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, 1998
[ ] 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. 000-24996
INTERNET COMMERCE CORPORATION
(Formerly 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.)
805 Third Avenue 9th Floor, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
(212) 271-7640
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Issuer's telephone number, including area code:
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
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(Title of Class)
Redeemable Class B Warrants
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(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: $19,481.
As of October 1, 1998 the issuer had 947,951
shares of Class A Common Stock outstanding and
194,397 shares of Class B Common Stock that are
convertible into Class A Common Stock. The
aggregate market value of the Common Stock held by
nonaffiliates as of October 1, 1998 was approximately
$1.8 million based on a closing price for the Class A
Common Stock of $2.00 on the Nasdaq Small Cap Market
for such date.
DOCUMENTS INCORPORATED BY REFERENCE
Item 13. Exhibits List and See Exhibit Index on page 25.
Reports on Form 8-K
PART I
Item 1. Description of Business
Except for the description of historical facts
contained herein, this Form 10-KSB contains certain
forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 concerning applications
of the Company's technologies and the Company's
proposed services and future prospects, that involve
risks and uncertainties, including the possibility
that the Company will: (i) be unable to
commercialize services 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.
a) Business Development
Internet Commerce Corporation (the "Company" or
"ICC"), formerly Infosafe Systems, Inc. is a
development stage company, engaged in the design,
development, and marketing of systems for securing,
controlling, delivering and auditing electronic
documents and files primarily over the Internet. The
Company believes that its technology and methods
address critical areas of electronic commerce and it
is seeking to position itself as an independent third
party to authenticate, certify, validate, authorize,
and deliver secure transactions for electronic
information.
Subsequent to fiscal year end, effective September
25, 1998, the Company completed the following consent
actions as authorized in Schedule 14-C, information
statement of action by written consent of majority
shareholders. The Company made the following
amendments to the Certificate of Incorporation of the
Company: 1) effected a reverse stock split (1 new share for
every 5 old shares) of the Companies securities. 2)
deleted reference to 50,000 shares of 9% Series A
Cumulative Convertible Preferred Stock for which
authorization had lapsed. 3) changed the Company's
name to "Internet Commerce Corporation." The Company
made the following amendments to the By-Laws of the
Company: 1) effected the implementation of a
classified Board of Directors. 2) added language that
specifies the duties and responsibilities of certain
officers of the Company. The Company amended the
Amended and Restated Stock Option Plan that, inter
alia, increased the number of shares authorized for
awards and grants thereunder. The Company approved the
merger of the Company's majority owned subsidiary
("ICCSUB" or the "subsidiary") into the Company.
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 805 Third Avenue 9th floor,
New York, New York 10022 and its telephone number is
(212) 271-7640. (See "Description of Properties.")
b) Business of Issuer
Principal Service and its Market
The Company launched CommerceSense(TM) System for
corporations and their electronic trading partners
during the third fiscal quarter ended April 30, 1998.
CommerceSense was designed to
provide a cost-effective alternative to Value Added
Networks (VANs) for traditional Electronic Data
Interchange ("EDI") users and new Electronic Commerce
("EC") participants. The system can be accessed using
a standard Web browser or virtually any other
communications protocol and as it is Internet based,
the market is global.
Distribution Methods of the Service
The Company's service is marketed by a combination of
direct sales and re-marketer channels. The
development of the distribution and marketing
channels is an ongoing activity of the Company as it
provides its geographically disbursed customers with
a local technical support and consulting resource.
Status of Publicly Announced Service and Products
The Company's electronic commerce service
"CommerceSense" was launched in March 1998, and is
currently in use by its customers for the secure
exchange of business to business electronic forms and
data files.
Another of the Company's products, the Design
Palette system, a photographic product library which
incorporated a proprietary hardware
unit, was adversely affected by the rapid development
of the Internet. The market favors Internet
compatible 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 products, including
Internet delivery, the Company abandoned the Design
Palette system during fiscal year 1997.
In addition, the Company's CopyRight!SM Metering
System, an electronic vending system for on-demand
authorization to photocopy copyrighted material
and its Advanced Imaging System were
abandoned during fiscal year 1998. Moreover, the
Company's previously announced intention to purchase
substantially all of the assets of Visus
Technologies, Inc. (VTI), a Pittsburgh, Pennsylvania
development stage company, was rescinded as the
system under license failed to generate sufficient
revenue or market interest.
Competitive Business Conditions
Competition. The business of facilitating business
to business EC is intensely competitive and
fragmented and is characterized by rapidly evolving
technology. Numerous companies, substantially all of
which have substantially greater financial and other
resources than the Company, are currently engaged in
business to business EC, primarily through VANs.
Although the Company is unaware of any other company
actually engaged in the commercial implementation of
an Internet business to business EC service or
product substantially similar to the CommerceSense
System (which does not require users to maintain
specialized hardware or software), the Company
anticipates that other companies will offer services
which are functionally similar and directly
competitive.
The Company further believes that it is possible to
provide some of the benefits of the CommerceSense
System by other means and that competitors may
provide other solutions for the conduct of business
to business EC. While the Company believes that the
CommerceSense System is of sufficiently high quality
and that it will be priced low enough to be
competitive with the other business to business EC
alternatives, there can be no assurance that
competitors will not provide alternative services or
systems, superior to what the Company could provide,
at a more cost-effective price.
Netscape, through its subsidiary, provides an
integrated family of Internet commerce applications
for conducting business to business and business to
consumer EC on the Internet, called CommerceXpert.
General Electric Information Services ("GEIS"), a
division of General Electric, a leading provider of
VAN products, has announced that it is pursuing
Internet based EC applications. In addition,
Harbinger, IBM, Sterling Software, AT&T and MCI all
successfully operate VANs. In addition to the
competition of their established VAN products, all of
the above referenced companies have announced
Internet initiatives which may directly compete with
the Company for Internet based business to business
EC market. All of these competitors have
substantially greater financial and other resources
than the Company and one or all of the products
and/or services they provide may gain greater
commercial acceptance than the CommerceSense System.
The failure of the CommerceSense System to attain
sufficient commercial acceptance would prevent the
Company from generating the revenues necessary to
continue in operation.
Rapid Technological Change; Need for New Products;
Introduction of Competitive Products.
The market for the Company's services is
characterized by rapidly changing technology and
frequent new product introductions. Even if
CommerceSense gains initial acceptance, the Company's
success will depend on, among other things, its
ability to enhance its products and to develop and
introduce new products and services that keep pace
with technological developments, respond to evolving
customer requirements and achieve continued market
acceptance. There can be no assurance that the
Company will be able to identify, develop, market,
support or acquire new products or deploy new
services successfully, that such new products or
services will gain market acceptance, or that the
Company will be able to respond effectively to
technological changes or product announcements by
competitors. Any failure by the Company to
anticipate or respond adequately to technological
developments and customer requirements or any
significant delays in product development or
introductions could result in a loss of market share
or revenues.
Uncertainties Relating to Commercial Use of the Internet.
The Company's strategy is to apply its technology to
the development of service products for use in
connection with the Internet. The success of these
products is dependent on the continued development
and acceptance of the Internet as a medium for the
exchange of business documents and effecting business-
tobusiness transactions. The failure of the Internet
to be an effective channel could have a material
adverse effect on the Company's business and
prospects. There can be no assurance that business-
to-business commerce over the Internet will become
widespread and it is not known whether this market
will develop to the extent necessary for demand for
the Company's services to emerge and become
commercially sustainable. Changes in or insufficient
availability of telecommunications services to
support the Internet also could result in slower
response times which might adversely affect
customers' ability or willingness to use the Internet
as a commercial marketplace. In addition, the
security and privacy concerns of existing and
potential customers, as well as concerns related to
computer viruses, may inhibit the growth of the
Internet marketplace.
If use of the Internet does not continue to grow in
acceptance or if the Internet infrastructure does not
effectively support customer demand, the Company's
business, results of operations and financial
condition could be materially adversely affected.
Patents and Trademarks
Patents
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.
In February 1995, the Company was granted
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 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.
Uncertain Patent Protection.
Although the Company has obtained patent rights, the
Company believes that the protection of its rights in
the CommerceSenseT System will depend primarily on
its proprietary software and messaging techniques
which constitute "trade secrets." The Company has
made no determination as to the patentability of
these trade secrets. The Company will continue to
evaluate, on a case-by-case basis, whether applying
for additional patents in the future is in the best
interests of the Company. There can be no assurance
that the Company's technology will remain a secret or
that others will not develop similar technology and
use such technology to compete with the Company.
Additionally, there can be no assurance that any
issued patents owned by the Company or its trade
secrets 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, including any
patent as to which a notice of allowance has issued,
will result in patents being issued, or that any
rights granted thereunder will provide competitive
advantages to the Company. Although the Company
believes that its technology does not infringe upon
the proprietary hardware or software of others, it is
possible that others may have or be granted patents
claiming products or processes that are necessary for
or useful to the development of the CommerceSenseT
System and that legal actions could be brought
against the Company claiming infringement. In the
event that the Company is unsuccessful against such a
claim, it may be required to obtain licenses to such
patents or to other patents or proprietary technology
in order to develop, manufacture or market its
products. There can be no assurance that the Company
will be able to obtain such licenses on commercially
reasonable terms, if at all. If the Company is
required to and does not obtain such licenses, it
would encounter delays in the development and
manufacturing of its products and technologies while
it attempted to design around such patents or other
rights and there can be no assurance that such
attempts would be successful. Failure to obtain such
licenses or to design around such patents or other
rights would have a material adverse effect on the
Company.
Trademarks
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 COMMERCESENSET
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 & Development
Research and development ("R & D") for fiscal 1998,
decreased from approximately $713,000 in fiscal 1997
to approximately $576,000 in fiscal 1998. In
addition, the Company capitalized approximately
$714,000 of software development costs not present in
the prior year. The increase in expenses was largely
attributable to the Company's focus on the
development of the CommerceSenseT System and the
corresponding increase in personnel, leading to
increased salary and related costs.
Number of Total employees and Number of Full Time Employees
At July 31, 1998, the Company had 16 full-time
employees, one part-time employee and one consultant.
Item 2. Description of Properties
The Company currently occupies approximately 5,900 square
feet of rental space at its principal executive offices
at 805 Third Avenue 9th floor, in New York, New York.
Item 3. Legal Proceedings
On May, 29, 1997, The Company commenced an
arbitration against its former Vice President and
Director of Technology, Robert Nagel ("Nagel"),
for fraud, breach of his employment
contract, breach of the duties of obedience and
loyalty and misappropriation of corporate
opportunities. Nagel denied the claims and served a
counterclaim alleging breach of the employment
agreement, discrimination on the basis of his
blindness, defamation, and violation of the Federal
Wiretapping Act and the Federal Eavesdropping Act.
The damages sought by Nagel against the Company are
for approximately $1,000,000, excluding interest,
costs and attorney's fees. The Company believes that
it has a meritorious case against Nagel and strong
defenses to Nagel's counterclaims. Nonetheless, it
is possible that the arbitrators will find in favor
of Nagel and against the Company. To date, the
Company and Nagel have participated in eight (8) days
of arbitration hearings. It is likely that the
decision of the arbitrators will be rendered during
the fall of 1998.
In a related matter in 1998, Nagel commenced an action
in the Supreme Court of the State of New York against
Arthur Medici ("Medici"), President of the Company,
alleging interference with an employment contract and other
claims. The complaint was subsequently removed to United
States District Court and dismissed on October 13, 1998.
An amended complaint was filed on October 28, 1998.
The damages sought by Nagel are for approximately $6.2
million. The Board has agreed to indemnify Medici in
connection with this action. In the event of an unfavorable
decision, the Company's financial position and results of
operations would be materially adversely effected.
Other than the foregoing matters, there are no pending
or threatened material legal proceedings to which the
Company is a party.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
(a) Market Information
The Company's Units, Class A Common Stock, Class A
Warrants and Class B Warrants are quoted on the
Nasdaq Small Cap Market under the symbols ICCSU,
ICCSA, ICCSW and ICCSZ, 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 prices have been adjusted
to reflect a 1 for 5 reverse stock split which became
effective as of September 25, 1998. The Company's
securities commenced trading on January 18, 1995.
