SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant __X__
Filed by a party other than the Registrant _____
Check the appropriate box:
__X__ Preliminary proxy statement
_____ Definitive proxy statement
_____ Definitive additional materials
_____ Soliciting material pursuant to Rule 14a-11 or Rule 14a-12
Infosafe Systems, Inc.
(Name of Registrant as Specified in Its Charter)
Infosafe Systems, Inc.
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
__X__ No fee required.
_____ Fee computed on table below per Exchange Act Rules 14a-6(I)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
___________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
___________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:1
___________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
__X__ Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing of which the
offsetting fee was paid previously. Identify the previous filing
by registration statement number, or the form or schedule and the
date of its filing.
(1) Amount previously paid:
___________________________________________________________________
(2) Form, schedule or registration statement no.:
___________________________________________________________________
(3) Filing party:
___________________________________________________________________
(4) Date filed:
___________________________________________________________________
_____________________________
1. Set forth the amount on which the filing fee is calculated and
state how it was determined.
INFOSAFE SYSTEMS, INC.
342 Madison Avenue, Suite 622
New York, New York 10173
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held July 18, 1997
To the Stockholders of
Infosafe Systems, Inc.
The Annual Meeting of the Stockholders of Infosafe Systems,
Inc. will be held on July 18, 1997 at 10:00 a.m. local time at
the offices of the Company, 342 Madison Avenue, Suite 622, New
York, New York 10173. The meeting is called for the following
purpose:
1. To elect a board of five directors;
2. To approve an amendment to the Company's 1994 Stock
Option Plan in order to increase the number of shares
of Class A Common Stock reserved for issuance
thereunder from 1,000,000 shares to 2,000,000 shares;
3. To approve an amendment to the Company's certificate of
incorporation, as amended, in order to increase the
number of authorized shares of Class A Common Stock by
20,000,000 shares to an aggregate of 40,000,000 shares
(which requires the approval of a majority of the
outstanding shares of Class A Common Stock as well as a
majority of all outstanding shares of Common Stock);
4. To approve the appointment of Richard A. Eisner &
Company, LLP as the independent auditors of the
Company; and
5. To consider and take action upon such other matters as
may properly come before the meeting or any adjournment
or adjournments thereof.
The close of business on May 20, 1997 has been fixed as the
record date for the determination of Stockholders entitled to
notice of, and to vote at, the meeting. The stock transfer books
of the Company will not be closed.
All Stockholders are cordially invited to attend the
meeting. Whether or not you expect to attend, you are
respectfully requested by the Board of Directors to sign, date
and return the enclosed proxy promptly. Stockholders who execute
proxies retain the right to revoke them at any time prior to the
voting thereof. A return envelope which requires no postage if
mailed in the United States is enclosed for your convenience.
By Order of the Board of Directors,
/s/ Arthur R. Medici_________________
Arthur R. Medici
President and Chief Executive Officer
Dated: June 10, 1997
INFOSAFE SYSTEMS, INC.
342 Madison Avenue, Suite 622
New York, New York 10173
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
This Proxy Statement is furnished in connection with the
solicitation of proxies by the Board of Directors of Infosafe
Systems, Inc. (the "Company") for the Annual Meeting of
Stockholders to be held at the offices of the Company,
342 Madison Avenue, Suite 622, New York, New York 10173 on July
18, 1997, at 10:00 a.m. and for any adjournment or adjournments
thereof, for the purposes set forth in the accompanying Notice of
Annual Meeting of Stockholders. Any Stockholder giving such a
proxy has the power to revoke it at any time before it is voted.
Written notice of such revocation should be forwarded directly
to the Secretary of the Company, at the above stated address.
Attendance at the meeting will not have the effect of revoking
the proxy unless such written notice is given or unless vote by
ballot at the meeting.
If the enclosed proxy is properly executed and returned, the
shares represented thereby will be voted in accordance with the
directions thereon and otherwise in accordance with the judgment
of the persons designated as proxies. Any proxy on which no
direction is specified will be voted in favor of the actions
described in this Proxy Statement and for the election of the
nominees set forth under the caption "Election of Directors."
The approximate date on which this Proxy Statement and the
accompanying form of proxy will first be mailed or given to the
Company's Stockholders is June __, 1997. The Company's Annual
Report for the fiscal year ended July 31, 1996 is being mailed to
stockholders simultaneously with the mailing of this proxy
statement.
Your vote is important. Accordingly, you are urged to sign
and return the accompanying proxy card whether or not you plan to
attend the meeting. If you do attend, you may vote by ballot at
the meeting, thereby canceling any proxy previously given.
VOTING SECURITIES
Only holders of shares of Class A Common Stock, $.01 par
value per share ("Class A Common Stock"), Class B Common Stock,
$.001 par value per share ("Class B Common Stock"), Class E-1
Common Stock, $.01 par value per share ("Class E-1 Common Stock")
and Class E-2 Common Stock, $.01 par value per share ("Class E-2
Common Stock"), of record at the close of business on May 20,
1997 are entitled to vote at the meeting. On the record date,
the Company had outstanding and entitled to vote 4,557,534
shares of Class A Common Stock, 1,478,637 shares of Class E-1
Common Stock and 1,478,637 shares of Class E-2 Common Stock, each
entitled to one vote upon all matters to be acted upon at the
meeting, and 1,372,566 shares of Class B Common Stock, each
entitled to six votes upon all matters to be acted upon at the
meeting. A majority in interest of the outstanding Class A Common
Stock, Class B Common Stock, Class E-1 Common Stock and Class E-2
Common Stock represented at the meeting in person or by proxy
shall constitute a quorum. Candidates for election as members of
the Board of Directors will be elected who receive the highest
number of votes, up to the number of directors to be chosen.
To approve and ratify the appointment of Richard A. Eisner &
Company, LLP, independent certified public accountants as the
independent auditors of the Company and to approve the
Amendment to the 1994 Stock Option Plan, the affirmative vote of
a majority of the Class A Common Stock, Class B Common Stock,
Class E-1 Common Stock and Class E-2 Common Stock so represented
is necessary for shareholder action. To approve the amendment to
the Company's certificate of incorporation as amended, the
affirmative vote of a majority in interest of all shares of Common
Stock and the affirmative vote of a majority in interest of the
outstanding Class A Common Stock is necessary for shareholder action.
Abstentions and broker non-votes are counted for purposes of
determining the presence or absence of a quorum for the
transaction of business. If a stockholder, present in person or
by proxy, abstains on any matter, the stockholder's shares will
not be voted on such matter. Thus, an abstention from voting on
any matter has the same legal effect as a vote "against" the
matter even though the stockholder may interpret such action
differently. Except for determining the presence or absence of a
quorum for the transaction of business, broker non-votes are not
counted for any purpose in determining whether a matter has been
approved.
The executive offices of the Company are located at
342 Madison Avenue, Suite 622, New York, New York 10173. The
Company expects to mail this Proxy Statement and the accompanying
form of proxy on or about June 20, 1997.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of May 20, 1997, certain
information concerning the beneficial ownership of the Company's
Class A, Class B and Class E Common Stock, by (I) each
stockholder known by the Company to own beneficially five percent
or more of the outstanding Class A, Class B and Class E Common
Stock of the Company; (ii) each director; (iii) each person named
in the Executive Compensation Table; and (iv) all executive
officers and directors of the Company as a group, and their
percentage ownership and voting power. Each share of Class B
Common Stock is entitled to six votes per share and each share of
Class A Common Stock and Class E Common Stock is entitled to one
vote per share. For the purposes of this Proxy Statement,
beneficial ownership is defined in accordance with the rules of
the Securities and Exchange Commission and generally means the
power to vote or dispose of the securities regardless of any
economic interest therein.
<TABLE>
<CAPTION>
Class A Class B Class E
Common Stock Common Stock(2) Common Stock(2)
-------------------- -------------------- --------------------
Name and Address Number Number Number % of Vote
of Beneficial Owner of Shares % of Shares % of Shares % of all Classes
_______________________ _____________ ____ _____________ ____ ____________ ____ ______________
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas H. Lipscomb (3) 100,000 (4) * 813,126 (5) 59.2 820,624 30.0 36.7
Arthur R. Medici (6) 116,666 * 70,000 5.1 270,000 9.9 4.4
Alan N. Alpern (3) 50,000 (4) * 153,582 (7) 5.6 210,340 7.7 7.3
Charles C. Johnston 10,000 (8) * * * * * *
Robert S. Christie 10,000 (8) * * * * * *
________________________ _____________ ____ _____________ ____ ____________ ____ _____________
All executive officers 286,666 (4) * 1,036,708 69.9 1,300,964 47.6 48.7
and directors as a
group (5 persons)
__________________
* Less than one percent.
<FN>
<F1>
(1) Except as otherwise noted, each individual or entity has sole
voting and investment power over the securities listed and the
address of each beneficial owner is c/o the Company. Includes
each holder's Class B Common Stock being held in escrow (the
"Escrow Shares") which 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 January 1998. The officers and directors of the company have
agreed not to sell or transfer any shares of the common stock of
the Company owned by them until April 30, 1998.
<F2>
(2) Shares cannot be transferred (except for 20,000 shares of
Class B Common Stock owned by Mr. Alpern which have been
pledged to a bank) or converted into Class A Common Stock
until the Company amends its Certificate of Incorporation to
permit the Company to reserve for issuance out of its
authorized Class A Common Stock all shares of Class A common
stock issuable on the exercise of the Class A Warrants,
Class B Warrants and the underwriters purchase option
issuable in connection with a private placement.
<F3>
(3) The shares owned by Mr. Lipscomb and Mr. Alpern, with the
exception of 20,000 shares of Class B Common Stock owned by
Mr. Alpern which have been pledged to a bank, have been
deposited in a voting trust for a term of three years,
pursuant to which shares will be voted at the direction of a
majority of the non-management directors of the Company and
Mr. Medici.
<F4>
(4) Represents immediately exercisable options.
<F5>
(5) Includes 427,409 Escrow Shares. Mr. Lipscomb has granted
options to purchase 16,875 shares of Class A Common Stock
issuable upon conversion of the shares of Class B Common
Stock beneficially owned by him, including the right to
receive 16,875 Class E Shares, to two individuals and one
entity (the "Lipscomb Options'').
<F6>
(6) Represents immediately exercisable options. Excludes an
option to purchase 183,334 shares of Class A Common Stock
not exercisable within 60 days. The Class B and Class E
shares listed in the table are subject to cancellation if
Mr. Medici's employment with the Company terminates prior to
the expiration of three years from the date of the
commencement of his employment agreement with the Company.
<F7>
(7) Includes 94,591 Escrow Shares. Also includes 18,218 shares
of Class B Common Stock owned by Mr. Alpern's wife, as to
which Mr. Alpern disclaims beneficial ownership.
<F8>
(8) Represents 10,000 immediately exercisable options. Excludes
options to purchase 30,000 shares of Class A Common Stock
not exercisable within 60 days.
</FN>
</TABLE>
PROPOSAL 1
ELECTION OF DIRECTORS
At the meeting, five directors will be elected by the
Stockholders to serve until the next Annual Meeting of
Stockholders or until their successors are elected and shall
qualify. It is intended that the accompanying proxy will be
voted for the election, as directors, of the five persons named
below, unless the proxy contains contrary instructions. The
Company has no reason to believe that any of the nominees will
not be a candidate or will be unable to serve. However, in the
event that any of the nominees should become unable or unwilling
to serve as a director, the persons named in the proxy have
advised that they will vote for the election of such person or
persons as shall be designated by the Management.
The following sets forth the names and ages of the five
nominees for election to the Board of Directors, their respective
principal occupations or employments during the past five years
and the period during which each has served as a director of the
Company.
Robert S. Christie 43 Director
Neal B. Freeman 56 Director
Charles C. Johnston 61 Director
Thomas H. Lipscomb 58 Chairman of the Board
Arthur R. Medici 47 President and Chief Executive Officer
Robert S. Christie has been a director of the Company since
March 1997. Since November 1996, he has served as President and
Chief Executive Officer of Thomson & Thomson Corporation, a
global leader in trademark and copyright services and
information. From 1994 until 1996, he was President of the
McGraw-Hill College Book Company. From 1990 until 1994, Mr.
Christie was Group Vice President for Equity Information Services
at Standard & Poor's Information Company. Mr. Christie has
served on the Board of Directors of Standard & Poor's Corporation
and five of its subsidiaries.
Neal B. Freeman has been a director of the Company since
June 11, 1997. Mr. Freemen is Chairman and CEO of The Blackwell
Corporation, a television production company he founded in 1981.
Mr. Freeman also founded and served for 12 years as President and
CEO of Jefferson Communications, Inc., a worldwide feature
syndicate, from 1974 to 1986 when it was sold. From 1965 to
1974, Mr. Freeman was an executive with the Hearst Corporation.
He currently serves as a Director of Comsat Corporation and
National Review, Inc. and as Vice Chairman of the Ethics and
Public Policy Center. In previous years, Mr. Freeman served,
by Presidential appointment, as Commissioner of the President's
Commission on White House Fellows, and as a Director of the
Corporation for Public Broadcasting.
Charles C. Johnston has been a director of the Company since
October 1996. Mr. Johnston is Chairman of ISI Systems ("ISI"), a
subsidiary of Teleglobe of Montreal. Previously he was founder,
Chief Executive Officer and President of ISI prior to its
purchase by Teleglobe in November 1989. Prior to establishing
ISI in 1969, Mr. Johnston held executive management positions
with Management Service, Boston, Massachusetts and Cambridge Data
Corporation, Cambridge, Massachusetts, as well as sales,
marketing and management positions with IBM in its Hartford,
Connecticut branch.
Thomas H. Lipscomb was elected as the non-executive Chairman
of the Board of the Company in December 1996. He served as
President and Chief Executive Officer of the Company, which he
co-founded, from January 1992 until December 1996. From August
1991 until January 1992, Mr. Lipscomb was a self-employed
consultant. From June 1988 through July 1991, he was President
of Cryptologics International Inc. (currently known as Wave
Systems Corp.), a firm engaged in the development of information
technology. From May 1985 through May 1988, Mr. Lipscomb served
as Vice President--Entertainment of Honeybee Productions, Inc., a
film production company. Prior to that, he held a number of
editorial and executive positions in book publishing, including
President of the New York Times Book Company.
Arthur R. Medici joined the Company in November 1996 as the
President and Chief Executive Officer and as a director. From
August 1994 to February 1996, Mr. Medici was President of the
North America division, of Derwent, Inc., in McLean, Virginia, a
producer of international patent abstracts and information
formatted for print, CD-ROMS and digital on-line delivery. From
November 1990 to July 1994, Mr. Medici was Senior Vice President,
Sales and Marketing of Thompson & Thompson in North Quincy,
Massachusetts, a trademark and copyright research software firm
and was responsible for development and expansion of marketing
operations. Derwent, Inc. and Thompson & Thompson are
subsidiaries of the Thompson Corporation, Stamford, Connecticut.
From October 1987 to August, 1990, Mr. Medici was Vice
President, Sales and Service of Autographix in Waltham,
Massachusetts, a developer and distributor of turnkey presentation
graphics workstations and software. From June 1986 to July
1987, Mr. Medici was Director of Sales at Kurzweil Computer
Products (a subsidiary of Xerox) in Cambridge, Massachusetts, an
image scanning systems company. Mr. Medici received a Master of
Science degree from Columbia Business School in 1984 and a
Bachelor of Arts degree from Hobart College in 1972.
All directors hold office until the next annual meeting of
stockholders and until their successors are duly elected and
qualified. Officers serve at the discretion of the Board of
Directors, subject to rights, if any, under contracts of
employment.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the
aggregate compensation paid or accrued by the Company to the
Chief Executive Officer and to executive officers whose annual
compensation exceeded $100,000 for the fiscal year ended July 31,
1996 (collectively, the "named executive officers"):
Summary Compensation Table
The following table sets forth the compensation paid or
accrued by the Company for services rendered during the fiscal
year ended July 31, 1996 to Thomas H. Lipscomb, who was the
Company's Chief Executive Officer and President, until December
1996 and Alan N. Alpern, the Company's Chief Financial and Legal
Officer, the only other executive officer of the Company during
such fiscal year.
Annual Compensation Long Term Compensation
------------------------ ------------------------
Name and Other
Principal Annual
Position Year Salary($) Compensation($) Options(#)
_____________________ ______ __________ _______________ __________
Thomas H. Lipscomb 1996 175,000(1) -0- -0-
Alan N. Alpern 1996 -0- 125,000(1) -0-
_____________
(1) Includes accrued compensation of an aggregate of $32,705 for
these two officers which, pursuant to agreements between the
Company and these two individuals, will not be paid and will be
contributed to capital of the Company.
The following table sets forth the number and value of
unexercised in-the-money options at July 31, 1996 for the executive
officers named above. There were no options exercised in fiscal 1996
by either of the named individuals.
Option/SAR Grants in Last Fiscal Year
% of Total
Options
Granted to Exercise
Options Employees or Base Expiration
Name Granted (#) in Fiscal Year Price ($/Sh) Date
____________________ ___________ ______________ ____________ __________
Thomas H. Lipscomb -0- -0- -0- --
Alan N. Alpern -0- -0- -0- --
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Value
Number of
Unexercised Value of
Options at Unexercised
FY-End(#) In-the-Money
Shares Acquired Value Exercisable/ Options/SAR's
Name on Exercise (#) Realized($) Unexercisable at FY-End($)
__________________ ______________ ___________ _____________ _____________
Thomas H. Lipscomb -0- -0- 100,000/0 -0-
Alan N. Alpern -0- -0- 50,000/0 -0-
Report of the Board of Directors On Repricing of Options
The Company's stock option plans have been
utilized to provide directors, executives and other
employees with increased motivation and incentive to
exert their best efforts on behalf of the Company
through the opportunity to benefit from appreciation in
the value of the Common Stock. Due to a decline in the
price of the Common Stock in the fiscal year ended July
31, 1996, certain options outstanding under the
Company's various stock option plans were exercisable
at prices which were significantly in excess of the
then current market value of the Class A Common Stock.
