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, 1997
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
342 Madison Avenue, New York, New York 10173
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(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
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None None
Securities registered under Section 12(g) of the Act:
Class A Common Stock, $.01 par value
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(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: $17,323.
As of November 12, 1997 the issuer had 4,720,419 shares
of Class A Common Stock outstanding and 591,322 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 November 12,
1997 was approximately $6.4 million based on a
closing price for the Class A Common Stock of $1.5625 on
the Nasdaq Small Cap Market for such date.
DOCUMENTS INCORPORATED BY REFERENCE
Item 13. Exhibits List and Reports on Form 8-K See Exhibit Index on page 31
PART I
Item 1. Business
(a) General Development of Business
Infosafe Systems, Inc. (the "Company " or
"Infosafe") is 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, as
well as the technology licensed from Visus
Technologies, Inc. ("VTI"), and technology and methods
being developed by a new subsidiary of the Company,
Internet Commerce Corporation ("ICC"), address
critical areas of electronic commerce such as
security, delivery, verification, and metering of
information. The Company is seeking to position itself
as an independent third party to authenticate,
certify, validate, authorize, and facilitate secure
transactions for electronic information.
The Company has realized minimal revenue and
incurred substantial losses since inception and
anticipates continued losses through fiscal year
ending July 31, 1998, as it continues to seek
commercial markets for its current products and
develops new applications for its technology. In
February through April of 1997, Infosafe raised $5.05
million gross proceeds in a private placement. A
portion of the financing was used to form and purchase
a majority interest in ICC and to license Visus'
technology and is being used for the development and
marketing of those product lines. The remainder was
used to create and fund an in-house Call Center to
promote the use of the Company's CopySafe Metering
System and service. In addition, the Call Center will
be used for telemarketing ICC's service once it is
ready for commercial launch.
Arthur R. Medici, the Company's President and
Chief Executive Officer, has introduced a new
management team with experience in Internet
technology, electronic marketing, and customer service
orientation. The research and development group has
been replaced to reflect this new skill set, and is
now under the direction of David Hubbard, who jointly
serves as Chief Technology Officer for Infosafe and ICC.
Although management believes that the Company will be
successful in developing and marketing the new line of
Electronic Commerce (EC) and advanced imaging products
and services, there can be no assurance that it will
be able to do so, or that its present resources or
access to additional financing will be adequate to
achieve these objectives, or to continue as a going
concern.
The Company's revised strategic direction and
market emphasis resulted in certain staff and other
restructuring. Walter M. Psztur, the Controller and
Secretary, was appointed on September 22, 1997.
Additionally, the Board of Directors has been
reorganized. Former Infosafe Chairman Thomas H.
Lipscomb did not seek reelection, and resignations
were submitted by Alan N. Alpern, Frank Schwab, Jr.,
and William N. Walker. The vacancies were filled by
Neal Freeman, Robert Christie, and Stanley Bielak.
Much of Infosafe's development efforts to launch
and support its Design Palette system, incorporating
the proprietary Mark III hardware unit, have been
adversely affected by the rapid development of the
Internet. The market favors Internetcompatible
products and services rather than proprietary hardware
solutions. Given the absence of a revenue stream and
the projected cost of upgrading the Design Palette
product library and software configuration to make it
competitive with other offerings, including Internet
delivery, Infosafe is no longer supporting Design
Palette.
The Company initially developed the Mark III, an
encryption and metering control unit, as a hardware-
based solution to the distribution of information.
Because the Company believes that software-based
distribution systems provide advantages over the Mark
III hardware system, it has suspended further
development of the Mark III and related software-based
mechanisms. The Company has written down assets held
for lease, consisting of its Mark III control units,
to an estimated salvage value of approximately $9,000,
resulting in a write off of approximately $396,000 for
the fiscal year ended July 31, 1997 ("Fiscal 1997").
In addition, the Company has determined that the
related software development and patent costs would
also not realize their value, and has written off the
remaining unamortized value of approximately $65,000
and approximately $46,000, respectively, during Fiscal
1997. Consequently, there were aggregate write-offs of
approximately $507,000 for Fiscal 1997.
In April 1997, Infosafe formed and purchased a
majority interest in Internet Commerce Corporation
(ICC), which develops Internet-based products and
services for the electronic commerce (EC) marketplace.
ICC expects to capitalize on its expertise in the
procurement process, Electronic Data Interchange (EDI)
and the capabilities of the Internet to develop new
products and services focusing on the electronic
transmission of business documents. The ICC Web-based
service hopes to provide a lower cost alternative to
Value Added Networks (VANs) for Fortune 1000 companies
using traditional EDI to transact business with
suppliers. ICC also plans to make paperless commerce
transactions affordable to small and midsize companies
and suppliers. During its system development stage,
ICC has sought input from major corporations, many of
which have expressed interest in this type of service,
and several of which have indicated their willingness
to provide beta test sites for the ICC service.
Infosafe funded ICC in an amount of $500,000 of
capital and also provided administrative and overhead
support for ICC of up to $24,000 a month for six
months of its operation. The Company is seeking to
raise additional financing for ICC to expedite the
commercial availability of ICC service offerings.
Subject to negotiation of a mutually satisfactory
asset purchase agreement, Infosafe has given notice of
its intention to exercise its option to purchase
substantially all of the assets Visus Technologies,
Inc. ("VTI"), a Pittsburgh, Pennsylvania development
stage company which develops unique Internet imaging
systems and services using proprietary software tools.
Infosafe had previously obtained a license from VTI
for an advance royalty of $150,000. See "Business -
Advanced Imaging Systems and Outsourcing Services." If
the transaction is consummated, Infosafe will acquire
all of VTI's assets and assume certain liabilities, in
exchange for consideration consisting of a currently
indeterminate number of shares of Class A Common
Stock, to be determined based on, among other factors,
the level of any sales of products utilizing VTI's
technology included in the acquired assets. Infosafe
intends to use VTI's technology in combination with
its own patented technologies in an attempt to
generate sales delivery channels for documents and
images over private and public networks.
In February 1997, Infosafe launched The
CopyRight!SM Metering System, an electronic copyright
permissions vending system designed for quick print
chains and other photocopy venues. Based on
proprietary technology, the metering system enables
customers to obtain on-demand the necessary copyright
license to legally reproduce copyrighted materials
registered with Copyright Clearance Center, Inc.
("CCC"), the largest licensor of photocopy reproduction
rights in the United States. Infosafe and CCC jointly
launched the CopyRight turnkey system at the National
Association of Quick Printers Association ("NAQP")
Owners' Conference in February 1997. To date, there
have been no commercial installations of the system,
and it appears that copy and print shops prefer a
software-based solution. Therefore, in May 1997, the
Company launched a toll-free service enabling copy
shops to call the Company and request permission to
reproduce material from specific publications. Once
credit card payment has been authorized, the Company
faxes a certificate that confirms rights have been
granted.
Given its limited resources, and the requirements
of its current initiatives outlined above, the Company
has discontinued programs for the commercial
distribution of photographic images to the graphics
industry, and its auditing system for World Wide Web
sites.
The Company was incorporated under the laws of
the State of Delaware on November 18, 1991, and
commenced operations in January 1992. The Company's
executive offices are located at 342 Madison Avenue,
New York, New York 10173 and its telephone number is
(212) 867-7200. See "Properties."
(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 the
transmission of digitally stored information products.
(c) Narrative Description of Business
The Company's Technology and Products
Infosafe is developing Internet-based products and
services to facilitate electronic commerce ("EC") transactions
on the Internet and other networks for commercial and
governmental niche markets. The Company has expertise
in the areas of business-tobusiness EDI, advanced imaging
applications and on-demand copyright authorization. Through a
policy of strategic partnerships, technology licensing
agreements, acquisitions and financing new business
formations, Infosafe has undertaken the development of
capabilities to meter, certify, validate, authorize,
authenticate and facilitate transactions over
intranets and the Internet.
Internet Commerce Corporation
Infosafe formed and owns a majority interest in
Internet Commerce Corporation ("ICC"), a company which
designs, develops and markets products and services
for the EC marketplace.
ICC is developing an EC system composed of both
Internet connectivity and packaged software offerings
which provide a low cost alternative service to Value
Added Networks (VANs), which currently dominate the
corporate EDI market. ICC is developing EDI and EC
services that draw on senior management's procurement
industry expertise and access to Fortune 1000
accounts. ICC has assembled a technical staff with
significant experience in EDI, real-time
communications, database systems, security
technologies, and Internet/Intranet integration.
ICC will initially target Fortune 1000 companies
using traditional EDI to transact business with
suppliers. By creating a secure distribution system
over the Internet featuring document conversion
services and real-time communications, ICC expects to
make paperless commerce transactions affordable to
small and midsize companies and suppliers. This open
system approach is designed to enable large
corporations to connect with the majority of their
vendors --large and small -- resulting in significant
savings in processing time and staff.
Based on a patent held by Infosafe, ICC can send
encrypted documents across the Internet, which upon
receipt at the destination, are simultaneously
decrypted, branded (i.e., assigned a unique
identifier) and logged for the purposes of
verification and non-repudiation.
Advanced Imaging Systems & Outsourcing Services
Through an exclusive license and the proposed
acquisition of VTI's assets, Infosafe has, through
such license, and will, through such proposed
acquisition, acquire rights to unique imaging systems
and services incorporating proprietary software and
software development tools. Utilizing advanced
imaging processing technologies developed by a team of
scientists at Carnegie Mellon University's Imaging
Systems Lab, Infosafe can provide a turn-key solution
for converting paper-based archives of documents and
images into searchable digital files for distribution
and sale over the Internet or Intranet.
It is anticipated that this product line will to
include: Feature Center, a multi-level software platform for
developing advanced image processing applications;
Scan2Web, an Internet software application for the
online delivery of documents via the Internet, and a
line of Internet publishing tools.
The Scan2Web technology is at the core of an
imaging system that allows record management
archivists to electronically process and fulfill
requests for copies of documents using conventional
scanning technology and imaging formats. An important
feature of this system is that no special software or
hardware, other than a standard Web browser, is
required to view and/or download the documents posted
on the Internet. With this system, any user with an
Internet connection (i.e., standard Web browser) can
browse through the digital records at no cost,
electronically order and pay for copies on-demand, and
download the purchased document(s) to a computer,
local storage device or printer. However, the Scan2Web
technology ensures that users purchase a document
before obtaining a "business quality" copy.
Feature Center (patent pending), which is currently
under development by VTI, will reduce the programming time
and complexity to assemble, test and deliver an image
recognition solution. The Feature Center development
project has been developed in cooperation with the
National Institute of Standards and Technology.
The CopyRight!SM Metering System
Infosafe has developed the first electronic
vending system for obtaining on-demand permission to
photocopy copyrighted material. Introduced this year,
The CopyRight Metering System enables customers to
purchase copying authorization from a database of more
than 93,000 copyrighted titles controlled by CopyRight
Clearance Center, Inc. ("CCC"), the largest licensor of
photocopy reproduction rights in the United States.