Fiscal Years Ended July 31:
1997 1998
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High Low High Low
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Units
1st Quarter $48.750 $40.000 $25.000 $ 8.125
2nd Quarter 47.500 15.000 18.125 5.625
3rd Quarter 45.000 25.000 11.250 2.190
4th Quarter 40.625 13.125 4.375 0.625
Class A Common Stock
1st Quarter 28.125 15.000 13.750 5.000
2nd Quarter 23.750 10.313 10.000 4.845
3rd Quarter 21.015 11.565 10.000 1.875
4th Quarter 20.625 6.250 4.690 0.938
Class A Warrants
1st Quarter 14.688 7.500 8.750 0.625
2nd Quarter 17.500 3.125 4.375 0.940
3rd Quarter 15.315 6.250 2.345 0.315
4th Quarter 13.750 3.750 0.940 0.080
Class B Warrants
1st Quarter 12.500 6.250 5.470 0.625
2nd Quarter 12.500 1.875 3.750 0.625
3rd Quarter 14.375 4.375 1.720 0.155
4th Quarter 12.500 2.500 1.250 0.080
(b) Holders
As of July 31, 1998, there were approximately 160 record
holders of the Company's Class A Common Stock,
approximately 24 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 not paid any cash dividends on its
Common Stock and does not intend to declare or pay
cash dividends in the foreseeable future. The Company
expects that it will retain all available earnings, if
any, to finance and expand its business.
Possible Delisting of Units, Class A Common Stock,
Class A Warrants and Class B Warrants from the Nasdaq
Stock Market.
While the Company's Units, Class A Common Stock, Class
A Warrants and Class B Warrants are currently quoted
on the Nasdaq SmallCap Market, there can be no assurance that
the Company will meet the criteria for continued listing.
Continued inclusion on the Nasdaq SmallCap Market
requires that, among other things, the Company have at
least $2,000,000 in "net tangible assets" ("net
tangible assets" equals total assets less total
liabilities and goodwill), or at least $35,000,000 in
total market value, or at least $500,000 in net income
in two out of its last three fiscal years, as well as
at least 500,000 shares in the public float, at least
$1,000,000 in market value of the public float, and a
bid price of not less than $1.00 per share for 30
trading days.
If the Company is unable in the future to satisfy the
Nasdaq SmallCap Market maintenance requirements, its
securities may be delisted from the Nasdaq SmallCap
Market. In such event, trading, if any, in the Units,
Class A Common Stock and Warrants would thereafter be
conducted in the over-the-counter market in the so
called "pink sheets" or the NASD's "Electronic
Bulletin Board." Consequently, the liquidity of the
Company's securities could be severely adversely
affected, not only in the number of securities which
could be bought and sold, but also through delays in
the timing of transactions, reduction in security
analysts' and media coverage of the Company and lower
prices for the Company's securities than might
otherwise be attained.
The Nasdaq Stock Market, Inc. ("Nasdaq") notified the
Company by letter dated, May 28, 1998, that the Class
A Common Stock failed to maintain a minimum bid price
of $1.00. The Class A Common Stock was subject to
being de-listed from The Nasdaq SmallCap Market (the
"SmallCap Market") because the minimum closing bid
price of $1.00 had not been sustained for at least ten
consecutive trading days. On August 20, 1998, the
closing bid price of the Class A Common Stock was $.25
per share on a prereverse split basis ("pre-split"),
the Company's public float was approximately 4,720,419
pre-split shares and the market value of such public
float was approximately $1.2 million. With the
effectiveness of the Company's reverse stock split on
September 25, 1998, the Company has maintained the
$1.00 minimum bid price requirement of the SmallCap
Market. Nasdaq has notified the Company that it has
reviewed the Company's common stock and unit trading
history, with respect to the closing bid, and has
deemed the Company to be in compliance with the bid
price requirement, as of October 8, 1998.
On July 8, 1998, the Company was also notified by
Nasdaq that it no longer meets the Nasdaq requirement
that it maintain: (i) net tangible assets of $2
million; (ii) a market capitalization of $35 million;
or (iii) net income of $500,000 in two of the most
recently completed fiscal year. On July 10, 1998, the
Company met with Nasdaq officials to review the
Company's plans for achieving compliance, including
the Bridge Financing and subsequent equity offerings,
and submitted a formal proposal on July 22, 1998 to
Nasdaq for achieving compliance (the "Listing
Proposal"). The Listing Proposal indicated that the
Company expected that, with the proceeds of the Bridge
Financing and subsequent equity offerings, it should
meet the "net tangible asset" requirement.
On July 21, 1998, the Company was notified that it no
longer meets the Nasdaq requirement that it maintain a
minimum of two active market makers in the Company's
Class A and Class B Warrants (the "Existing
Warrants"). The Company informed Nasdaq that it
believed that the public announcement that the Company
intended to engage in a Warrant Exchange Offer had
negatively affected the market for the Existing
Warrants. On October 1, 1998, the Company informed
Nasdaq that it plans to close its Private Placement of
Bridge Financing, commence a equity offering and then
initiate the Warrant Exchange Offering. Once a
Registration Statement on Form S-4 for the Warrant
Exchange Offer is filed, the Company expects a
resumption of an active market.
On October 22, 1998, the Company was notified that it
continues to be unable to meet the following two
Nasdaq requirements: 1). (i) net tangible assets of $2
million; (ii) a market capitalization of $35 million;
or (iii) net income of $500,000 in two of the most
recently completed fiscal year, and 2). maintain a
minimum of two active market makers in the Existing
Warrants. In light of these concerns, the Company was
informed by Nasdaq, that it would not be afforded an
extension of time in which to achieve compliance.
Accordingly, the securities of the Company would have
been delisted from the Nasdaq SmallCap Market,
effective with the close of business on October 29,
1998. On October 27, 1998, the Company requested
a hearing with Nasdaq, an action which stays the delisting.
Risk of Low-Priced Stock.
If the Company's securities were delisted from Nasdaq
they could become subject to Rule 15g-9 under the
Securities Exchange Act of 1934, which imposes
additional sales practice requirements on broker-
dealers which sell such securities to persons other
than established customers and "accredited investors"
(generally, individuals with net worths in excess of
$1,000,000 or annual incomes exceeding $200,000, or
$300,000 together with their spouses). For
transactions covered by this rule, a broker-dealer
must make a special suitability determination for the
purchaser and have received the purchaser's written
consent to the transaction prior to sale.
Consequently, such rule may adversely affect the
ability of broker-dealers to sell the Company's
securities and may adversely affect the ability of
purchasers of the Company's securities to sell any of
the securities acquired in the secondary market.
Regulations of the Securities and Exchange Commission
(the "SEC") generally define a "penny stock" to be any
non-Nasdaq equity security that has a market price (as
therein defined) of less than $5.00 per share or with
an exercise price of less than $5.00 per share,
subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules
require delivery, prior to any transaction in a penny
stock, of a disclosure schedule prepared by the SEC
relating to the penny stock market. Disclosure is
also required to be made about commissions payable to
both the broker-dealer and the registered
representative and current quotations for the
securities. Finally, monthly statements are required
to be sent disclosing recent price information for the
penny stock held in the account and information on the
limited market in penny stocks.
The foregoing required penny stock restrictions will
not apply to the Company's securities if such
securities continue to be listed on Nasdaq SmallCap
Market and have certain price and volume information
provided on a current and continuing basis or meet
certain minimum net tangible assets or average revenue
criteria. There can be no assurance that the Company's
securities will continue to qualify for exemption from
these or modified restrictions. In any event, even if
the Company's securities were exempt from such
restrictions, it would remain subject to Section
15(b)(6) of the Exchange Act, which gives the
Commission the authority to prohibit any person that
is engaged in unlawful conduct while participating in
a distribution of a penny stock from associating with
a broker-dealer or participating in a distribution of
a penny stock, if the Commission finds that such a
restriction would be in the public interest.
If the Company's securities were subject to the
existing or proposed rules on penny stocks, the market
liquidity for the Company's securities could be severely
adversely affected.
Effect of Outstanding Options and Warrants; Registration Rights.
As of the date of this Form 10-KSB, 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 942,944
shares of Class A Warrants exercisable for 942,944
additional Class A Common Stock and 942,944 Class B
Warrants; (ii) an aggregate of 1,699,454 Class B
Warrants (including the 942,944 Class B Warrants
issued on the exercise of Class A Warrants),
exercisable for 1,699,454 shares of Class A Common
Stock; (iii) the Unit Purchase Options issued to D. H.
Blair and its designees in connection with the IPO and
the 1997 Private Placement to purchase 31,000 and
112,229 Units, respectively, which Units contain an
aggregate of 143,229 shares of Class A Common Stock,
160,016 Class A Warrants and an aggregate of 320,032
Class B Warrants (including 160,016 Class B Warrants
underlying the Class A Warrants), such Class A
Warrants and Class B Warrants are exercisable for an
aggregate of 480,048 shares of Class A Common Stock;
(iv) options to purchase 1,779,536 shares of Class A
Common Stock under the 1994 Plan as amended, and 4,000
shares of Class A Common Stock under the 1992 Plan;
(v) options to purchase 11,500 shares of Class A
Common Stock, 5,750 shares of Class E-1 Common Stock
and 5,750 shares of Class E-2 Common Stock; (vi)
42,063 other warrants (the "Private Placement
Warrants") to purchase 42,063 shares of Class A Common
Stock, 18,825 shares of Class E-1 Common Stock and
18,825 shares of Class E-2 Common Stock; (vii) 88,500
Bridge warrants issuable as of July 31, 1998; (viii)
500,000 other warrants for issuance to
consultants. The existence of the IPO and Private
Placement Unit Purchase Options, outstanding options
and warrants, Class A Warrants, Class B Warrants, and
other options and warrants 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.
The Class A Warrants and the Class B Warrants are
subject to redemption by the Company at a redemption
price of $.25 per Warrant upon not less than 30 days'
prior written notice if the closing bid price of the
Class A Common Stock shall have averaged in excess of
$45.50 and $61.25 per share, respectively as adjusted
by the reverse stock split, for 30 consecutive trading
days ending within 5 days of the notice. This
condition has not been satisfied with respect to any
of the Warrants, and the Company does not anticipate
that this condition will be met in the foreseeable
future. Such redemption of the Warrants could force
the holders to exercise such Warrants and pay the
exercise prices therefor at a time when it may be
disadvantageous for the holders to do so, to sell the
Warrants at the then current market price when they
might otherwise wish to hold the Warrants, or to
accept the redemption price which, at the time the
Warrants are called for redemption, is likely to be
substantially less than the market value of the Warrants.
In addition, holders of the IPO and Private Placement
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, the
Company's other warrants were exercisable through
February 10, 2002 at exercise prices of $2.50 to
$39.15 per share as adjusted, and contain anti-
dilution provisions, demand and "piggy-back"
registration rights.
The shares of Class A Common Stock issuable upon
exercise of the Class A or Class B Warrants issued or
issuable principally in connection with the Company's
IPO and 1997 Private Placement which were registered
pursuant to the Company's Registration Statement or
Form S-3 which became effective on May 22, 1997 may be
resold without restriction provided there is a current
prospectus under the Securities Act relating thereto
and applicable state securities laws are complied
with.
Possible Adverse Effects of Authorization of Preferred Stock;
Anti-Takeover Provisions.
The Company's Certificate of Incorporation authorizes
the issuance of 5,000,000 shares of Preferred Stock
with such designations, rights and preferences as may
be determined from time to time by the Board of
Directors. The Board has approved the adoption of an
anti-takeover device that "will protect shareholders'
value" by utilizing the Preferred Stock. Accordingly,
the Board of Directors is empowered, without
shareholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power
or other rights of the holders of the Company's Common
Stock. In the event of issuance, the preferred stock
could be utilized, under certain circumstances, as a
method of discouraging, delaying or preventing a
change in control of the Company.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Except for the description of historical facts
contained herein, the discussion in this Item 6
contains certain forwardlooking 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, 1999. The
Company's actual results could differ materially from
those discussed herein.
Overview
The Company is a development stage company, engaged
in the design, development, and marketing of systems
for securing, controlling, delivering and auditing
electronic documents and files, primarily over the
Internet. The Company believes its technology and
methods address critical areas of electronic commerce
and is seeking to position itself as an independent
third party to authenticate, certify, validate,
authorize, and deliver secure transactions for
electronic information. From November 18, 1991
(inception) to July 31, 1998, the Company recognized
revenues of approximately $629,000 and had an
accumulated deficit of approximately $14.3 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 market the CommerceSense System it has
developed and on it's ability to raise the necessary
additional operating funds. The likelihood of the
success of the Company must be considered in light of
the difficulties and risks inherent in a new business.
There can be no assurance that revenues will increase
significantly in the future or that the Company will
ever achieve profitable operations.
In June 1998, the Company commenced a private offering
(the "Private Offering") to accredited investors,
including officers and directors of the Company, of up
to $2,000,000 in aggregate principal amount of Bridge
Units to raise the funds necessary to continue in
operation. Each Bridge Unit consists of an unsecured
promissory note (the "Bridge Note") and warrants to
acquire shares of Class A Common Stock (the "Bridge
Warrants"). There is no minimum level of subscriptions
or purchases associated with the sale of the Bridge Units.
