -------
Expenses:
Cost of revenue......................... 42,625 20,799 80,405 71,924 195,104
Write down of assets held for lease (Note C) 470,000 470,000 470,000
Operating expenses..................... 561,672 851,116 1,319,674 2,402,928 7,007,353
------- -------- --------- --------- ---------
T o t a l........................... 604,297 1,341,915 1,400,079 2,944,852 7,672,457
-------- --------- --------- --------- ---------
Operating loss............................. (498,517) (1326,290) (1,294,299) (2,893,356) (7,080,389)
Interest income............................ 66,635 32,629 82,622 179,004 345,626
Settlement expense (Note D)................ (325,000) (325,000) (340,000)
Interest expense (including debt
discount and deferred financing fees... ( 3,887) (344,841) (18,762) (387,525)
--------------- -------- --------- -------- ---------
Net (loss).................................. $(756,882) $(1,297,548) $(1,881,518) $(2,733,114) $(7,426,288)
========== ============ ============ ============ ============
Net (loss) per common share................. $(.25) $(.38) $(.94) $(.80)
====== ====== ====== ======
Weighted average number of common
shares and common shares equivalent
outstanding............................ 2,992,320 3,422,781 2,011,984 73,422,781
========= ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements.
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INFOSAFE SYSTEMS, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
For the
Period from
Nine Months Ended November 18, 1991
APRIL 30, (Inception) to
1995 1996 APRIL 30, 1996
---- ---- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss)............................... $(1,881,518) $(2,733,114) $(7,462,288)
Write off equipment held for lease... 470,000 470,000
Other net cash provided by (used in)
operating activities.............. (453,378) (1,693) 234,306
--------------- ------------- -------------
Net cash (used in) operating activities (2,334,896) (2,264,807) (6,757,982)
Cash flows from investing activities....
Purchase of marketable securities.... (746,150) (10,924,452)
Sale of marketable securities........ 2,917,156 9,442,497
Other investing activities........... (129,256) (39,019) (608,018)
------------- ------------ -------------
Net cash provided by (used in)
investing activities (129,256) 2,131,987 (2,089,973)
Cash flows from financing activities
Proceeds from issuance of common stock 8,912,500 11,025,260
Cost in connection with sale of common
securities........................ (1,688,447) (2,027,906)
Payment of deferred financing costs. (209,419) (224,919)
Proceeds from bridge loan........... 1,500,000 1,500,000
Payment of bridge loan.............. (1,500,000) (1,500,000)
Exercise of warrants................ 185,313 213,063
Other financing activities.......... (139,472) (69,796)
------------------- -------------- -----------------
Net cash provided by financing activities
7,014,634 45,841 8,915,702
NET INCREASE (DECREASE) IN CASH 4,550,482 (86,979) 67,747
Cash beginning of period............... 18,253 154,726
----------- ----------
CASH END OF PERIOD..................... $4,568,735 $67,747 $67,747
========== ======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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INFOSAFE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE A) Basis of Presentation and the Company:
(1) Basis of presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article 3 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included. Operating results for the three-month and nine month periods
ended April 30, 1996 and for the period from November 18, 1991 (inception) to
April 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending July 31, 1996.
The balance sheet at July 31, 1995 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the audited financial
statements and footnotes thereto included in the Form 10-KSB, for the Company's
fiscal year ended July 31, 1995.
(2) Organization and business:
Infosafe Systems, Inc. (the "Company") is a development stage company
engaged in the design, development and marketing of systems for securing,
controlling, metering and auditing electronic products, documents and programs,
used in stand alone applications, corporate networks and open systems such as
the Internet, across all operating platforms without risk of compromising and
exposing the digital products to theft or corruption.
(NOTE B) - Summary of Significant Accounting Policies:
Net loss per share of common shares is based on the weighted average
number of shares outstanding during the period excluding Class B shares in
escrow, all Class E-1 and Class E-2 shares. In 1995, the loss per share
computation includes options and warrants issued within twelve months of the
Company's initial public offering, using the treasury stock method.