The Company has concerns about the marketability of
this product, and its related toll-free telemarketing
service to provide similar copyright authorizations.
Internet Commerce Corporation
ICC is developing Internet-based EDI and EC
services that it expects will provide a lower cost
alternative to Value Added Networks (VANs), which are
based on high-cost, high-maintenance private network
infrastructures. The Company believes that many
corporations today that have invested in EDI using
VANs are only connected to their largest vendors,
creating a "big player to big player" market. ICC will
initially target large corporations using VAN services
who despite an investment in EDI, are not connected to
many of their vendors and must still process a large
volume of paper transactions manually. The Company
believes a Webbased procurement system offers key
advantages over VAN networks, such as lower per-
transaction costs, standard browser access and low
software start-up costs. The ICC services are designed
to make connections affordable to midsize and small
vendors and suppliers.
Given the high-level decision typical for this
type of service, the initial sales effort will be the
responsibility of the management team. Once a
customer base is developed, a focused team of
seasoned sales executives will be recruited to
penetrate specific industry segments. In addition, a
team of systems engineers will be established to
ensure optimum user awareness and acceptance of the
ICC service. Ultimately, sales and marketing will be
deployed on a regional basis, and consist of face-to-
face selling, telemarketing, electronic marketing,
and computer-aided instruction. This effort will be
supported by extensive advertising, direct-mailings,
and a public relations campaign.
Advanced Imaging Applications & Outsourcing
Infosafe is marketing (under a license agreement
with VTI) Internet imaging services to two specific
client sectors: (i) county, state and federal
government agencies that have paperbased archives of
public documents and deeds, and (ii) private
companies with archives available to the public.
Infosafe is currently demonstrating an Internet-
based County Records Manager (CRM) system to several
County Clerk's Offices with large, paper-based
archives, which must manually process and fulfill
orders for copies of deeds. While aware of the
benefits of migrating to online services, the Company
believes that many government agencies are hindered
by the high costs traditionally associated with
document conversion, building and maintaining an
electronic delivery channel and supporting multiple
user interfaces. The VTI Scan2Web-based system
provides an affordable, secure solution. While any PC
user with a browser is able to search the electronic
archives at no cost, they must purchase a document
online to receive a "business quality" digital copy.
Infosafe will concentrate its initial efforts on
customizing and installing image processing
applications at a limited number of public and
corporate sites. These installations will serve as
reference accounts to showcase the technology's
utility and ease. The Company hopes to pursue the
Value Added Reseller and Distributor markets by
creating "packaged" Internet Imaging applications
with the planned launch of Feature Center in late
1998-early 1999. The Company anticipates that it will
market Feature Center in combination with Scan2Web
processing modules and support services.
CopyRight!SM Metering System & Toll-Free Service
The CopyRight! Metering System, an electronic
copyright permissions system for in-store use, was
launched at the National Association of Quick
Printers Association (NAQP) Owners' Conference in
February 1997. From the initial response, it appeared
that commercial copy and print shops prefer a
softwarebased solution that requires no in-store
installation. To gain acceptance for this new
product, as well as to create market demand for
instant copyright permissions within commercial copy
shops, the Company launched a companion toll-free
service in May 1997.
Infosafe has promoted its new toll-free service
for instant copyright permissions in cooperation with
some of the nation's largest copy shop franchisers.
As part of the promotions, a floppy disk containing
customizable marketing materials (i.e.,
advertisements, flyers and posters) were distributed
by certain national chains to their individual store
owners. Additionally, the Company has exhibited at
two major NAQP Conferences during 1997; however, the
commercial viability of this service has not yet been
demonstrated.
The Company signed a two-year agreement with
Copyright Clearance Center, Inc. in December 1996 with
respect of the Company's offering of the Infosafe copyright
metering system to commercial locations which will
provide users access to CCC's licensing facilities
and database. The CCC Agreement requires the Company
to provide equipment and services to the vendor at
the Company's expense. Both CCC and the Company
receive transactional fees from the copyright
metering system customers. The agreement with CCC
does not include a specific commitment that CCC will
provide the Company with full access to its database
and licensing facilities during the term of the
agreement nor does it restrict CCC's right to grant
such access to other companies. Accordingly, there
can be no assurance that CCC will continue to provide
access to its database and licensing facilities to
the Company or that CCC will not grant access to its
database and licensing facilities to competitors of
the Company. Furthermore, there can be no assurance
that the agreement with CCC will be
renewed after the expiration of its term.
Proprietary Rights and Intellectual Property
On August 26, 1997, the Company was granted
patent No. 5,661,799 entitled Apparatus and Storage
Medium for Decrypting Information. The essential
components of this patent include 1) the decryption
of encrypted information without requiring that
decryption keys be transmitted from one place to
another, 2) the decryption of encrypted information
which employs different keys for different segments
of information, and 3) the disabling of a system for
the decryption of encrypted information if a user is
no longer authorized to retrieve information.
On January 7, 1997, the Company was granted
patent No. 5,592,549 entitled Method and Apparatus
for Retrieving Selected Information from a Secure
Information Source. There are three essential
components to this "Branding Patent:" 1) decryption
of an electronic item or product i.e. a document or
software, 2) the attachment of an identifying serial
number, 3) the logging of the item number and serial
number. By attaching a "brand" at the time the
document is decrypted from a secure data source, an
"audit trail" of the decrypted information can be
maintained.
The Company plans to use these patents for the
secure storage requirements of the Electronic
Commerce service currently in development by ICC.
In February 1995, the US Patent and Trademark
Office granted the Company US Patent No. 5,394,469
entitled, "Method and Apparatus for Retrieving Secure
Information From Mass Storage Media," for its system
to retrieve and monitor the use of protected
information from various digital media. In December
1995, the Company was granted US Patent No. 5,473,687
entitled, "Method for Retrieving Secure Information
from A Database," covering its technology for
providing a secure method for the commercial
distribution and use of digital information on a
rental basis using a technique to discourage long-
term use without endangering the computer or the
operating system.
The Company believes, however, that commercial
protection of its products will depend primarily on
the proprietary algorithms and encryption techniques
embodied in its technology retaining their status as
"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 customers,
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. 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.
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, PROTECTED BY
INFOSAFE and DESIGN PALETTE have been registered
with the United States Patent and Trademark Office.
The applications to register AUDINET and AUDITED BY
INFOSAFE 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.
Research and Development
Infosafe has reorganized its technology
department to facilitate a new Intranet and Internet-
based product development strategy. The Company's new
Chief Technology Officer and Vice President of
Engineering has built a staff of technical
professionals with experience in EDI, real-time
communications and messaging systems, database
systems, security technologies, and Internet/Intranet
integration.
Infosafe will also maintain a research and
development operation in Pittsburgh, PA for the core
team of advanced imaging application programmers who
were instrumental in the development of Scan2Web.
They will support Scan2Web application users, while
continuing to develop Features Center.
For the fiscal year ended July 31, 1997, the
Company expended $713,442 on research and development
activities. From its inception on November 18, 1991
through July 31, 1997, the Company expended
$2,725,036 on research and development activities.
At July 31, 1997, the Company had an aggregate of 7
employees and consultants engaged in research, design
and development activities.
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 Commerce (EC), advanced imaging
applications, 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 economic than those being
developed by the Company.
Internet Commerce Corporation
The EDI market for Fortune 1000 corporations is
currently dominated by Value Added Network (VAN) suppliers.
According to recent Interactive Data Corporation
("IDC") industry research, large VANs are grossing
over $7 billion in revenues worldwide annually, and
the US market is experiencing a 30% annual growth
rate. With a proprietary closed loop architecture,
the costs associated with VAN implementation have
been historically high for many small and mid-sized
trading partners.
ICC believes its low-cost alternative Internet-
delivered EDI and EC services will offer competitive
advantages, based on gains in transmission speed,
document conversion capabilities and lower entry
costs, and that these innovations will enable clients
to connect with a greater number of their vendors and
suppliers, regardless of size.
Other companies have announced intentions to
launch competitive EC, procurement and EDI services
via the Internet, including IBM, General Electric
Information Services ("GEIS"), Harbinger, Sterling
Commerce and start-up Ariba Technologies. Since this
is a highly-competitive market, there can be no
assurance that the Company's competitors will not
succeed in developing technologies and products that
are more effective or economic than those being
developed by the Company.
Advanced Imaging Applications
Competition in the field of advanced imaging
applications is growing. Large organizations such as IBM,
Hewlett-Packard, Adobe Systems, Inc. and others market
imaging products that deliver some of the benefits of
the Scan2Web imaging solution. Watermark, Westbrooke
Technologies and other companies have document
management and imaging features in products that
provide some of the functionality of the Scan2Web.
Additionally, commercial Webbased companies, such as
JFAX, FaxSav and NetCentric, offer services to
transmit facsimile document images over the Internet.
Infosafe believes Scan2Web provides low cost
distributed imaging and document management that can
potentially service a broader market than can be
addressed by the more expensive systems. Scan2Web
system advantages include a reduction in the cost of
paper-to-digital document conversion; elimination of
specialized software or training, and access to
electronic archives using only a conventional Web
browser. Infosafe provides outsourcing services, and
will assume control of the archive conversion,
management and distribution processes.
However, Infosafe believes Scan2Web offers
innovations in ease-of-use that will appeal to a mass
market. With the Company's image processing systems,
no special software is required to transmit faxes for
posting on a client Web site and a standard browser
can be used to access and search its Web-based
archives.
The CopyRight!SM Metering System & Toll-free Service
The CopyRight! Metering System is the first
electronic turnkey system to provide instant, on-demand
copyright permissions for customers of quick print
and copy shops. Although no other competitive system for
in-store installation exists, the Company has not yet
determined the marketability of this service.
The toll-free service is currently being test
marketed in cooperation with certain national quick
print franchisers. Copyright permission can also be
obtained directly from publishers, or by calling
Copyright Clearance Center. Infosafe intends to
provide rapid turn-around times. The Company hopes
this will generate sufficient market demand to
support the telemarketing service, which, to date,
has not yet been determined to be marketable.
Service and Support
Infosafe is providing customer support and sales
for the toll-free copyright permissions staff using
internal staff. The Company plans to hire
professional telemarketers to contact the franchisees
stores who received promotional materials as part of
a national chain-wide promotion.
Employees
At July 31, 1997, the Company had 14 full-time
employees and three consultants. Seven of these
individuals are engaged in design and development,
five 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 at its principal executive offices at
342 Madison Avenue, in New York, New York, pursuant to a
lease which expired June 1997 and is on a month to month
lease. In October 1997, the Company entered into a
new lease agreement for a new principal executive office of
approximately 5,900 square feet at 805 Third Avenue, New York,
NY, and anticipates a January 1, 1998 occupancy.