The Bridge Notes bear interest at a rate of 10% per
annum and are due and payable from the proceeds of a
subsequent equity offering no later than the one hundred
eightieth (180th) day after the date of issuance of
each Bridge Note. The Bridge Notes are unsecured
obligations of the Company.
The Bridge Warrants entitle the holder to purchase .3
shares of Class A Common Stock for each $1.00 of
principal amount of Bridge Notes purchased at an
exercise price of $2.50 per share, at any time or from
time to time during the period beginning on the one
hundred eightieth (180th) day after the date of
issuance of the Bridge Note Unit (the "Commencement
Date"), until the date which is thirty six (36) months
thereafter (the "Expiration Date").
However, if more than one year has elapsed
since the issuance of the Bridge Warrants and the bid
price of the Class A Common Stock exceeds $7.50 per
share for ten (10) consecutive trading days. The
Company may accelerate the Expiration Date to a date
not less than ten (10) business days after the mailing
of notice of such acceleration to each registered
holder of the Bridge Units (the "Acceleration
Notice").
The Company anticipates that it will need approximately
$800,000 in additional proceeds from the
Bridge Financing or other sources to
continue its operations through the end of December
1998. The Company believes that it will secure such
amount by mid November 1998. In the event that the
Company does not raise necessary amount from the
Bridge Financing, it will seek alternative sources of
funding, including a private placement of equity
securities or one or more strategic venture partners.
As of July 31, 1998, the Company had received and
accepted subscription for the purchase of $295,000 of
Bridge Units from individual accredited investors. As
of October 28, 1998 the Company has received and
accepted $595,000 from accredited investors.
The Company has incurred substantial losses since
inception and anticipates losses to continue at least
through the fiscal year ending July 31, 1999 ("fiscal
1999") as the Company attempts to expand commercial
markets for CommerceSense. Although management believes
that the Company will be successful in marketing
CommerceSense, 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, 1998 compared with Fiscal Year Ended July 31, 1997.
For the fiscal year ended July 31, 1998 ("fiscal
1998"), the Company recognized revenues of
approximately $20,000; $18,000 from sales generated
by CommerceSense and $2,000 from Advanced Imaging,
compared to revenues of $17,000 in the fiscal year
ended July 31, 1997, ("fiscal 1997"). The Company
announced that it had abandoned its operations and
support for both Advanced Imaging Systems and it's
CopyRight Metering Systems in the third fiscal
quarter, 1998. See "Description of Business."
Research and development ("R & D") for fiscal 1998,
decreased from approximately $713,000 in fiscal 1997
to approximately $576,000 in fiscal 1998. In
addition, the Company capitalized approximately
$714,000 of software development costs not present in
the prior year. The increase in expenses was largely
attributable to the Company's focus on the development
of the CommerceSenseT System and the corresponding
increase in personnel, leading to increased salary,
and related costs.
Selling, general and administrative expenses
increased from approximately $1,900,000 in fiscal 1997
to $2,307,000 in fiscal 1998. The increase is
attributable to an increase in average staffing levels
over the fiscal year, leading to increases in salary
and related costs.
Write-down of assets for fiscal 1998, decreased from
approximately $507,000 in fiscal 1997 to approximately
$178,000 in fiscal 1998. For fiscal 1998, the un-
amortized portion of the Visus Technology prepaid
license fee and notes receivable from Visus Technology
were written off as the Company abandoned operations
and support for the Advanced Imaging Systems during
the third fiscal quarter of the year. For fiscal
1997, the writedowns were related to equipment
previously held for lease, related software development
and patent costs.
Interest and investment income decreased from
approximately $90,000 in fiscal 1997 to approximately
$87,000 in fiscal 1998. The decrease is due to a
decrease in average balances of investment securities
for the period.
Interest expense was approximately $31,000 in fiscal
1998 compared to approximately $2,000 in fiscal 1997.
The increase in interest expense is attributable to
the financing of a capital lease and debt discount
amortization related to Bridge Note Warrants.
The net loss for fiscal 1998 was $2,997,181 compared
to $3,068,066 in fiscal 1997. Management believes
that losses will continue through fiscal 1999 as the
Company is still in the development stage and is in
the process of commercializing and marketing its new
service.
Liquidity and Capital Resources
The Company has incurred substantial losses since
inception. Although no assurance can be given, the
Company anticipates that revenues will continue to be
generated, although as a result of increased expenses
associated with such revenues, losses may increase,
or the decrease in losses realized in fiscal 1999 may not
be comparable to fiscal 1998. At July 31, 1998, the Company
had a negative working capital of approximately ($914,000).
The Company has financed its operations primarily
through private placements during fiscal 1994, its
initial public offering during fiscal 1995 (the
"IPO"), a private placement in March 1997 and a
private placement of Bridge Note Units during fiscal
1998. The Company anticipates losses at least
through fiscal 1999, as the Company attempts to
expand commercial markets for CommerceSense. The
Company does not have sufficient financial resources
to continue its operations beyond November 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,
1998, and for the years then ended and for the period
from November 18, 1991, (inception) to July 31, 1998,
contain a paragraph in regard to the substantial
doubt 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 marketing its CommerceSense service.
The Company has a net operating loss carryforward
for tax purposes of approximately $14 million at July
31, 1998, 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 2013. 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.
Year 2000 Compliance
The Company has commenced implementation of new
financial software for internal operating purposes
that is Year 2000 ("Y2K") compliant. The Company's
CommerceSenseT service is fully Y2K compliant. Upon
completion of the implementation of the new financial
software there will be no costs relating to
modification of software incurred by the Company.
The Company is in communication with customers and
others with which it conducts business to determine
the extent to which the Company would be vulnerable
to these third parties failure to remediate their own
potential year 2000 problems. The inability of the
Company or these other significant third parties to
adequately address Y2K issues could cause disruption
of the Company's operations.
Item 7. 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
- ------------------------ ------ ---------------------------------
Richard J. Berman 56 Chairman, Chief Executive Officer
Arthur R. Medici 49 President and Director
Alan N. Alpern 71 Chief Financial Officer
Robert S. Christie 44 Director
Charles C. Johnston 63 Director
Richard J. Berman On September 22, 1998, Richard J.
Berman was elected to the Board of Directors and
appointed Chairman and Chief Executive Officer of the
Company. Previously, Mr. Berman, through American
Acquisition Company, acted as principal in venture
capital and real estate, as an advisor in mergers and
acquisitions, and as a source of funding for small
growth companies. He is also the former Chairman of
Prestolite Battery Company, the largest battery
producer in Canada which merged with Exide. Prior to
1983, he served as Senior Vice President of Bankers
Trust head of their merger and acquisition
department, and as Director of mergers and
acquisitions for Norton Simon, Inc.
Arthur R. Medici has been President and Director of
the Company since November 1996. From November 1996
to September 1998 he also served as Chief Executive
Officer of the Company. 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. Subsequent to fiscal
year end, Mr. Alpern resigned as Chief Financial
Officer.
Robert S. Christie has been a Director of the Company
since March 1997. Mr. Christie, an operations
executive with extensive experience 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). Subsequent to fiscal year end,
Mr. Christie resigned from the Board.
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 1998, resignations were submitted by
former board members Stanley Bielak and Neal B.
Freeman.
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:
Michael Cassidy Executive Vice President - General Manager
Anthony D'Angelo Director of Electronic Commerce Services
Michele Golden Executive Vice President - Business Development
David Hubbard Chief Technology Officer/Vice President of Engineering
Walter M. Psztur Vice President - Finance & Administration,
Corporate Secretary
Michael Cassidy is a co-founder of ICCSUB and
Executive Vice President of the Company. 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.
Anthony D'Angelo is the Director of Electronic
Commerce Services. He joined the Company in April
1997 as Director of Integration Services from
Standard Motor Products, a $700 million NYSE
automotive replacement parts manufacturer and
distributor. As an Information System Manager with
over 13 years of experience, he was responsible for
developing and managing their corporate EDI/EC
initiatives and systems for Standard's Canadian, Mid-
West, and Sales divisions.
Michele Golden is a co-founder of ICCSUB and
Executive Vice President of the Company. 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.
David Hubbard was named Chief Technology Officer and
Vice President of Engineering for the Company in
April 1997. He has over 16 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.
Walter M. Psztur has more than 19 years experience in
business and finance. From 1993 - 1997 he was the
Assistant Corporate Controller of Standard Motor
Products, a $700 million NYSE automotive replacement
parts manufacturer and distributor. Previously he was
the Corporate Accounting Manager at Breed
Technologies, Inc., an automotive safety products
manufacturer. Mr. Psztur has significant experience
in Financial and Operational organizations, systems
and procedures.
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
non-statutory 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
The Company is reviewing the reporting requirements
as it relates to Section 16(a) of the Exchange Act
and will take any steps necessary to bring its
reporting persons into compliance.
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, 1996, July 31, 1997
and July 31, 1998 to Arthur R. Medici, the Company's
President and former Chief Executive Officer, and the
next four highest paid officers whose compensation was
more than $100,000 in the years indicated.
Summary Compensation Table
Long Term
Annual Compensation Compensation
-------------------------- ------------
Other
Annual
Name and Fiscal Years Compen-
Principal Ended sation
Position July 31, Salary($) $ Options(#)
- ------------------- ------------ ----------- -------- ------------
Arthur R. Medici 1998 200,000 (1) -0- -0-
President 1997 102,000 -0- -0-
1996 n/a n/a n/a
Thomas H. Lipscomb (2) 1998 n/a n/a n/a
Former CEO and President 1997 145,833 -0- -0-
1996 175,000 -0- -0-
Alan N. Alpern (3) 1998 -0- 101,500 (1) -0-
Chief Financial Officer 1997 -0- 125,000 -0-
1996 -0- 125,000 -0-
(1) Accrued compensation aggregating approximately $40,000 for
these two officers was in arrears as of July 31, 1998.
(2) Mr. Lipscomb resigned as President and Chief
Executive Officer on October 15, 1996.
(3) Mr. Alpern resigned as Chief Financial Officer
on September 10, 1998.
Option/SAR Grants
There were no in-the money unexercised Options/SAR
Grants at fiscal year ended July 31, 1998.
Option Exercises
There were no Options/SAR Grants exercised during the
fiscal year ended July 31, 1998.
Employment Agreements
The Company entered into an employment agreement as
of November 1996 with its President, expiring in
July 2000, as amended. The contract required aggregate annual
salary of $175,000 to $225,000 and issuance of 14,000
Class B shares, 27,000 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 and $112,000 for the
years ended July 31, 1997 and 1998, respectively. In
addition, the Company granted 70,000 options to
purchase the Company's Class A Common Stock based
upon future earning levels of which one-third
immediately vested and the remaining two-thirds vest
if certain earning levels are met during his
employment term.
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. Subsequent to fiscal year end Mr. Alpern
resigned his position as Chief Financial Officer of
the Company. The Company is currently renegotiating
this agreement.
Stock Option Plans
Pursuant to the 1994 Stock Option Plan, (the "1994
Plan'') as amended by the Company's stockholders in
1998, the company may grant options to purchase an
aggregate of 1,960,000 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.
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,
1998 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 the number of shares
of Common Stock owned beneficially as of the October
20, 1998 by each principal holder, director, each
executive officer and all directors and executive
officers as a group. Other than as disclosed in the
following table and accompanying footnotes, the
directors, the named executive officers, and the
directors and executive officers as a group did not
own any other equity securities of the Company.
Unless otherwise noted, each individual has sole
voting and investment power. Fractional shares are
rounded to the nearest whole number.
<TABLE>
<CAPTION>
Class A Class B Redeemable
Common Stock (2) Common Stock Common Stock (3)
----------------- ----------------- -----------------
% Vote of
Name and Address Number Number Number of all
of Beneficial Owner (1) of shares % of shares % of shares % classes
- ------------------------ --------- ----- --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Arthur R. Medici (2) - - 14,000 7.2 54,000 9.4 4.6
Alan N. Alpern (2) - - 4,000 2.1 - - .8
Charles C. Johnston (2) 9,180 .7 - - - - .3
All executive officers
and directors as a
group (3 persons) 9,180 .7 18,000 9.3 54,000 9.4 5.7
Voting Trust (4) - - 169,033 87.0 236,326 41.3 41.7
Michele Golden (5) 188,655 14.9 - - - - 6.3
Michael Cassidy (5) 125,770 10.0 - - - - 4.2
</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 in care of the Company at its
principal office at 805 Third Avenue, New York,
New York 10022.
(2) The Executive officers and directors as a group
hold a total of, 271,597 immediately exercisable
options to purchase Class A Common Stock, 170,801
of which are "out of the money" at option prices
of $2.50 or greater per share and 100,796 of
which are "in the money" at option prices of
approximately $.26. Mr. Medici holds 50,398 of
these options and Mr. Alpern holds 50,398 of
these options.