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INFOSAFE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE C)- Equipment Held for Lease:
Equipment held for lease is composed of an encryption and metering
control unit (the "Mark III') and CD-ROMs. The CD-ROMs contain encrypted digital
images used exclusively for the Design Palette(TM) system. The Mark III is also
used as part of the Design Palette and has other applications currently in
development by the Company. The Company received notice from its single largest
supplier of digital images for the Design Palette that the supplier wishes to
terminate its participation in the Design Palette program effective November 30,
1996, which will require the Company to replace the CD-ROMs from such supplier.
In addition, the Company's management has determined that the quantity of Mark
IIIs produced by the Company is expected to exceed the anticipated demand for
these units. Therefore the Company has written off assets held for lease in the
amount of $470,000, which is the carrying cost of the CD-ROMs and the carrying
cost of the anticipated excess Mark III units.
(NOTE D) - Accrued Judgments and Contingencies:
(1) On September 24, 1994 the Company received a demand for arbitration
by International Development Partners ("IDP"), an entity with which 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 is alleged to be due in connection with financing for the Company. On
October 12, 1994, the Company filed an action claiming that the agreements with
IDP and its principal are void due to fraud and misrepresentation and seeking
damages in excess of $1,000,000. An arbitration award has been issued in favor
of IDP for $205,000 cash, 84,375 warrants 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. During August 1995, the Company obtained a $240,000 letter of
credit from its bank collateralized by the Company's marketable securities to be
used in connection with suspension of execution of the arbitration award pending
the Company's appeal. During October 1995 approximately $107,000 was removed
from the Company's checking account and is being held by the Court pending
results of legal proceedings. The Company believes that this claim is without
merit and is appealing the arbitration award. The Company also intends to pursue
its claims against IDP and its principal.
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<PAGE>
(2) The Company and its President are parties to an action brought by
Wave Systems Corp. ("Wave"), the former employer of such officer. Wave, a
competitor of the Company, is seeking, among other things, to enjoin the Company
and such officer from using or disclosing allegedly confidential and/or
propriety information and/or trade secrets and from unfairly competing with
Wave. Wave was seeking an award of damages in excess of $10 million, plus
attorneys' fees.
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 for seven years and the Wave officer who
verified Wave's complaint, stating Dr. Michener's belief that the Company had
not misappropriated any 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.
Wave has also requested leave to file an Amended Complaint against the
Company and Mr. Lipscomb. 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 its President filed a counter suit
against Wave seeking an award of $20 million for damages and attorneys fees as
well as declaratory and injunctive relief.
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<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a development stage company engaged in the development
and marketing of secure electronic distribution systems for digital products.
The Company commenced operations in January 1992. From November 18, 1991
(inception) to April 30, 1996, the Company recognized revenues of approximately
$592,000, of which $455,000 was from one customer (including a non-recurring
license fee of $350,000 from such customer), and had an accumulated deficit of
approximately $7.4 million. The Company has continued to operate at a deficit
since inception and expects to continue to operate at a deficit until such time
as operations generate sufficient revenues to cover costs.
The Company's strategy is to achieve broad market acceptance of the
Infosafe System. The Company's first commercial product, Design Palette(TM),
commenced shipping in July 1995. The Design Palette, which is developed for use
in the graphics industry, is being used to showcase and demonstrate the
commercial advantages of the Infosafe System. Revenues from the sales of digital
products provided by Design Palette have been disappointing. The Company
initially directed its marketing efforts to end users of Design Palette;
Infosafe has therefore redirected its marketing efforts of Design Palette to
large resellers of graphic products and mass markets (large print and copy
shops). The Company currently is developing a Windows(R) and a network version
of the Design Palette system for release in 1996.
PhotoDisc, the largest supplies of images for the Design Palette, has
given notice to the Company that it wishes to remove its products from the
Design Palette 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. In addition, management has determined that the quantity of Mark III
units produced by the Company is expected to exceed the anticipated demand.