Item 3. Legal Proceedings
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) be unable to
commercialize products based on its technology, (ii)
ever achieve profitable operations, or (iii) not
receive additional financing as required to support
future 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.
On May 29, 1997, the Company filed a Demand for
Arbitration with the American Arbitration Association
against its former Director of Technology, Robert
Nagel, seeking $200,000 to compensate the Company for
breach of contract, breach of fiduciary duty and
misappropriation of corporate opportunity. Mr. Nagel
has asserted counterclaims seeking damages of
approximately $1.4 million arising from alleged
discrimination under the Americans with Disabilities
Act, defamation, and breaches of other statutes. The
Company does not believe that Mr. Nagel's
counterclaims are meritorious and intends to
vigorously defend against the counterclaims, while
prosecuting its claim in arbitration against Mr.
Nagel. The matter is in the early stages of
discovery. The arbitration hearings have been
scheduled for April 1998.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
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, respectively. The following
table sets forth the high and low closing bid prices
of the Company's securities for the periods
indicated. 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, 1997
High Low
------------- -------------
Units
---------------------------
1st Quarter $ 9 3/4 $7 1/4
2nd Quarter 9 1/2 3
3rd Quarter 9 5
4th Quarter 8 1/8 2 5/8
Class A Common Stock
---------------------------
1st Quarter 5 5/8 3
2nd Quarter 4 3/4 2 1/16
3rd Quarter 4 13/64 2 5/16
4th Quarter 4 1/8 1 1/4
Class A Warrants
---------------------------
1st Quarter 2 15/16 1 1/2
2nd Quarter 3 1/2 5/8
3rd Quarter 3 1/16 1 1/4
4th Quarter 2 3/4 3/4
Class B Warrants
---------------------------
1st Quarter 2 1/2 1 1/4
2nd Quarter 2 1/2 3/8
3rd Quarter 2 7/8 7/8
4th Quarter 2 1/2 1/2
(b) Approximate Number of Equity Security Holders
As of July 31, 1997, there were approximately 180
record holders of the Company's Class A Common Stock,
approximately 15 record holders of the Company's
Class B Common Stock, approximately 100 record
holders of the Company's Class E-1 and Class E-2
Common Stocks, and approximately 150 record holders
of the Company's Class A and Class B Warrants.
(c) Dividends
The Company has never paid and has no current
intention of paying for the foreseeable future, a
cash dividend on its Common Stock since the Company's
Board of Directors has determined that it is in the
best interest of the Company and its stockholders to
follow a policy of retaining earnings to finance
future growth.
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 additional financing expected to be required
during the fiscal year ending July 31, 1998. The
Company's actual results could differ materially from
those discussed herein. See "Legal Proceedings."
Overview
The Company is a development stage company engaged in
the design, development and marketing of systems for
securing, controlling, metering and auditing
electronic products, documents and programs, for use
in stand-alone applications, corporate networks and
open networks such as the Internet. From November 18,
1991 (inception) to July 31, 1997, the Company
recognized revenues of approximately $609,000 and had
an accumulated deficit of approximately $11.3
million. The Company has continued to operate at a
deficit since inception, and it expects to continue
to operate at a deficit until such time, if ever, as
operations generate sufficient revenues to cover
costs. The Company's ability to generate revenues and
operate profitably, and to continue as a going
concern, is dependent on its ability to
launch and market the new product lines developed by
its majorityowned subsidiary Internet Commerce
Corporation (ICC), as well as its ability to
commercialize the advanced imaging applications
licensed from Visus Technologies Inc. The likelihood
of the success of the Company must be considered in
light of the difficulties and risks inherent in a new
business. There can beno assurance that revenues will
increase significantly in the future or that the Company
will ever achieve profitable operations.
In February and March, 1997, the Company realized net
proceeds of approximately $4,165,000 from gross
proceeds of $5,050,000 raised in a private placement
(the "1997 Private Placement") of 1,603,200 IPO
Units. Each IPO unit consists of one share of Class A
Common Stock, 1.1172 redeemable Class A Warrants and
1.1172 redeemable Class B Warrants. As a result of the
sale of the securities in the 1997 Private Placement,
pursuant to the anti-dilution provisions contained in
the Class A Warrants and the Class B Warrants, the
purchase price to be paid upon exercise of each Class
A Warrant and Class B Warrant of the Company by the
holder of such warrants has been adjusted from $6.50
to $5.82 for the Class A Warrants and from $8.75 to
$7.83 for the Class B Warrants. Further , as a result
of the 1997 Private Placement, an additional 0.11721
Class A Warrants were issued for each outstanding
Class A Warrant and an additional 0.11721 Class B
Warrants were issued for each outstanding Class B
Warrant. Accordingly, an aggregate of an additional
494,623 Class A Warrants and 396,830 Class B Warrants
were issued by the Company to holders of outstanding
Class A Warrants and Class B Warrants respectively,
resulting in an aggregate of 4,714,718 Class A
Warrants and 3,782,550 Class B Warrants outstanding.
Additionally, the Company has extended the expiration
date of the Class A Warrants and the Class B Warrants
to February 18, 2002.
The Company has incurred substantial losses since
inception and anticipates losses to continue through
the fiscal year ending July 31, 1998 ("fiscal 1998")
as the Company attempts to seek commercial markets for its
products and attempts to develop new applications for
its technology. The net proceeds of the 1997 Private
Placement were used to form and purchase a majority
interest in ICC and to license Visus' technology, and
is being used for the development and marketing of the
new product lines. Although management believes that
the Company will develop and market the new line of
Electronic Commerce (EC) and advanced imaging products
and services, there can be no assurance that it will
be able to do so or that its present resources or
access to additional financing will be adequate, if
available at all, to achieve these objectives or to
continue as a going concern.
Results of Operations
Fiscal Year Ended July 31, 1997 compared with Fiscal Year Ended July 31, 1996.
For the fiscal year ended July 31, 1997 ("fiscal
1997"), the Company recognized revenues of
approximately $17,000 from sales generated by Design
Palette compared to revenues of $51,000 in the fiscal
year ended July 31, 1996 ("fiscal 1996"). The Company
has discontinued development and marketing of the
Design Palette, the Company's first commercial product. See
"Business."
Research and development for fiscal 1997
decreased from $934,403 in fiscal 1996 to $713, 442 in
fiscal 1997. The decrease is attributable to the
revised strategic direction taken by the Company and
the corresponding turnover in personnel, leading to
decreased salary, consulting and related costs. In
addition, rental allocation was reduced due to
decreased utilization of lab space.
Selling, general and administrative expenses
decreased from $2,223,802 in fiscal 1996 to
$1,900,758 in fiscal 1997. The decrease is
attributable to the revised strategic direction of the
Company and the corresponding turnover in personnel,
leading to decreases in salary, consulting and related
costs.
Equipment previously held for lease was composed
of the Company's Mark III unit and CD-ROM's. The
Company's management has determined that since the
industry is moving from hardware solutions to software
solutions, the Company will not realize any value for
its equipment held for lease. In addition, the
Company has determined that the related software
development and patent costs would also not realize
their value and has written off the remaining
unamortized value of approximately $65,000 and
approximately $46,000, respectively, during fiscal
1997. Consequently, this resulted in aggregate write-
offs of approximately $507,000 for fiscal 1997.
Interest and investment income decreased from
$228,553 in fiscal 1996 to $90,448 in fiscal 1997.
The decrease is due to a decrease in average balances
of investment securities for the period.
Interest expense was $1,647 in fiscal 1997
compared to $24,783 in fiscal 1996. Interest expense
is attributable to the financing of capital assets.
The net loss for fiscal 1997 was $3,068,066
compared to $3,496,580 in fiscal 1996. Management
believes that losses will continue through fiscal 1998
as the Company is still in the development stage and
is in the process of commercializing and marketing new
products.
Liquidity and Capital Resources
The Company has incurred substantial losses since
inception. Although no assurance can be given, the
Company anticipates that revenues may be generated
commencing with the fiscal quarter ending April 30,
1998, although as a result of increased expenses
associated with any such revenues, losses may
increase, or the decrease in losses realized in fiscal
1997 compared to fiscal 1996 may not be similarly
realized in fiscal 1998 compared to fiscal 1997. At
July 31, 1997, the Company had working capital of
approximately $2.5 million. The Company has financed
its operations primarily through private placements
during fiscal 1994, its initial public offering during
fiscal 1995 (the "IPO") and a private placement in
March 1997. The Company anticipates losses through
fiscal 1998 as the Company attempts to market its
products and to develop new applications for its
technology. The Company does not have sufficient
financial resources to continue its operations beyond
fiscal 1998 without obtaining additional financing.
There can be no assurance that the Company will be
able to obtain the necessary financing or to generate
sufficient revenue to continue its operations and
continue as a going concern. Any additional equity
financing would be dilutive to stockholders, and debt
financing, if available, may contain covenants that
might restrict the Company's ability to implement
its current objectives.
The report of the Company's independent auditors
on the Company's financial statements as of July 31,
1997 and for the years then ended and for the period
from November 18, 1991 (inception) to July 31, 1997
contains a paragraph regarding the uncertainty with
respect to the ability of the Company to continue as a
going concern. The Company's ability to increase its
revenues and reduce or eliminate losses will be
dependent on its success in launching and marketing
its new products.
The Company has a net operating loss carryforward
for tax purposes of approximately $10.0 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
2012. The Internal Revenue Code of 1986, as amended,
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 IPO, the net
operating loss carryover of approximately $1,900,000
incurred prior to the IPO will be subject to an annual
limitation of approximately $400,000 until that
portion of the net operating loss is utilized or
expires.
In conjunction with the 1997 Private Placement,
certain
employees/shareholders and directors of the Company
agreed to contribute unpaid salaries aggregating
approximately $146,000 during fiscal 1997.
Possible Delisting of Securities from the Nasdaq Stock Market
While the Company's Units, Class A Common Stock,
Class A Warrants and Class B Warrants are currently
listed on the Nasdaq SmallCap market, there can be no
assurance that the Company will meet recently revised
criteria for continued listing, which will become
effective as of February 23, 1998.
The Company has been advised by Nasdaq that it may not
be able to meet the revised criteria for continued
listing. If the Company is unable in the future to
satisfy Nasdaq's maintenance requirements, its
securities may be delisted from Nasdaq. In such event,
trading, if any, in the Units, Class A Common Stock
and Warrants would thereafter be conducted in the
over-the-counter market in the NASD's "Electronic
Bulletin Board." The securities could also become
subject to Rule 15g-9 under the Securities and
Exchange Act of 1934, as well as to the "penny stock"
Securities and Exchange Commission regulations.
Consequently, in either case, the liquidity, trading
prices, and volume of the Company's currently listed
securities could be materially adversely affected.