In order to restore the incentive value to such
options the Board of Directors approved the repricing
of options held by certain officers, directors, and
employees.
During July 1996 the Company's Board of Directors
revised the exercise price of 195,000 options granted
under the plans for non-executive officers of the
Company and for members of the Board of Directors who
are not employees of the Company at exercise prices
ranging from $4.00 to $7.25 per share, to $4.00 per
share, which was in excess of the fair market value of
the Class A Common Stock of the Company on the
effective date of the repricing, which was $3.75 per
share. All other terms and conditions of these options
remained the same.
During June 1997 the Company's Board of Directors
revised the exercise price of 50,000 options granted
under the plans to an executive officer and director of
the Company at an exercise price of $7.25 per share,
to $4.00 per share, which was in excess of the fair
market value of the Class A Common Stock of the Company
on the effective date of the repricing, which was $____
per share. All other terms and conditions of these
options remained the same.
This report is submitted by the Company's Board of Directors.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of
1934, as amended, requires the Company's executive
officers, directors and persons who beneficially own
more than 10% of a registered class of the Company's
equity securities to file with the Securities and
Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and
other equity securities of the Company. Such executive
officers, directors, and greater than 10% beneficial
owners are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms filed by
such reporting persons.
Based solely on the Company's review of such forms
furnished to the Company and written representations
from certain reporting persons, the Company believes
that all filing requirements applicable to the
Company's executive officers, directors and greater
than 10% beneficial owners were complied with by such
persons.
EMPLOYMENT AGREEMENTS
The Company and Mr. Medici entered into an
Employment Agreement on November 25, 1996 pursuant to
which Mr. Medici is employed as President and Chief
Executive Officer for a three-year term and will
receive a base annual salary of $175,000 through July
31, 1997, $200,000 through July 31, 1998 and $225,000
through November 25, 1999. The Employment Agreement
also provides that Mr. Medici will receive annual cash
bonuses for 1997 and 1998 if the Company's earnings
exceed certain levels and long-term accruals payable in
cash and Class A Common Stock if the Company's earnings
during each year during the term exceed certain levels.
Additionally, Mr. Medici was granted options to
purchase 350,000 shares of Class A Common Stock at an
exercise price of $4.06 per share, the fair market
value on the date of grant, of which one-third
immediately vested and the remaining two-thirds will
vest if certain earnings levels are met during the
period of Mr. Medici's employment. The Company also
agreed to issue to Mr. Medici 70,000 shares of Class B
Common Stock, 135,000 shares of Class E-1 Common Stock
and 135,000 shares of Class E-2 Common Stock, which are
non-transferrable and will be canceled if Mr. Medici's
employment with the Company terminates prior to
August 1, 1999.
BOARD OF DIRECTORS
Committees
The Company has no standing committees of the Board of Directors.
Meetings
During the last full fiscal year, the Board of Directors met
nine times. All directors attended all meetings.
CERTAIN TRANSACTIONS
In November 1996 the Company entered into an employment
agreement with Arthur R. Medici the Company's President and Chief
Executive Officer pursuant to which the Company agreed to issue
to Mr. Medici, 70,000 shares of Class B Common Stock 135,000
shares of Class E-1 Common Stock and 135,000 shares Class E-2
Common Stock and options to purchase 350,000 shares of Class A
Common Stock. See "Employment Agreements." During January 1997,
officers and employees of the Company to whom the Company owed an
aggregate of $210,991 in deferred salaries and compensation,
including an aggregate of $137,493 owed to Mr. Lipscomb and Mr.
Alpern, agreed to cancel an aggregate of $150,991 of such accrued
compensation and contribute such amounts to capital of the
Company. The Company has had no other material transactions with
any executive officer, director, beneficial owner of 5% of the
Class A Common Stock of the Company or immediate family member of
any of the foregoing, in which the amount involved exceeded
$60,000.
PROPOSAL 2
AMENDMENT TO THE 1994 STOCK OPTION PLAN
At the Annual Meeting, the Stockholders are being asked to
approve an amendment (the "Amendment") to the Company's Amended
1994 Stock Option Plan (the "Plan") in order to increase the
number of shares reserved for issuance thereunder by 1,000,000
shares, from 1,000,000 shares to 2,000,000 shares of Class A
Common Stock. The Plan was adopted by the Board of Directors in
August 1994 and approved by the Stockholders in September 1994.
In December 1996, the Board of Directors adopted this amendment
to the Plan and recommends that the Stockholders approve the
Amendment.
The Company maintains the Plan to insure the retention of
existing executive personnel, key employees, directors and
consultants of the Company, to attract and retain competent new
executive personnel, key employees, directors and consultants and
to provide additional incentive to all such persons by permitting
them to participate in the ownership of the Company.
Summary of the Plan
In August 1994, the Board of Directors adopted, and in
September 1994, the stockholders approved, the 1994 Stock Option
Plan (the "1994 Plan'') which provides for the grant of options
to purchase an aggregate of 1,000,000 shares of the Company's
Class A Common Stock. By vote of the Board of Directors, the
1994 Plan has been increased by 1,000,000 shares. This increase
is subject to approval by the Company's stockholders. The 1994
Plan provides for the grant to employees of incentive stock
options within the meaning of Section 422 of the Code, and for
the grant of non-qualified stock options to eligible executive
officers, directors and employees of the Company. The 1994 Plan,
which expires in 2004, will be administered by the Board of
Directors or a committee designated by the Board of Directors.
The purposes of the 1994 Plan are to ensure the retention of
existing executive personnel, employees and consultants of the
Company, to attract and retain new executive personnel, employees
and consultants and to provide additional incentive by permitting
such individuals to participate in the ownership of the Company,
and the criteria to be utilized by the Board of Directors or
committee in granting options pursuant to the 1994 Plan will be
consistent with these purposes.
Options granted under the 1994 Plan may be exercisable for a
period of up to 10 years from the date of grant at an exercise
price which is not less than the fair market value of the Class A
Common Stock on the date of the grant, except that the term of an
incentive stock option granted under the 1994 Plan to a
stockholder owning more than 10% of the outstanding Class A
Common Stock may not exceed five years and its exercise price may
not be less than 110% of the fair market value of the Class A
Common Stock on the date of the grant. To the extent that the
aggregate fair market value, as of the date of grant, of the
shares of which incentive stock options become exercisable for
the first time by an optionee during the calendar year exceeds
$100,000, the portion of such option which is in excess of the
$100,000 limitation will be treated as a non-qualified stock
option. Upon the exercise of an option, payment may be made by
cash, check or any other means that the Board or the committee
determines. No option may be granted under the 1994 Plan after
September 2004. The options are non-transferrable during the
life of the option holder.
As of May 20, 1997, an aggregate of approximately 1,024,499
options granted to various employees and directors, vesting in
varying installments from date of grant, are outstanding under
the 1994 Plan and the 1992 Plan, and approximately 919,668
options remain available for grant under the Plans. In addition,
in November 1996, Arthur R. Medici was granted an option to
acquire 350,000 shares of Class A Common Stock at $4.06 per
share, one-third of which are immediately exercisable and the
remaining two-thirds of which vest when the Company meets certain
performance criteria. The options granted to Mr. Medici are
subject to stockholder approval of this proposed amendment to the
1994 Plan. During October 1996, Charles C. Johnston, a newly
elected member of the Board of Directors was granted 40,000 stock
options at an exercise price of $5.00, 10,000 of which are
immediately exercisable and the balance of which vest in three
equal annual installments. During March 1997, Robert S.
Christie, a newly elected member of the Board of Directors, was
granted 40,000 stock options at an exercise price of $3.50,
10,000 of which are immediately exercisable and the balance of
which vest in three equal annual installments. During June 1997,
Neal B. Freeman, a newly elected member of the Board of
Directors, was granted 40,000 stock options at an exercise price
of $ , 10,000 of which are immediately exercisable and the
balance of which vest in three equal annual installments.
Federal Income Tax Consequences
Incentive Stock Options. An optionee will not realize
taxable compensation income upon the grant of an incentive stock
option under the 1994 Plan. In addition, an optionee will not
realize taxable compensation income upon the exercise of an
incentive stock option if the optionee holds the shares acquired
until at least one year after exercise and, if later, until two
years after the date of grant of the option. The amount by which
the fair market value of the shares exceeds the option price at
the time of exercise generally is an item of tax preference for
purposes of the alternative minimum tax. If an optionee acquires
Common Stock through the exercise of an incentive stock option
under the 1994 Plan and subsequently sells the Common Stock after
holding the shares for the period described above, the gain which
is the difference between the sale price of the Common Stock and
the option exercise price will be taxed as capital gain. When
the holding period requirements discussed above are not
satisfied, the gain will be treated as compensation income, which
generally will not exceed the lesser of (i) the amount of gain on
sale, or (ii) the excess of the fair market value of the shares
at the exercise date over the exercise price.
An incentive stock option does not entitle the Company to an
income tax deduction except to the extent and at the time that an
optionee realizes compensation income therefrom.
Non-Qualified Stock Options. An optionee will not realize
taxable compensation income upon the grant of a non-qualified
stock option. Ordinarily, when an optionee exercises a
non-qualified stock option, the nominee will realize taxable
compensation income at the time equal to the difference between
the option price and the fair market value of the shares on the
date of exercise. For tax purposes an optionee will generally
have a basis in stock acquired through the exercise of a
non-qualified stock option under the 1994 Plan equal to the
amount taxed as compensation income plus the exercise price. If
the optionee subsequently sells the stock, any gain or loss
calculated as the difference between the sale price and the basis
will be taxed as capital gain or loss.
The amount of any compensation income realized by an
optionee upon exercise of a non-qualified stock option will be
allowable to the Company as a deduction at the time it is
realized by the optionee, provided that the Company complies with
applicable withholding requirements.
The foregoing discussion with respect to the tax treatment
of gain on sale of stock acquired on exercise of incentive or
non-qualified stock options assumes that at the date of such sale
the optionee is not a dealer in securities and holds such stock
as a capital asset.
Profit Sharing Plan
In January 1992, the Company adopted a Profit Sharing Plan,
pursuant to which an amount equal to 3.5% of the pre-tax profit
of the Company for each fiscal year will be set aside for the
benefit of such employees as are determined by the Board of
Directors. No funding was provided through July 31, 1996 as the
Company incurred a net loss for the period.
PROPOSAL 3
APPROVAL AND RATIFICATION OF THE AMENDMENT
TO THE CERTIFICATE OF INCORPORATION, AS AMENDED
The Board of Directors of the Company has adopted and
recommended to the Stockholders approval of an amendment to the
Company's certificate of incorporation, as amended, to increase
the authorized number of shares of Class A Common Stock from
20,000,000 to 40,000,000. The proposed increase in the
authorized Class A Common Stock has been recommended by the Board
of Directors to assure that an adequate supply of authorized
unissued shares is available for exercise of certain stock
options, warrants and for the conversion of certain shares of
Class B Common Stock and Class E Common Stock and for general
corporate needs.
As of May 20, 1997, in addition to the 4,557,534 shares of
Class A Common Stock outstanding ("Shares"), the Company had (i)
1,944,167 shares of Class A Common Stock reserved for issuance
under the 1992 and 1994 Plans (one million of these shares are
subject to the approval by the stockholders of the Company of the
Amendment to the 1994 Stock Option Plan) under which options to
purchase 1,024,499 shares of Class A Common Stock are
outstanding; (ii) 188,250 shares of Class A Common Stock reserved
for issuance upon the exercise of other outstanding warrants;
(iii) 1,782,500 shares of Class A Common Stock reserved for
issuance upon the exercise of Class A Warrants issued in
connection with the IPO and an additional 1,782,500 shares of
Class A Common Stock reserved for issuance upon the exercise of
the Class B Warrants underlying said Class A Warrants; (iv)
1,782,500 shares of Class A Common Stock reserved for issuance
upon the exercise of the Class B Warrants issued in connection
with the IPO; (v) 620,000 shares of Class A Common Stock reserved
for issuance upon the exercise of the underwriter's IPO Unit Purchase
Option and the Class A Warrants and Class B Warrants underlying such
option (vi) 84,375 shares of Class A Common Stock reserved for
issuance upon the exercise of Class A Warrants issued as a settlement
in an arbitration and an additional 84,375 shares of Class A Common
Stock reserved for issuance on the exercise of Class B Warrants
underlying said Class A Warrants and ; (vii) 750,000 shares of
Class A Common Stock reserved for issuance upon the exercise of
Class A Warrants issued to Selling Securityholders in the
Company's 1994 "Bridge Loan" and an additional 750,000 shares of
Class A Common Stock reserved for issuance on the exercise of
Class B Warrants underlying said Class A Warrants.
On March 31, 1997, the Company completed a private placement
to accredited investors pursuant to Regulation D of the
Securities Act of 1933 (the "1997 private placement"), through
D.H. Blair Investment Banking Corp. ("Blair") as placement agent,
of $5,050,000 of units. Each unit consists of 15,874 IPO Units,
each IPO Unit being identical to the IPO Units issued in the
Company's initial public offering, at a price of $3.15 per IPO
Unit. Each IPO Unit consists of one share of Class A Common
Stock, one Class A Warrant and one Class B Warrant. Each Class A
Warrant is exercisable until February 18, 2002 to purchase one
share of Class A Common Stock and one Class B Warrant at an
exercise price which was equal to $6.50 per share. Each Class B
Warrant will be exercisable until February 18, 2002 to purchase
one share of Class A Common Stock at an exercise price which was
equal to $8.75. Pursuant to the 1997 Private Placement, the
Company sold on aggregate of 1,603,274 shares of Class A Common
Stock, 1,603,274 Class A Warrants and 1,603,274 Class B Warrants.
The net proceeds from the 1997 Private Placement were
approximately $4.1 million after deducting an aggregate of
$505,000 and $151,500 in placement agent fees and expenses,
respectively, and other expenses of the offering. In addition
the Company issued warrants to Blair to purchase 561,146 shares
of Class A Common Stock, 561,146 Class A Warrants and 561,146
Class B Warrants. The Company has agreed to use its best efforts
to effect the registration of such securities under the
Securities Act of 1933, as amended, by June 18, 1997.
Pursuant to the anti-dilution provisions contained in the
warrants outstanding prior to the 1997 Private Placement, as a
result of the issuance of the Class A Common Stock issued in
connection with the 1997 Private Placement, the exercise prices
of such warrants as well as of the warrants issued in the 1997
Private Placement and the warrants underlying the 1997 Private
Placement Unit Purchase Option have been reduced from $6.50 to
$5.82 with respect to the Class A Warrants and from $8.75 to
$7.83 with respect to the Class B Warrants and an additional
0.11721 Class A Warrants and 0.11721 Class B Warrants are to be
issued to each outstanding Class A Warrant and Class B Warrant
outstanding and to be issued on exercise of Class A Warrants,
respectively. As a result, an additional 1,659,946 shares of
Class A Common Stock are reserved for issuance on exercise of
outstanding options, warrants or convertible securities due to
the anti-dilution provisions contained in such warrants.
Due to the number of IPO Units contained in each unit, there
is not currently sufficient authorized Class A Common Stock
available for issuance both pursuant to the 1997 Private
Placement (including shares issuable upon exercise of the
warrants issued in the 1997 Private Placement) and upon exercise
or conversion of outstanding warrants, options and convertible
securities of the Company. Consequently, in connection with
the 1997 Private Placement, the officers, directors and
employees of the Company and certain others (including certain
officers of Blair and D.H. Blair & Co., Inc.) holding an
aggregate of 1,328,399 shares of Class B Common Stock, 2,092,144
shares of Class E Common Stock issued and to be issued and
options, warrants and underwriters options to purchase 3,338,584
shares of Class A Common Stock, which are convertible or
exercisable into, under certain circumstances, an aggregate of
6,759,127 shares of Class A Common Stock, have agreed that, if
there is not sufficient authorized Class A Common Stock available
for issuance pursuant to the 1997 Private Placement, they will
not convert their shares of Class B and Class E Common Stock into
Class A Common Stock until such additional shares of Class A
Common Stock are authorized by the Stockholders and will not
exercise their stock options without the consent of the Company
and Blair (such directors of the Company being Thomas H.
Lipscomb, holding 100,000 stock options, 813,126 shares of Class
B Common Stock and 820,621 shares of Class E Common Stock, Arthur
R. Medici, holding 350,000 stock options, 70,000 shares of Class
B Common Stock and 270,000 shares of Class E Common Stock, and
Alan N. Alpern, holding 50,000 stock options, 135,364 shares of
Class B Common Stock and 175,364 shares of Class E Common Stock).
The Company does not expect that it will meet the earnings targets
necessary for the release of the 781,244 Class B shares held in
escrow by December 31, 1997 on which date such shares will be
forfeited and contributed to capital.
Approval and ratification of the amendment to the certificate
of incorporation, as amended, would authorize sufficient Class A
Common Stock for issuance upon exercise or conversion of such
outstanding warrants, options and convertible securities by and
for the benefit of such officers, directors and employees of the
Company and of Blair and D.H. Blair & Co., Inc. and will permit
the Company to meet its obligation to these parties.