Therefore the Company has determined that a write down of assets in the amount
of $470,000 is necessary in order to write off 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 Infosafe technology is highly flexible and suitable for a wide range
of electronic commerce and information applications. The Company is currently
testing a proprietary Infosafe solution to meter, audit and protect commercial
transactions over the Internet. The Infosafe technology can also be tailored for
internal security systems for corporations and institutions. In addition the
Company is pursuing new digital information applications for its technology in
electronic interchange, metering and document management and verification
systems.
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<PAGE>
RESULTS OF OPERATIONS
Three Months Ended April 30, 1996 Compared with Three Months Ended April 30,
1995.
For the three months ended April 30 1996 ("the 1996 Three Months"), the
Company recognized revenues of approximately $16,000, which resulted from sales
generated by the Design Palette. For the three months ended April 30, 1995 ("the
1995 Three Months"), the Company recognized revenues of approximately $106,000
from the purchase from International Typeface Corporation ("ITC") of its
interest in Design Palette as a result of recognizing as revenue a portion of
non-refundable advances previously received by the Company in excess of the
amount allocated by the Company to their cancellation.
For the 1996 Three Months, as previously noted, the Company has written
down assets held for lease aggregating $470,000. The write down was due to the
excess quantity of Mark III units and the write off of CD-ROMs. There was no
write off of assets for the 1995 Three Months.
Operating expenses were approximately $851,000 in the 1996 Three Months
and approximately $562,000 in the 1995 Three Months. This increase was due to an
increase in costs to improve, modify and develop new applications for the
Company's technology. In addition the Company incurred increased selling,
administrative and personnel costs associate with marketing the Infosafe
technology and the Design Palette.
The Company had interest income of approximately $33,000 in the 1996 Three
Months and approximately $67,000 in the 1995 Three Months. This income is earned
on funds received from the Company's initial public offering ("IPO") in January
1995 prior to expenditure.
The 1996 Three Months interest expense of approximately $4,000 is
attributed to the financing of various capital assets. There was no interest
expense for the 1995 Three Months.
Due to the above, the Company had a net loss) of $1,297,548 in the 1996
Three Months compared to a net loss of $756,882 in the 1995 Three Months.
Nine Months Ended April 30, 1996 Compared with Nine Months Ended April 30, 1995.
For the nine months ended April 30, 1996 ("1996 Nine Months") the Company
recognized revenues of approximately $51,000, the majority of which resulted
from sales generated by the Design Palette. For the nine months ended April 30,
1995 ("1995 Nine Months") the Company recognized revenues of approximately
$106,000 from the purchase of ITC 's remaining interest in Design Palette not
already owned by the Company. The 1995 Nine Months revenue is due to a portion
of non-refundable advances previously received by the Company in excess of the
amount allocated by the Company to their cancellation.
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For the 1996 Nine Months, as previously noted, the Company has written
down assets held for lease aggregating $470,000. The write down was due to the
excess quantity of Mark III units and the write off of CD-ROMs. There was no
write off of assets for the 1995 Nine Months.
Operating expenses were approximately $2,403,000 in the 1996 Nine Months
and approximately $1,320,000 in the 1995 Nine Months. The increase was as due to
increased sales and administrative expenses to support the development and sale
of the Company's technology, including but not limited to the Design Palette.
The Company had interest income of approximately $179,000 in the 1996 Nine
Months and approximately $83,000 in the 1995 Nine Months. This income relates to
interest earned on funds received from the Company's IPO in January 1995 prior
to their expenditures.
Interest expense was approximately $19,000 in the 1996 Nine Months as
compared to $345,000 in the 1995 Nine Months. This decrease is attributable to
interest, financing fees and debt discount on notes issued in the bridge
financing completed in the 1995 Nine Months. The 1996 Nine Months interest
expense is attributed to the financing of various capital assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced net losses and negative cash flow from
operations since its inception. At April 30, 1996, the Company had working
capital of approximately $1,100,000 as a result of the completion of the IPO.
The Company has financed its operations primarily through private placements and
the public offering of its securities, which aggregated net proceeds of
approximately $9 million. Such proceeds were used for working capital purposes,
including general and administrative expenses and the repayment of and accrued
interest on indebtedness.