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, incur during the periods in which
the earnings thresholds are met or are probable of
being met or such minimum bid prices attained,
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. Such
charge would not be deductible for federal income tax
purposes. 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.
Effect of Outstanding Operations and Warrants; Registration Rights
After giving effect to the issuance of the securities
issued in the 1997 Private Placement and the anti-
dilution adjustments in the exercise price of the
Class A Warrants and Class B Warrants issued and
outstanding or issuable upon the exercise of certain
options the Company had outstanding: (i) an aggregate
of 4,714,718 Class A Warrants (including 494,623 Class
A Warrants issuable pursuant to anti-dilution
provisions contained in such Class A Warrants)
exercisable for 4,714,718 shares of Class A Common
Stock and 4,714,718 Class B Warrants; (ii) an
aggregate of 8,497,376 Class B Warrants (including the
4,714,718 Class B Warrants issued on the exercise of
Class A Warrants, and including 891,453 Class B
Warrants issuable pursuant to antidilution provisions
contained in such Class B Warrants), exercisable for
8,497,376 shares of Class A Common Stock; (iii) the
Unit Purchase Options issued to Blair and its
designees in connection with the Company's IPO and the
Company's 1997 Private Placement to purchase an
aggregate of 716,146 Units identical to the Units sold
in the IPO and the 1997 Private Placement, such Units
containing an aggregate of 716,146 shares of Class A
Common Stock, 800,082 Class A Warrants and aggregate
of 1,600,164 Class B Warrants (including 800,082 Class
B. Warrants underlying the Class A Warrants), such Class A
Warrants and Class B Warrants exercisable for an aggregate
of 2,400,246 shares of Class A Common Stock (including 251,808
shares of Class A Common Stock issuable pursuant to
anti-dilution provisions contained in such Warrants);
(iv) options to purchase 966,999 shares of Class A
Common Stock under the 1994 Plan; (v) options to
purchase 57; 500 shares of Class A Common Stock,
28,750 shares of Class E-1 Common Stock and 28,750
shares of Class E-2 Common Stock under the 1992 Plan
and (vi) 210,314 other warrants (the "Private
Placement Warrants") (including 22,064 warrants
issuable pursuant to antidilution provisions contained
in such warrants) to purchase 210,314 shares of Class
A Common Stock, 94,125 shares of Class E1 Common Stock
and 94,125 shares of Class E-2 Common Stock. For the
respective terms of such securities, the holders
thereof are given an opportunity to profit from a rise
in the market price of the Company's Class A Common
Stock with a resulting dilution in the interests of
the other stockholders. The existence of the Stock
with a resulting dilution in the interests of the
other stockholders. The existence of the IPO Unit
Purchase Options, outstanding options and warrants,
Class A Warrants, Class B Warrants, and other options
that may be issued by the Company may hinder future
financing by the Company. Further, the holders of such
options and warrants may exercise them at a time when
the Company would otherwise be able to obtain
additional equity capital on terms more favorable to
the Company. No prediction can be made as to the
effect, if any that sale of these securities or the
availability of such securities for sale without
restriction will have on the market prices of the
Company's securities prevailing from time to time.
Nevertheless, the possibility that substantial amounts
of securities may be sold in the public market may
adversely affect prevailing market prices for the
Company's securities and could impair the Company's
ability to raise capital through the sale of its
securities.
In addition, holders of the IPO Unit Purchase
Option and the Private Placement Unit Purchase Option
have registration rights with respect to such option
and the underlying securities. Exercise of the
registration rights may involve substantial expense to
the Company. Additionally, as of May 22, 1997, the
Company's other warrants were exercisable through
September 10, 2002 at exercise prices of $.50 to $2.50
per share, and contain anti-dilution provisions,
demand and "piggy-back" registration rights.
Possible Adverse Effect on Liquidity and Trading Prices of the
Company's Securities Due to Certain Legal Matter Involving
D.H. Blair Investment Banking Corp. and D.H. Blair & Co., Inc.
Based upon publicly disseminated information, the
Company understands that the NASD Regulation, Inc. fined
Blair Inc. ("Blair") $2 million, and ordered Blair to
repay approximately $2.4 million to investors who were
overcharged as the result of excessive markups in initial
public offering transactions involving securities of 16 issuers,
including Infosafe. Certain employees of Blairwere also
fined an aggregate of $525,000.
Based on public reports, in its settlement with the
NASD, Blair neither admitted nor denied the
allegations. The NASD has not suggested that
Infosafe or the other companies knew of, or were
involved in, these violations.
The action taken by NASD could limit Blair's ability
to continue making a market in the Company's securities, which
could adversely affect the liquidity or trading
prices, or continued listing, of such securities.
Financial Statements
The response to this item is submitted in a separate section
of this report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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
---------------------- ----- ------------------------------
Arthur R. Medici 48 Chief Executive Officer,
President and Director
Alan N. Alpern 70 Chief Financial Officer
Stanley Bielak 50 Director
Robert S. Christie 43 Director
Neal B. Freeman 57 Director
Charles C. Johnston 62 Director
Arthur R. Medici has been President, Chief
Executive Officer, and Director of the Company since
December 1996. From August 1994 to December 1996,
Mr. Medici was President of the North American
division of Derwent Information, Ltd., a producer of
international patent abstracts and information
formatted for print, CD-ROM and digital online
delivery. From November 1990 to August 1994, Mr.
Medici was Senior Vice President at Thomson &
Thomson. Both companies are subsidiaries of The
Thomson Corporation's Intellectual Property
Resources Group.
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. From October 1995 until July
1997, he was a Director. Since October 1996, he has
been Chief Financial Officer of American Pharmed
Labs 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.
Stanley Bielak has been a Director of the
Company since August 1997. Mr. Bielak is the founder
and Chief Executive Officer of Information Transport
Associates Inc., a developer of middleware for
remote and mobile computing applications. From
1978 to 1982, he was a co-founder and Chief Executive
Officer of Conservation Controls Inc., a manufacturer
of microprocessor control used for commercial
refrigeration systems. A management expert, Mr.
Bielak has served as Chief Executive Officer of
several companies, including Transportation Management
Systems Inc., Utilitrol Inc., Seed Software Inc. and
Axiom Software Inc.
Neal B. Freeman has been a Director of the
Company since June 1997. Mr. Freeman is Chairman and
Chief Executive Officer of The Blackwell Corporation,
a Peabody award-winning television production company
he founded in 1981. He also founded and served for 12
years as President and Chief Executive Officer of
Jefferson Communications, Inc.
Robert S. Christie has been a Director of the
Company since March 1997. Mr. Christie, an operations
executive with extensiveexperience in the international
real-time information industry and higher education markets,
was named President and Chief Executive Officer of Thomson &
Thomson Corporation, a trademark and copyright
services and information company, in November 1996.
Prior to joining Thomson & Thomson, he was President
of the McGraw-Hill College Book Company (1994-1996),
and prior to that, Group Vice President for Equity
Information Services at Standard & Poor's Information
Company (1990-1994).
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.
During Fiscal 1997, Thomas H. Lipscomb, Chairman
of the Board and former Chief Executive Officer,
resigned as a Director and Chief Executive Officer of
the Company. Resignations were also submitted by
former board members William N. Walker, Frank Schwab,
Jr. and Alan N. Alpern.
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:
David Hubbard Chief Technology Officer/Vice President of
Engineering -Infosafe/ICC
Michael Cassidy Executive Vice President -ICC
Michele Golden Executive Vice President -- ICC
Walter M. Psztur Controller and Secretary
David Hubbard was named Chief Technology Officer
and Vice President of Engineering for Infosafe and ICC
in April 1997. He has over 15 years of large system
design experience, having been responsible as manager
and individual contributor for the research and
development of corporate software and technology as
CTO for Track Data Corp., which provides real-time
market data to institutional and individual investors.
His leadership in collecting and disseminating
valuable electronic information is fortified by his
experience with of Internet technologies.
Michael Cassidy is a co-founder and Executive
Vice President of Internet Commerce Corporation (ICC).
From 1995-1997, he was director of Business
Development for New Paradigm Software Corporation and
provided management oversight for its Electronic Data
Interchange (EDI) services. From 1992-1995, he was the
Chief Executive Officer of Greentree Software Inc., a
Marlboro, MA software developer. From 1990-1992, he
was President of Rivergate Systems, a networked
imaging system provider.
Michele Golden is a co-founder and Executive Vice
President of Internet Commerce Corporation (ICC). From
1995-1997, she was president and founder of New
Paradigm Golden-link, an Electronic Data Interchange
(EDI) service provider. She served as the U.S. liaison
in the Prime Minister's Office of Israel in 1994. From
1992-1994, she was vice president of Business
Development for CIS Corporation, an EDI service
bureau. From 1985-1991, she was a commercial real
estate broker for Cushman & Wakefield.
Walter M. Psztur has more than 18 years
experience in business and finance. From 1993-
September 1997 (when he joined the Company as
Controller and Secretary) he was the assistant
corporate controller for Standard Motor Products, a
NYSE-listed automotive replacement parts manufacturer
and distributor. From 1992 to September 1993, he was
the corporate accounting manager at Breed
Technologies, Inc., an automotive safety products
manufacturer.
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.
Each Director, other than the Chief Executive
Officer, is granted a number of stock options
which vest ratably over time and are exercisable at a
price determined on the date of grant.
Compliance with Section 16(a) of the Exchange Act
Other than Neal B. Freeman, to the Company's
knowledge,there were no delinquent Section 16(a) filers.
Item 10. Executive Compensation
The following table sets forth the compensation
paid or accrued by the Company for services rendered
during the fiscal years ended July 31, 1995, July 31,
1996 and July 31, 1997 to Arthur R. Medici, the
Company's Chief Executive Officer and President,
Thomas H. Lipscomb, former President and Chief
Executive Officer and Alan N. Alpern, the Company's
Chief Financial Officer.
Summary Compensation Table
Long Term
Annual Compensation Compensation
-----------------------------------------------
Other
Annual
Name and Fiscal Years Compen-
Principal Ended sation
Position July 31 Salary($) $ Options(#)
------------------ ------------ ---------- ---------- --------------
Arthur R. Medici 1997 102,000 -0- -0-
1996 n/a n/a n/a
1995 n/a n/a n/a
Thomas H. Lipscomb 1997 145,833(1) -0- -0-
1996 175,000 -0- -0-
1995 177,91 -0- -0-
Alan N. Alpern 1997 -0- 125,000(1) -0-
1996 -0- 125,000 -0-
1995 -0- 109,375 -0-
(1) Accrued compensation aggregating
approximately $83,000 for these two officers was
earned during fiscal years ending July 31, 1996 and
1997, and was contributed to additional paid-in
capital during January 1997.
The following table sets forth the number and value of
unexercised in-the-money options at July 31, 1997 for
the executive officers named above.