The Company is negotiating to enter into an acquisition
agreement which the Company expects will result in the issuance
of a maximum of 750,000 shares of Class A Common Stock over the
next three years. The Company has also participated, as majority
shareholder, in the formation of a new corporation and in the
event of favorable results, certain minority shareholders may be
entitled to exchange there shares of that corporation for Class A
Shares of Infosafe Systems Inc. The number of Infosafe Systems
Inc. Class A Common Stock which may be issued cannot presently be
determined. The Company has no additional plans, arrangements,
or agreements to issue Shares other than those described above,
the Board of Directors of the Company believes it is advisable
and in the best interest of the Company to have available
authorized but unissued Shares in an amount adequate to provide
for the possible future needs of the Company.
The additional authorized Shares will benefit the Company by
providing flexibility to the Board of Directors without further
action or authorization by Stockholders (except as required by law),
in responding to business needs and opportunities as they arise, or
for other proper corporate purposes. These corporate purposes
might include issuance of shares of Preferred Stock, acquisitions
of securities or other assets of other corporations, stock
dividends, stock splits, employee stock options, convertible debt
financings, the obtaining of capital funds through public and
private offerings of shares of Common Stock or of securities
convertible into shares, or to compensate employees or retain
consultants, and issuance of warrants in connection with any of
the foregoing. The issuance of any additional Shares will be on
terms deemed to be, at the time of such issuances, in the best
interests of the Company and its Stockholders. If such
additional authorized shares of Common Stock are subsequently
issued to other than existing Stockholders, the percentage
interest of existing Stockholders in the Company will be reduced.
Holders of Common Stock have no preemptive rights with respect
to future issuances of Common Stock.
The Board of Directors is not aware of any attempt to gain
control of the Company nor is it recommending this amendment to
increase the number of authorized Shares of Common Stock in
response to any specific effort to obtain control of the Company.
The proposed amendment to increase the number of authorized
Shares is not designed as nor intended to be an anti-takeover
measure; however, the authorized but unissued Shares could be
used by incumbent management to make a change in control of the
Company more difficult and time-consuming. Under certain
circumstances, such unissued Shares could be used to create
obstacles or to frustrate persons seeking to effect a takeover or
otherwise gain control of the Company with a view to instituting
a merger, sale of all or part of the Company's assets, or other
similar transaction which may not be in the best interest of the
Stockholders.
It is expected that the proposed amendment, if approved by
the Stockholders, will be made effective as soon as practicable
after approval by the Stockholders, by the filing and recording
of an appropriate Certificate of Amendment as required under
Delaware law.
Authorization or Issuance of Securities Otherwise Than For Exchange
The Company has an outstanding letter of intent with Visus
Technologies, Inc. (VTI) which provides the Company with an option
to acquire 100% of the common stock of VTI for Class A Common
Stock of the Company. The Company is currently conducting discussions
with VTI to change the terms acquistiion to terms more acceptable to
the Company and expects that the number of shares to be issued in
the acquisition will depend on VTI's revenues and the market price
of the Company's Class A Common Stock. The Company expects that
it will issue up to a maximum of 750,000 shares of Class A Common
Stock in the acquisition if such acquisition should occur. The
Company will not solicit further authorization by a vote of the
Stockholders for the issuance of such securities prior to such
issuance and the Company does not expect that such issuance will
affect the rights of existing securityholders of the Company.
In March, 1997, the Company entered into an exclusive licensing
agreement with VTI for the resale of VTI's Scan2Web software.
Scan2Web enables users to browse an on-line document archive and
view content on a computer while preventing the printing of a
"business quality" document. To receive an original document or
a "business quality" copy, the user must pay the system provider
(i.e. the Company, or the archive manager). The Company intends
to use VTI's technology in combination with its own propriety
metering and encryption technologies to create secure sales
delivery channels for documents and images over private and public
networks.
PROPOSAL 4
APPOINTMENT OF INDEPENDENT AUDITORS
The Management of the Company recommends the appointment of
Richard A. Eisner & Company, LLP, independent certified public
accountants, as the Company's independent auditors for the fiscal
year ending July 31, 1997. Richard A. Eisner & Company, LLP has
been the Company's auditors for the past fiscal year and has no
direct or indirect financial interest in the Company. A
representative of Richard A. Eisner & Company, LLP is expected to
be present at the Annual Meeting of Stockholders with the
opportunity to make a statement if he or she desires to do so,
and shall be available to respond to appropriate questions.
GENERAL
The Management of the Company does not know of any matters
other than those stated in this Proxy Statement which are to be
presented for action at the meeting. If any other matters should
properly come before the meeting, it is intended that proxies in
the accompanying form will be voted on any such other matters in
accordance with the judgment of the persons voting such proxies.
Discretionary authority to vote on such matters is conferred by
such proxies upon the persons voting them.
The Company will bear the cost of preparing, printing,
assembling and mailing the proxy, Proxy Statement and other
material which may be sent to Stockholders in connection with
this solicitation. It is contemplated that brokerage houses will
forward the proxy materials to beneficial owners at the request
of the Company.
The Company's statements of operations for the years ended
July 31, 1995 and 1996 and the related statements of
stockholders' equity and cash flows and the Company's balance
sheets at July 31, 1995 and 1996 are incorporated herein by
reference to the Company's Annual Report to Stockholders for the
year ended July 31, 1996, a copy of which is being delivered to
stockholders simultaneously with the delivery of this proxy
statement.
The Company will provide without charge to each person being
solicited by this Proxy Statement, on the written request of any
such person, a copy of the Annual Report of the Company on Form
10-KSB for the year ended July 31, 1996 (as filed with the
Securities and Exchange Commission) including the financial
statements thereto. All such requests should be directed to
Investor Relations, Infosafe Systems, Inc., 342 Madison Avenue,
Suite 622, New York, New York 10173.
STOCKHOLDER PROPOSALS
All proposals intended to be presented at the Company's next
Annual Meeting of Stockholders must be received at the Company's
executive office no later than December 31, 1997, for inclusion
in the Proxy Statement and form of proxy related to that meeting.
By Order of the Board of Directors,
/s/ Arthur R Medici__________________
Arthur R. Medici
President and Chief Executive Officer
Dated: June 10, 1997
PROXY
INFOSAFE SYSTEMS, INC.
ANNUAL MEETING OF STOCKHOLDERS
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Arthur R. Medici as proxy to represent
the undersigned at the Annual Meeting of Stockholders to be held at 342
Madison Avenue, Suite 622, New York, New York 10173 on July __, 1997 at 10:00
a.m. and at any adjournment thereof, and to vote the shares of Class A Common
Stock the undersigned would be entitled to vote if personally present, as
indicated below.
1. Election of Directors
FOR all nominees listed below _____ WITHHOLDING AUTHORITY _____
(except as marked to the to vote for all nominees
contrary belo) listed below
Robert S. Christie, Neal B. Freeman, Charles C. Johnston,
Thomas H. Lipscomb and Arthur R. Medici
(INSTRUCTION: To withhold authority to vote for any individual
nominee, print that nominee's name on the line provided below.)
____________________________________________________________________
2. To approve and ratify the amendment to the Company's 1994 Stock
Option Plan to increase the number of options available for grant
from 1,000,000 to 2,000,000.
FOR_____ AGAINST_____ ABSTAIN_____
3. To approve an amendment to the Company's certificate of
incorporation, as amended, in order to increase the number of
authorized shares of Class A Common Stock by 20,000,000 shares
to an aggregate of 40,000,000 shares.
FOR_____ AGAINST_____ ABSTAIN_____
4. Approval and ratification of the appointment of Richard A. Eisner &
Company, L.L.P. as independent accountants.
FOR_____ AGAINST_____ ABSTAIN_____
5. In their discretion, proxies are authorized to vote upon such
business as may properly come before the meeting.
The Shares represented by this proxy will be voted as directed. If no
contrary instruction is given, the Shares will be voted FOR the election of
the nominees and FOR the approval and ratification of the appointment of
Richard A. Eisner & Company, L.L.P. as the independent accountants of the
Company.
DATED:______________________, 1997
__________________________________
Signature
__________________________________
Signature if held jointly.
(Please date, sign as name appears at the
left, and return promptly. If the Shares
are registered in the names of two or more
persons, each should sign. When signing
as Corporate Officer, Partner, Executor,
Administrator, Trustee or Guardian, please
give full title. Please note any changes
in your address alongside the address as
it appears in the proxy.)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1996
or
[ ] 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.
(Name of Small Business Issuer in its charter)
Delaware 13-3645702
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
342 Madison Avenue, New York, New York 10173
- -------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (212) 867-7200
--------------
Securities registered under Section 12(b) of the Act:
Name of each exchange
Title of Each class on which registered
--------------------- -----------------------
None None
Securities registered under Section 12(g) of the ct:
Class A Common Stock, $.01 par value
- ------------------------------------
Title of Class)
Redeemable Class A Warrants
- ---------------------------
(Title of Class)
Redeemable Class B Warrants
- ---------------------------
(Title of Class)
Units consisting of Class A Common Stock,
Redeemable Class A Warrants and
Redeemable Class B Warrants
- ---------------------------
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No___
---
Check here if there is no disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B contained herein, and will not be contained, to the
best of the issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. / /
State the issuer's revenues for its most recent fiscal year: $51,268.
As of October 31, 1996 the issuer had 2,940,309 shares of Class A
Common Stock outstanding and 528,305 shares of Class B Common Stock that are
readily convertible into Class A Common Stock. The aggregate market value of the
Common Stock held by nonaffiliates as of October 30, 1996 was approximately $9.0
million based on a closing price for the Class A Common Stock of $4.50 on the
Nasdaq Small Cap Market for such date.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Item 13. Exhibits List and See Exhibit Index on page.
Reports on Form 8-K
2
PART I
-------
Item 1. Business
---------
Except for the description of historical facts contained herein, this
Form 10-KSB contains certain forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 concerning applications of the Company's technologies and the Company's
proposed products and future prospects, that involve risks and uncertainties,
including the possibility that the Company will (i) not receive financing prior
to December 31, 1996, (ii) be unable to commercialize products based on its
technology, or (iii) that it will ever achieve profitable operations, as
detailed herein and under "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and from time to time in the
Company's filings with the Securities and Exchange Commission and elsewhere.
Such statements are based on management's current expectations and are subject
to a number of factors and uncertainties which could cause actual results to
differ materially from those described in the forward-looking statements.
(a) General Development of Business
-------------------------------
Infosafe Systems, Inc. (the "Company " or "Infosafe") 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, for use in stand-alone applications, corporate networks and open
networks such as the Internet. The Company believes its technology, which has
recently been expanded to support both hardware-based and software distribution
solutions, addresses critical areas of electronic commerce: security, delivery,
verification and metering.
The Company has incurred substantial losses since inception and
anticipates losses to continue through the next fiscal year as the Company seeks
commercial markets for its products and develops new applications for its
technology. The Company does not have sufficient financial resources to continue
its operations after December 31, 1996 without obtaining financing. The Company
is actively pursuing new financing; however, if such financing is not obtained
prior to December 31, 1996, the Company will be forced to curtail and then cease
operations. Although management believes that the Company will be successful in
marketing and developing its products as well as obtaining the necessary
financing, there can be no assurance that it will be able to do so. These
factors raise substantial doubt regarding the ability of the Company to continue
as a going concern.
Due to the maturing of new mass delivery media, such as corporate
intranets and open networks, including the Internet, the Company has been able
to identify new, broad-based opportunities for securing and metering digital
content for large-scale information providers to offer new services to their
existing and prospective customer base. Accordingly, the Company has targeted
four potential opportunities to commercialize its technology.
First, the Company is negotiating an agreement with the Copyright
Clearance Center (R) (CCC) to introduce an electronic copyright permissions
vending machine to be installed in photocopy shops (quick printers), thereby
3
allowing customers to obtain the necessary rights for quick printers to legally
photocopy copyrighted materials. CCC is the largest licensor of photocopy
reproduction rights in the United States, and currently has responsibility for
1.75 million titles of books and periodicals from 9,200 publishers and continues
to acquire additional titles. Infosafe has developed the CopyRight(TM) system, a
turn-key hardware/software application of its technology, that it believes can
be easily installed at quick print locations. The software allows store
employees to search CCC's database of publication titles, locate those items of
interest, license use and record sales. All transactions are recorded in
encrypted form in Infosafe's proprietary Mark III hardware. Upon execution of a
definitive agreement, a joint marketing program with CCC is anticipated.
Second, the Company will continue to support the Design Palette(TM)
system, its first product, which was introduced in July 1995. Although the
Company originally focused the majority of its efforts on developing and
commercializing the Design Palette, the Company did not achieve its anticipated
results. The Company will continue marketing the Design Palette, although its
principal focus will not be on this market and there can be no assurance that
Design Palette will ever achieve commercial viability. The Design Palette system
puts a graphics product library on a desktop, comprised of individually priced
products from over 20 vendors. Design Palette utilizes proprietary hardware,
firmware and software and may be utilized for delivery of products from CD-ROMs,
from a stand-alone computer or over networks. Deliverable products include
fonts, images artwork, software programs and documents. To date, the Company's
revenues from marketing the Design Palette have been minimal.
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. The Company has held
discussions with other suppliers of graphic images suitable for the Design
Palette. While there can be no assurance that such discussions will have a
successful result, the Company believes that entering into 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 will continue to develop and
market the Design Palette system and will seek to upgrade its CD-ROM library in
fiscal 1997 to include more high-end products, such as graphic materials not
otherwise readily available to independent graphic designers.
Third, the Company is developing digital distribution systems for image
publishers and specialized information providers. The sectors of the imaging
industry being targeted by the Company for this potential application of its
technology fall into two distinct groups: the Royalty Free (RF) industry and the
high-quality stock photo market where the price of a photograph is negotiated.
The Company believes that these markets are in need of two services which the
Company's technology could provide: better search tools and timely,
cost-effective fulfillment (delivery).
Finally, Infosafe is developing a World Wide Web ("WWW") site auditing
system. The Company expects to offer a secure auditing tool (to be known as
AudiNet(TM)) which can independently monitor and tabulate the number of "hits"
(i.e., visits) to a Web site, and provide verified numbers for the establishment
of advertising rates and programs. The Company anticipates that it will target
this application of its technology to print media enterprises migrating to the
Internet who need site traffic numbers.
4
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.
(b) Financial Information About Industry Segments
----------------------------------------------
The Company operates in one business segment: the design, development,
assembly and marketing of secure electronic distribution systems for digitally
stored information products.
(c) Narrative Description of Business
----------------------------------
Industry Background
The trend within corporate America over the past decade has been
towards distributed data processing, with networked personal computers replacing
centralized mainframes. Intranets -- powerful corporate and institutional local
area networks ("LANs") and wide-area networks (WANs) with links to the Internet
- -- now service over 35 million users, according to a recent estimate by the
Information Industry Association. Electronic information products and services
are now available to the desktop user from multiple data sources: CD-ROMs
connected to LAN servers, commercial on-line services, the Internet, magnetic
tape distribution, wideband telecommunications, and satellite broadcast.
The Internet is rapidly evolving from a medium of free information
exchange to a global commercial marketplace. While the aggregate revenues from
Internet commerce are estimated to be a $200 million in 1996, the International
Data Corporation ("IDC"), a major publisher of trade journals for the digital
information industry, estimates that Internet commerce value will reach about
$186 billion by the year 2000. IDC estimates the Internet served approximately
56 million users in 1995, and that this number will grow to approximately 200
million by the end of 1999. In addition, IDC projects that Internet users as a
percentage of the PC base will grow from 31% in 1995 to approximately 56% in
1999, and that the number of Web servers will grow at a 5-year Compound Annual
Growth Rate (CAGR) of 210% from 1995 to 2000. The Company believes that the
emergence of new electronic publishing and delivery technologies will result in
a proliferation of new multimedia products and information services.
The Company's Technology
While the Internet and Intranet represent huge potential markets for
electronic publishers and information providers, there are security and
verification risks involved in distributing digital product over proprietary and
open networks. The Company believes that its technology can provide solutions
for these critical needs and is expanding the applications of its technology to
address these emerging business opportunities.
Hardware-Based Solutions
The Company has been developing and marketing secure distribution systems for
electronic publishers and information providers who commit valuable data,
documents and multimedia products to CD-ROM (or other digital sources) for use
at the point-of-sale. The hardware-based systems meter the usage of such
information and release it on a "pay-per-use" basis. Only authorized subscribers
can access the product library, and no sale can occur without a recorded
transaction. Corporate users can turn each node on a network into an
individually auditable cost center, as well as establish varying degrees of
information access and credit levels per employee. This technology has been in
limited commercial use since July 1995, with the launch of the Design Palette.
Although the Company intends to continue to market the Design Palette, the
Company anticipates focusing a greater amount of its resources on developing
Internet-related and other products. See "-Product Lines" below.
5
A key component of the Company's technology is a decryption and
metering hardware unit, the patented Mark III, which is attached to a user's
personal computer or a network computer and which releases digital product from
an encrypted CD-ROM library on a "pay-per-use" basis. The unit keeps a running
account of the identity and cost of each "packet of information" purchased by
each user and transmits this information to a central facility for billing
purposes. The unit makes information available 24 hours a day, seven days a
week, to its users and may be disabled remotely. These remote transmission
capabilities let information providers update product databases, eliminate
unpaid subscriptions and instantly renew or increase customer credit lines.
Software-Based Solutions
Many information publishers are moving to digital distribution of their
content. The Company is developing software schemes for distributing and
tracking usage of this content securely over traditionally insecure channels,
primarily CD-ROM and the Internet, which software systems are suitable for many
different types of information, from databases of technical documents, market
research, legal or medical information to images, clip-art and software.