(3) The redeemable common stock includes shares of
both Class E-1 Common Stock and Class E-2 Common
Stock. As of July 31, 1998 the Class E Common
Stock was no longer convertible into shares of
Class A Common Stock. The Class E Common Stock
will continue to retain its voting power until
March 31, 1999, when all of the shares of the
Class E Common Stock will be redeemed pursuant to
their terms.
(4) Substantially all of the Class B Common Stock and
Class E-1 Common Stock and Class E-2 Common Stock
beneficially owned by Thomas H. Lipscomb, Alan
N. Alpern, and Michael T. Brooks constituting
20.9%, 2.0% and 16.0% of the vote of all classes
of common stock of the Company, respectively,
have been deposited in the Voting Trust or are
subject to an irrevocable proxy until February of
2000, except in the case of Mr. Brook's shares
which are subject to the Company's option to
purchase his Class B shares at any time.
Pursuant to the Voting Trust and irrevocable proxy,
the shares will be voted at the direction of a
majority of the Company's non-management
directors and Mr. Berman, subject to certain
exceptions, including the dissolution or
liquidation of the Company, 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 and irrevocable proxy on
the sale of the shares by the beneficiary owner thereof.
(5) The co-founders of ICCSUB, Mr. Cassidy and Ms.
Golden have Class A Common Stock to be issued,
pursuant to the Merger of ICCSUB into the Company
effective September 25, 1998. In addition, the
co-founders have an aggregate of 130,790 shares
of immediately exercisable options to purchase
Class A Common stock at an option price of
approximately $.26.
Voting Trust
Thomas H. Lipscomb (former Chairman of the Board and
President of the Company), and Alan N. Alpern (former
Chief Financial Officer of the Company) have
deposited 449,098 substantially all of the shares of
Common Stock beneficially owned by them and other
members of their families, which includes Class B
Common Stock and Class E Shares of the Company into a
voting trust (the "Voting Trust") until February 18,
2000. As of May 1, 1998, 123,739 shares of Class B
Common Stock were forfeited pursuant to an Escrow
Agreement dated as of September 11, 1992 as amended
September 20, 1994 (the "Escrow Agreement") and such
shares will be delivered by the Escrow Agent to the
Company which may hold the shares in treasury or
cancel the shares. As of June 19, 1998, Michael T.
Brooks has agreed to deposit 80,000 shares of Class B
Common Stock into the Voting Trust. Accordingly, as
of June 19, 1998 the shares in the Voting Trust
represent 46.5% of the total voting power of the
Company. The shares of Common Stock held in the
voting trust will be voted at the direction of
a majority of the non-management directors of the
Company and Richard J. Berman, the Chief Executive
Officer of the Company. The voting trust and the
disproportionate vote afforded the Class B Common
Stock could serve to impede or prevent a change of
control of the Company. As a result, potential
purchasers may be discouraged from seeking to acquire
control of the Company through the purchase of Class
A Common Stock, which could have a depressive effect
on the price of the Company's securities.
The Company is unable to predict the effect that
sales made under Rule 144, or otherwise, may have on
the then prevailing market price of the Company's
securities although any future sales of substantial
amounts of securities pursuant to Rule 144 could
adversely affect prevailing market prices.
Item 12. Certain Relationships and Related Transactions
None
Item 13. Exhibits, List and Reports on Form 8-K
13 (a) Exhibits
3.1 Articles of Incorporation
3.2 By-Laws
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 February 18, 2002 (1)
9.1 Voting Trust
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)
10.17 Lease for Executive Offices (7)
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
* 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
(7) Incorporated by reference to the Company's Report on
Form 10-QSB dated October 31, 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.
13 (b) Document List
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheet
July 31, 1998
Consolidated Statement of Operations - Years Ended
July 31, 1998 and 1997, and
November 18, 1991 (Inception) to July 31, 1998
Consolidated Statement of Changes in Shareholder Equity - Years Ended
July 31, 1992; July 31, 1993; July 31, 1994; July 31, 1995
July 31, 1996; July 31, 1997 and July 31, 1998
Consolidated Statements of Cash Flows - Years Ended
July 31, 1998 and 1997 and
November 18, 1991 (Inception) through July 31, 1998
13 (b) Reports on Form 8K
On September 25, 1998, the Company filed a Current Report on Form 8-K.
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.
INTERNET COMMERCE CORPORATION
Date: October 29, 1998
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/ Richard J. Berman______ Chief Executive Officer, October 29, 1998
Richard J. Berman Chairman of the Board
of Directors
(Principal Executive Officer)
/s/Arthur R. Medici________ President & Director October 29, 1998
Arthur R. Medici
/s/Walter M. Psztur________ V. P. Finance & October 29, 1998
Walter M. Psztur Administration
(Chief Financial Officer,
Principal Accounting
Officer & Secretary)
/s/Charles C. Johnston_____ Director October 29, 1998
Charles C. Johnston
Exhibit Index
Exhibit Reference
Number Number
- ------- ---------
3.1 Articles of Incorporation 3.1
3.2 By-Laws 3.2
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 February 18, 2002 (1) *
9.1 Voting Trust 9.1
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) *
10.17 Lease for Executive Offices (7) *
11.1 Computation of Net Loss Per Share 11.1
27.1 Financial Data Schedule 27.1
* 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
(7) Incorporated by reference to the Company's Report
on Form 10-QSB dated October 31, 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.
INTERNET COMMERCE CORPORATION
(FORMERLY INFOSAFE SYSTEMS, INC. AND SUBSIDIARY)
(a development stage company)
FINANCIAL STATEMENTS
JULY 31, 1998
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Internet Commerce Corporation
New York, New York
We have audited the accompanying consolidated balance sheet of
Internet Commerce Corporation (formerly Infosafe Systems, Inc. and
subsidiary), (a development stage company) as of July 31, 1998, 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, 1998, and for the period from November 18, 1991 (inception)
through July 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of
Internet Commerce Corporation as of July 31, 1998, and the consolidated
results of its operations and its cash flows for each of the years in
the two-year period ended July 31, 1998, and for the period from
November 18, 1991 (inception) through July 31, 1998, 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, has a negative working
capital position and has incurred operating losses since inception which
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described
in Note A. 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
September 23, 1998
With respect to Note A
September 25, 1998
With respect to Note L
October 23, 1998
With respect to Note J [3]
October 28, 1998
<TABLE>
INTERNET COMMERCE CORPORATION
(FORMERLY INFOSAFE SYSTEMS, INC. AND SUBSIDIARY)
(a development stage company)
CONSOLIDATED BALANCE SHEET
AS OF JULY 31, 1998
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 178,287
Accounts receivable 7,231
Prepaid expenses and other assets 100,882
--------------
Total current assets 286,400
Fixed assets 533,188
Software development costs 714,298
Other assets 1,200
--------------
Total assets $ 1,535,086
--------------
--------------
LIABILITIES
Current liabilities:
Accounts payable $ 575,031
Bridge notes 232,557
Capital lease obligation 84,505
Due to officers 39,792
Accrued expenses 268,854
--------------
Total current liabilities 1,200,739
Capital lease obligation - less current portion 196,887
--------------
Total liabilities 1,397,626
--------------
Commitments and contingencies
Redeemable Common Stock 5,729
STOCKHOLDERS' EQUITY
Common stock:
Class A - par value $.01 per share, 40,000,000 shares authorized,
one vote per share; 947,951 shares issued and outstanding 9,480
Class B - par value $.01 per share, 2,000,000 shares authorized,
six votes per share; 194,397 shares issued and outstanding 1,944
Additional paid-in capital 14,532,208
Notes receivable (112,500)
Deficit accumulated during development stage (14,299,401)
--------------
Total stockholders' equity 131,731
--------------
Total liabilities and stockholders' equity $ 1,535,086
--------------
--------------
--------------
</TABLE>
See independent auditors' report and notes to consolidated financial statements
<TABLE>
INTERNET COMMERCE CORPORATION
(FORMERLY 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
1997 1998 July 31, 1998
------------- ------------ --------------------
<S> <C> <C> <C>
Revenue:
License fees $ 350,000
Services $ $ 17,481 17,481
Other 17,323 2,000 261,163
--------------------------------------------------------------------------------------------------
Total 17,323 19,481 628,644
--------------------------------------------------------------------------------------------------
Expenses:
Cost of revenue (including amortization
of software development costs of
$41,363 for the year ended July 31,
1997 and $75 for the year ended
July 31, 1998, and $137,001
for the period November 18, 1991
(inception) through July 31, 1998) 53,634 11,315 256,714
Research and development 713,442 575,802 3,300,838
Selling, general and administrative 1,900,758 2,307,382 9,959,176
Write-down of assets 507,356 177,735 1,155,091
--------------------------------------------------------------------------------------------------
Total 3,175,190 3,072,234 14,671,819
--------------------------------------------------------------------------------------------------
Operating (loss) (3,157,867) (3,052,753) (14,043,175)
--------------------------------------------------------------------------------------------------
Interest and investment income 90,448 86,613 572,236
Settlement expense (394,828)
Minority interest 1,000 1,000
Interest expense (1,647) (31,041) (426,234)
--------------------------------------------------------------------------------------------------
NET (LOSS) $ (3,068,066) $ (2,997,181) $ (14,291,001)
--------------------------------------------------------------------------------------------------
BASIC AND DILUTED (LOSS) PER COMMON SHARE $ (3.61) $ (2.79)
---------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC AND DILUTED (LOSS)
PER SHARE 849,980 1,075,718
___________________________________________________________________________
</TABLE>
See independent auditors' report and notes to consolidated financial statements
<TABLE>
INTERNET COMMERCE CORPORATION
(FORMERLY INFOSAFE SYSTEMS, INC. AND SUBSIDIARY)
(a development stage company)
Consolidated Statements of Changes in Stockholders' Equity
For the Period from November 18, 1991 (Inception) through July 31, 1998
<CAPTION>
Unreal-
ized
Gain
(Deficit) (loss) on
Class A Class B Accumulated Market- Total Redeemable
Common Stock Common Stock Additional During the able Stock- Common Stock
----------------- ---------------- Paid-in Note Development Secur- holders' ---------------
Shares Amount Shares Amount Capital Receivable Stage ities Equity Shares Amount
---------------------------------------------------------------------------------------------------------------------
<S> <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 1,375 548,625 550,000
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)
Net (loss) (837,357) (837,357)
Stock di-
vidend on
Class A
and
Class B
common
stock (20,378) (20,378) 2,037,862 $20,378
Stock
to be
issued to
holders
of pre-
ferred
shares,
options
and
warrants (6,568) (6,568) 656,882 6,568
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as
at July
31, 1994 542,875 5,429 1,494,987 1,556 1,814,611 (2,117,791) (296,195) 2,694,744 26,946
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 27,195 27,750 30
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 9,221,820 (4,737,574) 90,320 4,600,331 2,694,774 26,946
Class B
common
stock
exchanged
for Class
A common
stock in
August
1995 8,000 80 (8,000) (8) (72)
Class B
common
stock
exchanged
for Class
A common
stock in
October
1995 12,000 120 (12,000) (12) (108)
Class B
common
stock
exchanged
for Class
A common
stock in
November
1995 5,937 59 (5,937) (6) (53)
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)
Class B
common
stock
exchanged
for Class
A common
stock in
July 1996 19,520 196 (19,520) (20) (176)
Shares
canceled 74 74 (7,500) (74)
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 9,694,582 (8,234,154) 5,552 1,496,452 2,687,274 26,872
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 71,873 71,943 270,000 2,700
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 930 930 (93,000) (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 14,175,808 (11,302,220) 8,928 2,931,153 2,864,274 28,642
- --------------------------------------------------------------------------------------------------------------------------------
Issuance
of common
stock on
June 19,
1998 at
$.28125
per share 400,000 400 112,100 ($112,500)
Class B
common
stock
exchanged
for Class
A common
stock in
May 1998 9,669 97 (9,669) (9) (88)
Class B
common
stock
exchanged
for Class
A common
stock in
June 1998 9,669 97 (9,669) (9) (88)
Amortiza-
tion of
value of
B Shares
- employ-
ment con-
tract of
November
1996 111,971 111,971
Escrow
shares
canceled (781,244) (781) 781
Fair value
of war-
rants on
bridge
note
financing 71,803 71,803
Net (loss) (2,997,181) (2,997,181)
Unrealized
(loss) on
market-
able sec-
urities (8,928) (8,928)
- -------------------------------------------------------------------------------------------------------------------------------
Balance as
at July
31, 1998
- before
reverse
stock
split 4,739,757 $47,398 971,984 $1,034 $14,472,287 ($112,500) ($14,299,401) 108,818 2,864,274 $28,642
- -----------------------------------------------------------------------------------------------------------------------------------
Adjust-
ment for
reverse
stock
split (3,791,806)(37,918) (777,587) 910 59,921 22,913 (2,291,420 (22,913)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance
as at
July 31,
1998
- after
reverse
stock
split 947,951 $ 9,480 194,397 $1,944 $14,532,208 ($112,500) ($14,299,401) $131,731 572,854$ 5,729
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See independent auditors' report and notes to consolidated financial statements
<TABLE>
INTERNET COMMERCE CORPORATION
(FORMERLY 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
1997 1998 July 31, 1998
-------------- --------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) $ (3,068,066) $ (2,997,181) $ (14,291,001)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization 156,853 135,621 843,690
Loss on disposal of equipment held for lease 682 682
Services contributed by stockholder 138,240
Write-down assets 507,356 177,735 1,155,091
Common stock and warrants issued for
compensation and settlement 101,643 111,971 436,550
Contribution of capital by employees/
stockholders 145,784 145,784
Amortization of debt discount 8,413 8,413
Minority interest (1,000) (1,000)
(Increase) decrease in:
Accounts receivable, prepaid expenses and
other assets (166,445) 65,688 (175,678)
Increase (decrease) in:
Accounts payable, notes payable,
accrued expenses 83,888 534,584 884,631
Due to stockholders (56,163) (60,000)
-----------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (2,295,468) (2,023,169) (10,854,598)
-----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Equipment held for lease (794,773)
Capitalization of software development costs (714,373) (921,188)
Purchases of fixed assets (32,332) (435,896) (935,233)
Purchases of marketable securities (2,640,017) (778,745) (16,083,295)
Sales of marketable securities 1,052,626 3,268,762 16,083,295
Patents, copyrights and trademarks (84,631)
-----------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities (1,619,723) 1,339,748 (2,735,825)
-----------------------------------------------------------------------------------------------------
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
preferred stock (75,000)
Payment of dividends (8,400)
Proceeds from financing lease 312,639 340,715
Payment of financing lease (9,329) (41,611) (59,330)
Payment of purchase agreement (15,000) (70,000) (212,840)
Proceeds from subordinated debenture 100,000
Payment of subordinated debenture (100,000)
Exercise of warrants and options 88,500 424,895
Proceeds from bridge loan 295,000 1,795,000
Payment of bridge loan (1,500,000)
Proceeds from loan payable 27,180 27,180
Payment of loan payable (27,180) (27,180)
Payment of deferred financing costs (224,919)
Repayment of loan from stockholder
Capital contribution from minority stockholder 1,000 1,000
-----------------------------------------------------------------------------------------------------
Net cash provided by financing
activities 4,257,585 468,848 13,768,710
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 342,394 (214,573) 178,287
Cash and cash equivalents, beginning of year. 50,466 392,860
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year. $ 392,860 $ 178,287 $ 178,287
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
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
Notes receivable in exchange for common stock $ 112,500
Debt discount in connection with bridge loan 71,803 146,803
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 $ 1,647 $ 21,681 106,733
</TABLE>
See independent auditors' report and notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - THE COMPANY:
Internet Commerce Corporation (the "Company" or "ICC"),
formerly Infosafe Systems, Inc., is engaged in the design,
development, and marketing of systems for securing,
controlling, delivering and auditing electronic documents,
and files primarily over the Internet. The Company believes
its technology and methods address critical areas of
electronic commerce and is seeking to position itself as an
independent third party to authenticate, certify, validate,
authorize and deliver secure transactions for electronic
information.