Option/SAR Grants in Fiscal Year Ended July 31, 1997
- ----------------------------------------------------
% of Total
Options
Granted to
Employees Exercise
Options in Fiscal Year or Base Expiration
Name Granted(#) ended July 31, 1997 Price ($/sh) Date
- ------------------- ---------- ------------------- ------------ ------------
Arthur R. Medici 350,000 74.5% 4.06 11/26/06
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($) Unexercisable at FY-End($)
- ------------------ --------------- ----------- --------------- ------------
Arthur R. Medici -0- -0- 350,000/116,667
Thomas H. Lipscomb -0- -0- 100,000/0 -0-
Alan N. Alpern -0- -0- 50,000/0 -0-
Employment Agreements
Effective November 26, 1996, the Company appointed
Arthur R. Medici as President and Chief Executive Officer
pursuant to a three-year employment agreement
("Agreement"). The Agreement provides for the Company
to issue 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
cannot be transferred by Mr. Medici until August 1999
and will be canceled by the Company if his employment
is terminated prior to August 1999 ("Vesting
Period"). The Company will reflect compensation
expense and an increase to additional paid in capital
aggregating $298,593 in connection with the issuance
of such shares over the Vesting Period, compensation
expense and an increase in additional paid in capital
was $74,643 for the year ending July 31, 1997.
Effective January 1, 1992, and amended as of
October 1994, the Company entered into a consulting
agreement with Alan N. Alpern pursuant to which Mr.
Alpern devotes more than half of his business time to
the Company as Chief Financial Officer. The agreement
with Mr. Alpern provides for a base annual salary of
$125,000 for 1997.
Stock Option Plans
Pursuant to the 1994 Stock Option Plan, as
recently amended by the Company's stockholders in
1997, (the "1994 Plan'') the company may grant
options to purchase an aggregate of 2,000,000 shares
of the Company's Class A Common Stock. The 1994 Plan
provides for the grant to key employees of incentive
stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986, 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, is 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.
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-
transferable during the life of the option holder.
As of November 13, 1997, an aggregate of 1,124,000
options granted to various employees and directors,
vesting in varying installments from date of grant,
are out standing under the 1994 Plan and the
Company's 1992 Stock Option Plan, and 896,000 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.
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,
1997 as the Company incurred a net loss for the
period.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of November 10, 1997,
certain information concerning the beneficial
ownership of the Company's Class A, Class B and Class
E-1 and E-2 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-1 and E-2 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. 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-1 and E-2 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
Class A Class B E-1 and E-2
Common Common Common
Stock (1) Stock Stock
----------- ----------- ----------- % Vote
Name and Address of Number of Number of Number of all
Beneficial Owner Shares % Shares % Shares % Classes
- ------------------------- ----------- ---- ----------- ----- ----------- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas H. Lipscomb (4) 100,000 (2) 2.1 813,126 (3) 59.2 820,624 30.0 36.7
Arthur R. Medici 116,666 (6) 2.5 70,000 (6) 5.1 270,000 9.9 4.4
Alan N. Alpern (4) 50,000 (2) 1.1 153,582 (5) 9.9 210,340 6.4 6.4
Neil Freeman (8) 10,000 * - * - * *
Charles C. Johnson (7) 20,000 * - * - * *
Robert Christie (8) 10,000 * - * - * *
All executive officers
and directors as a
group (6 persons) 306,666 6.5 1,036,700 75.5 1,300,964 47.6 47.5
- ----------------------
* Less than one percent.
</TABLE>
(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.
(2) Represents immediately exercisable options.
(3) Includes 427,409 Class B 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'').
(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.
(5) Excludes 16,000 options to purchase Class A
Common Stock not presently exercisable.
(6) Mr. Medici holds options to purchase 116,666
Class A Shares, which are immediately
exercisable. Mr. Medici also holds 70,000 shares
of Class B Common Stock, which may be canceled
if certain operating performance criteria are
not achieved.
(7) Includes 20,000 shares available upon exercise
of immediately exercisable options. Excludes
options to purchase 20,000 shares of Class A
Common Stock not exercisable within 60 days.
(8) Includes 10,000 shares issuable upon exercise of
immediately exercisable options. Excludes
options to purchase 30,000 shares of Class A
Common Stock not exercisable within 60 days.
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 $11.9
million for the fiscal year ending July 31, 1998;
(ii) the Bid Price (as defined) of the Company's
Class A Common Stock averages in excess of $22.33 per share
for 30 consecutive business days through January 1998;
(iii) 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 (ii) above.
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 $14.6
million for the fiscal year ending July 31, 1998;
(ii) the Bid Price of the Company's Class A Common Stock
averages in excess of $29.70 per share for 30
consecutive business days through January 1998;
(iii) the Company is acquired by or merged
into anotherentity for which stockholders of the Company receive
per share consideration equal to or greater than the
levels set forth in (ii) above.
The Class E Shares will be redeemed by the
Company for $.0001 per share and canceled 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 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
The Escrow Shares will be released to the stockholders in
the event that:
(i) the Minimum Pretax Income amounts to at least $10.0
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 $18.00 per share for 30 consecutive
business days through January 1998.
Voting Trust. Substantially all of the Class A
Common Stock, Class B Common Stock and Class E Common
Stock beneficially owned by Thomas H. Lipscomb and
Alan N. Alpern constituting 38.0% and 7.6% of the
percentage of the vote of all classes of common stock
of the Company, respectively, assuming the issuance
of the maximum number of IPO Units, have been
deposited in a voting trust or are subject to an
irrevocable proxy for a term of three years,
commencing on the First Closing Date. Pursuant to the
voting trust or irrevocable proxy, the shares will be
voted at the direction of a majority of the Company's
non-management directors and Mr. Medici, subject to
certain exceptions, including certain mergers and
sale of all or substantially all of the Company's
assets. The shares deposited in the voting trust or
irrevocable proxy will be released from the voting
trust or irrevocable proxy on the sale of the shares.
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 canceled. 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
Item 13. Exhibits, List and Reports on Form 8-K
13 (a) Document List
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheet
July 31, 1997
Consolidated Statement of Operations -
Years Ended July 31, 1997 and 1996, and
November 18, 1991 (Inception) to July 31, 1997
Statement of Change in Shareholder Equity -
Years Ended July, 31, 1992; July 31, 1993;
July 31, 1994; July 31, 1995; July 31, 1996 and
July 31, 1997
Consolidated Statement of Cash Flow -
Years Ended July 31, 1997 and 1996 and
November 18, 1991 (Inception) through
July 31, 1997
Exhibits required by Item 601 of Securities and Exchange Commission
Regulations 5-B.
See "Exhibit Index Page 31"
13 (b) Reports on Form 8K
On June 10, 1997, the Company filed a Current Report on Form 8-K.
Exhibit Index
Exhibit Reference
Number Number
4.2 Form of Underwriter's Option (1) *
4.3 Form of Warrant Agreement (1) *
4.5 Escrow agreement, as amended (1) *
4.6 Form of warrant expiring September 10, 2002 (1) *
10.1 1992 Stock Option Plan (1) *
10.2 1994 Stock Option Plan (1) *
10.3 Employment Agreement with Thomas H. Lipscomb, as amended (1) *
10.4 Consulting agreement with Alan N. Alpern, as amended (1) *
10.5 Lease for Executive Offices, as supplemented (1) *
10.6 License and Option Agreement dated February 9, 1994 between
the Registrant and International Typeface Corporation (1)*** *
10.7 Employment agreement with Charlton Calhoun III, as amended (1) *
10.8 Agreement between International Typeface Corporation and the
Company dated April 21, 1995 (2) *
10.9 Employment Agreement with Arthur R. Medici (3) *
10.10 Warrant Agreement, dated February 10, 1997 (4) *
10.11 Amendment, dated February 10, 1997, to Warrant Agreement
dated January 25, 1995 (4) *
10.12 Form of Agent's Option (4) *
10.13 M/A Agreement Extension (4) *
10.14 Agreement with Copyright Clearance Center,
dated December 12, 1996 (4)** *
10.15 Formation and Stock Purchase Agreement, dated as of
April 16, 1997 among the Company, Michele Golden and
Michael Cassidy (6) *
10.16 Notice to Class A and Class B Warrant Holders Regarding
Anti-dilution Effect of the 1997 Private Placement (5) *
11.1 Computation of Net Loss Per Share *
___________
* Incorporated by reference:
(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
(3) Incorporated by reference to the Company's Report on
Form 8-K dated November 26, 1996
(4) Incorporated by reference to the Company's Report on
Form 10-QSB dated January 31, 1997
(5) Incorporated by reference to the Company's Report on
Form 8-K dated June 11, 1997
(6) Incorporated by reference to the Company's Report on
Form 10-QSB dated April 30, 1997
** This Document has been filed separately with the
Securities and Exchange Commission pursuant to a
request for confidential treatment. An excised version
of the Document is being filed as an exhibit hereto.
*** Confidential treatment has been granted for portions of this Exhibit.
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 13, 1997
By: /s/ Arthur R. Medici
--------------------
Arthur R. Medici, 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/ Arthur R. Medici President, Chief Executive Officer November 13, 1997
---------------------- Director
Arthur R. Medici (Principal Executive Officer)
/s/ Alan N. Alpern Chief Financial Officer November 13, 1997
----------------------
Alan N. Alpern
/s/ Walter M. Psztur Controller and Secretary November 13, 1997
---------------------- (Principal Accounting Officer)
Walter M. Psztur
/s/ Stanley Bielak Director November 13, 1997
----------------------
Stanley Bielak
/s/ Robert S. Christie Director November 13, 1997
----------------------
Robert S. Christie
/s/ Neal B. Freeman Director November 13, 1997
----------------------
Neal B. Freeman
/s/Charles C. Johnston Director November 13, 1997
----------------------
Charles C. Johnston
INFOSAFE SYSTEMS, INC. AND SUBSIDIARY
FINANCIAL STATEMENTS
JULY 31, 1997
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Infosafe Systems, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of
Infosafe Systems, Inc. and subsidiary (a development stage company) as
at July 31, 1997, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of
the years in the two-year period ended July 31, 1997, and for the
period from November 18, 1991 (inception) through July 31, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements enumerated
above present fairly, in all material respects, the consolidated
financial position of Infosafe Systems, Inc. and subsidiary at July 31,
1997, and the consolidated results of their operations and their cash
flows for each of the years in the two-year period ended July 31, 1997,
and for the period from November 18, 1991 (inception) through July 31,
1997, in conformity with generally accepted accounting principles.