The Company believes that the remaining net proceeds from the IPO will be
sufficient to finance the Company's working capital requirements until the end
of fiscal 1996. There can be no assurance that the Company will generate
sufficient revenues to fund its operations after such period or that the Company
will realize sufficient revenue from commercializing the Infosafe System by that
time. 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.
The cost of the Company's capitalized software is currently amortized
using the straight-line method. Although the Infosafe System has not yet
achieved general commercial acceptance, the Company has begun shipping the
Design Palette which contains its capitalized software. The
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Company is also in negotiation with several other providers of information,
images and other electronic products. Although there can be no assurance that
any of these agreements will result in additional commercial applications of the
Infosafe system, the Company expects that, in the future, it will recover its
investment in capitalized software through profitable operations.
The Company is a party to agreements with officers and employees expiring
from December 1996 through April 1999 which provide aggregate minimum annual
compensation of approximately $635,000.
The Company and its President are parties to an action brought by a
competitor. The Company has been vigorously defending this action, and certain
of the claims advanced by the plaintiff were dismissed by the court during
February 1996. On May 3, 1996, Wave requested permission from the Court to
discontinue its claims against the Company. 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 may 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 its President filed a counter suit against
Wave seeking an award of $20 million for damages and attorneys fees as well as
declaratory and injunctive relief. Wave's withdrawal of its claims does not
affect the pendency of the Company's counterclaim, which remains pending. See
"Part II, Item 1--Legal Proceedings."
At April 30, 1996 the Company has a net operating loss carry forward for
tax purposes of approximately $7 million to offset future taxable income for
federal tax purposes. The utilization of the loss carry forward to reduce future
income taxes will depend on the Company's ability to generate sufficient taxable
income prior to the expiration of the net operating loss carry forward. The
carry forward expires from 2007 to 2010. The Internal Revenue Code and
Regulations contain provisions which limit the use of available net operating
loss carry forward in any given year should significant changes (greater than
50%) in ownership interests occur. As a result of the IPO, the net operating
loss carry forward of approximately $1,900,000, incurred prior to the IPO, will
be subject to an annual limitation of approximately $400,000 until the net
operating loss is utilized or expires.
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PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
(1) On September 24, 1994 the Company received a demand for arbitration by
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 is alleged to be due in connection with
financing for the Company. On October 12, 1994 the Company filed an action
claiming that the agreements with IDP and its principal are void due to fraud
and misrepresentation and seeking damages in excess of $1,000,000. An
arbitration award has been issued in favor of IDP for $205,000 cash, the 84,375
Class A Warrants 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
believes that this claim is without merit and is appealing the arbitration
award. The Company also intends to pursue its claims against IDP and its
principal.
(2) 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 for seven years and the Wave officer who
verified Wave's complaint, stating Dr. Michener's belief that the Company had
not misappropriated any 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
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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.
ITEM 5 : OTHER INFORMATION
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 may
file patent applications covering certain aspects of its technology in Japan and
the European Economic Community.
The co-inventors of the issued patent, Thomas H. Lipscomb, co-founder and
Chief Executive Officer of the Company, and Dr. Robert H. Nagel, Chief Scientist
and a Co-founder of the Company, have assigned the rights to this patent to the
Company.
The Company continues to refine its marketing strategy and technology,
capitalizing on the maturing of new mass delivery media, such as corporate
intranets and open networks, including
-14-
<PAGE>
the Internet, the Company has identified new, broader-based opportunities of
securing and metering digital content for large-scale information providers to
offer new services to their existing and prospective customer base. The Company
believes its technology, which has recently been expanded to support both
hardware-based and software distribution solutions, addresses the critical areas
of electronic commerce: security, verification, usage patterns and metering.
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, management 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 is expected
to 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. The Company has held discussions with other suppliers of
graphic images suitable for the Design Palette. While their can be no assurance
that such discussions will have a successful result, the Company believes that
negotiations with one or more suppliers 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. The Company has determined
that a write down of assets to be leased in the amount of $470,000 is necessary
in order to write off the full carrying value of both the CD-ROMs and
anticipated excess Mark III units produced and held by the Company.