The Company initially developed a hardware-based
distribution system, which it abandoned during the fiscal
year ended July 31, 1997. In the third fiscal quarter ended
April 30, 1998, the Company abandoned its operations and support
for its advanced imaging system products and its electronic vending
system for on-demand authorization to photocopy copyrighted
material, known as the CopyRight Metering System. This action was
taken due to the Company's inability to generate sufficient revenue
from these products or to achieve any significant market
penetration, its need to conserve cash resources, and its
decision to accelerate the development and marketing of
Internet-based products and services for the electronic
commerce ("EC") marketplace.
The Company launched the CommerceSense(TM) system for
corporations and their trading partners during the third
quarter ended April 30, 1998. CommerceSense was designed to
provide a cost-effective alternative to Value Added Network
(VANs) for traditional Electronic Data Interchange ("EDI")
users and new EC participants. The system can be accessed
using a standard Web browser or virtually any other
communications protocol. The Company is seeking to raise
additional financing to accelerate the commercial
introduction and marketing of its EDI/EC secure services.
Subsequent to fiscal year end, effective September 25, 1998,
the Company merged its majority owned subsidiary ("ICCSUB" or the
"subsidiary") into the Company. The merged Company was then
renamed "Internet Commerce Corporation". In addition, the
Company completed a 1 for 5 reverse stock split (the "stock
split"). The stock split has been reflected in the Company's
consolidated balance sheet and consolidated statement of
operations, adjusted in the consolidated statements of
changes in stockholders equity and notes to consolidated
financial statements. The three minority holders of the
16.7% of the shares of common stock of ICCSUB not already
owned by the Company will receive, in exchange for each of
such shares, 16.72474 shares of Class A Common Stock.
The Company has incurred substantial losses since inception,
and anticipates losses to continue as the Company attempts to
market and develop its service. The Company has a negative
working capital position, and 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 service 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. The consolidated financial
statements do not include any adjustments that might result
from the outcome of this uncertainty.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
[1] Principles of consolidation:
The accompanying consolidated financial statements include
the accounts of the Company and it's 83.3% owned subsidiary.
All significant intercompany accounts and transactions have
been eliminated in consolidation.
[2] Revenue recognition:
The Company accounts for its revenues in accordance with
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue
Recognition", issued by the American Institute of Certified
Public Accountants. SOP 97-2 provides guidance on applying
generally accepted accounting principles in recognizing
revenue on software transactions.
The Company's revenues are derived from services which
include subscription fees, implementation fees and consulting
fees. Subscription fees are for use of the Company's service
and are recognized over the service period. Implementation
fees are generally billed in the period the new customer is
activated. Consulting fees are recognized as services are
performed.
[3] Depreciation and amortization:
Office and technology equipment, software, and furniture and
fixtures are stated at cost and are depreciated on the
straight-line method over three 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.
[4] Software development costs:
Costs related to the conceptual formulation and design of
software are expensed as research and development. Certain
software development costs incurred during the fiscal year
were capitalized. A detailed product and program design had
been completed and the Company established that the necessary
skills, hardware, and software technology were available to
the Company to produce the product. The completeness of the
detail program design and its consistency with the product
design have been confirmed. The detail program design has
been reviewed for high risk development issues and any
uncertainties related to identified highrisk development
issues have been resolved through coding and testing.
Capitalized software costs are amortized over a maximum of
three years or the expected life of the product, whichever is
less.
[5] Loss per share of common stock:
The Company calculates its loss per share under the
provisions of Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires
dual presentation of "basic" and "diluted" loss per share on
the face of the statement of operations. In accordance with
SFAS 128, which was adopted by the company in 1998 and
retroactively applied in 1997, basic and diluted net loss per
common share is computed by dividing the net loss by the weighted
average number of shares of common stock outstanding during
each period. No effect has been given to Class E-1 shares
and Class E-2 shares, options or warrants in the diluted
computation as their effect would be antidilutive.
[6] Income taxes:
The Company accounts for income taxes in accordance with
Statement of Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). SFAS 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.
[7] 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.
[8] 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.
[9] Impairment of long-lived assets:
The Company adopted SFAS 121, "Accounting for Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" during
the year ended July 31, 1997. SFAS 121 establishes accounting standards
for the impairment of long-lived assets, certain identifiable
assets and goodwill related to those assets. During the
year ended July 31, 1997, the Company wrote down its
software development costs, patents and trademarks,
copyrights and equipment previously held for lease in
aggregate of $ 507,356 and during the year ended July 31,
1998, the Company wrote down its prepaid licensing fee,
notes receivable and equipment previously held for lease in
the aggregate of $177,735. Since inception the Company has
written off $1,155,091 of long-lived assets.
[10] Stock-based compensation:
The Company accounts for its stock-based compensation plans
under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." The Financial Accounting Standards Board
issued SFAS 123, "Accounting for Stock-Based Compensation."
SFAS 123 established a fairvalue-based method of accounting for stock-based
compensation plans. The Company has adopted the disclosure requirements of
SFAS 123 and has presented the proforma effects on net loss and loss per
share of common stock as if SFAS 123 had been adopted, as well as certain
other information.
[11] Recently issued accounting pronouncements:
In June 1997, the Financial Accounting Standards Board issued
SFAS 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period,
resulting from transactions and other events and
circumstances from nonowner sources. The Company is
reviewing the impact of adopting SFAS 130, which will be
effective for the Company for the year ending July 31, 1999.
NOTE C - PREPAID AND OTHER ASSETS:
Prepaid and other assets consist of the following:
Prepaid insurance $ 46,756
Prepaid expenses and other 54,126
--------
Total $100,882
--------
--------
NOTE D - FIXED ASSETS:
Fixed assets consist of the following:
Office and technology equipment (including
capital lease of $312,639) $761,102
Furniture and fixtures 91,196
Office software 56,385
Leasehold improvements 31,044
--------
Total 939,727
Less accumulated depreciation 406,539
--------
Total $533,188
--------
--------
NOTE E - ACCRUED EXPENSES:
Accrued expenses consist of the following:
Legal and professional fees $ 35,000
Rent 98,095
Other 135,759
--------
Total $268,854
--------
--------
NOTE F - REDEEMABLE COMMON STOCK:
As of July 31, 1998, the Company failed to achieve the
specified earnings levels or bid prices and accordingly the
Class E Common Stock is no longer convertible into shares of
Class A Common Stock. The Class E Common Stock will continue
to retain its voting power until March 31, 1999, when all of the
shares of the Class E Common Stock will be redeemed pursuant
to their terms.
1) Class E-1 par value $.01 per share
2,000,000 shares authorized, one vote per
share; 286,427 shares issued and to be
issued redemption value $.0005 per share
2) Class E-2 par value $.01 per share
2,000,000 shares authorized, one vote per
share; 286,427 shares issued and to be
issued redemption value $.0005 per share
NOTE G - STOCKHOLDERS' EQUITY:
[1] Common shares:
Class A Common Stock and Class B Common Stock are identical
in all respects except Class A Common Stock has one vote per
share and Class B Common Stock has six votes per share.
The Class A Common Stock and Class B Common Stock vote
together as a single class on all matters on which stockholders
may vote, except when class voting may be required by applicable law.
Holders of Class A Common Stock are entitled to receive such
dividends, together with the holders of Class B Common Stock, pro
rata based on the number of shares held, when, as and if declared by the
Board of Directors, from funds legally available therefor, subject
to the rights of holders of any outstanding Preferred Stock. In
the event of the liquidation, dissolution or winding up of the affairs
of the Company, all assets and funds of the Company remaining after the
payment of all debts and other liabilities, subject to the rights of the
holders of any outstanding Preferred Stock, shall be distributed, pro rata,
among the holders of the Class A Common Stock and Class B Common Stock.
[2] Preferred stock:
The Company has five million shares authorized with a par
value of $.01, and as of July 31, 1998, no shares have been issued.
[3] As of July 31, 1998 the Company had the following
common stock warrants outstanding or issuable:
Number of Exercise Expiration
Shares Price Date
-------------- -------- ------------------
Miscellaneous 3,750 $12.50 September 10, 1998
Class A 942,944 (a)(b) $29.10 February 18, 2002
Class B 756,510 (b) $39.15 February 18, 2002
Bridge Warrants Issuable 88,500 (c) $ 2.50 June 30, to July
16, 2001
(a) Upon exercise, holder is entitled to
one share of Class A Common Stock and one
share of Class B Warrant.
(b) Class A and Class B Warrants are
redeemable at $.25 per warrant under certain conditions.
(c) The Bridge Warrants entitle the holder to purchase
.3 shares of Class A Common Stock for each $1.00 of principal
amount of Bridge Notes purchased at an exercise price of $2.50
per share, for a period of from six months after the date of
issuance of the Bridge Note Unit, until the date which is
three years thereafter. Under certain circumstances the
Company may accelerate the Expiration Date.