The accompanying consolidated 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 raise 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 13, 1997
With respect to Note G
October 28, 1997
<TABLE>
INFOSAFE SYSTEMS, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED BALANCE SHEET
AS AT JULY 31, 1997
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 392,860
Accounts receivable - net of allowance for doubtful accounts
of $5,000 6,149
Marketable securities - available for sale (Note C) 2,498,945
Prepaid expenses and other assets (Note D) 169,853
-------------------------------------------------------------------------------------
Total current assets 3,492,379
Fixed assets (Notes E and K[3]) 232,838
Other assets (Note F) 191,734
-------------------------------------------------------------------------------------
Total assets $ 3,492,379
-------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Accounts payable $ 234,422
Loan payable 27,180
Capital lease obligation (Note K[3]) 10,364
Purchase agreement (Note G) 85,000
Accrued expenses (Note H) 115,618
Due to stockholder 60,000
-------------------------------------------------------------------------------------
Total current liabilities 532,584
-------------------------------------------------------------------------------------
Commitments and contingencies (Notes K and L)
STOCKHOLDERS' EQUITY
(Note I)
Common Stock:
Class A - par value $.01 per share, 40,000,000 shares authorized,
one vote per share; 4,720,419 shares issued and outstanding 47,204
Class B - par value $.001 per share, 2,000,000 shares authorized,
six votes per share; 1,372,566 shares issued and outstanding,
including 781,244 shares held in escrow 1,433
Class E-1 - par value $.01 per share, 2,000,000 shares authorized,
one vote per share; 1,432,137 shares issued and to be issued
redemption value $.0001 per share 14,321
Class E-2 - par value $.01 per share, 2,000,000 shares authorized,
one vote per share; 1,432,137 shares issued and to be issued
redemption value $.0001 per share 14,321
Additional paid-in capital 14,175,808
(Deficit) accumulated during development stage (11,302,220)
Unrealized gain on marketable securities 8,928
-------------------------------------------------------------------------------------
Total stockholders' equity 2,959,795
-------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 3,492,379
-------------------------------------------------------------------------------------
</TABLE>
Attention is directed to the foregoing accountants' report and
to the accompanying notes to financial statements
<TABLE>
INFOSAFE SYSTEMS, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
For the Year Ended Period From
July 31, November 18, 1991
----------------------------- (Inception) through
1996 1997 July 31, 1997
------------- ------------ --------------------
<S> <C> <C> <C>
Revenue:
License fees $ 350,000
Other $ 51,268 $ 17,323 259,163
--------------------------------------------------------------------------------------------------
Total 51,268 17,323 609,163
--------------------------------------------------------------------------------------------------
Expenses:
Cost of revenue (including amortization
of software development costs of
$41,363 for the year ended July 31,
1996 and July 31, 1997, and $136,926
for period November 18, 1991
(Inception) through July 31, 1997) 68,585 53,634 245,399
Research and development 934,403 713,442 2,725,036
Selling, general and administrative 2,223,802 1,900,758 7,651,794
Write-down of assets 470,000 507,356 977,356
--------------------------------------------------------------------------------------------------
Total 3,696,790 3,175,190 11,599,585
--------------------------------------------------------------------------------------------------
Operating Loss (3,645,522) (3,157,867) (10,990,422)
--------------------------------------------------------------------------------------------------
Interest and investment income 228,553 90,448 485,623
Settlement expense (54,828) (394,828)
Minority interest 1,000 1,000
Interest expense (24,783) (1,647) (395,193)
--------------------------------------------------------------------------------------------------
NET (LOSS) $ (3,496,580) $ (3,068,066) $ (11,293,820)
--------------------------------------------------------------------------------------------------
NET (LOSS) PER COMMON SHARE $ (1.05) $ (0.72)
---------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 3,325,090 4,249,901
___________________________________________________________________________
</TABLE>
Attention is directed to the foregoing accountants' report and
to the accompanying notes to financial statements
<TABLE>
INFOSAFE SYSTEMS, INC. AND SUBSIDIARY
(a development stage company)
Statement of Changes in Stockholder's Equity
For the Period form November 18, 1991 (Inception) through July 31, 1997
(See Note I)
<CAPTION>
Unreal-
ized
Gain
(Deficit) (loss) on
Class A Class B Class E-1 Class E-2 Accumulated Market- Total
Common Stock Common Stock Common Stock Common Stock Additional During the able Stock-
----------------- ---------------- ----------------- ----------------- Paid-in Development Secur- holders'
Shares Amount Shares Amount Shares Amount Shares Amount Capital Stage ities Equity
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance
of common
stock on
January
8, 1992
at
$.007412
per share 20,180 $ 21 $ 129 $ 150
Issuance
of common
stock on
January
8, 1992
at
$.007412
per share
(includ-
ing ser-
vices
rendered) 1,479,807 1,540 9,460 11,000
Rent con-
tributed
by stock-
holder
from
March 1,
1992 to
July 31,
1992 5,000 5,000
Costs as-
sociated
with sale
of pre-
ferred
shares (2,500) (2,500)
Net (loss) $ (149,580) (149,580)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as
at July
31, 1992 1,499,987 1,561 12,089 (149,580) (135,930)
Issuance
of shares
from
November
1992 to
June 1993
at $4.00
per share 378,125 $ 3,781 1,508,719 1,512,500
Costs as-
sociated
with
sales of
common
shares
from
November
1992 to
June 1993 (271,725) (271,725)
Warrants
issued as
compensa-
tion at
$.04 per
warrant 20,000 20,000
Warrants
issued
with debt 500 500
Dividends
on pre-
ferred
shares (11,250) (11,250)
Net (loss) (1,113,454) (1,113,454)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at
July 31,
1993 378,125 3,781 1,499,987 1,561 1,269,583 (1,274,284) 641
Issuance
of shares
in
September
1993 at
$4.00 per
share 137,500 3,781 548,625 550,000
Costs as-
sociated
with sale
of common
shares in
September
1993 (78,733) (78,733)
Dividends
on pre-
ferred
shares (6,150) (6,150)
Shares is-
sued for
services
in
December
1993 and
March
1994 at
$4.60 per
share 9,750 98 44,752 44,850
Shares is-
sued as
compensa-
tion in
July 1994
at $4.60
per share 12,500 125 57,375 57,500
Transfer
of shares 5,000 50 (5,000) (5) (45) 0
Net (loss) (837,357) (837,357)
Stock di-
vidend on
Class A
and
Class B
common
stock 1,018,931 $10,189 1,018,931 $10,189 (20,378) 0
Stock
to be
issued to
holders
of pre-
ferred
shares,
options
and
warrants 328,441 3,284 328,441 3,284 (6,568) 0
- -----------------------------------------------------------------------------------------------------------------------------------
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 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 1,782,500 17,825 8,894,675 8,912,500
Cost as-
sociated
with sale
of common
shares in
January
and
February
1995 (1,693,447) (1,693,447)
Warrants
issued for
compensa-
tion 54,186 54,186
Shares is-
sued and
cancella-
tion of
accrued
dividends
in
settlement
with pre-
ferred
stock-
holder in
July 1995 40,038 400 49,600 9,000 59,000
Exercise
of
warrants
in July
1995 55,500 555 15 15 27,195 27,750
Net (loss) (2,628,783) (2,628,783)
Unrealized
gain on
market-
able se-
curities 90,320 90,320
- -----------------------------------------------------------------------------------------------------------------------------------
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 9,221,820 (4,737,574) 90,320 4,627,277
Class B
common
stock
exchanged
for Class
A common
stock in
August
1995 8,000 80 (8,000) (8) (72) 0
Class B
common
stock
exchanged
for Class
A common
stock in
October
1995 12,000 120 (12,000) (12) (108) 0
Class B
common
stock
exchanged
for Class
A common
stock in
November
1995 5,937 59 (5,937) (6) (53) 0
Warrants
exercised
in
November
1995 275,000 2,750 134,750 137,500
Stock
options
exercised
in
January
1996 5,000 50 19,950 20,000
Stock
options
exercised
April
1996 5,000 50 19,950 20,000
Warrants
exercised
in April
1996 3,125 31 7,782 7,813
Warrants
issued
for
settle-
ment in
June 1996 168,750 168,750
Stock
options
exercised
in June
1996 30,833 308 123,024 123,332
Class B
common
stock
exchanged
for Class
A common
stock in
June 1996 123,221 1,232 (123,221) (123) (1,109) 0
Class B
common
stock
exchanged
for Class
A common
stock in
July 1996 19,520 196 (19,520) (20) (176) 0
Shares
canceled (3,750) (37) (3,750) (37) 74 0
Net (loss) (3,496,580) (3,496,580)
Unrealized
(loss) on
market-
able se-
curities (84,768) (84,768)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as
at July,
31, 1996 2,908,549 29,085 1,326,309 1,387 1,343,637 13,436 1,343,637 13,346 9,694,582 (8,234,154) 5,552 1,523,324
Class B
common
stock
exchanged
for Class
A common
stock in
August
1996 16,760 167 (16,760) (17) (150)
Stock
options
exercised
in
September
1996 15,000 150 59,850 60,000
Class B
common
stock
exchanged
for Class
A common
stock in
November
1996 3,760 38 (3,760) (4) (34)
Capital
contri-
bution of
officers
deferred
salaries
in
January
1997 145,784 145,784
Shares
issuable
with
employ-
ment
contract
of
November
1996 70,000 70 135,000 1,350 135,000 1,350 71,873 74,643
Shares
issued
as com-
pensation
in
November
1996 at
$3.87 per
share 6,968 70 26,930 27,000
Class B
common
stock
exchanged
for Class
A common
stock in
December
1996 3,223 32 (3,223) (3) (29)
Issuance
of shares
in
February
through
April
1997 at
$3.15 per
share 1,603,260 16,034 5,033,966 5,050,000
Cost as-
sociated
with sale
of common
stock in
February
through
April
1997 (884,766) (884,766)
Exercise
of
warrants
in June
1997 63,681 636 27,864 28,500
Exercise
of
warrants
in July
1997 99,218 992 (992)
Shares
canceled (46,500) (465) (46,500) (465) 930
Net (loss) (3,068,066) (3,068,066)
Unrealized
gain on
market-
able se-
curities 3,376 3,376
- -----------------------------------------------------------------------------------------------------------------------------------
Balance
as at
July 31,
1997 4,720,419 $47,204 1,372,566 $1,433 1,432,137 $14,321 1,432,137 $14,321 $14,175,808 $(11,302,220) $ 8,928 $ 2,959,795
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Attention is directed to the foregoing accountants' report and
to the accompanying notes to financial statements
<TABLE>
INFOSAFE SYSTEMS, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Period From
For the Year Ended July 31, November 18, 1991
-------------------------------- (Inception) to
1996 1997 July 31, 1997
-------------- --------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) $ (3,496,580) $ (3,068,066) $ (11,293,820)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization 143,237 156,853 708,069
Loss on disposal of equipment held for lease 682 682
Services contributed by stockholder 138,240
Write-down assets 470,000 507,356 977,356
Common stock and warrants issued for
compesation and settlement 168,750 101,643 324,579
Contribution of capital by employees/
stockholders 145,784 145,784
Minority interest (1,000) (1,000)
(Increase) decrease in:
Accounts receivable, prepaid expenses and
other assets 131,265 (166,445) (241,366)
Increase (decrease) in:
Accounts payable and accrued expenses (1,855) 83,888 350,047
Settlement payable (340,000)
Due stockholders 56,163 (56,163) 60,000
-----------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (2,869,020) (2,295,468) (8,831,429)
-----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Equipment held for lease (118,010) (794,773)
Capitalization of software development (206,815)
Purchases of fixed assets (75,654) (32,332) (499,337)
Purchases of marketable securities (2,486,231) (2,640,017) (15,304,550)
Sales of marketable securities 5,236,566 1,052,626 12,814,533
Patents, copyrights and trademarks (17,958) (84,631)
-----------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 2,538,713 (1,619,723) (4,075,573)
-----------------------------------------------------------------------------------------------------
Cash flows from financing acitivies:
Proceeds from issuance of common stock 5,050,000 16,075,260
Costs in connection with sale of common stock (884,766) (2,912,671)
Proceeds from issuance of Series A convertible
redeemable preferred stock 125,000
Redemption of Series A cumulative convertible
perferred stock (75,000)
Payment of dividends (8,400)
Proceeds from financing lease 28,076
Payment of financing lease (8,390) (9,329) (17,749)
Payment of purchase agreement (127,840) (15,000) (142,840)
Proceeds from subordinated debenture 100,000
Payment of subordinated debenture (100,000)
Exercise of warrants and options 308,645 88,500 424,895
Proceeds from bridge loan 1,500,000
Payment of bridge loan (1,500,000
Proceeds from loan payable 27,180 27,180
Payment of deferred financing costs (224,919)
Repayment of loan from stockholder 53,632
Capital contribution from minority stockholder 1,000 1,000
-----------------------------------------------------------------------------------------------------
Net cash provided by financing
activities 226,047 4,257,585 13,299,862
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (104,260) 342,394 392,860
Cash and cash equivalents, beginning of year. 154,726 50,466
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year. $ 50,466 $ 392,860 $ 392,860
-----------------------------------------------------------------------------------------------------
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
Financing of Design Palette 227,840
Class A common stock issued in settlement
with preferred stockholder 50,000
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 19,983 $ 1,647 85,052
</TABLE>
Attention is directed to the foregoing accountants' report and
to the acompanying notes to financial statements
INFOSAFE SYSTEMS, INC. AND SUBSIDIARY
(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 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 has
developed "The Infosafe System" which meters the usage of information
and can release information on a "pay per use."