For these distribution systems, the Company's technology can create a
digital product catalog that contains product extracts and summaries, and which
can be supported by efficient searching software. The catalog's content is
indexed and hyper-linked to be searched by category, keyword or full-text. The
catalogs are designed to be easily updated, allowing publishers who are
struggling to keep up with the fast pace of technology to make the latest
versions of their content available to a wide audience at low cost. The catalogs
can be distributed over the Internet using a WWW server, hosted by Infosafe or
any other company. Catalogs that are not updated as often could be distributed
on CD-ROMs mastered by the Company.
The Company's technology has the potential to offer several different
methods of fulfilling orders generated by these catalogs. The product can be
included on a CD in encrypted form and decrypted with a key, obtained from
Infosafe after making payment. The product can be hosted on the WWW site as
well, and obtained over the Internet after making a credit card or other
electronic form of payment. In cases where the user has no Internet access, or
the product is too large for convenient distribution over the Internet, the
Company can cut "one-off" CDs with the purchased product for overnight shipping.
6
Product Lines
The CopyRight(TM) system: The quick print industry, primarily photo
copy shops, is one of the fastest growing and most profitable segment of the
graphic arts industry, according to the National Association of Quick Printers,
the official industry trade association. In 1995, the industry had revenues of
$14.7 billion from the 42,000 quick print outlets in the United States. Each
quick printer must turn away customers that are attempting to photocopy
copyrighted materials. Major quick printers have settled or lost lawsuits
resulting from alleged copyright violations.
Infosafe is negotiating with CCC to jointly market an application of
the Company's technology in quick print shops which will allow quick printers to
obtain the necessary rights to legally photocopy copyrighted materials for their
customers. CCC is the largest licensor of photocopy reproduction rights in the
United States, and currently has responsibility for 1.75 million titles of books
and periodicals from 9,200 publishers and continues to acquire additional
titles. The Company has developed the CopyRight(TM) system, an application of
its technology utilizing hardware and software that easily installs at a quick
print location. The software allows store employees to search a database of
publication titles, locate those items of interest, license use and record
sales. All transactions are recorded in encrypted form in Infosafe's proprietary
Mark III hardware. The transactions could be collected by Infosafe and
transmitted to CCC so that an audit trail of all rights purchased through the
system of this application of its technology. A numbered certificate can be
printed for each customer that provides evidence of payment of royalties
compliance with applicable copyright law.
The Company is in preliminary stage negotiations with a large national
quick print chain to place the CopyRight system in their stores. Initial
marketing efforts will target other large national quick print chains, although
the Company believes that every quick print outlet is a potential customer of
this application of its technology.
Design Palette(TM) System: Infosafe's first commercial product, the
Design Palette system, puts a digital graphic design product library on a
desktop, comprised of individually priced products from multiple vendors. Users,
at no charge, can query the entire contents of the library, preview competing
products simultaneously, and even run select product demos. The Design Palette
is currently being used by advertising agencies, graphic designers, publishers,
marketing and corporate communications departments, desktop publishing
resellers, copy shops and service bureaus.
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 there can be no assurance that such discussions will
result in agreements with other suppliers, the Company believes that
negotiations with one or more suppliers will provide graphic images and other
products for licensing through the Design Palette at least equal in quantity and
quality to those previously available from PhotoDisc.
7
During the fiscal year ended July 31, 1996 the Company's revenues from
sales through the Design Palette were approximately $51,000.
Potential Internet Products:
The Company believes that the emergence of new electronic publishing
and delivery technologies, such as the Internet and corporate intranets, will
result in a proliferation of new multimedia products and information services.
Without the up-front costs of leasing and staffing a physical storefront,
corporations from major media interests to small entrepreneurs are setting up
"shop" on the Internet and finding a ready consumer market. The Company believes
these Internet vendors are looking for secure product marketing and distribution
channels, as well as auditing systems to tabulate and verify Web site traffic.
Due to the fact, however, that the Internet is a relatively new communications
network, there exists a great amount of economic uncertainty regarding products
to monitor and meter Internet usage. Further, due to the Company's financial
condition, it is uncertain whether the Company will have sufficient resources to
fully pursue the development of Internet products.
Distribution of Digital Content: The Company is developing digital
distribution systems for use by image publishers and specialized information
providers in the Royalty Free (RF) industry and the high-quality stock photo
market where the price of a photograph is negotiated. The Company believes that
the digital RF image market and the high quality stock photo market are
expanding. According to a Future Image research report, the RF photo industry
has grown from $25 million in 1993, to $130 million in 1995, and is forecasted
to reach $1 billion by the year 2000. The Company will attempt to work with
proprietors of graphic databases in the quality stock photo market to create CD
catalogs of thumbnail images for distribution to users, as well as an
Infosafe-managed Web site to showcase the entire product library, which can be
constantly updated to attract new customers. The system could support on-line
credit card purchases over the Internet, with the image downloaded direct to the
buyer's hard drive. Purchases could also be made from the CD catalog for users
with no Internet access or low bandwidth, and the image could be sent by
overnight delivery.
World Wide Web Site Auditing: The Company is developing a secure
auditing tool (AudiNet (TM)) for WWW site auditing which can independently
monitor and tabulate the number of "hits" (i.e., visits) to a Web site, and
provide verified numbers for the establishment of advertising rates and
programs. AudiNet is being designed to analyze Web site visitor data to detect
repeat hits ("ghosts") and other log irregularities so that Web advertisers have
an independent third-party auditor to verify site traffic data. The Company
believes that advertising is the most important early source of anticipated
revenue from Internet operations. As with traditional print and broadcast media,
advertising rates are determined by the number of consumer impressions. The
Company intends to target print media enterprises that will be available on the
Internet and who need basic site traffic numbers and do not require complex
demographic analysis.
8
Marketing and Distribution Strategy
CopyRight(TM) System: If current negotiations between the Company and
CCC are successfully concluded, the Company expects to engage in a joint
marketing effort with CCC in order to market this potential product. Initial
marketing efforts will target large, national quick print chains, although the
Company believes each and every quick print outlet is a potential customer.
Digital Distribution Systems: The Company plans to develop digital
distribution systems for image publishers and specialized information providers
in the RF industry and the high-quality stock photo market utilizing both
CD-ROMs and the Internet. While several image database companies are offering
online marketing and/or distribution services, the Company believes this
application of the Company's technology could have commercial advantages, such
as usage tracking, easy-to-use search function and detailed image information
(i.e., scanning format, file size, format compression type and whether an image
has been color-corrected). The Company believes it can attract image vendors
lacking electronic access for their product by offering incremental product
updates through an Infosafe-managed site, and through faster CD turnaround for
image agencies which typically publish product CDs only annually. The Company
also plans to target world-class photographers by offering them the opportunity
to sell their work direct to the public through their own Web site, operated and
managed by the Company.
Design Palette System: 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. The
Company has held discussions with other suppliers of graphic images suitable for
the Design Palette. While there 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 will seek to upgrade graphic
images in the Design Palette library and, if the Company is successful in doing
so, will seek to market this product to graphics designers, desktop publishers,
resellers, service bureaus and mass marketers of graphics and related products.
AudiNet: Several companies now offer WWW auditing and verification
services. The Company is developing AudiNet, a secure auditing tool, for
monitoring and tabulating Web site hits to provide verified numbers for the
establishment of advertising rates and programs. The Company believes this
application of its technologies will be priced competitively on the low-end of
the auditing services market. The Company plans to target print media
enterprises utilizing the Internet who need verification of the number of site
visits numbers but do not require complex demographic analysis.
Proprietary Rights and Intellectual Property
The Company has received two patents. In addition, two patent
applications pending in the United States Patent and Trademark Office have been
allowed, covering various aspects of the Company's technology and are expected
to issue shortly. The Company is examining the desirability of filing several
international patent 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. 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 key part of the technology is a decryption and metering unit which
9
is attached to a user's personal computer or network and releases digital
information on a pay-per-use basis. The unit keeps a running account of the
identity and cost of each packet of information purchased by each user and
transmits this information to a central facility for billing purposes. In
December 1995, the Company was granted a second patent by the U.S. Patent and
Trademark Office for its technology to provide a secure method for the
commercial distribution and usage of digital product on a temporary or rental
basis. This patent, No. 5,473,687, covers the Company's method for retrieving
secure digital information or product from an encrypted database for commercial
rental, which (i) limits access to authorized renters only, (ii) provides for
the electronic collection of several different packets of information from the
same secure database and (iii) discourages the reuse and/or permanent storage of
the rented digital intellectual property. The co-inventors of these patents,
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 their rights to the Company without royalties or other compensation.
The Company believes, however, that commercial protection of its
products will depend primarily upon the proprietary algorithms and encryption
techniques embodied in its technology remaining "trade secrets." The Company
believes that its chances of attaining commercial success will depend more on
its ability to rapidly develop and market its proposed products to a broad group
of information providers and publishers and to a substantial number of
subscribers rather than on its ability to prevent potential competitors from
providing similar services.
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. Furthermore,
there can be no assurance that the validity of any of the patents would be
upheld if challenged by others in litigation or that the Company's activities
would not infringe patents owned by others. As the number of patents and
products in the Company's industry increases and as the functionality of these
products further overlaps, the Company believes that products based on this type
of technology may increasingly become the subject of patent infringement claims.
The Company would incur substantial costs in defending itself in infringement
litigation brought by others, or in prosecuting infringement claims against
third parties. An adverse party claiming patent or copyright infringement might
assert claims for substantial damages or seek to obtain an injunction or other
equitable relief, which could effectively block the ability of the Company to
make, use, distribute and sell hardware or software products.
Furthermore, there can be no assurance that others have not
independently developed or will not independently develop and patent similar or
superior products and/or technologies, duplicate any of the Company's products
or technologies or design around the Company's patents. There can be no
assurance that patents issued to others will not adversely affect the
development or commercialization of the Company's products or technologies. The
Company could incur substantial costs in defending itself in suits brought
against it or any of its licensees, or in suits in which the Company may assert
its patents or patents in which it may have rights against others or in suits
contesting the validity of a patent; therefore, the Company currently has
10
a policy of patent infringement liability insurance protecting it for costs and
damages relating to claims of infringement up to an aggregate of $1 million. Any
such proceedings would be protracted. In addition, there can be no assurance
that the Company would be successful in defending its patent rights in any
future infringement action. If the outcome of any such litigation is adverse to
the Company's interests, the Company's business may be materially adversely
affected.
In addition, the Company may be required to obtain licenses to patents
or other proprietary rights of third parties. No assurance can be given that any
licenses required under any such patents or proprietary rights would be made
available on terms acceptable to the Company, 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.
In November 1992, the Company received notice of a possible
infringement from a patent holder but believes, based on the opinion of special
patent counsel, that such claim is without merit. 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.
The Company relies on trade secrets and proprietary know-how, which it
will seek to protect, in part, by confidentiality agreements with its employees,
consultants and customers. There can be no assurance that the Company's trade
secrets will not otherwise become known or be independently discovered by
competitors.
The Company's trademarks INFOSAFE(R) and PROTECTED BY INFOSAFE(R) have
been registered with the United States Patent and Trademark Office. The Company
has filed applications with the United States Patent and Trademark Office to
register the following trademarks: INFOGATE(TM), INFOTEL(TM), INFOCHIP(TM),
DESIGN PALETTE(TM), DIGITAL NOTARY(TM), AUDINET(TM), AUDITED BY INFOSAFE(TM) and
COPYRIGHT(TM). The applications to register PROTECTED BY INFOSAFE; INFOGATE and
INFOTEL have now been allowed as trademarks and await registration. The Company
intends to apply for additional name and logo marks in the United States and in
foreign jurisdictions. No assurance can be given that registrations will issue
on the non-allowed applications or that interested third parties will not
petition the United States Patent and Trademark Office to cancel the Company's
registration.
11
Research and Development
The Company believes that its metering technology, customized for both
software-only, hardware-only and combined metering solutions, is highly flexible
and can be suitable for a wide range of electronic commerce and information
security applications. The Company believes that its technology can provide a
complete, end-to-end digital sales and distribution channel, as well as
specialized services. While the Company's research and development efforts to
date have concentrated on the product areas described above, future research and
development efforts, subject to the Company's future financial condition, are
expected to include:
Internet Audit and Information Clearinghouse Systems: In recognition of
the need for centralized credit clearance and transaction processing services
within this rapidly growing electronic marketplace, the Company intends to work
jointly with vendors conducting digital information transactions as their
"information clearinghouse". This potential application of the Company's
technology could provide an itemized record of information usage, including end
user, date and time of access, type of transaction, copyright and licensing
compliance and purchase price (if applicable), as well as provide the following
services: credit clearance, recording and classifying of transactions (i.e.,
dividing into auditables and billables), issuance of usage statements and
invoices to all parties, and document and transaction verification.
Secure Electronic Data Interchange (EDI), Storage and Verification: The
Company intends to develop new digital information applications to track
electronic data interchange and document management systems. The amount of
traffic in these systems is expected to increase dramatically over the next
decade -- within corporations, over dedicated LANs and WANs and on the Internet.
The Company believes its technology is capable of controlling, auditing and
protecting digital information as it is transferred or stored in these systems.
Internet Security/Internal Corporate Network Audits: The Company
believes that its technology is capable of serving as an internal security
system for corporations and institutions. Electronic storage is more convenient
and efficient then paper archives, but also more difficult to protect against
illegal entry or copying. The Company's technology could enable companies to
control, protect and limit access to valuable intellectual and proprietary
information stored digitally. Further, the Company believes that its technology
could allow companies to more efficiently track and allocate the costs
associated with acquiring and using information, internally and externally.
For the fiscal year ended July 31, 1996, the Company expended $934,403,
on research and development activities. From its inception on November 18, 1991
through July 31, 1996, the Company expended $2,011,594 on research and
development activities. At October 31, 1996, the Company had an aggregate of
seven employees and consultants engaged in design and development activities.
12
Competition
The Company is subject to various risks such as economic recession,
technological and market shifts and supply of quality labor and products. The
market for the Company's technology is competitive. The Company intends to rely
mainly on service and technology to develop and maintain its competitive
position. The Company's future success may depend in part on its continued
ability to keep pace with technological developments. There are other companies
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 not succeed in developing
technologies and products that are more effective or more affordable than those
being developed by the Company.
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. See "Item 3 --Legal
Proceedings." The Company anticipates it will also face competition as
publishers and repackages 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
believes that it 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.
13
The image industry already offers online and Internet-based
distribution systems. Many of the large RF image banks have created their own
online search and distribution channels, among the most prominent are PhotoDisc
and Publishers Depot (PNI), both of, which sell large image collections online
which can be downloaded by the purchaser. Other RF image vendors such as
Comstock and Index Stock are engaged in online marketing and support online
distribution of low-resolution images.
The Company is aware of currently available WWW auditing services and
several companies providing Internet audit services. Among the leaders, I-Pro
and Nielsen Media Research have formed a strategic partnership to develop and
deliver a broad range of Internet measurement and evaluation services. Products
include an independent site verification and reporting system, a consumer
demographics service, a Web measurement and analysis tool, and a product for
conducting syndicated or custom studies. Another Internet service provider,
NetCount, offers products and services for web site measurement and verification
for both Web site proprietors and Internet-based advertisers, and has announced
it is developing ancillary services, including a Web site rate and ranking
system, and a product to provide demographic data. Interse Corporation has
products for independent site verification and reporting and one product for
consumer demographics. As of July 1996, it reported 1,000 customers. It also has
entered into a strategic alliance with Arbitron to provide technical web
analysis covering all industries using the Internet.
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 not succeed in developing
technologies and products that are more effective or more affordable than those
being developed by the Company.
Manufacturing and Suppliers
The Company does not currently intend to develop its own manufacturing
capabilities but plans to continue to engage contract manufacturers to build the
control units of the Infosafe System in accordance with the Company's
specifications. The control units are comprised of stock components generally
available from a number of sources. The Company is currently aware of a number
of suppliers of encryption chips. The Company will continue to have internal
staff technicians review quality of product assembly and manufacture of the
Company's products on an ongoing basis.
Service and Support
The Company believes that customer service, technical support and
training will be important factors in system sales and customer satisfaction.
For the foreseeable future, subscriber support services will be staffed
internally with appropriately trained employees. The Company has equipped these
individuals with computer driven product manuals, documentation and user support
databases to support telephonic subscriber inquiries. User support personnel
attempt to resolve subscriber difficulties on an expedited basis. Services and
technical support offered by or through the Company are expected to include (i)
installing of the Infosafe System and servicing or replacing leased control
units in the field; (ii) directing the manufacturing and shipment of CD-ROMs;
14
and (iii) providing technical assistance to customers and their subscribers. The
Company's technical personnel will also assist the sales and marketing efforts
of the Company by conducting demonstrations of the Company's system for
potential customers and their end-users.
Employees
At October 31, 1996, the Company had 12 full-time employees and three
consultants. Seven of these individuals are engaged in design and development,
three in marketing and five are administrative and clerical personnel. None of
the Company's employees is currently covered by a collective bargaining
agreement. The Company considers its employee relations to be good.
Item 2. Properties
----------
The Company currently occupies approximately 6,600 square feet of space
in New York, New York pursuant to a lease which expires June 1997 and provides
for an annual rental payment of approximately $150,000. The Company believes its
current facilities will be sufficient for the foreseeable future and that it
will be able to lease the same or comparable premises upon the expiration of its
current lease.
Item 3. Legal Proceedings
-----------------
Other than as described below, there are no pending legal proceedings
to which the Company is a party.
The Company and its President and Chief Executive Officer, Thomas H.