-15-
<PAGE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
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
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
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
11.1 Computation of Net Loss Per Share
27 Financial Data Schedule
- ------------------------
(1) Incorporated by reference to 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 ** Confidential treatment has been granted for portions of this
Exhibit.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the three
months ended April 30, 1996.
-16-
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
INFOSAFE SYSTEMS, INC.
Dated: June 13, 1996 By: /S/ THOMAS H. LIPSCOMB
-------------------------
Thomas H. Lipscomb, President and
Chief Executive Officer
By: /S/ ALAN. N. ALPERN
-------------------------
Alan N. Alpern, Chief Financial
Officer
-17-
<PAGE>
EXHIBIT INDEX
EXHIBIT NO.
PAGE NO.
4.2 Form of Underwriter's Option*
4.3 Form of Warrant Agreement, with Specimen Form of Class A and
Class B Warrant Certificate attached*
4.5 Escrow agreement, as amended*
4.6 Form of warrant expiring September 10, 2002*
10.1 1992 Stock Option Plan*
10.2 1994 Stock Option Plan*
10.3 Employment Agreement with Thomas H. Lipscomb, as amended*.
10.4 Consulting agreement with Alan N. Alpern, as amended*
10.5 Lease for Executive Offices, as supplemented*
10.6 Supplemental Lease for Executive Office
10.7 License and Option Agreement dated February 9, 1994 between the
Registrant and International Typeface Corporation *
10.8 Purchase of the Design Palette(TM) System from International Typeface
Corporation**
11.1 Computation of Net Loss Per Share
27 Financial Data Schedule
- -------------------------
* Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File no. 33-83940)
** Incorporated by reference to the Company's Form 8-K (File No. 0-5362)
*** Confidential treatment has been granted for portions of this Exhibit.
-19-
EXHIBIT 11.1
COMPUTATION OF NET (LOSS) PER SHARE
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL ,30 APRIL
----------------------------------- ---------------------
1995 1996 1995 1996
-------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C>
Net (loss)......................................... $(756,882) $ (1,297,548) $ (1,881,518) $(2,733,114)
Cumulative dividend on preferred shares............ (1,125) (3,375)
NET (LOSS) ATTRIBUTABLE TO COMMON
SHAREHOLDERS.................................... $(758,007) $ (1,297,548) $(1,884,893) $(2,733,114)
========== =========== ========== ==========
Weighted average number of Class A common
share outstanding............................... 2,278,577 2,734,975 1,184,844 2,734,975
Weighted average number of Class B common
share outstanding............................... 1,494,987 1,469,050 1,494,987 1,469,050
Addcommon stock equivalents issued within twelve months of an initial public
offering (determined by the "treasury
stock" method).................................. 113,400
Less escrow shares................................. (781,244) (781,244) (781,244) (781,244)
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARE
AND COMMON SHARE EQUIVALENTS
OUTSTANDING..................................... 2,992,320 3,422,781 2,011,987 3,422,781
========= ========= ========= =========
NET (LOSS) PER SHARE OF COMMON SHARE AND
COMMON SHARE EQUIVALENTS........................ $(.25) $(..38) $(.94) $(.80)
====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> APR-30-1996
<CASH> 67,747
<SECURITIES> 1,500,145
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,788,787
<PP&E> 922,775
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,711,562
<CURRENT-LIABILITIES> 691,949
<BONDS> 0
0
0
<COMMON> 55,593
<OTHER-SE> 1,951,754
<TOTAL-LIABILITY-AND-EQUITY> 2,711,562
<SALES> 51,496
<TOTAL-REVENUES> 51,496
<CGS> 71,924
<TOTAL-COSTS> 71,924
<OTHER-EXPENSES> 2,872,928
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,762
<INCOME-PRETAX> (2,733,114)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,733,114)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,733,114)
<EPS-PRIMARY> (.80)
<EPS-DILUTED> (.80)
</TABLE>