The Company initially developed a hardware-based distribution
system and is currently developing software-based distribution systems
utilizing this technology.
In April 1997, the Company formed and purchased a majority
interest in Internet Commerce Corporation ("ICC"), an 83.3% owned
subsidiary. ICC is a new company which is developing Internet-based
business to business communication and electronic products and
services. Material inter-company balances and transactions have been
eliminated.
The Company has incurred substantial losses since inception,
and anticipates losses to continue through the next fiscal year as the
Company attempts to market and develop its products. While the Company
raised approximately $4.2 million of net proceeds from a private placement
of securities (see Note I) from February through April 1997, the Company
will need additional financing to complete development and market its
products, and to continue its operations beyond the fiscal year ending
July 31, 1998. 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 developing and marketing 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.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
[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. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease or the estimated
useful life of the asset. A prepaid license fee which originated in
connection with a license agreement entered into in March 1997
is being amortized using the straight-line method over the
term of the agreement (ten years).
[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. During the year ended July 31, 1997, the
Company wrote off the unamortized balance of its software development
costs of $64,948.
[5] Patents, copyrights and trademarks:
Costs to obtain patents, copyrights and trademarks have been
capitalized. The Company obtained two new patents during the fiscal
year, but due to the low cost of procurement directly expensed all
costs. During the year ended July 31, 1997, the Company wrote off the
unamortized balance of its patents, copyrights and trademarks of
$45,906.
[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 antidilutive options and warrants.
[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 management is unable to conclude that it
is more likely than not that the benefit will be realized.
[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.
[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 adopted 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 a long lived asset may not be recoverable. FASB 123
encourages companies, among other things, to establish a fair value
based method of accounting for stock-based compensation plans and
requires disclosure thereof on a fair value basis. The adoption of FASB
121 and 123 did not have a material impact on the financial statements.
During the year ended July 31, 1996, the Company wrote down its
equipment previously held for lease by $470,000 and during the year
ended July 31, 1997, the Company wrote down its software development
costs, patents, trademarks, copyrights and equipment previously held
for lease in the aggregate of $507,356. (See Notes B[4, 5] and F.)
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.
[11] Recently issued accounting pronouncements:
FASB No. 128, "Earnings Per Share" ("EPS"), is effective for
both interim and annual periods ending after December 15, 1997. FASB
No. 128 supercedes APB No. 15 and specifies the computation,
presentation and disclosure requirement for basic and diluted EPS. The
Company has determined that the adoption of this new standard will not
have a material effect on EPS for all periods presented.
NOTE C - MARKETABLE SECURITIES:
Available-for-sale marketable securities are as follows:
Gross Estimated
Unrealized Fair
Cost Gains Value
----------- ---------- -----------
United States
Government Securities $ 2,490,017 $ 8,928 $ 2,498,945
The above investments matures from October 1997 to June 1998 and bears
interest from 5.69% to 6.3% per annum.
Interest income of $191,623 and $86,881 and realized gains of
$22,510 and $1,747 were earned with respect to marketable securities
for the year ended July 31, 1996 and July 31, 1997, respectively. The
Company uses the first-in, first-out method to value the cost of its
marketable securities upon disposition.
NOTE D - PREPAID AND OTHER ASSETS:
Prepaid and other assets consist of the following:
Prepaid insurance . . . . . . . . . . . . . $ 77,217
Prepaid expenses and other . . . . . . . . . 47,636
Notes receivable . . . . . . . . . . . . . . 45,000
--------
T o t a l. . . . . . . . . . . . . $169,853
--------
NOTE E - FIXED ASSETS:
Fixed assets consist of the following:
Office and technology equipment (including
capital lease of $28,124) . . . . . . . . $379,266
Furniture and fixtures . . . . . . . . . . . 91,196
Office software. . . . . . . . . . . . . . . 32,638
Leasehold improvements . . . . . . . . . . . 30,238
--------
T o t a l. . . . . . . . . . . . . $533,338
Less accumulated depreciation. . . . . . . . 300,500
--------
T o t a l. . . . . . . . . . . . . $232,838
--------
NOTE F - OTHER ASSETS:
Other assets consist of the following:
Deposits . . . . . . . . . . . . . . . . . . $ 40,249
Prepaid license fee. . . . . . . . . . . . . 142,500
Equipment previously held for lease. . . . . 8,985
--------
T o t a l. . . . . . . . . . . . . $191,734
--------
In March 1997, the Company entered into an exclusive
licensing agreement for the resale of software. It enables users to
browse an on-line document archive and view content 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 a fee.
The license agreement entered into with Visus Technologies, Inc. ("VTI")
is amortized using the straight-line method over the term of the licensing
agreement (10 years). The Company is obligated to pay VTI a software
royalty fee of 10%, half of which is to be applied to the prepaid license
fee, on all revenue realized using the Visus Scan2Web software
per this agreement.
Equipment previously held for lease was composed of an
encryption and metering control unit called the Mark III. During the
fiscal year ended July 31, 1996, the Company stopped production of
these control units until such time as the demand for these units
increases and reduced the value of the control units to reflect their
remaining realizable value. The Company is in the process of
developing "software only" applications for its technology and had
written down its equipment previously held for lease to an estimated
salvage value at July 31, 1997 to approximately $9,000. This resulted
in a write down of $396,502 for the year ended July 31, 1997.
NOTE G - PURCHASE AGREEMENT:
During April 1995 the Company entered into an agreement (the
"Purchase Agreement") to purchase the interest not already owned by it
in a digital metering and encryption system, thus becoming the sole
owner of the system. The Company paid $350,000 on the execution of the
Purchase Agreement and was 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 of $85,000 which was due in August 1996. On October 28,
1997, the Company settled the debt by agreeing to pay $15,000 and
to provide a $55,000 irrevocable letter of credit payable in April,
1998.
NOTE H - ACCRUED EXPENSES:
Accrued expenses consist of the following:
Legal and professional fees . . . . . . . . . $ 47,000
Royalties . . . . . . . . . . . . . . . . . . 12,115
Other . . . . . . . . . . . . . . . . . . . . 56,503
--------
T o t a l . . . . . . . . . . . . . $115,618
--------
NOTE I - 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 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
designated earnings before tax level increases with time. The earnings
level for conversion ranges from $11.9 million for the year ended July
31, 1997 to $14.6 million for the year ended July 31, 1998. The
required bid price of the Company's Class A common stock is $22.33 and
$29.70 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, 1997. The Company is required to redeem its
Class E-1 and E-2 shares at $.0001 per share if the earnings levels or
market price targets are not achieved by March 31, 1999.
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 December 31, 1997 or
if the price of the Company's Class A common stock reaches $18.00 per
share 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 of July
31, 1997. If none of the conditions have been met, on May 1, 1998, the
escrow shares are required to be forfeited and contributed to capital
of the Company.
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.
In February through April, 1997, the Company realized net
proceeds of approximately $4,165,000 from gross proceeds of $5,050,000
raised in a private placement (the "1997 Private Placement") of
1,603,175 Units. Each Unit consists of one share of Class A common
Stock, 1.11721 redeemable Class A Warrants and 1.11721 redeemable Class
B Warrants. As a result of the sale of the securities in the 1997 Private
Placement, pursuant to the anti-dilution provisions contained in the Class A
Warrants and the Class B Warrants, the purchase price to be paid upon
exercise of each Class A Warrant and Class B Warrant of the Company by
the holder of such warrants has been adjusted from $6.50 to $5.82 for
the Class A Warrants and from $8.75 to $7.83 for the Class B Warrants.
Further, as a result of the 1997 Private Placement, an additional
.11721 Class A Warrants are issuable for each outstanding Class A
Warrant and an additional .11721 Class B Warrants are issuable for each
outstanding Class B Warrant. Accordingly, an aggregate of an additional
494,623 Class A Warrants and 396,830 Class B Warrants were issued by the
Company to holders of outstanding Class A Warrants and Class B Warrants
respectively, resulting in an aggregate of 4,714,718 Class A Warrants
and 3,782,550 Class B Warrants outstanding. Additionally, the Company
has extended the expiration date of the Class A Warrants and the Class
B Warrants to February 18, 2002.
In conjunction with the 1997 Private Placement, certain
employees/shareholders and directors of the Company agreed to
contribute unpaid salaries aggregating approximately $146,000 during
the year ended July 31, 1997.