Lipscomb are defendants in an action filed on November 25, 1994 in the Supreme
Court of the State of New York for New York County by Wave Systems Corp.
("Wave") . Mr. Lipscomb was co-founder and the former President of Wave, a
competitor of the Company, until July 1991. The plaintiff alleged, among other
things, that (i) Mr. Lipscomb and the Company misappropriated trade secrets and
proprietary and confidential business information belonging to plaintiff,
breached a confidentiality agreement with the plaintiff and have engaged in
unfair competition with the plaintiff; and (ii) that it would be irreparably
damaged by such wrongful appropriation and unfair competition. 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 April, 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. Wave subsequently has requested permission from the Court to
discontinue its claims against the Company and Mr. Lipscomb with prejudice. In
response, the Company has agreed that the claims should be dismissed with
prejudice and asked the Court to require that Wave be required to pay a portion
of the attorney's fees and costs the Company has incurred in defending this
action. If Wave's claim is not discontinued, the Company intends to continue to
vigorously defend this action. An unfavorable outcome in this litigation could
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 future results of
operations.
15
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 misrepresentation about the nature and
characteristics of the Company's goods and services. Wave's withdrawal of its
claims would not affect the pendency of the Company's counter claim, which
remains pending.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not Applicable.
16
PART II
---------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
-----------------------------------------------------------------------
(a) Price Range of Securities
-------------------------
The Company's Units, Class A Common Stock, Class A Warrants and Class B
Warrants are listed on the Nasdaq Small-Cap Market under the symbols ISFEU,
ISFEA, ISFEW and ISFEZ. The following tables set forth the high and low closing
bid prices of the Common Stock for the periods indicated as reported by Nasdaq.
These quotations represent prices between dealers in securities, do not include
retail mark-ups, mark-downs or commissions and do not necessarily represent
actual transactions. The Company's securities commenced trading on January 18,
1995.
Fiscal Year Ended July 31, 1996
- -------------------------------
High Low
Sales Price Sales Price
Units
-------
1st Quarter 14 3/4 12 1/4
2nd Quarter 14 1/2 11 3/4
3rd Quarter 15 1/2 12 1/4
4th Quarter 12 3/4 8 1/4
Class A Common Stock
-----------------
1st Quarter 8 3/16 7
2nd Quarter 8 6 1/4
3rd Quarter 8 6 1/8
4th Quarter 6 1/2 2 3/4
Class A Warrants
-----------------
1st Quarter 4 1/4 3 1/4
2nd Quarter 4 5/8 3
3rd Quarter 4 1/2 3 1/2
4th Quarter 4 1/8 2 5/8
Class B Warrants
-----------------
1st Quarter 2 3/4 2 1/8
2nd Quarter 3 1/4 2 5/8
3rd Quarter 3 1/4 2 3/8
4th Quarter 3 1/8 2 1/8
17
(b) Approximate Number of Equity Security Holders
----------------------------------------------
As of October 31, 1996 there were approximately 80 record holders of
the Company's Common Stock. The Company believes that there are in excess of 750
beneficial owners.
(c) Dividends
-----------
The Company has never paid a cash dividend on its Common Stock
and intends to continue to follow a policy of retaining earnings to finance
future growth. Accordingly, the Company does not anticipate the payment of cash
dividends to holders of Common Stock in the foreseeable future.
18
Item 6. Management's Discussion and Analysis of Financial Condition and Results
------------------------------------------------------------------------
of Operations
- -------------
The discussion in this Item 6. contains certain forward-looking
statements within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties,
such as the Company's ability to obtain financing prior to December 31, 1996, of
which there can be no assurance. The Company's actual results could differ
materially from those discussed herein.
Overview
The Company is a development stage company engaged in the development
and marketing of secure electronic distribution and metering systems for digital
information products. The Company commenced operations in January 1992. From
November 18, 1991 (inception) to July 31, 1996, the Company recognized revenues
of approximately $592,000, $455,000 was from one customer, and had an
accumulated deficit of approximately $8.2 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. Further, due to the impact of the Company's financial condition on its
cash flow, the Company's operations are expected to continue to be negatively
impacted to the extent substantial additional financing is not received or
sufficient revenues are not generated from operations. The Company is actively
pursuing new financing; however, if such financing is not obtained prior to
December 31, 1996, the Company will be forced to curtail and then cease
operations
The Company's strategy is to achieve broad market acceptance of the
Infosafe System. The Company is currently focusing on the following markets for
the Infosafe System: (i) concluding negotiations with Copyright Clearance Center
(R) to market an electronic copyright permission vending machine which will
allow quick printers to legally photocopy copyrighted materials, (ii) the
graphic design market, including, but not limited to, the promotion of the
Design Palette, (iii) the development of a digital distribution system for
specialized information and (iv) the development of a World Wide Web site
auditing system.
Results of Operations
Year Ended July 31, 1996, compared with Year Ended July 31, 1995.
For the fiscal year ended July 31, 1996 ("fiscal 1996"), the Company
recognized revenues of approximately $51,000 which was attributed to sales
generated from the Design Palette, the Company's first commercial product. For
the fiscal year ended July 31, 1995 ("fiscal 1995"), the Company recognized
revenues of approximately $141,000, of which approximately $106,000 was from the
purchase of International Typeface Corporation's ("ITC") interest in Design
Palette not already owned by the Company 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. The remaining
revenue for fiscal 1995 was generated from miscellaneous sources.
19
Research and development for fiscal 1996 increased $397,145 to $934,403
over fiscal 1995. The increase is attributable to the expansion of the Company's
research and development department, which is responsible for developing and
maintaining the Company's technology. The department's expansion resulted in
increased personnel leading to increased salary, consulting and related costs.
In addition the research and development department's expansion resulted in
additional rent expense and overhead costs for the Company.
Selling, general and administrative expense increased $634,077 to
$2,223,802 in fiscal 1996. This increase is attributed to increased
administrative and marketing salaries as the Company continues its efforts to
introduce and market commercial products. The increase is also attributable to
increased advertising expenses for marketing the Design Palette. In addition the
Company incurred substantial legal expenses due to its litigation with Wave and
a settled litigation. (See Item 3. Legal Proceedings)
Equipment held for lease is composed of the Company's Mark III unit and
CD-ROMs. The CD-ROMs contain encrypted digital images used exclusively for the
Design Palette 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 during
fiscal 1996, which is the carrying cost of the CD-ROMs and the carrying cost of
the anticipated excess Mark III units.
Interest income increased from $152,117 in fiscal 1995 to $228,553 in
fiscal 1996. The increase is due to the investment of the net proceeds received
from the Company's initial public offering in January 1995.
The Company accrued a settlement cost of $340,000 in fiscal 1995 due to
an arbitration award. In fiscal 1996 the award was paid in full resulting in
additional expense of $54,828.
Interest expense in fiscal 1996 is attributable to imputed interest for
amounts due to ITC for the purchase of the remaining interest in Design Palette
not already owned by the Company and interest form a capitalized lease
agreement. Interest expense of $344,841 in fiscal 1995 was due to interest on
notes issued in the bridge financing completed in October 1994 as well as
deferred financing fees and debt discount aggregating $284,419.
The net loss for fiscal 1996 was $3,496,580 compared to $2,628,783 in
fiscal 1995. Management believes the loss will increase in fiscal 1997 as the
Company is still in the development stage and is in the process of
commercializing and marketing its products.
Liquidity and Capital Resources
The Company has incurred substantial losses and negative cash flow from
operations since its inception. At July 31, 1996 the Company had working capital
20
of approximately $600,000. The Company has financed its operations primarily
through private placements during fiscal 1994 and a public offering during
fiscal 1995. The Company anticipates losses to continue through the next fiscal
year as the Company markets its products and develops new applications for its
technology. The Company does not have sufficient financial resources to continue
its operations beyond the calendar year ending 1996 without obtaining financing.
The Company is actively pursuing long-term and short-term financing which may
include debt and equity financing. There can be no assurance that the Company
will be able to obtain the necessary financing to continue its operations or
that the Company will realize sufficient revenue from commercializing its
technology. There also can be no assurance that any financing will be available
if needed, 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 operations.
The report of the Company's independent auditors on the Company's
financial statements as of July 31, 1996 and for the years then ended and for
the period from November 18, 1991 (inception) to July 31, 1996 contains a
paragraph regarding the uncertainty with respect to the ability of the Company
to continue as a going concern. The Company has incurred substantial losses
since inception and anticipates losses to continue at a substantial rate through
the next fiscal year as it markets its products and develops new applications
for its technology. The Company does not have sufficient financial resources to
continue its operations after December 31, 1996 without obtaining financing. The
Company is actively pursuing new financing, however, if such financing is not
obtained prior to December 31, 1996, the Company will be forced to curtail and
then cease operations. These factors raise substantial doubt regarding the
ability of the Company to continue as a going concern.
The Company has a net operating loss carryforward for tax purposes of
approximately $7.5 million to offset future taxable income for federal tax
purposes. The utilization of the loss carryforward 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 carryforwards. The carryforward
expires from 2007 to 2011. The Internal Revenue Code and Regulations contain
provisions which limit the use of available net operating loss carryforwards in
any given year should significant changes (greater than 50%) in ownership
interests occur. Due to the initial public offering, the net operating loss
carryover of approximately $1,900,000 incurred prior to the initial public
offering will be subject to an annual limitation of approximately $400,000 until
the net operating loss is utilized or expires.
The Company is a party to agreements with two officers which provide
aggregate minimum annual compensation of approximately $300,000 and is party to
certain agreements with other employees which provide for aggregate minimum
annual compensation payments of approximately $460,000. The agreements expire
during January 1997 through April 1998. Since June 1996 the two officers and two
other employees who are party to the agreements above, have been paid 50% of
their salaries. The remaining portion of the salaries are being accrued and will
not be paid prior to the Company's obtaining additional financing.
21
Charge to Income in the Event of Release of Escrowed Shares or Conversion
of Class E Shares
In connection with an earlier private placement in 1993, an aggregate
of 781,244 shares of the Company's Class B Common Stock were placed in escrow.
Such shares will be released to the stockholders in the event the Company
attains certain earnings thresholds or the Company's Class A Common Stock meets
certain minimum bid prices. In August 1994, the Company's Board of Directors
approved a stock dividend of one share of Class E-1 Common Stock and Class E-2
Common Stock for each two shares of Class A and Class B Common Stock. 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 or the market
price of the Class A Common Stock achieves certain targets over the next five
years. The Securities and Exchange Commission has adopted a position with
respect to arrangements such as the one entered into between the Company and its
stockholders who are officers, directors, employees or consultants of the
Company with respect to the Escrow Shares and the Class E Shares. 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. Accordingly, the
Company will, in the event of the release of the Escrow Shares or conversion of
the Class E Shares, recognize during the periods in which the earnings
thresholds are met or are probable of being met or such minimum bid prices
attained, what will likely be one or more substantial charges 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 or its working capital, it may have a negative effect
on the market price of the Company's securities. See Note G of Notes to
Financial Statements.
Financial Statements
---------------------
The response to this item is submitted in a separate section
of this report. See Index to Consolidated Financial Statements on page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
-----------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
22
PART III
---------
Item 9. Directors, Executive Officers, Promoters and Control Persons;
---------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
Directors and Executive Officers
The directors and executive officers of the Company, along with their
respective ages and positions with the Company, are as follows:
Name Age Position
Thomas H. Lipscomb 58 Chief Executive Officer,
President and Director
Alan N. Alpern 69 Chief Financial Officer
and Director
William N. Walker 58 Director
Frank Schwab, Jr. 64 Director
Charles C. Johnston 61 Director
Thomas H. Lipscomb has been President and Chief Executive Officer of
the Company, which he co-founded, since January 1992. From August 1991 until
January 1992, Mr. Lipscomb was a self-employed consultant. From June 1988
through July 1991, he was President of Cryptologics International Inc.
(currently known as Wave Systems Corp.), a firm engaged in the development of
information technology. See "Business--Legal Proceedings." From May 1985 through
May 1988, Mr. Lipscomb served as Vice President--Entertainment of Honeybee
Productions, Inc., a film production company. Prior to that, he held a number of
editorial and executive positions in book publishing, most recently as President
of the New York Times Book Company.
Alan N. Alpern has been Chief Financial Officer of the Company, which
he co-founded, since January 1992 and was also Chairman of the Board from
January 1992 until April 1995. Since October 1995 he has been a director, and
since October 1996, he has been Chief Financial Officer, of American Pharmed Dr.
Liedtke Inc., a pharmaceutical company. From June 1990 until October 1996 Mr.
Alpern served as a director of Van American, Inc., an insurance holding company
in Lexington, Kentucky. He also served as Chief Financial Officer of Van
American Company, Inc. from June 1990 until December 1993. From May 1988 until
June 1990, he was self-employed as an attorney and business consultant.
William N. Walker has been a director of the Company since January
1992. Since September 1993, he has served as President of New Century Trading
Corporation, a company engaged in commercial transactions in Russia and the
former Soviet Union. From January 1992 through August 1993, Mr. Walker was
Executive Vice President and Chief Legal Officer of Tosco Corporation, a New
York Stock Exchange petroleum products company. From October 1974 through
January 1992, he was a partner with the law firm of Mudge Rose Guthrie Alexander
& Ferdon in New York. Mr. Walker has held many positions in government,
including Deputy United States Trade Representative and Director of the
Presidential Personnel Office.
23
Frank Schwab, Jr. has been a director of the Company since December
1992. Since 1965, Mr. Schwab has served as President and Chief Executive Officer
of Anderson & Schwab and its predecessors, a management consulting firm which
specializes in, among other things, strategic and organizational planning,
controls and market analysis.
Charles C. Johnston has been a director of the Company since October
1996. Mr. Johnston is Chairman of ISI Systems ("ISI"), a subsidiary of Teleglobe
of Montreal. Previously he was founder, Chief Executive Officer and President of
ISI prior to its purchase by Telglobe in November 1989. Prior to establishing
ISI in 1969, Mr. Johnston held executive management positions with Management
Service, Boston, MA and Cambridge Data Corporation, Cambridge. MA as well as
sales, marketing and management positions with IBM Hartford, Connecticut branch.
All directors hold office until the next annual meeting of stockholders
and until their successors are duly elected and qualified. Officers serve at the
discretion of the Board of Directors, subject to rights, if any, under contracts
of employment.
Other Significant Employees:
The following persons, although not executive officers, make
significant business contributions to the Company:
Robert H. Nagel, Ph.D. Executive Vice President--Technology
Charlton H. Calhoun III Executive Vice President--Marketing
Craig C. Hale Director, New Technology
Patrick Brosnan Controller and Secretary
Robert H. Nagel, Ph.D. is one of three co-founders of the Company and
has been Executive Vice President--Technology of the Company since January 1992.
From 1982 through January 1992, Dr. Nagel served as President of Nagel
Associates, Inc., a systems development firm that designed computer systems for
such clients as the United States Navy and the New York City Transit Authority.
From 1977 through 1982, Dr. Nagel served as technical director of Telerate
Systems, Inc., a provider of electronic financial information, during its
expansion from a start-up company. Prior thereto through 1978, Dr. Nagel formed
and operated Information Distribution and Retrieval, Inc. which was a joint
venture with Reuters and was instrumental in the creation of the systems design
for Reuters' worldwide computer-based communications network. As a principal
consultant at Network Analysis Corporation, from 1969 through 1972, Dr. Nagel
contributed to the design of ARPANET, Telenet and the NASDAQ system.
Charlton H. Calhoun III has been Executive Vice President of Marketing
of the Company since January 1992. From 1990 through 1993, Mr. Calhoun served as
President of International Desktop Communications, Ltd., a publisher of desktop
communications and PC publishing materials. Since 1988, Mr. Calhoun has operated
Calhoun & Associates, Inc., an independent advertising sales firm. From 1968 to
1988, Mr. Calhoun was employed in various positions with McGraw-Hill
Publications Company, including from 1986 to 1988 as Group Vice President-
Process Industries & Industrial Group.
24
Craig C. Hale joined the Company in March 1996 to oversee all of the
Company's research and development programs. He gained extensive project
management experience while working for Honeywell Inc.'s Space & Strategic
Avionics Division as a Program Manager and Technical Director for over seven
years, and twice received an annual citation as "Outstanding Engineer." Prior to
that, he was a senior design engineer at Smiths Industries Aerospace and Defense
Systems, Inc. designing a smart navigation and weapons delivery system for
military aircraft. Mr. Hale has extensive programming experience for military
and corporate clients.
Patrick Brosnan has been the Controller and Secretary since May 1995.
Prior thereto, for five years he was employed by Richard Eisner & Company LLP, a
public accounting firm in various positions, including Audit Manager since 1993.
Mr. Brosnan is a CPA.
Key Consultant
Massimo Vignelli has served as Director of Design of the Company on a
consulting basis since January 1992. Mr. Vignelli operates a world-renowned
design firm, Vignelli Associates, and has received many national and
international honors, awards, and honorary doctorates including the first
Presidential Design Award of the U.S. Government, presented by President Ronald
Reagan in 1985, the American Institute for Graphic Arts Gold Medal, the American
Institute of Architects Industrial Arts Medal, and appointment to the Art
Directors' Club Hall of Fame.
Directors' Compensation
Directors of the Company do not receive any fixed compensation for
serving on the Board. Board members will be reimbursed for all reasonable
expenses incurred by them in connection with serving as directors of the
Company.
Compliance with Section 16(a) of the Exchange Act
To the Company's knowledge, there were no delinquent Section 16(a)
filers except as follows: William N. Walker and Frank Schwab, Jr. each filed one
late Form 4.