[4] Stock option plan:
1994 Stock Option Plan before amendment:
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 plan was
400,000, excluding the assumption of the ICCSUB Plan, as of
July 31, 1998. 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 were 152,600 outstanding options
to purchase Class A Common Shares under this plan for the
year ended July 31, 1998. Options to purchase 79,264 Class A
Common Shares were exercisable as of July 31, 1998. The
Company had 247,400 options reserved for future issuance
under the Plan as of July 31, 1998. Subsequent to fiscal
year end the plan was amended. (See 1994 Stock Option Plan,
as amended with assumption of the ICCSUB Plan)
1992 Stock Option Plan
The Company's 1992 Stock Option Plan was terminated upon
adoption of the 1994 Plan. Options to purchase 4,000 Class A
Common Shares previously granted under the 1992 Plan are
outstanding and exercisable as of July 31, 1998.
1997 ICCSUB Stock Option Plan:
In May 1997, ICCSUB adopted a 1997 Incentive and Non-
Qualified Stock Option Plan under which options may be
granted to purchase ICCSUB Common Stock. The number of
shares reserved for issuance under the Plan is 350,000.
There were 317,500 outstanding ICCSUB options to purchase
ICCSUB Class A Common Shares under this plan for the year
ended July 31, 1998. Options to purchase 40,835 ICCSUB Class
A Common Shares were exercisable as of July 31, 1998. Such
options were granted at the estimated market value of the
Common Stock at the time of grant. Subsequent to fiscal year
end, the ICCSUB Stock Option Plan became part of the
Company's 1994 Stock Option Plan as amended. (See 1994 Stock
Option Plan, as amended with assumption of the ICCSUB Plan)
1994 Stock Option Plan as amended:
Subsequent to fiscal year end, the 1994 Stock Option Plan
was amended. The number of authorized shares was increased
to 1,960,000 to accommodate the assumption of the ICCSUB 1997
Stock Option Plan and to issue an amount of options to its
employees and directors which exceeded the number of options
previously available.
There were 1,224,054 outstanding options to purchase Class A
Common Shares under this amended plan for the year ended July
31, 1998. Options to purchase 233,612 Class A Common Shares
were exercisable as of July 31, 1998. The Company had 735,946
shares reserved for future issuance under the Plan as of July
31, 1998. During two separate Board of Directors Meetings
held subsequent to fiscal year end, the Company granted
options to purchase a total of 555,482 shares of Class A Common Stock
to directors and employees. The Company had 180,464 options
reserved for future issuance under the Plan as of October 1, 1998.
Underwriter Warrants:
The underwriter for the Company's initial public offering
was granted an option to purchase 31,000 shares of Class A
Common Stock, 34,633 Class A Warrants and 34,633 Class B
Warrants. The option was exercisable on January 17, 1996 and
expires on February 18, 2002 at an exercise price of $33.75
per share of Class A Common Stock, $.50 per Class A Warrant
and $.25 per Class B Warrant.
The underwriter for the Company's 1997 private placement
were issued warrants to purchase 112,229 shares of Class A
Common Stock, 125,383 Class A Warrants and 125,383 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 $32.50 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 $41.25 per share.
The Company applies APB Opinion 25 and related interpretations in
accounting for its options. Accordingly, no compensation cost
has been recognized for its employee stock option grants. Had
the 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 SFAS 123, the
Company's net loss and loss per share would have increased
the pro forma amounts indicated below:
JULY 31,
1997 1998
------------- -------------
Net Loss As reported $ (3,068,066) $ (2,997,181)
Pro forma $ (3,808,530) $ (3,245,320)
Net Loss Per Share As reported $ (3.61) $ (2.79)
Pro forma $ (4.48) $ (3.02)
The resulting effect on pro forma net loss and net loss per
share disclosed for the year ended July 31, 1997 and July 31,
1998 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, 1997 and July 31, 1998
pro forma results include the impact of only two and three
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 1994 and 1992 Stock
Option Plans as of July 31, 1997 and 1998, and changes during
the years ending on those dates is presented below:
(Shares in thousands)
1997 1998
------------------------- -------------------------
Options Shares Weighted-Average Shares Weighted-Average
Exercise Price Exercise Price
- ----------------- ------ ---------------- ------ ----------------
Outstanding at
beginning of year 147.8 $23.30 183.8 $21.83
Granted 94.0 $20.12 44.0 $10.03
Exercised (3.0) $20.00
Forfeited (55.0) $22.95 (71.2) $19.33
Outstanding at
end of year 183.8 $21.83 156.6 $19.65
Options exercisable
at year-end 88.4 $23.73 83.3 $19.82
exercisable at
The following table summarizes information about stock options outstanding
as of July 31, 1998:
(Shares in thousands)
Options Outstanding Options Exercisable
------------------------------------ ------------------------
Weighted-
Shares Average Weighted- Shares Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise as of Contractual Exercise as of Exercise
Prices 07/31/98 Life Price 07/31/98 Price
- ------------- ----------- ----------- --------- ----------- ---------
$9.38 9 9.0 years $ 9.38 3.0 $ 9.38
$17.50-$25.00 147.6 8.1 years $20.28 80.3 $20.21
156.6 8.1 years $19.65 83.3 $19.82
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
1997 and 1998: dividend yield of zero (0%) percent, expected
volatility of eighty-two (82%) for 1997 and ninety-two (92%)
percent for 1998, weighted average risk-free interest rate of
5.99% for 1997 and 5.90% for 1998 and expected life of three
years. The weighted average fair value at date of grant for
options granted during the years ended July 31, 1997 and July
31, 1998 was $11.76 and $6.15 per option, respectively.
[5] Note Receivable:
The Company holds a promissory note for $112,500 at an
interest rate of 10%. The maturity date is December 31,
1998. The note was received in connection with the sale of
80,000 shares of Class B Common Stock to an existing
shareholder.
NOTE H - INCOME TAXES:
[1] Federal income taxes:
The Company has a net operating loss carryforward for tax
purposes of approximately $14 million as of July 31, 1998.
This carryforward expires from 2007 to 2013. 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, 1998
-------------
Deferred tax assets:
Accrued expenses $ 61,000
Write-down of assets 408,000
Federal, state and local net
operating loss carryforwards 6,695,000
------------
Total 7,164,000
------------
Less deferred tax liabilities:
Capitalized software
development costs (336,000)
Depreciation (33,000)
------------
Total (369,000)
------------
Net Asset 6,795,000
Valuation allowance (6,795,000)
------------
Net deferred tax asset $ - 0 -
------------
The Company's effective tax rate varied from the statutory
federal income tax rate as follows:
July 31,
-----------------
1997 1998
------- -------
Expected tax rate (benefit) (34.0)% (34.0)%
Increase in taxes resulting from:
Non deductable items - 0 -% 1.0 %
Increase in Valuation allowance 34.0 % 33.0 %
------- -------
Effective tax rate - 0 -% - 0 -%
------- -------
NOTE I - COMMITMENTS:
[1] Employment and consulting agreements:
(a) The Company entered into an employment agreement as of
November 1996 with its President, expiring in July 2000, as amended.
The contract required aggregate annual salary of $175,000 to
$225,000 and issuance of 14,000 Class B shares, 27,000 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 and $112,000 for the years ended
July 31, 1997 and 1998, respectively. In addition, the Company granted
70,000 options to purchase the Company's Class A Stock based upon
future earning levels 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 agreements with six other
employees expiring from April to July 2000. The agreements
require aggregate annual payment of $630,000 per year. The
Company has a consulting agreement with one individual
expiring in January 2000. The Company is currently
renegotiating this agreement.
(c) The Company entered into an employment agreement as of
September 1998, with its Chairman and Chief Executive
Officer. The contract requires annual salary of $180,000.
For the first six months, the salary will accrue and be paid
in equivalent shares of Class A Common Stock at the market
value on March 15, 1999. On or about March 16, 1999, the
Board of Directors will conduct a review and determine method
of compensation from that date forward.
[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, 1998.
[3] Bridge Notes:
The Company has $295,000 of Bridge Notes outstanding as of
July 31, 1998 at an interest rate of 10%. As of July 31,
1998, the accrued interest was $947. The Bridge Notes are for
the Private Placement of Bridge financing the Company is
undergoing. The Company has commenced a private offering of
up to $2,000,000 in aggregate principal amount Bridge Notes
to raise the funds necessary to continue in operation.
In conjunction with the Bridge Notes issued, the Company granted
Bridge Warrants to purchase .3 shares of Class A Common Stock
for each $1.00 of principal amount of Bridge Notes purchased
at an exercise price of $2.50 per share. The Company valued
these warrants using the BlackScholes pricing model at
$71,803, which are being treated as debt discount and
amortized over the period of the loan.
[4] Capital Lease:
The Company entered into a leasing agreement for computer
equipment. The lease requires 39 monthly payments of $10,464
through May 2001 with an interest rate of 13%. The
outstanding balance as of July 31, 1998 was $281,392. The
Company capitalized the equipment at an asset value of
approximately $312,000. The Company has provided a letter of
credit in the amount of $37,500 for the equipment.
Future minimum capitalized lease payments as of July 31, 1998
are as follows:
Year ending July 31,
--------------------
1999 $ 125,572
2000 125,572
2001 104,643
---------
355,787
Amount representing imputed interest 74,395
---------
Present value of future minimum
lease payments 281,392
Less current maturities 84,505
---------
Long-term capital lease $ 196,887
---------
[5] Operating Lease:
The Company entered into a lease agreement on January 1, 1998 for
new offices and research facilities for 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 $163,000 and
$205,000 for the years ended July 31, 1997 and July 31, 1998,
respectively.
Future minimum rental payments at July 31, 1998 are as follows:
Year ending July 31,
--------------------
1999 $ 185,510
2000 185,510
2001 185,510
2002 185,510
2003 185,510
Thereafter 278,264
----------
Total $1,205,814
----------
NOTE J - CONTINGENCIES:
[1] The Company commenced an arbitration against its former
Vice President and Director of Technology, Robert Nagel
("Nagel"), on May 29, 1997 for fraud, breach of his
employment contract, breach of the duties of obedience and
loyalty and misappropriation of corporate opportunity. Nagel
denied the claims and served a counterclaim alleging breach
of the employment agreement, discrimination on the basis of
his blindness, defamation, and violation of the Federal
Wiretapping Act and the Federal Eavesdropping Act. The
damages sought by Nagel against the Company are for
approximately $1,000,000, excluding interest, costs and
attorney's fees. The Company believes that it has a
meritorious case against Nagel and strong defenses to Nagel's
counterclaims. Nonetheless, it is possible that the
arbitrators will find in favor of Nagel and against the
Company. To date, the Company and Nagel have participated in
eight (8) days of arbitration hearings. It is likely that
the decision of the arbitrators will be rendered during the
fall of 1998. Other than the foregoing matter, there are no
pending or threatened material legal proceedings to which the
Company is a party.
[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 and so informed
counsel for Mr. Lipscomb. No estimate can be made as no
formal claim has been filed.
[3] In a related matter in 1998, Nagel commenced an action
in the Supreme Court of the State of New York against Arthur
Medici ("Medici"), President of the Company, alleging interference
with an employment contract and other claims. The complaint
was subsequently removed to United States District Court and
dismissed on October 13, 1998. An amended complaint was filed on
October 28, 1998. The damages sought by Nagel are for approximately
$6.2 million. The Board has agreed to indemnify Medici in connection
with this action. In the event of an unfavorable decision, the
Company's financial position and results of operations would be
materially adversely effected.
NOTE K - YEAR 2000 COMPLIANCE (UNAUDITED):
The Company has commenced implementation of new financial
software for internal operating purposes that is Year 2000
("Y2K") compliant. The Company's CommerceSenseT service is
fully Y2K compliant. Upon completion of the implementation of the
new financial software there will be no costs relating to modification
of software incurred by the Company. The Company is in
communication with customers and others with which it
conducts business to determine the extent to which the
Company would be vulnerable to these third parties failure to
remediate their own potential year 2000 problems. The
inability of the Company or these other significant third
parties to adequately address Y2K issues could cause
disruption of the Company's operations.
NOTE L - SUBSEQUENT EVENTS:
Subsequent to fiscal year end the Company has raised an
additional $300,000 of Bridge Financing. In connection to
the Bridge Notes issued subsequent to year end, 90,000 Bridge
Warrants to purchase Class A Common Stock have become issuable.
The Company has also issued an additional $150,000 of Notes Payable,
accruing interest at 10% per annum, $100,000 of which is from family
members of an officer of the Company and $50,000 from an
unaffiliated party. The notes are due on October 31, 1998.
CERTIFICATE OF AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION OF INFOSAFE SYSTEMS, INC.
Infosafe Systems, Inc. (the "Corporation"), a corporation organized
and existing under the General Corporation Law of the State of Delaware
(the "DGCL"), does hereby certify as follows:
1. The present name of the Corporation is Infosafe Systems, Inc.
and its original certificate of incorporation was filed with the office of
the Secretary of the State of Delaware on November 18, 1991.