In July 1997, the Board of Directors amended the Company's
certificate of incorporation to increase the number of authorized
shares of its Class A common stock by 20 million shares to an aggregate
of 40 million shares. This action was approved by the shareholders
during the Company annual meeting.
[2] As of July 31, 1997 the Company had the following common
stock warrants outstanding:
Number of Exercise Expiration
Shares Price Date
---------------- ---------- ------------------
Miscellaneous . . . . . 18,750 $2.50 September 10, 1998
Class A . . . . . . . . 4,714,718 (a)(b) $5.82 February 18, 2002
Class B . . . . . . . . 3,782,550 (b) $7.83 February 18, 2002
(a) Upon exercise, holder is entitled to one share of Class A
common stock and 1.11721 Class B warrants.
(b) Class A and Class B warrants are redeemable at $.05 per
warrant under certain conditions.
[3] Preferred stock:
The Company has five million shares authorized with a par value
of $.01, and as of July 31, 1997, no shares have been issued.
[4] 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 1,000,000 to
2,000,000 during the year ended July 31, 1997. 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. There are 884,000 outstanding options
to purchase Class A common shares under this plan as of year ended
July 31, 1997. Options to purchase 421,995 Class A common shares are
exercisable at July 31, 1997. During a Board of Directors Meeting held
subsequent tofiscal year end, the Company granted options to purchase a
total of 260,000 shares of Class A common stock to two Board Members and
five employees. The Company has 1,116,000 shares reserved for future
issuance under the Plan as of July 31, 1997.
The Company's 1992 Stock Option Plan was terminated upon
adoption of the 1994 Plan. Options to purchase 20,000 Class A common
shares previously granted under the 1992 Plan are outstanding and
exercisable on July 31, 1997.
The underwriter for the Company's initial public offering was
granted an option to purchase 155,000 shares of Class A common stock,
173,167 Class A warrants and 173,167 Class B warrants. The option was
exercisable on January 17, 1996 and expires on February 18, 2002 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.
The underwriter for the Company's 1997 private placement were
issued warrants to purchase 561,146 shares of Class A common stock,
626,917 Class A warrants and 626,917 Class B warrants. 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 is exercisable
until February 18, 2002 to purchase one share of Class A common stock
at an exercise price which was equal to $8.25 per share.
In May 1997, ICC adopted a 1997 Incentive and Non-Qualified Stock
Option Plan under which options may be granted to purchase ICC Common
Stock. The number of shares reserved for issuance under the plan
is 350,000. During the fiscal year entering July 31, 1997 ICC granted
options to purchase a total of 301,000 shares of ICC Common Stock to
twelve employees and Board Members. Such options were granted at
the estimated market value of the Common Stock at the time of grant.
The Company applies APB Opinion 25 and related
interpretations in accounting for its options. Accordingly, no
compensation cost has been recognized for its stock option grants. Had
compensation cost for the Company's stock options grants been
determined based on the fair value at the grant dates for awards
consistent with the method of FASB 123, the Company's net loss and loss
per share would have increased the pro forma amounts indicated below:
JULY 31,
-----------------------------
1996 1997
------------- -------------
Net Loss As reported $ (3,496,580) $ (3,068,066)
Pro forma $ (3,935,029) $ (3,415,377)
Net Loss Per Share As reported $ (1.05) $ (.72)
Pro forma $ (1.18) $ (.80)
The resulting effect on pro forma net loss and net loss per share
disclosed for the year ended July 31, 1996 and July 31, 1997 is not
likely to be representative of the effects on net loss and net loss per
share on a pro forma basis in future years, because the year ended July
31, 1996 and July 31, 1997 pro forma results include the impact of only
one and two years, respectively, of grants and related vesting, while
subsequent years will include additional grants and vesting.
A summary of the status of the Company's stock options as of July 31,
1996 and 1997, and changes during the years ending on those dates is
presented below:
(Shares in thousands)
----------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Shares Price Shares Price
------------------------------ -------- --------- -------- ---------
Outstanding at beginning
of year 515 $4.95 724 $4.67
Granted 284 4.00 470 4.06
Exercised (41) 4.00 (15) 4.00
Forfeited (34) 4.00 (275) 4.59
Outstanding at the end
of year 724 4.67 904 4.39
Options exercisable at yearend 338 5.44 442 4.75
The following table summarizes information about stock options
outstanding at July 31, 1997:
(Shares in thousands)
----------------------------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Range of Shares Remaining Average Shares Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 07/31/97 Life Price at 07/31/97 Price
------------- ----------- ----------- --------- ----------- ---------
$3.25 - $7.25 904 8.8 years $4.39 442 $4.75
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1997: dividend
yield of zero (0%) percent, expected volatility of eighty-two (82%)
percent, risk-free interest rate from 5.0% to 6.4% and expected life of
three years.
NOTE J - INCOME TAXES:
[1] Federal income taxes:
The Company has a net operating loss carryforward for tax
purposes of approximately $10,000,000 at July 31, 1997. This
carryforward expires from 2007 to 2012. 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, 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 that portion of 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,
---------------------------
1996 1997
------------ ------------
Deferred tax assets:
Development stage costs . . . . . . . . . . $ 176,000 $ 92,000
Accrued expenses. . . . . . . . . . . . . . 54,000 52,000
Write-down of assets. . . . . . . . . . . . 135,000 460,000
Federal, state and local net
operating loss carryforwards. . . . . . . 3,548,000 4,716,000
------------ ------------
T o t a l . . . . . . . . . . . . . 3,913,000 5,320,000
------------ ------------
Less deferred tax liabilities:
Capitalized software development costs. . . (51,000) -0-
Depreciation. . . . . . . . . . . . . . . . (19,000) (25,000)
Marketable securities . . . . . . . . . . . (3,000) (4,000)
------------ ------------
T o t a l . . . . . . . . . . . . . (73,000) (29,000)
------------ ------------
Net Asset. . . . . . . . . . . . . . . . . . . 3,840,000 5,291,000
Valuation allowance. . . . . . . . . . . . . . (3,840,000) (5,291,000)
------------ ------------
Net deferred tax asset . . . . . . . . . . . . $ -0- $ -0-
------------ ------------
The Company's effective tax rate varied from the statutory federal
income tax rate as follows:
July 31,
-------------------
1996 1997
------- -------
Expected tax rate (benefit) . . . (34.0)% (34.0)%
Valuation allowance . . . . . . . 34.0 % 34.0 %
------- -------
Effective tax rate . . -0-% -0-%
------- -------
NOTE K - COMMITMENTS:
[1] Employment and consulting agreements:
(a) The Company entered into an Employment Agreement as of
November 1996 with its President and Chief Executive Officer, expiring
in November 1999. The contract required aggregate annual salary of
$175,000 to $225,000 and issuance of 70,000 Class B shares, 135,000
Class E-1 and E-2 shares. The shares are forfeited by the stockholder
if the terms of the contract are not met. The Company has valued such
shares in the amount of approximately $299,000 and is amortizing a
compensation charge. The Company expensed approximately $75,000 for the
year ended July 31, 1997. In addition, the Company granted 350,000
options to purchase the Company Class A stock based upon future earning
levels at an exercise price of $4.06 of which one-third immediately vested
and the remaining two-thirds vest if certain earning levels are met during
his employment.
(b) The Company has employment and consulting agreements
with three other employees and one other individual expiring in April
2000 and January 2000, respectively. The Agreements require aggregate
annual payment of $465,000 per year.
[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 shall be set aside for the benefit of
employees. No funding was provided through July 31, 1997.
[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 outstanding balance as of July
31, 1997 was $10,364. The Company capitalized the equipment at an
asset value of approximately $28,000.
[4] Leases:
The Company's lease agreement for office and research
facilities expired on June 30, 1997 and is on a month to month basis.
In October 1997, the Company entered into a lease agreement for new
offices and research facilities, which is expected to begin on or about
January 1, 1998 and expire in seven years. The Company has provided an
$85,000 irrevocable letter of credit to the landlord as required in the
lease agreement. The Company also rents storage facilities on a month
to month basis. Aggregate rent expense was approximately $171,000 and
$163,000 for the years ended July 31, 1996 and July 31, 1997,
respectively. Subrental income was approximately $12,000 for each of
the years ended July 31, 1996 and July 31, 1997.
Future minimum rental payments are as follows:
Year ended July 31,
-------------------
1998 $ 16,900
1999 169,300
2000 203,200
2001 203,200
2002 203,200
Thereafter (2.4 yrs) 491,000
----------
Total $1,286,800
----------
NOTE L - CONTINGENCIES:
[1] On May 29, 1997, the Company filed a Demand for
Arbitration with the American Arbitration Association against its
former Director of Technology, Robert Nagel, seeking $200,000 to
compensate the Company for breach of contract, breach of fiduciary duty
and misappropriation of corporate opportunity. Mr. Nagel has asserted
counterclaims seeking damages of approximately $1.4 million arising
from alleged discrimination under the Americans with Disabilities Act,
defamation, and breaches of other statutes. The Company does not
believe that Mr. Nagel's counterclaims are meritorious and intends to
vigorously defend against the counterclaims, while prosecuting its
claim in arbitration against Mr. Nagel. The matter is in the early
stages of discovery. The arbitration hearings have been scheduled for
April 1998.
[2] On October 15, 1996, Mr. Thomas Lipscomb, the former President and
Chief Executive Officer of the Company, informed the Board of Directors
that he was tendering his resignation as President and Chief Executive
Officer, effective upon the Board of Directors appointing his successor.
Such successor, Mr. Arthur R. Medici, was appointed as President and
Chief Executive Officer by the Board on December 17, 1996. Subsequently,
on July 17, 1997, the Company received correspondence from counsel to
Thomas Lipscomb, notifying the Company that Mr. Lipscomb had terminated
his services under his Employment and Consulting Agreement ("Agreement"),
dated as of January 1, 1992, as thereafter amended. By such letter,
Mr. Lipscomb also demanded to be paid certain amounts allegedly due
under the Agreement. The Company does not believe Mr. Lipscomb's claims
under the Agreement are meritorious.
INFOSAFE SYSTEMS, INC. AND SUBSIDIARY
(a development stage company)
COMPUTATION OF NET (LOSS) PER COMMON SHARE
Year Ended July 31,
----------------------------
1996 1997
------------- ------------
Net(loss) attributable to common shareholders $ (3,496,580) $(3,068,066)
------------- ------------
Weighted average number of Class A
common shares outstanding 2,641,907 3,625,676
Weighted average number of Class B
common shares outstanding 1,464,427 1,405,469
Less escrow shares (781,244) (781,244)
------------- ------------
Weighted average number of common shares 3,325,090 4,249,901
------------- ------------
Net (loss) per common share $ (1.05) (0.72)
------------- ------------
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<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 392,860
<SECURITIES> 2,498,945
<RECEIVABLES> 11,149
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<CGS> 53,634
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<INCOME-PRETAX> (3,068,006)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,068,066)
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