25
Item 10. Executive Compensation
The following table sets forth the compensation paid or accrued by the
Company for services rendered during the fiscal year ended July 31, 1996 to
Thomas H. Lipscomb, the Company's Chief Executive Officer and President, and
Alan N. Alpern, the Company's Chief Financial Officer, the only other executive
officer of the Company during such fiscal year.
Summary Compensation Table
Long Term
Annual Compensation Compensation
-------------------- ------------
Other
Annual
Name and Compen-
Principal sation
Position Year Salary($) $ Options(#)
----------- ------ ----------- --------- ----------
Thomas H. Lipscomb 1996 175,000 (1) -0- -0-
Alan N. Alpern 1996 -0- 125,000 (1) -0-
- -------------
(1) Includes accrued compensation of an aggregate of $32,705 for these two
officers that will not be paid until the Company obtains additional
financing.
The following table sets forth the number and value of unexercised
in-the-money options at July 31, 1996 for the executive officers named above.
There were no options exercised in fiscal 1996 by either of the named
individuals.
Option/SAR Grants in Last Fiscal Year
--------------------------------------
% of Total
Options
Granted to Exercise
Options Employees or Base Expiration
Name Granted (#) in Fiscal Year Price ($/Sh) Date
------- ------------ -------------- ------------- -----------
Thomas H. Lipscomb -0- -0- -0- --
Alan N. Alpern -0- -0- -0- --
26
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Value
----------------------------------------------------
Number of
Unexercised Value of
Options at Unexercised
FY-End(#) In-the-Money
Shares Acquired Value Exercisable Options/SAR's at
Name on Exercise (#) Realized($) Unexercisable FY-End($)
- ------------------ ---------------- ----------- ------------- ----------------
Thomas H. Lipscomb -0- -0- 100,000/0 -0-
Alan N. Alpern -0- -0- 50,000/0 -0-
Employment Agreements
Effective January 1, 1992, and amended as of October 1994, the Company
entered into a three-year employment agreement with Thomas H. Lipscomb pursuant
to which Mr. Lipscomb will serve on a full-time basis as President and Chief
Executive Officer of the Company and a two-year consulting agreement with Alan
N. Alpern pursuant to which Mr. Alpern will devote more than half of his
business time to the Company as Chief Financial Officer. The agreements with
Messrs. Lipscomb and Alpern provide for base annual salaries of $175,000 and
$125,000, respectively, for the 1996 calendar year. Each agreement provides that
if the Company breaches the agreement or if either of Messrs. Lipscomb or Alpern
is not elected a director of the Company, and, in the case of Mr. Lipscomb, is
not maintained as President and Chief Executive Officer of the Company or any of
its subsidiaries, then Messrs. Lipscomb or Alpern, as the case may be, may
terminate his agreement with the Company and will be entitled to a cash payment
in an amount equal to his base annual salary for the remaining term of his
agreement. At the end of each agreement, Messrs. Lipscomb and Alpern may each
elect to serve as a consultant to the Company for three annual consulting
periods at monthly payments of $7,500 and $12,000, respectively. Each agreement
also contains non-competition and confidentiality provisions.
Stock Option Plans
In August 1994, the Board of Directors adopted, and in September 1994,
the stockholders approved, the 1994 Stock Option Plan (the "1994 Plan") which
provides for the grant of options to purchase an aggregate of 500,000 shares of
the Company's Class A Common Stock. By vote of the Board of Directors, the 1994
Plan has been increased by 500,000 shares to provide that 1,000,000 shares of
Class A Common Stock be available for grant, which increase was approved by the
Company's stockholders in April 1996. The 1994 Plan provides for the grant to
key employees of incentive stock options within the meaning of Section 422 of
the Code, and for the grant of non-qualified stock options to eligible executive
officers, directors and key employees of the Company. The 1994 Plan, which
expires in 2004, will be administered by the Board of Directors or a committee
designated by the Board of Directors. The purposes of the 1994 Plan are to
ensure the retention of existing executive personnel, key employees and
consultants of the Company, to attract and retain new executive personnel, key
employees and consultants and to provide additional incentive by permitting such
individuals to participate in the ownership of the Company, and the criteria to
be utilized by the Board of Directors or committee in granting options pursuant
to the 1994 Plan will be consistent with these purposes.
27
Options granted under the 1994 Plan may be exercisable for a period of
up to 10 years from the date of grant at an exercise price which is not less
than the fair market value of the Class A Common Stock on the date of the grant,
except that the term of an incentive stock option granted under the 1994 Plan to
a stockholder owning more than 10% of the outstanding Class A Common Stock may
not exceed five years and its exercise price may not be less than 110% of the
fair market value of the Class A Common Stock on the date of the grant. To the
extent that the aggregate fair market value, as of the date of grant, of the
shares of which incentive stock options become exercisable for the first time by
an optionee during the calendar year exceeds $100,000, the portion of such
option which is in excess of the $100,000 limitation will be treated as a
non-qualified stock option. Upon the exercise of an option, payment may be made
by cash, check or any other means that the Board or the committee determines. No
option may be granted under the 1994 Plan after September 2004. The options are
non-transferrable during the life of the option holder. As of October 31, 1996,
an aggregate of 764,000 options granted to various employees and directors,
vesting in varying installments from date of grant, are outstanding under the
1994 plan and the Company's 1992 Stock Option Plan and 190,000 options remain
available for grant under the 1994 Plan. During April 1996 the Company's Board
of Directors revised the exercise price of the options granted under the
plans for non executive officers of the Company and for members of the Board
of Directors who are not employees of the Company who were granted options
prior to this repricing, to be $4.00 per share, being in excess of the fair
market value on the effective date of the repricing. During October 1996,
a newly elected member of the Board of Directors was granted 40,000 stock
options at an exercise price of $5.00, 10,000 of which are immediately
exercisable and the balance of which vest in three equal annual installments.
Profit Sharing Plan
In January 1992, the Company adopted a Profit Sharing Plan, pursuant to
which an amount equal to 3.5% of the pretax profit of the Company for each
fiscal year will be set aside for the benefit of such employees as are
determined by the Board of Directors. No funding was provided through July 31,
1996 as the Company incurred a net loss for the period.
28
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of October 28, 1996, certain
information concerning the beneficial ownership of the Company's Class A, Class
B and Class E Common Stock, by (i) each stockholder known by the Company to own
beneficially five percent or more of the outstanding Class A, Class B and Class
E Common Stock of the Company; (ii) each director; (iii) each person named in
the Executive Compensation Table; and (iv) all executive officers and directors
of the Company as a group, and their percentage ownership before and after this
offering and voting power after this offering. Each share of Class B Common
Stock is entitled to six votes per share and each share of Class A Common Stock
and Class E Common Stock is entitled to one vote per share. See "Escrow Shares"
below for a description of other terms of the Class E Common Stock.
<TABLE>
<CAPTION>
Class A
Common Class B Class E Common
Stock (1) Common Stock Stock % of
---------- ------------------ ------------------ Vote
of
Name and Address of Number of Number of Number of all
Beneficial Owner of Shares % Shares % Shares % Classes
-------------------- ----------- ----- ------------ ------ --------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas H. Lipscomb 100,000(2) 3.4 813,126(3) 62.1 813,126 41.2 43.1%
Alan N. Alpern 50,000(2) 1.7 157,342(4) 12.0 205,342 10.4 9.4%
William Walker 18,000(5) * 20,179(6) 1.5 26,830 1.4 1.1%
Frank Schwab 18,000(5) * 27,679(6)(7) 2.1 34,330 1.4 1.4%
Robert Nagel 50,000(8) 1.7 59,557(9) 4.5 136,850 6.9 3.6%
Charles C. Johnston 10,000(9) * -- * -- * *
All executive officers and
directors as a group (4 persons) 186,000 5.1 1,018,326 77.7 1,079,628 54.7 55.0%
- -------------
*Less than one percent.
<FN>
<F1>
(1) Except as otherwise noted, each individual or entity has sole voting
and investment power over the securities listed and the address of each
beneficial owner is c/o the Company. Includes each holder's Escrow
Shares.
<F2>
(2) Represents immediately exercisable options.
<F3>
(3) Includes 427,409 Escrow Shares. Mr. Lipscomb has granted options to
purchase 16,875 shares of Class A Common Stock issuable upon conversion
of the shares of Class B Common Stock beneficially owned by him,
including the right to receive 16,875 Class E Shares, to two
individuals and one entity (the "Lipscomb Options").
29
<F4>
(4) Includes 94,591 Escrow Shares. Also includes 25,978 shares of Class B
Common Stock owned by Mr. Alpern's wife, as to which Mr. Alpern
disclaims beneficial ownership, including 18,217 Escrow Shares.
<F5>
(5) Excludes 16,000 options to purchase Class A Common Stock not presently
exercisable.
<F6>
(6) Includes 10,510 Escrow Shares.
<F7>
(7) Includes 7,500 Lipscomb Options.
<F8>
(8) Consists of 2,500 shares of Class A Common Stock beneficially owned by
Dr. Nagel and options to purchase 47,500 shares of Class A and Class E
Common Stock exercisable within 60 days.
<F9>
(9) Includes 59,557 Escrow Shares.
<F10>
(10) Represents immediately exercisable options. Excludes options to
purchase 30,000 shares of Class A Common Stock not presently
exercisable.
</FN>
</TABLE>
Class E Shares
In connection with the Company's initial public offering, in August
1994, the Company declared a stock dividend consisting of shares of Class E-1
and E-2 Common Stock to all holders of its Class A and Class B Common Stock.
Class E-1 Shares
Each Class E-1 share will be automatically converted into one share of
Class A Common Stock, if, and only if, one or more of the following conditions
is/are met:
(i) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings (all as audited and determined by the
Company's independent public accountants) (the "Minimum Pretax Income") amounts
to at least $6.6 million for the fiscal year ending July 31, 1997;
(ii) the Minimum Pretax Income amounts to at least $8.8 million for the
fiscal year ending July 31, 1998;
(iii) the Bid Price ( as defined) 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 July 19, 1996;
(iv) 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 level set forth in (iii) above.
30
Class E-2 Shares
Each Class E-2 share will be automatically converted into one share of
Class A Common Stock, if, and only if, one or more of the following conditions
is/are met:
(i) the Minimum Pretax Income amounts to at least $8.1 million for the
fiscal year ending July 31, 1997;
(ii) the Minimum Pretax Income amounts to at least $10.8 million for
the fiscal year ending July 31, 1998;
(iii) 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 July 19, 1996;
(iv) 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 (iii) above.
The Class E Shares will be redeemed by the Company for $.0001 per share
and cancelled if such earnings levels or market price targets are not achieved.
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 $7.4 million for the
twelve months ending December 31, 1997;
(ii) the Bid Price of the Company's Class A Common Stock shall average
in excess of $13.35 per share for 30 consecutive business days during the 18
month period commencing July 19, 1996.
31
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 January 18, 1995. 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 with respect to the Escrow Shares 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. If none of the applicable earnings or market
price levels with respect to the Class E Shares set forth above have been met by
March 31, 1999, the Class E Shares, as well as any dividends or other
distributions 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 reportable 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note G of "Notes to Financial Statements."
The earnings and market price levels set forth above were determined by
negotiation between the Company and the underwriter of its initial public
offering 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.
Item 12. Certain Relationships and Related Transactions
-----------------------------------------------
None
32
PART IV
--------
Item 13. Exhibits, List 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 23.1 Independent
23.1 Auditors Consent
- -----------
(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 July 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INFOSAFE SYSTEMS, INC.
Date: November 1, 1996
By: /s/ Thomas H. Lipscomb
-----------------------------
Thomas H. Lipscomb, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/Thomas H. Lipscomb President, Chief Executive November 1, 1996
- ------------------------- Officer, Director (Principal
Thomas H. Lipscomb Executive Officer)
/s/ Alan N. Alpern Director and Chief November 1, 1996
- ------------------------- Financial Officer
Alan N. Alpern
/s/ Patrick Brosnan Controller and Secretary November 1, 1996
- ------------------------- (Principal Accounting Officer)
Patrick Brosnan
/s/ William N. Walker Director November 1, 1996
- -------------------------
William N. Walker
/s/ Frank Schwab, Jr. Director November 1, 1996
- -------------------------
Frank Schwab, Jr.
/s/ Charles C. Johnston Director November 1, 1996
- -------------------------
Charles C. Johnston
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INFOSAFE SYSTEMS, INC.
Date: November 1, 1996
By: _____________________________
Thomas H. Lipscomb, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
____________________ President, Chief Executive November 1, 1996
Thomas H. Lipscomb Officer, Director (Principal
Executive Officer)
____________________ Director and Chief November 1, 1996
Alan N. Alpern Financial Officer
____________________ Controller and Secretary November 1, 1996
Patrick Brosnan (Principal Accounting Officer)
____________________ Director November 1, 1996
William N. Walker
____________________ Director November 1, 1996
Frank Schwab, Jr.
____________________ Director November 1, 1996
Charles C. Johnston
INFOSAFE SYSTEMS, INC.
FINANCIAL STATEMENTS
JULY 31, 1996
[LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Infosafe Systems, Inc.
We have audited the accompanying balance sheet of Infosafe Systems, Inc.
(a development stage company) as at July 31, 1996, and the related statements of
operations, changes in stockholders' equity (capital deficiency) and cash flows
for each of the years ended July 31, 1995 and July 31, 1996, and for the period
from November 18, 1991 (inception) to July 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present
fairly, in all material respects, the financial position of Infosafe Systems,
Inc. as at July 31, 1996, and the results of its operations and its cash flows
for each of the years ended July 31, 1995 and July 31, 1996, and for the period
from November 18, 1991 (inception) to July 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note A, the
Company is in the development stage and has incurred operating losses since
inception which raises substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Richard A. Eisner & Company, LLP
New York, New York
October 22, 1996
<TABLE>
<CAPTION>
INFOSAFE SYSTEMS, INC.
(a development stage company)
BALANCE SHEET
AS AT JULY 31, 1996
A S S E T S
-----------
<S> <C>
Current assets:
Cash and cash equivalents (Note B[8]) . . . . . . . . . . . . . . . $ 50,466
Accounts receivable - net of allowance for
doubtful accounts of $5,000. . . . . . . . . . . . . . . . . . . . 18,996
Marketable securities - available for sale
(Notes B[2] and D) . . . . . . . . . . . . . . . . . . . . . . . . 908,178
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . 113,613
-------------
Total current assets . . . . . . . . . . . . . . . . . . . . 1,091,253
Equipment held for lease (Notes B[3] and C) . . . . . . . . . . . . . . 420,613
Software development costs - net of amortization of $95,563 (Note B[4]) 111,252
Fixed assets (Notes B[3] and E) . . . . . . . . . . . . . . . . . . . . 299,082
Patents, copyrights and trademark - net of amortization of $21,811
(Note B[5]). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,820
Deposits and other. . . . . . . . . . . . . . . . . . . . . . . . . . . 40,312
-----------
T O T A L . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,025,332
===========
L I A B I L I T I E S
---------------------
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 192,447
Purchase agreement (Note F). . . . . . . . . . . . . . . . . . . . . 100,000
Current portion of capital lease obligation (Note J[3]). . . . . . . 9,322
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 73,712
Due to stockholders. . . . . . . . . . . . . . . . . . . . . . . . . 116,163
-----------
Total current liabilities . . . . . . . . . . . . . . . . . . 491,644
Capital lease obligation - less current portion (Note J[3]) . . . . . . 10,364
-----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 502,008
-----------
Commitments, contingencies and other matters (Notes J and K)
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
--------------------
(Note G)
<S> <C>
Common stock:
Class A - par value $.01 per share, 20,000,000 shares authorized,
one vote per share; 2,908,549 shares issued and outstanding. . . . 29,085
Class B - par value $.01 per share, 2,000,000 shares authorized,
six votes per share; 1,326,309 issued and outstanding including
781,244 shares held in escrow. . . . . . . . . . . . . . . . . . . 1,387
Class E-1 - par value $.01 per share, 2,000,000 shares authorized,
one vote per share; 1,343,637 shares issued and to be issued
redemption value $.0001 per share. . . . . . . . . . . . . . . . . 13,436
Class E-2 - par value $.01 per share, 2,000,000 shares authorized,
one vote per share; 1,343,637 shares issued and to be issued
redemption value $.0001 per share. . . . . . . . . . . . . . . . . 13,436
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 9,694,582
(Deficit) accumulated during the development stage. . . . . . . . . . . (8,234,154)
Unrealized gain on marketable securities. . . . . . . . . . . . . . . . 5,552
-----------
Total stockholders' equity. . . . . . . . . . . . . . . . . . 1,523,324
-----------
T O T A L . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,025,332
===========
</TABLE>
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
- 2 -
<TABLE>
<CAPTION>
INFOSAFE SYSTEMS, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
For the Year Ended Period From
July 31, November 18, 1991
---------------------------------- (Inception) to
1995 1996 July 31, 1996
----------- ----------- ------------------------
<S> <C> <C> <C>
Revenue:
License fees. . . . . . . . . . . $ 350,000
Other revenues. . . . . . . . . . $ 140,572 $ 51,268 241,840
----------- ----------- -----------
T o t a l. . . . . . . . . 140,572 51,268 591,840
----------- ----------- -----------
Expenses:
Cost of revenue (including
amortization of software
development costs of $40,668
and $41,363). . . . . . . . . . 109,648 68,585 191,765
Research and development. . . . . 537,258 934,403 2,011,594
Selling, general and
administrative. . . . . . . . . 1,589,725 2,223,802 5,751,036
Write-down of assets held for
lease . . . . . . . . . . . . . 470,000 470,000
----------- ----------- -----------
T o t a l. . . . . . . . . 2,236,631 3,696,790 8,424,395
----------- ----------- -----------
Operating (loss) . . . . . . . . . . (2,096,059) (3,645,522) (7,832,555)
Interest and investment income . . . 152,117 228,553 395,175
Settlement expense (Note K). . . . . (340,000) (54,828) (394,828)
Interest expense (including debt
discount and deferred financing
fees) . . . . . . . . . . . . . . (344,841) (24,783) (393,546)
------------ ----------- -----------
NET (LOSS) . . . . . . . . . . . . . $(2,628,783) $(3,496,580) $(8,225,754)
=========== =========== ===========
Net (loss) per common share. . . . . $(1.15) $(1.05)
====== ======
Weighted average number of common
shares and common share
equivalents outstanding . . . . . 2,278,779 3,325,090
=========== ===========
</TABLE>
Attention is directed to the foregoing accountants' report and
to the accompanying notes to financial statements.