2. This Certificate of Amendment to the Amended and Restated
Certificate of Incorporation was duly adopted by the Board of Directors of
the Corporation (the "Board") and by a majority of the outstanding stock
entitled to vote thereon and a majority of the outstanding stock of each
class entitled to vote thereon as a class in accordance with Sections 228,
242 and 245 of the DGCL.
3. This Certificate of Amendment to the Amended and Restated
Certificate of Incorporation amends the certificate of incorporation of the
Corporation, as heretofore amended (the "Certificate of Incorporation").
4. Upon the filing (the "Effective Time") of this Certificate of
Amendment to the Certificate of Incorporation pursuant to the DGCL, the
number of authorized shares of the Corporation's Class A Common Stock shall
be 40,000,000, Class B Common Stock 2,000,000, Class E-1 Common Stock
2,000,000, Class E-2 Common Stock 2,000,00, and Preferred Stock 5,000,000.
5. The text of the Certificate of Incorporation is hereby amended
by striking out Article First thereof and by substituting in lieu of said
Article as follows:
FIRST: The name of the corporation is
Internet Commerce Corporation
6. The text of the Certificate of Incorporation is hereby amended
by striking out Article Fourth, Sections I and III in their entirety and
replacing in lieu of said Sections of Article Fourth as follows:
FOURTH:
I. Capital Stock; Reverse Stock Split.
(1) The aggregate number of shares which the Corporation shall
have authority to issue is Fifty One Million (51,000,000) shares, consisting
of (i) Forty Million (40,000,000) shares of Class A Common Stock, $.01 par
value per share; (ii) Two Million (2,000,000) shares of Class B Common
Stock, $.01 par value per share; (iii) Two Million (2,000,000) shares of
Class E-1 Common Stock, $.01 par value per share; (iv) Two Million
(2,000,000) shares of Class E-2 Common Stock, $.01 par value per share; and
(v) Five Million (5,000,000) shares of preferred stock, $.01 par value per
share.
(2) As of the Consent Effective Date ("Reverse Split Date"),
each five (5) shares of Class A Common Stock, Class B Common Stock, Class E-1
Common Stock and Class E-2 Common Stock then issued and outstanding was,
without any further action on the part of the Corporation or any stockholder,
automatically changed and reclassified into one share of Class A Common
Stock, Class B Common Stock, Class E-1 Common Stock and Class E-2 Common
Stock, as the case may be, and from and after the Reverse Split Date each
certificate which theretofore represented any five (5) shares of the then
issued and outstanding Class A Common Stock, Class B Common Stock, Class E-
1 Common Stock, or Class E-2 Common Stock shall automatically be deemed to
represent one share of Class A Common Stock, Class B Common Stock, Class E-
1 Common Stock, or Class E-2 Common Stock, as the case may be (the "Reverse
Stock Split").
(3) No fractional shares of Common Stock shall be issued in
connectionwith the Reverse Stock Split and each holder of shares shall be
entitled to receive an amount equal to the fair value of any fractional
interests with respect to the shares of Common Stock.
* * *
III. Preferred Stock. The Board of Directors of the Corporation
is authorized, subject to any limitations prescribed by law, to provide for
the issuance of the shares of Preferred Stock in series designated by the
Board of Directors pursuant to this Section III.
A. Series of Preferred Stock
i. Designation of Series of Preferred Stock. The Board
of Directors is hereby expressly authorized, by resolution or resolutions
thereof, to provide for, designate and issue, out of the 5,000,000
authorized but undesignated and unissued shares of Preferred Stock, one or
more series of Preferred Stock, subject to the terms and conditions set
forth herein. Before any shares of any such series are issued, the Board
of Directors shall fix, and hereby is expressly empowered to fix, by
resolution or resolutions, the following provisions of the shares of any
such series:
(1) the designation of such series, the number of shares to
constitute such series and the stated value thereof, if different from the par
value thereof;
(2) whether the shares of such series shall have voting rights
or powers, in addition to any voting rights required by law, and, if so, the
terms of such voting rights or powers, which may be full or limited;
(3) the dividends, if any, payable on such series, whether any
such dividends shall be cumulative, and, if so, from what dates, the conditions
and dates upon which such dividends shall be payable, and the preference or
relation which such dividends shall bear to the dividends payable on any
shares of stock or any other class or any other series of this class;
(4) whether the shares of such series shall be subject to
redemption by the Corporation and, if so, the times, prices and other
conditions of such redemption;
(5) the amount or amounts payable upon shares of such series
upon, and the rights of the holders of such series in, the voluntary or
involuntary liquidation, dissolution or winding up, or upon any distribution
of the assets, of the Corporation;
(6) whether the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and manner
in which any such retirement or sinking fund shall be applied to the purchase
or redemption of the shares of such series for retirement or other corporate
purposes and the terms and provisions relative to the operation thereof;
(7) whether the shares of such series shall be convertible
into, or exchangeable for, shares of stock of any other class or any other
series of this class or any other securities and, if so, the price or prices
or the rate or rates of conversion or exchange and the method, if any, of
adjusting the same, and any other terms and condition or exchange;
(8) the limitations and restrictions, if any, to be effective
while any shares of such series are outstanding upon the payment of dividends
or the making of other distributions on, and upon the purchase, redemption or
other acquisition by the Corporation of, the Common Stock or shares of
stock of any other class or any other series of this class;
(9) the conditions or restrictions, if any, to be effective
while any shares of such series are outstanding upon the creation of
indebtedness of the Corporation upon the issue of any additional stock,
including additional shares of such series or of any other series of this
class or of any other class; and
(10) any other powers, designations, preferences and relative,
participating, optional or other special rights, and any qualifications,
limitations or restrictions thereof.
The powers, designations, preferences and relative,
participating, optional or other special rights of each series of Preferred
Stock, and the qualifications, limitations or restrictions thereof, if any,
may differ from those of any and all other series at any time outstanding.
The Board of Directors is hereby expressly authorized from time to time to
increase (but not above the total number of authorized shares of Preferred
Stock) or decrease (but not below the number of shares thereof then
outstanding) the number of shares of stock of any series of Preferred Stock
designated as any one or more series of Preferred Stock pursuant to this
Paragraph (A)(1).
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Incorporation to be executed this 23rd day of September, 1998.
INFOSAFE SYSTEMS, INC.
By: /s/Walter M. Psztur_____
Walter M. Psztur
Corporate Secretary
ARTICLE IX
OFFICERS
Section 1. Number and Qualifications. The officers of the Corporation
shall include Chairman of the Board, Vice Chairman of the Board,
President, Chief Executive Officer, Chief Operating Officer, Chief
Financial Officer, one or more Vice Presidents, a Secretary, a Treasurer,
and one or more Assistant Secretaries and Assistant Treasurers. The
Chairman of the Board of Directors shall be chosen by the Board of
Directors at its first meeting after the annual meeting of the
stockholders. The remaining officers of the Corporation shall be chosen by
the Executive Committee from time to time and at its first meeting after
the annual meeting of the stockholders.
Section 2. The offices of President, Vice-President, Secretary and
Treasurer need not be a members of the Board of Directors. Any two or more
offices may be held by the same person, except the offices of President and
Secretary. When all the issued and outstanding stock of the Corporation is
owned by one person, such person may hold all or any combination of
offices.
Section 3. The Executive Committee may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Executive Committee.
Section 4. Compensation. The salaries of all officers and agents of
the Corporation shall be fixed by the Board of Directors.
Section 5. Term. The officers of the Corporation shall hold office
until their successors are chosen and qualify. The Chairman of the Board
of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any officer elected or appointed by
the Executive Committee may be removed at any time by the affirmative vote
of a majority of the Executive Committee. Any vacancy in the office of
Chairman of the Board of Directors shall be filled by the Board of
Directors. Any vacancy occurring in any other office of the Corporation
shall be filled by the Executive Committee.
Section 6. The Chairman of the Board. The Chairman of the Board of
Directors, when present, shall preside at all meeting of stockholders and
Directors. He shall perform such other duties as may be assigned to him
from time to time by the Board of Directors or the Executive Committee.
Section 7. The Chairman of the Executive Committee. The Chairman of
the Executive Committee, when present, shall preside at all meetings of
stockholders and Directors. He shall perform such other duties as may be
assigned to him from time to time by the Board of Directors or the
Executive Committee.
Section 8. The Chief Executive Officer. The Chief Executive Officer
shall be the chief executive officer of the Corporation. He shall perform
such other duties as may be assigned to him from time to time by the Board
of Directors or the Executive Committee.
Section 9. The Chief Executive Officer may execute bonds, mortgages and
other contracts requiring a seal under the seal of the Corporation, except
where required or permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be expressly delegated
by the Board of Directors to some other officer or agent of the
Corporation.
Section 10. The Chief Operating Officer. The Chief Operating Officer
shall be responsible to the Board of Directors for the formulation and
presentation to the Board of the financial and business policies of the
corporation and programs for the implementation thereof by the appropriate
executives of the Corporation. He shall perform such other duties as may
be assigned to him from time to time by the Board of Directors or the
Executive Committee.
Section 11. The Chief Operating Officer may execute bonds, mortgages and
other contracts requiring a seal under the seal of the Corporation, except
where required or permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be expressly delegated
by the Board of Directors to some other officer or agent of the
Corporation.
Section 12. The Vice-Chairman of the Board of Directors. The Vice-
Chairman of the Board of Directors, in the absence of the Chairman, shall
preside at all meetings of stockholders and Directors. He shall perform
such other duties as are provided herein and as may be assigned to him from
time to time by the Board of Directors or the Executive Committee.
Section 13. The President. The President shall handle general and
active management of the business of the Corporation and shall see that all
orders and resolutions of the Board of Directors are carried into effect.
Section 14. The President may execute bonds, mortgages and other
contracts requiring a seal under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the Corporation.
Section 15. The Chief Financial Officer. The Chief Financial Officer
shall handle the general and active management of the financial affairs of
the Corporation and shall see that all orders and resolutions of the Board
of Directors are carried into effect.
Section 16. The Chief Financial Officer may execute bonds, mortgages and
other contracts requiring a seal under the seal of the Corporation, except
where required or permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be expressly delegated
by the Board of Directors to some other officer or agent of the
Corporation.
Section 17. The Chief Marketing Officer. The Chief Marketing Officer
shall handle the general and active management of the marketing, sales and
strategic plans of the Corporation, and shall perform such other duties and
have such other powers as the Board of Directors may from time to time
prescribe.
Section 18. The Chief Technology Officer. The Chief Technology Officer
shall handle the general and active management of the research, development
and engineering affairs of the Corporation, and shall perform such other
duties and have such other powers as the Board of Directors may from time
to time prescribe.
Section 19. The Vice-President. The Vice-President or, if there shall
be more than one, the Vice-Presidents in the order determined by the Board
of Directors, shall, in the absence or disability of the President and the
Chief Operating Officer, perform the duties and exercise the powers of the
President and shall perform such other duties and have such other powers as
the Board of Directors may from time to time prescribe.
Section 20. The Secretary and Assistant Secretaries. The Secretary
shall attend all meetings of the Board of Directors and all meetings of the
stockholders and record all the proceedings of the meetings of the
Corporation and of the Board of Directors in a book to be kept for that
purpose and shall perform like duties for the standing committees when
required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
President, under whose supervision he shall be. He shall have the custody
of the corporate seal of the Corporation and he, or an Assistant Secretary,
shall have authority to affix the same to any instrument requiring it and,
when so affixed, it may be attested by his signature or by the signature of
such Assistant Secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the Corporation and to
attest the affixing by his signature.
Section 21. The Assistant Secretary or, if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors,
shall, in the absence or disability of the Secretary, perform the duties
and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors may from time
to time prescribe.
Section 22. The Treasurer and Assistant Treasurer. The Treasurer shall
have the custody of the corporate funds and securities and shall keep full
and accurate accounts of receipts and disbursements in books belonging to
the Corporation and shall deposit all moneys and other valuable effects in
the name and to the credit of the Corporation in such depositories as may
be designated by the Board of Directors.
Section 23. He shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors
at its regular meetings, or when the Board of Directors so requires, an
account of all his transactions as Treasurer and of the financial condition
of the Corporation.
Section 24. If required by the Board of Directors, he shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of
his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his
possession or under his control belonging to the Corporation.
Section 25. The Assistant Treasurer, or, if there shall be more than
one, the Assistant Treasurers in the order determined by the Board of
Directors, shall, in the absence or disability of the Treasurer, perform
the duties and exercise the powers of the Treasurer and shall perform such
other duties and have such other powers as the Board of Directors may from
time to time prescribe.