- 3 -
<TABLE>
<CAPTION>
INFOSAFE SYSTEMS, INC.
(a development stage company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
FOR THE PERIOD FROM NOVEMBER 18, 1991 (INCEPTION) TO JULY 31, 1996
(See Notes A and G)
Class A Class B Class E-1 Class E-2
Common Stock Common Stock Common Stock Common Stock
-------------- ----------------- ----------------- -----------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock on January 8, 1992 at $.007412
per share . . . . . . . . . . . . . . . . . . . . . . 20,180 $ 21
Issuance of common stock on January 8, 1992 at $.007412
per share (including services rendered) . . . . . . . 1,479,807 1,540
Rent contributed by stockholder from March 1, 1992 to
July 31, 1992 . . . . . . . . . . . . . . . . . . . .
Costs associated with sale of preferred shares . . . . .
Net (loss) . . . . . . . . . . . . . . . . . . . . . . .
--------- -----
Balance as at July 31, 1992. . . . . . . . . . . . . . . 1,499,987 1,561
Issuance of shares from November 1992 to June 1993 at
$4.00 per share . . . . . . . . . . . . . . . . . . . 378,125 $3,781
Costs associated with sales of common shares from
November 1992 to June 1993. . . . . . . . . . . . . .
Warrants issued as compensation at $.04 per warrant. . .
Warrants issued with debt. . . . . . . . . . . . . . . .
Dividends on preferred shares. . . . . . . . . . . . . .
Net (loss) . . . . . . . . . . . . . . . . . . . . . . .
------- ------ --------- -----
Balance as at July 31, 1993. . . . . . . . . . . . . . . 378,125 3,781 1,499,987 1,561
Issuance of shares in September 1993 at $4.00 per share. 137,500 1,375
Costs associated with sale of common shares in
September 1993. . . . . . . . . . . . . . . . . . . .
Dividends on preferred shares. . . . . . . . . . . . . .
Shares issued for services in December 1993 and March
1994 at $4.60 per share . . . . . . . . . . . . . . . 9,750 98
Shares issued as compensation in July 1994 at $4.60 per
share . . . . . . . . . . . . . . . . . . . . . . . . 12,500 125
Transfer of shares . . . . . . . . . . . . . . . . . . . 5,000 50 (5,000) (5)
Net (loss) . . . . . . . . . . . . . . . . . . . . . . .
Stock dividend on Class A and Class B common stock . . . 1,018,931 $10,189 1,018,931 $10,189
Stock to be issued to holders of preferred shares,
options and warrants. . . . . . . . . . . . . . . . . 328,441 3,284 328,441 3,284
------- ----- --------- ----- --------- -------- --------- -------
Balance as at July 31, 1994. . . . . . . . . . . . . . . 542,875 5,429 1,494,987 1,556 1,347,372 13,473 1,347,372 13,473
</TABLE>
<TABLE>
<CAPTION>
(Deficit)
Accumulated Unrealized Stockholder
Additional During the Gain on Equity
Paid-In Development Marketable (Capital
Capital Stage Securities Deficiency)
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Issuance of common stock on January 8, 1992 at $.007412
per share . . . . . . . . . . . . . . . . . . . . . . $ 129 $ 150
Issuance of common stock on January 8, 1992 at $.007412
per share (including services rendered) . . . . . . . 9,460 11,000
Rent contributed by stockholder from March 1, 1992 to
July 31, 1992 . . . . . . . . . . . . . . . . . . . . 5,000 5,000
Costs associated with sale of preferred shares . . . . . (2,500) (2,500)
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . $ (149,580) (149,580)
---------- ----------- -----------
Balance as at July 31, 1992. . . . . . . . . . . . . . . 12,089 (149,580) (135,930)
Issuance of shares from November 1992 to June 1993 at
$4.00 per share . . . . . . . . . . . . . . . . . . . 1,508,719 1,512,500
Costs associated with sales of common shares from
November 1992 to June 1993. . . . . . . . . . . . . . (271,725) (271,725)
Warrants issued as compensation at $.04 per warrant. . . 20,000 20,000
Warrants issued with debt. . . . . . . . . . . . . . . . 500 500
Dividends on preferred shares. . . . . . . . . . . . . . (11,250) (11,250)
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . 1,113,454) (1,113,454)
---------- ----------- -----------
Balance as at July 31, 1993. . . . . . . . . . . . . . . 1,269,583 (1,274,284) 641
Issuance of shares in September 1993 at $4.00 per share. 548,625 550,000
Costs associated with sale of common shares in
September 1993. . . . . . . . . . . . . . . . . . . . (78,733) (78,733)
Dividends on preferred shares. . . . . . . . . . . . . . (6,150) (6,150)
Shares issued for services in December 1993 and March
1994 at $4.60 per share . . . . . . . . . . . . . . . 44,752 44,850
Shares issued as compensation in July 1994 at $4.60 per
share . . . . . . . . . . . . . . . . . . . . . . . . 57,375 57,500
Transfer of shares . . . . . . . . . . . . . . . . . . . (45) - 0 -
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . (837,357) (837,357)
Stock dividend on Class A and Class B common stock . . . 20,378) - 0 -
Stock to be issued to holders of preferred shares,
options and warrants. . . . . . . . . . . . . . . . . (6,568) - 0 -
---------- ----------- -----------
Balance as at July 31, 1994. . . . . . . . . . . . . . . 1,814,611 (2,117,791) (269,249)
(continued)
</TABLE>
- 4 -
<TABLE>
<CAPTION>
INFOSAFE SYSTEMS, INC.
(a development stage company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
FOR THE PERIOD FROM NOVEMBER 18, 1991 (INCEPTION) TO JULY 31, 1996
(See Notes A and G)
(continued)
Class A Class B Class E-1 Class E-2
Common Stock Common Stock Common Stock Common Stock
---------------- --------------- ---------------- ---------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as at July 31, 1994. . . . . . . . . . . . . . . 542,875 $ 5,429 1,494,987 $1,556 1,347,372 $13,473 1,347,372 $13,473
Warrants issued with debt in September 1994. . . . . . .
Issuance of shares in January and February 1995 at
$5.00 per share . . . . . . . . . . . . . . . . . . . 1,782,500 17,625
Cost associated with sale of common shares in January
and February 1995 . . . . . . . . . . . . . . . . . .
Warrants issued for compensation . . . . . . . . . . . .
Stock issued in settlement with preferred stockholder
in July 1995 . . . . . . . . . . . . . . . . . . . . 40,038 400 15 15
Exercise of warrants in July 1995. . . . . . . . . . . . 55,500 555
Net (loss) . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on marketable securities . . . . . . . .
--------- ------- --------- ------ --------- ------- --------- -------
Balance as at July 31, 1995. . . . . . . . . . . . . . . 2,420,913 $24,209 1,494,987 1,556 1,347,387 13,473 1,347,387 13,473
Class B common stock exchanged for Class A common stock
in August 1995. . . . . . . . . . . . . . . . . . . . 8,000 80 (8,000) (8)
Class B common stock exchanged for Class A common stock
in October 1995 . . . . . . . . . . . . . . . . . . . 12,000 120 12,000 (12)
Class B common stock exchanged for Class A common stock
in November 1995. . . . . . . . . . . . . . . . . . . 5,937 59 (5,937) (6)
Warrants exercised in November 1995. . . . . . . . . . . 275,000 2,750
Stock options exercised in January 1996. . . . . . . . . 5,000 50
Stock options exercised in April 1996. . . . . . . . . . 5,000 50
Warrants exercised in April 1996 . . . . . . . . . . . . 3,125 31
Warrants issued for settlement in June 1996 (Note K) . .
Stock options exercised in June 1996 . . . . . . . . . . 30,833 308
Class B common stock exchanged for Class A common stock
in June 1996. . . . . . . . . . . . . . . . . . . . . 123,221 1,232 (123,221) (123)
Class B common stock exchanged for Class A common
stock in July 1996. . . . . . . . . . . . . . . . . . 19,520 196 (19,520) (20)
Shares canceled. . . . . . . . . . . . . . . . . . . . . (3,750) (37) (3,750) (37)
Net (loss) . . . . . . . . . . . . . . . . . . . . . . .
Unrealized (loss) on marketable securities . . . . . . .
--------- ------- --------- ------ --------- ------- --------- -------
BALANCE AS AT JULY 31, 1996. . . . . . . . . . . . . . . 2,908,549 $29,085 1,326,309 $1,387 1,343,637 $13,436 1,343,637 $13,436
========= ======= ========= ====== ========= ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
(Deficit)
Accumulated Unrealized Stockholder
Additional During the Gain on Equity
Paid-In Development Marketable (Capital
Capital Stage Securities Deficiency)
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Balance as at July 31, 1994. . . . . . . . . . . . . . . $1,814,611 $(2,117,791) $ (269,249)
Warrants issued with debt in September 1994. . . . . . . 75,000 75,000
Issuance of shares in January and February 1995 at
$5.00 per share . . . . . . . . . . . . . . . . . . . 8,894,675 8,912,500
Cost associated with sale of common shares in January
and February 1995 . . . . . . . . . . . . . . . . . . (1,693,447) (1,693,447)
Warrants issued for compensation . . . . . . . . . . . . 54,186 54,186
Stock issued in settlement with preferred stockholder
in July 1995 . . . . . . . . . . . . . . . . . . . . 49,600 9,000 59,000
Exercise of warrants in July 1995. . . . . . . . . . . . 27,195 27,750
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . (2,628,783) (2,628,783)
Unrealized gain on marketable securities . . . . . . . . $90,320 90,320
---------- ----------- ------- ----------
Balance as at July 31, 1995. . . . . . . . . . . . . . . 9,221,820 (4,737,574) 90,320 4,627,277
Class B common stock exchanged for Class A common stock
in August 1995. . . . . . . . . . . . . . . . . . . . (72) - 0 -
Class B common stock exchanged for Class A common stock
in October 1995 . . . . . . . . . . . . . . . . . . . (108) - 0 -
Class B common stock exchanged for Class A common stock
in November 1995. . . . . . . . . . . . . . . . . . . (53) - 0 -
Warrants exercised in November 1995. . . . . . . . . . . 134,750 137,500
Stock options exercised in January 1996. . . . . . . . . 19,950 20,000
Stock options exercised in April 1996. . . . . . . . . . 19,950 20,000
Warrants exercised in April 1996 . . . . . . . . . . . . 7,782 7,813
Warrants issued for settlement in June 1996 (Note K). . . 168,750 168,750
Stock options exercised in June 1996 . . . . . . . . . . 123,024 123,332
Class B common stock exchanged for Class A common stock
in June 1996. . . . . . . . . . . . . . . . . . . . . (1,109) - 0 -
Class B common stock exchanged for Class A common
stock in July 1996. . . . . . . . . . . . . . . . . . (176) - 0 -
Shares canceled. . . . . . . . . . . . . . . . . . . . . 74 - 0 -
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . (3,496,580) (3,496,580)
Unrealized (loss) on marketable securities . . . . . . . (84,768) (84,768)
---------- ----------- -------- ----------
BALANCE AS AT JULY 31, 1996. . . . . . . . . . . . . . . $9,694,582 $(8,234,154 $ 5,552 $1,523,324
========== =========== ======== ==========
</TABLE> Attention is directed to the foregoing accountants' report and
to the accompanying notes to financial statements.
- 5 -
<TABLE>
<CAPTION>
INFOSAFE SYSTEMS, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
For the
Period From
Year Ended July 31, November 18, 199
-------------------------- (Inception) to
1995 1996 July 31, 1996
------ ------ -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,628,783) $(3,496,580) $ (8,225,754)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . 375,543 143,237 551,216
Services contributed by stockholder. . . . . . . . . . . . . 138,240
Write-down of assets held for lease. . . . . . . . . . . . . 470,000 470,000
Warrants issued for compensation and settlement. . . . . . . 54,186 168,750 222,936
(Increase) decrease in:
Accounts receivable, prepaid expenses and other assets . . (143,117) 131,265 (74,921)
Increase (decrease) in:
Accounts payable and accrued expenses. . . . . . . . . . . (18,737) (1,855) 266,159
Settlement payable . . . . . . . . . . . . . . . . . . . . 340,000 (340,000)
Due to stockholders. . . . . . . . . . . . . . . . . . . . 56,163 116,163
Deferred income. . . . . . . . . . . . . . . . . . . . . . (350,000)
Lease deposits . . . . . . . . . . . . . . . . . . . . . . (31,000)
------------ ----------- ------------
Net cash (used in) operating activities. . . . . . . . . (2,401,908) (2,869,020) (6,535,961)
------------ ----------- ------------
Cash flows from investing activities:
Equipment held for lease . . . . . . . . . . . . . . . . . . . . (646,697) (118,010) (794,773)
Capitalization of software developments costs. . . . . . . . . . (3,835) (206,815)
Purchase of fixed assets . . . . . . . . . . . . . . . . . . . . (136,802) (75,654) (467,005)
Purchases of marketable securities . . . . . . . . . . . . . . . (10,178,302) (2,486,231) (12,664,533)
Sales of marketable securities . . . . . . . . . . . . . . . . . 6,525,341 5,236,566 11,761,907
Patents, copyrights and trademarks . . . . . . . . . . . . . . . (38,152) (17,958) (84,631)
Due from stockholders. . . . . . . . . . . . . . . . . . . . . . (53,632) 53,632
------------ ----------- ------------
Net cash provided by (used in) investing activities. . . (4,532,079) 2,592,345 (2,455,850)
------------ ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common shares. . . . . . . . . . . . . 8,912,500 11,025,260
Costs in connection with sale of common shares . . . . . . . . . (1,688,447) (2,027,905)
Proceeds from issuance of Series A convertible redeemable
preferred stock. . . . . . . . . . . . . . . . . . . . . . . . 125,000
Redemption of Series A cumulative convertible preferred stock. . (75,000)
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . (8,400)
Proceeds from financing lease. . . . . . . . . . . . . . . . . . 28,076 28,076
Payment of financing lease. . . . . . . . . . . . . . . . . . . (8,390) (8,390)
Payment of purchase agreement. . . . . . . . . . . . . . . . . . (127,840) (127,840)
Proceeds from subordinated debenture . . . . . . . . . . . . . . 100,000
Payment of subordinated debenture. . . . . . . . . . . . . . . . (100,000)
Exercise of warrants and options . . . . . . . . . . . . . . . . 27,750 308,645 336,395
Proceeds from bridge loan. . . . . . . . . . . . . . . . . . . . 1,500,000 1,500,000
Payment of bridge loan . . . . . . . . . . . . . . . . . . . . . (1,500,000) (1,500,000)
Payment of deferred financing costs. . . . . . . . . . . . . . . (209,419) (224,919)
------------ ----------- ------------
Net cash provided by financing activities. . . . . . . . 7,070,460 172,415 9,042,277
------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . . . . 136,473 (104,260) 50,466
Cash and cash equivalents, beginning of period . . . . . . . . . . 18,253 154,726
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD. . . . . . . . . . . . . . $ 154,726 $ 50,466 $ 50,466
============ =========== ============
Supplemental schedule of noncash financing activities:
Stock dividend on Class A and Class B common shares. . . . . . . $ 20,378
Stock to be issued to holders of preferred shares, options
and warrants . . . . . . . . . . . . . . . . . . . . . . . . . 6,568
Debt discount in connection with bridge loan . . . . . . . . . . $ 75,000 75,000
Financing of design Palette. . . . . . . . . . . . . . . . . . . 227,840 227,840
Class A common stock issued in settlement with preferred
stockholder. . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000
Supplemental disclosure of cash flow information:
Cash paid for interest during the period . . . . . . . . . . . . 60,422 $ 19,983 83,405
</TABLE>
Attention is directed to the foregoing accountants' report and
to the accompanying notes to financial statements.
- 6 -
INFOSAFE SYSTEMS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company:
Infosafe Systems, Inc. (the "Company") is a development stage company
engaged in the development and marketing of secure electronic distribution and
metering systems for digital products. The Company has developed "The Infosafe
System" which consists of hardware and software products to enable publishers
and other information owners to distribute digital information without risk of
theft.
The Company has incurred substantial losses since inception and,
anticipates losses to continue through the next fiscal year as the Company
markets its products and develops new applications for its technology. The
Company does not have sufficient financial resources to continue its operations
without obtaining financing. The Company is actively pursuing long-term and
short-term financing which may include debt and equity financing. Although
management believes that the Company will be successful in marketing and
developing its products as well as obtaining the necessary financing, there can
be no assurance that it will be able to do so. These factors raise substantial
doubt regarding the ability of the Company to continue as a going concern.
(NOTE B) - Summary of Significant Accounting Policies:
[1] Revenue recognition:
Revenue based on usage and leasing of the Company's system is
recognized as earned.
[2] Marketable securities:
The Company accounts for investments in marketable securities
in accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("FASB 115").
In accordance with FASB 115 marketable securities are classified as
available-for-sale.
[3] Depreciation and amortization:
Office and technology equipment and furniture and fixtures are
stated at cost and are depreciated on the straight-line method over five to
seven years. Equipment held for lease is stated at cost and depreciated over its
estimated useful life at the time the equipment is placed into service.
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease or the estimated useful life of the asset.
(continued)
- 7 -
INFOSAFE SYSTEMS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Summary of Significant Accounting Policies: (continued)
[4] Software development costs:
Costs relating to the conceptual formulation and design of
software are expensed as research and development. Costs incurred subsequent to
establishment of technological feasibility to produce the finished product are
generally capitalized. Technological feasibility was established when a product
design and a working model were completed. Capitalized software costs are
amortized by the straight-line method over a maximum of five years or the
expected life of the product, whichever is less.
[5] Patents, copyrights and trademark:
Costs to obtain patents, copyrights and trademarks have been
capitalized. The Company has submitted numerous applications which are currently
pending. These costs are being amortized over five years.
[6] Loss per share of common stock:
Net loss per share of common stock is based on the weighted
average number of shares outstanding during the period excluding Class B shares
in escrow, all Class E-1 shares and Class E-2 shares and including options and
warrants issued within twelve months prior to the Company's initial public
offering using the treasury stock method as if they were outstanding through
October 31, 1994.
[7] Income taxes:
The Company accounts for income taxes in accordance with
Statement of Accounting Standards No. 109, "Accounting for Income Taxes" ("FASB
109"). FASB 109 measures deferred income taxes by applying enacted statutory
rates in effect at the balance sheet date to the differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. The resulting asset was fully reserved since the likelihood of
realization of the benefit cannot be established.
[8] Statement of cash flows:
For purposes of the statement of cash flows, the Company
considers all highly liquid cash investments purchased with an original maturity
of three months or less to be cash equivalents.
(continued)
- 8 -
INFOSAFE SYSTEMS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Summary of Significant Accounting Policies: (continued)
[9] Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and
reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
[10] Recently issued accounting pronouncements:
In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("FASB 121"), and Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FASB 123"). FASB 121 requires, among
other things, that entities identify events or changes in circumstances which
indicate that the carrying amount of an asset may not be recoverable. FASB 123
requires, among other things, that companies establish a fair value based method
of accounting or disclosure for stock-based compensation plans. The Company
believes that adoption of FASB 121 and FASB 123 will not have a material impact
on its financial statements. The Company has elected to continue to account for
employee stock-based compensation in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," using intrinsic
values with appropriate disclosures using the fair value based method.
(NOTE C) - Equipment Held for Lease:
Equipment held for lease consists of the following:
Completed hardware units. . . . $362,922
Parts . . . . . . . . . . . . . 57,691
--------
T o t a l . . . . . . $420,613
========
Equipment held for lease is composed of an encryption and metering control
unit and CD-ROMs. The CD-ROMs contain encrypted digital images used exclusively
for the Design Palette System ("Design Palette"), a commercial product using the
Infosafe System. The control unit is also used as part of the Design Palette and
has other applications currently in development by the Company. The Company
(continued)
- 9 -
INFOSAFE SYSTEMS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE C) - Equipment Held for Lease: (continued)
received notice from its single largest supplier of digital images for the
Design Palette, that it is terminating 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 has stopped production
of the control units until such time as the demand for the units increases.
Therefore the Company has written off, in full, the CD-ROM cost and has reduced
the value of the parts held for production to its estimated salvage value. In
addition the value of the control units was reduced to reflect its remaining
economic life. This resulted in a write down of long-lived assets aggregating
$470,000 for the fiscal year ended July 31, 1996.
(NOTE D) - Marketable Securities:
Available-for-sale marketable securities is as follows:
Available-For-Sale
------------------
Gross Estimated
Unrealized Fair
Cost Gain Value
---- ---------- ---------
United States Treasury Note -
due January 31, 1997 . . . $902,626 $5,552 $908,178
Interest income of $117,782 and $191,623 and realized gains of $6,848
and $22,510 were earned for the year ended July 31, 1995 and July 31, 1996,
respectively.
(NOTE E) - Fixed Assets:
Fixed assets consist of the following:
Office and technology equipment (including
capital lease of $28,124) . . . . . . . . $382,630
Furniture and fixtures . . . . . . . . . . . 91,192
Leasehold improvements . . . . . . . . . . . 27,183
--------
T o t a l. . . . . . . . . . . . . 501,005
Less accumulated depreciation. . . . . . . . 201,923
--------
B a l a n c e. . . . . . . . . . . $299,082
========
(continued)
- 10 -
INFOSAFE SYSTEMS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - Purchase Agreement:
During April 1995 the Company entered into an agreement (the "Purchase
Agreement") to purchase the interest not already owned by it in the Design
Palette, thus becoming the sole owner of the system. The Company paid $350,000
on the execution of the Purchase Agreement and is required to pay without
interest an aggregate of $250,000 in various installments through August 1996.
The amount due under the Purchase Agreement was recorded at its present value
using a discount rate of 11% per annum. The Company has not paid its final
payment which was due in August 1996.
(NOTE G) - Stockholders' Equity:
[1] Common shares:
Each Class E-1 and Class E-2 common share will automatically
convert into Class A common stock in the event that the Company's earnings
before taxes reach certain earnings levels through July 31, 1998 or if the price
of the Company's common stock reaches certain price levels for a thirty
consecutive business day period through January 1998. The earnings levels for
conversion ranges from a minimum of $6.6 million to a maximum of $10.8 million
in 1998. The required bid price of the Company's common stock ranges from $16.50
to $22 per share. The Company has not achieved the earnings levels, and the
price of the Company's common stock has not reached the required levels as of
July 31, 1996. On March 31, 1999, all Class E-1 and Class E-2 shares not
previously converted into Class A common stock will be redeemed by the Company
for $.0001 per share.
In connection with the Company's private placement in 1992,
the stockholders, on a pro rata basis, placed an aggregate of 781,244 Class B
shares in escrow to be released based on obtaining certain pretax earnings
levels through the calendar year 1997 or if the price of the Company's Class A
common stock reaches certain price levels for a thirty consecutive business day
period through January 1998. The Company has not achieved the earnings levels
and the price of the Company's common stock has not reached the required levels
as at July 31, 1996. If none of the conditions have been met by May 1, 1997, the
escrow share will be forfeited to the Company. The minimum pretax earnings
requirement for release of the shares ranges from a minimum of $4.1 million to a
maximum of $7.4 million through calendar year 1997. The required bid price of
the Company's common stock ranges from $10 to $13.25 per share.
(continued)
- 11 -
INFOSAFE SYSTEMS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Stockholders' Equity: (continued)
[1] Common shares: (continued)
Upon release of any of the Class B shares held in escrow or
upon conversion of any Class E-1 or Class E-2 shares to Class A shares, the
Company will incur an earnings charge for compensation expense in the amount of
the then fair value of the shares released or converted. Such charge is not
deductible for income tax purposes.
The holders of the Class A, Class E-1 and Class E-2 shares are
entitled to one vote per share. The holders of the Class B shares are entitled
to six votes per share. The Class B shares automatically convert to Class A
shares upon sale or transfer or upon the option of the holder.
[2] Common stock warrants:
As at July 31, 1996 the Company had the following common stock
warrants outstanding:
Number of Exercise Expiration
Shares Price Date
--------- -------- ----------
Financial Consultants . . . . 169,500 $ .50 September 10, 2002
Miscellaneous . . . . . . . . 18,750 2.50 September 10, 1998
Class A . . . . . . . . . . . 2,616,875 (a)(b) 6.50 January 17, 2000
Class B . . . . . . . . . . . 1,782,500 (b) 8.75 January 17, 2000
(a) Upon exercise, the holder is entitled to one share of Class A common
stock and one Class B warrant.
(b) Class A and Class B warrants are redeemable at $.05 a warrant under
certain conditions.
[3] Stock option plan:
In August 1994, the Company adopted a 1994 Stock Option Plan
(the "Plan") under which incentive stock options and nonqualified stock options
may be granted to purchase the Company's Class A common stock through 2004. The
number of shares of Class A common stock reserved for issuance under the option
plan was increased from 500,000 to 1,000,000 during the year ended July 31,
1996. Options are to be granted at a price not less than the fair market value
of the Company's Class A shares on the date of grant. The Company has granted
outstanding 664,000 options to purchase Class A common stock under this plan
through the year ended July 31, 1996. Options to purchase 276,000 Class A common
stock are exercisable as at July 31, 1996. During a Board of Directors meeting
held in October 1996, a new
(continued)
- 12 -
INFOSAFE SYSTEMS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Stockholders' Equity: (continued)
[3] Stock option plan: (continued)
member of the Board of Directors was granted options to purchase 40,000 shares
of Class A common stock. The Company has 336,000 shares reserved for future
issuance under the Plan as at July 31, 1996.
The Company's 1992 Stock Option Plan was terminated upon adoption of
the 1994 Plan. Options to purchase 60,000 Class A common shares previously
granted under the 1992 Plan are outstanding. Options to purchase 54,998 Class A
common stock are exercisable as at July 31, 1996.
During July 1996 the Company's Board of Directors revised the exercise
price of the options granted under the plans for nonexecutive officers of the
Company and for members of the Board of Directors who are not employees of the
Company who were granted options prior to this repricing. The options were
repriced to be exercised at $4.00 per share, being in excess of the fair market
value on the effective date of the repricing. The exercise price for all options
issued under the plans is from $4.00 to $7.25 per share, exercisable as at July
31, 1996.
Information regarding these plans are as follows:
Shares
------
Balance outstanding - July 31, 1995. . 515,000
Granted . . . . . . . . . . . 284,000
Exercised . . . . . . . . . . (40,833)
Canceled. . . . . . . . . . . (34,167)
-------
Balance outstanding - July 31, 1996. . 724,000
=======
The underwriter for the Company's initial public offering was granted
an option to purchase 155,000 shares of Class A common stock, Class A warrant
and Class B warrant. The option was exercisable on January 17, 1996 and expires
on January 17, 2000 at an exercise price of $6.75 per share of Class A common
stock, $.10 per Class A warrant and $.05 per Class B warrant.
(continued)
- 13 -
INFOSAFE SYSTEMS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - Income Taxes:
[1] Federal income taxes:
The Company has a net operating loss carryforward for tax
purposes of approximately $7,500,000 as at July 31, 1996. This carryforward
expires from 2007 to 2011. Certain development stage expenses have been
capitalized for tax purposes and are being amortized over a sixty-month period
beginning on September 1, 1993.
The Internal Revenue Code and Income Tax Regulations contain
provisions which limit the use of available net operating loss carryforwards in
any given year should significant changes (greater than 50%) in ownership
interests occur. Due to the initial public offering in January 1995, the net
operating loss carryover of approximately $1,900,000 incurred prior to the
initial public offering will be subject to an annual limitation of approximately
$400,000 until the net operating loss is utilized or expires.
[2] Deferred income taxes:
The principal components of deferred tax assets, liabilities
and the valuation allowance are as follows:
July 31,
-----------------------
1995 1996
---------- --------
Deferred tax assets:
Development stage costs . . . . $ 251,000 $ 176,000
Accrued expenses. . . . . . . . 188,000 54,000
Write-down of assets held
for lease . . . . . . . . . . 135,000
Federal, state and local net
operating loss carryforwards. 1,927,000 3,548,000
Less deferred tax liabilities:
Capitalized software
development costs . . . . . . (70,000) (51,000)
Depreciation. . . . . . . . . . (6,000) (19,000)
Marketable securities . . . . . (3,000)
Valuation allowance. . . . . . . . (2,290,000) (3,840,000)
---------- -----------
Net deferred tax asset . . . . . . $ - 0 - $ - 0 -
========== ===========
(continued)
- 14 -
INFOSAFE SYSTEMS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - Income Taxes: (continued)
[2] Deferred income taxes: (continued)
The Company's effective tax rate varied from the statutory
federal income tax rate as follows:
July 31,
------------------
1995 1996
------- --------
Expected tax rate benefit . . . (34.0)% (34.0)%
State and local taxes
benefit net of federal
benefit. . . . . . . . . . . (13.1) (13.1)
Valuation allowance . . . . . . 47.1 47.1
----- -----
Effective tax rate . . . . - 0 - % - 0 - %
===== =====
(NOTE I) - Related Party Transaction:
The Company has a month to month, oral agreement with an
employee/stockholder for the stockholder's company to use office space and
supplies for $1,000 per month.
(NOTE J) - Commitments:
[1] Employment and consulting:
(a) The Company has employment and consulting agreements as of
October 1994 with its president, and a member of the board expiring during
January 1998 and January 1997, respectively. The contract requires aggregate
annual payment of $300,000. There is an option at the end of the term of each
agreement for the president and the member of the board to become consultants
for three years. Since June 1996, the president and the member of the board have
been paid 50% of their salaries. The remaining 50% will not be paid until the
Company obtains additional financing.
(b) The Company is party to employment agreements with the
director of technology, vice president of marketing, and two other employees.
The agreements provide for aggregate annual salaries of $460,000 and expiring
from October 1997 through April 1998. There is an option at the end of the term
of the agreement with the director of technology to become a consultant for two
years. The agreement with the vice president of marketing further provides for
additional salary
(continued)
- 15 -
INFOSAFE SYSTEMS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - Commitments: (continued)
[1] Employment and consulting: (continued)
of 2% of annual revenue net of certain expenses in excess of $1,000,000 as
defined. Since June 1996, the vice president of technology and the vice
president of marketing have received 50% of their salaries. The remaining 50%
will not be paid until the Company obtains additional financing.
[2] Profit sharing plan:
During January 1992, the Company adopted a Profit Sharing
Plan, whereby an amount equal to 3.5% of the pretax profit of the Company for
each fiscal year will be set aside for the benefit of employees as determined by
the Board. No funding was provided through July 31, 1996 as the Company incurred
a net loss for the periods.
[3] Leased equipment:
The Company entered into a leasing agreement for a telephone
system. The lease requires 36 monthly payments of $914 through July 1998 with an
interest rate of 11%. The Company had previously capitalized approximately
$28,000 of equipment.
[4] Leases:
The Company entered into a lease agreement for office and
research facilities which expires on June 30, 1997. The future minimum lease
payment on this lease is approximately 141,000. The Company also rents storage
facilities on a month to month basis. Aggregated rent expense was approximately
$94,000 and $171,000 for the years ended July 31, 1995 and July 31, 1996,
respectively. Subrental income was approximately $12,000 for each of the years
ended July 31, 1995 and July 31, 1996.
(NOTE K) - Contingencies and Other Matters:
During the year ended July 31, 1995 an arbitration award was issued in
favor of International Development Partners ("IDP"). The Company reserved
$340,000 at the time of arbitration award while the Company attempted to appeal.
During the year ended July 31, 1996 a final arbitration award resulted in a cash
payment, including expenses and fees of approximately $226,000, and the issuance
of 84,375 Class A Warrants to IDP valued at approximately $169,000.
(continued)
- 16 -
INFOSAFE SYSTEMS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE K) - Contingencies and Other Matters: (continued)
The Company and its president were parties to an action brought by the
former employer of such officer. On May 3, 1996, the plaintiff requested
permission from the Court to discontinue its claims against the Company and its
president with prejudice. The Company has agreed that the claim should be
discussed with prejudice and has asked the Court to require that the plaintiff
be required to pay a portion of the attorney's fees and costs the Company has
incurred in defending this action. The Company believes the plaintiff's proposed
claims lack any factual basis. If the plaintiff's claim is not discontinued, the
Company intends to vigorously defend such action.
In March 1996 the Company and its president filed a counter suit
against the plaintiff seeking an award of $20 million for damages and attorneys
fees as well as declamatory and injunctive relief. The plaintiff's withdrawal of
its claims does not affect the pendency of the Company's counterclaim, which
remains pending.
- 17 -
EXHIBIT INDEX
Exhibit Page
Number Description Number
-------- ------------- -------
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
23.1 Independent Auditors Consent
- ------------
(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.
EXHIBIT 11
INFOSAFE SYSTEMS, INC.
(a development stage company)
COMPUTATION OF NET (LOSS) PER COMMON SHARE
Year Ended July 31,
----------------------------
1995 1996
------------ ------------
Net (loss) attributable to common
shareholders. . . . . . . . . . . . . $(2,628,783) $(3,496,580)
=========== ===========
Weighted average number of Class A common
shares outstanding . . . . . . . . . . 1,479,986 2,641,907
Weighted average number of Class B common
shares outstanding . . . . . . . . . . 1,494,987 1,464,427
Add common share equivalents issued within
twelve months prior to an initial
public offering (determined by
the "treasury stock" method) . . . . . 85,050
Less escrow shares. . . . . . . . . . . . (781,244) (781,244)
----------- -----------
Weighted average number of common shares
and common share equivalents
outstanding. . . . . . . . . . . . . . 2,278,779 3,325,090
=========== ===========
Net (loss) per common share and common
share equivalents. . . . . . . . . . . $(1.15) $(1.05)
========= =========
The accompanying notes are an integral part
of these financial statements.
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 333-04361 on Form S-3 and Post-Effective Amendment on Form S-3 to
Registration Statement No. 33-83940 on Form SB-2 of Infosafe Systems Inc. of our
report, dated October 22, 1996, appearing in this Annual Report on Form 10K-SB
of Infosafe Systems Inc. for the year ended July 31, 1996.
RICHARD A EISNER & COMPANY LLP
New York, New York
October 31, 1996