VOTING TRUST AGREEMENT
DATE: _______ __, 1997
PARTIES: Arthur R. Medici, William N. Walker, Frank
Schwab, Jr. and Charles C. Johnston and their
successors or additional Trustees appointed
pursuant to this Agreement ("Trustees"); and
The owners and holders of Common Stock of Infosafe
Systems, Inc., who are listed and whose signatures
appear on Exhibit A attached hereto (collectively,
"Shareholders").
RECITALS: (A) The Shareholders beneficially own and hold
an aggregate of 2,245,490 shares of Class A Common
Stock, Class B Common Stock, Class E-1 Common Stock
and Class E-2 Common Stock (collectively, the
"Common Stock") of Infosafe Systems, Inc.
("Company"), as set forth in Exhibit A attached
hereto.
(B) As a condition to the bridge financing and
public offering (the "Public Offering") pursuant to
the letter of intent dated January 9, 1997 between
the Company and D.H. Blair Investment Banking Corp.,
the Shareholders have agreed to deposit the shares
of Common Stock beneficially owned by them in a
voting trust and give to the Trustees, as agents and
attorney-in-fact for each Shareholder, such
irrevocable powers as are set forth under the terms
and conditions of this Voting Trust Agreement
("Agreement").
AGREEMENTS:
The parties hereto mutually agree as follows:
1. Transfer of Shares to Trustees.
(a) The Shareholders hereby assign and transfer to
Trustees 2,245,490 shares of the Common Stock ("Shares") of the
Company, which Shareholders beneficially own. The ownership of
the Shares by the Shareholders is set forth on Exhibit A attached
hereto. The Shareholders, respectively, have properly endorsed
or shall properly endorse to the Trustees, the stock certificates
for such 2,245,490 Shares; the Trustees shall deliver to the
Shareholders in exchange for such Shares, voting trust
certificates substantially in the form attached hereto as Exhibit
B. The Shares represented by the stock certificates so deposited
by the Shareholders ("Shares Deposited") shall be transferred
upon the books of the Company to the name of the Trustees and the
Trustees are hereby authorized and empowered to cause such
transfers to be made. During the term of this Agreement, the
Trustees shall possess the legal title to the Shares Deposited.
The Trustees shall be entitled to exercise all rights of every
kind and nature, arising under the Shares Deposited, including,
but not limited to, the right to vote in person or by proxy and
execute consents with respect to any or all of the Shares
Deposited on all matters which may properly be voted on by
stockholders of the Company, except for the following matters, as
to which the Voting Trustees shall vote the Shares Deposited in
accordance with the direction received from each of the
Shareholders with respect to the Shares Deposited by such
Shareholders: (i) dissolution or liquidation of the Company,
(ii) merger or consolidation of the Company (other than a merger
or consolidation in which the Common Stock holders receive
securities of the surviving corporation having substantially
similar rights to the Common Stock, and stockholders of the
Corporation immediately prior to such transaction are holders of
at least a majority of the voting securities of the surviving
corporation immediately thereafter), or (iii) the sale of all, or
substantially all, of the assets.
(b) The Trustees may vote in favor of the election of
themselves as directors and officers of the Company and on, and
in favor of, the ratification and approval of the acts of
themselves as directors and officers in the general conduct of
the business and affairs of the Company.
2. Appointment of Proxy Holder and Grant of Proxy.
(a) Each Shareholder, respectively, hereby appoints
the Trustees to act as the proxy of such respective Shareholder,
and grants the Trustees the power to vote cumulatively or
otherwise, any and all Shares set opposite the Shareholder's
respective name and signature on Exhibit A hereto, to the extent
any of such Shares are not deposited in the voting trust, and any
additional Shares acquired subsequent to the date hereof at any
annual or special meeting of stockholders of the Company, or any
adjournment or adjournments thereof at which the Shares would be
entitled to vote.
(b) This Proxy is coupled with an interest and is
irrevocable, except as specifically hereinafter set forth.
(c) The Trustees may vote the Shares subject to this
Agreement in favor of the election of themselves as directors of
the Company and of, and in favor of, the ratification and
approval of the acts of themselves as directors and officers in
the general conduct of the business and affairs of the Company.
3. Dividends and Distributions.
The holders of Voting Trust Certificates issued by the
Trustees shall be entitled to receive payments of all dividends
and other distributions with respect to the Common Stock, other
than (i) dividends or distributions consisting of voting stock
shares of capital stock of the Company with respect to the Shares
Deposited. Upon the declaration of any dividend, other than (i)
dividends consisting of voting stock or (ii) distributions of or
conversions into additional voting shares of capital stock of the
Company by the Company with respect to the Shares Deposited, the
qqa Trustees shall distribute or cause all such dividends or
other distributions to be distributed by the Company to the
Shareholders of the Shares Deposited pursuant to this Agreement.
Any dividends or other distributions consisting of (i) voting
stock or (ii) distributions of or conversions into additional
voting shares of capital stock of the Company shall be subject to
the terms of this Agreement on the same basis as the respective
Shares on which such dividends were declared.
4. Term.
The term of this Agreement shall commence on the date
first above set forth and continue until the earlier of:
(a) 5:00 p.m., New York time, on the third anniversary
of the effective date of the Public Offering; or
(b) the first anniversary of the date hereof, if the
public offering referred to in (a) has not been closed by such
date.
At the end of the term as set forth in subparagraphs 4(a) or
(b) above, the Trustees shall deliver the Certificates for the
Shares Deposited to the respective Shareholders as their
respective sole property.
5. Restrictions on Transfer.
(a) The voting trust certificates issued by the Voting
Trustees may be transferred on the books of the Voting Trustees
upon the surrender of any and all certificates, properly indorsed
by the registered holders. The voting trust certificates have
not been registered under the Securities Act of 1933, as amended
(the "Act"), and the rules and regulations thereunder. No
transfer of the voting trust certificates shall be made except in
accordance with an applicable exemption to registration
hereunder. Every transferee of a voting trust certificate shall
by the acceptance of such certificate become a party to this
Voting Trust Agreement with the same effect as though an original
party to this Voting Trust Agreement and shall be included within
the meaning of the term "Shareholders" whenever used herein.
As a condition of permitting any transfer or delivery
of stock certificates or voting trust certificates, the Trustees
may require the payment of any stamp tax or other governmental
charge in connection with such transfer.
(b) Any Shareholder, on ten (10) days' prior written
notice to the Trustees, accompanied by the Voting Trust
Certificate therefor, may withdraw from the Shares Deposited any
or all of the shares of Common Stock of the Company represented
by such voting trust certificate, which the Shareholder intends
and is permitted to sell in accordance with the Act pursuant to
the exemption under Rule 144, provided such sales are to third
parties who are not affiliated or associated with, and are not
relatives of, the Shareholder. The Shareholder shall notify the
Trustees of any such sale and the Trustees shall in a timely
manner deliver a certificate for the Shares sold by the
Shareholder free of the legend required by the terms of this
Agreement. Any such released stock may not be voted by the
Shareholder but only by the permitted transferee of such stock
from the Shareholder and the Trustees shall retain the right to
vote such Shares until the sale. Any released shares which are
not sold as permitted by this Section 5 within thirty (30) days
of the release shall be deemed redeposited by the Shareholder
with the Trustees. The Shareholder shall return the
certificate(s) representing all Shares withdrawn in accordance
herewith and not sold and the Trustees shall provide a new Voting
Trust Certificate for all Shares Deposited which remain deposited
following such withdrawal.
(c) All certificates representing the Shares subject
to this Agreement shall bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE
ARE SUBJECT TO THE TERMS OF A VOTING TRUST
AGREEMENT, DATED AS OF ______________, 1997, A
COPY OF WHICH IS ON FILE AND MAY BE INSPECTED
AT THE OFFICES OF THE COMPANY.
6. Dissolution of the Company.
In the event of dissolution or liquidation of the Company
during the term of this Agreement, in such manner as to entitle
the holders of shares of any class of its stock to liquidating
dividends or distributions in respect thereof, the Trustees shall
cause all such liquidating or dividends or distributions to be
distributed by the Company pro rata to the holders of voting
trust certificates for the Shares Deposited hereunder.
7. Merger of the Company.
In the event of a merger or consolidation involving the
Company, the securities or other proceeds of any such merger or
consolidation payable to the Shareholder other than distributions
consisting of voting stock, which shall be held by the Trustees
on the same basis as the respective Shares in respect of which
the distributions are made, shall be distributed pro rata to the
holders of the voting trust certificates in accordance with the
number of Shares Deposited hereunder.
8. Compensation of Trustees.
The Trustees shall not be entitled to any compensation for
acting as Trustees.
9. Liability of Trustees.
The Trustees shall not be liable to any Shareholders or any
other persons for, and each of the Shareholders hereby releases
each Trustee from, any loss, liability or claim by reason of any
matters relating to or arising out of the Trustees serving as
Trustees hereunder, or any action taken as Trustee hereunder
except to the extent any of the foregoing shall result from such
Trustee's own willful misfeasance or his own bad faith. In no
event shall any Trustee be liable for any misfeasance or non-
feasance of any attorney, auditor, appraiser, accountant, agent,
or employee, or of any of the other Trustees. The Trustees are
hereby authorized and empowered to construe this Agreement and
their construction made in good faith shall be binding upon the
Shareholders and other parties interested.
10. The Trustees.
Any of the Trustees may at any time resign by mailing to the
Company at its principal office at 342 Madison Avenue, New York,
New York 10017, his written resignation to take effect ten (10)
days thereafter or upon the prior written acceptance thereof by
the Company or some later date specified in such notice.
11. Successor and Additional Trustees.
In the event any of the Trustees shall cease to be an
"Independent Director", or in the case of Arthur R. Medici, Mr.
Medici shall cease to be President and Chief Executive Officer of
the Company, then such person shall cease to be a Trustee. Any
person elected after the date hereof as an Independent Director
shall upon execution of an instrument agreeing to be bound by
this Agreement become a Trustee hereunder with the same force and
effect as though originally named herein. As used herein,
"Independent Director" shall mean a director who is not an
officer or employee of the Company and has not previously served
as an officer or employee of the Company.
12. Deposits of Additional Shares.
From time to time after execution hereof, the Trustees may
receive deposits of any additional certificates representing
fully paid and non-assessable shares of common or other general
voting stock of the Company upon the terms and under the
conditions of this Agreement and, in respect of all such deposits
so received, the Trustees shall issue and deliver Voting Trust
Certificates in the form specified herein in accordance with the
provisions of this Agreement. Any (i) dividends or distributions
consisting of voting stock or (ii) distributions of or
conversions into additional voting shares with respect to the
Shares Deposited shall be issued in the name of the Trustees as
additional deposits hereunder and the Trustees shall issue
additional Voting Trust Certificates therefor.
13. Acts of Trustees.
(a) The Trustees may act at a meeting, including
telephonic meetings, or act by a written instrument, without a
meeting, signed by the requisite number of Trustees. All actions
to be taken by the Trustees hereunder shall be a approved by the
vote or consent of a majority of the Trustees.
(b) The Trustees may vote or may act in person or by
proxy. The Trustees may vote by proxy at any meeting of
shareholders of the Company. Any such proxy or consent shall be
executed by the requisite number of Trustees required for
approval of such action as set forth in Section 13 (a).
14. Trustees' Relation with the Company.
The Trustees may act as, and receive compensation as,
directors, officers (in the case of Mr. Medici) or agents of the
Company, or members of any committee of the Company, or of any
controlled, subsidiary, or affiliated entity of the Company, or
be otherwise associated therewith. Additionally, the Trustees or
any firm of which he may be a member, or any corporation or
association of which he may be a stockholder, director, or
officer, or any such firm, corporation or association in which he
may be otherwise directly or indirectly interested, may, to the
extent permitted by law and without liability in any way or under
any circumstances by reason thereof, contract with the Company or
with any controlled, affiliated, or subsidiary entity, or be or
become pecuniarily interested in any matter or transaction to
which the Company, or any controlled, affiliated, or subsidiary
entity of the Company, may in any way be concerned, as fully as
though he were not a Trustee.
15. No Security for Performance.
The Trustees shall not be required to give any bond or
security for the discharge of their duties.
16. Counterparts.
This Agreement may be executed in any number of counterparts
and all such counterparts taken together shall be deemed to
constitute one and the same Agreement.
17. Notices. All notices hereunder shall be in writing and
delivered personally or-sent by registered or certified mail,
postage prepaid.
If to Shareholder: at his address shown on the books and
records of the Company
If to the Trustee: c/o the address of the Company
Either party may change the address to which notices are to
be sent to it by giving 10 days written notice of such change of
address to the other parties in the manner above provided for
giving notice. If delivered in person, then such notice shall be
effective immediately; if mailed, then 72 hours after deposit,
postage prepaid.
18. Shareholder's Grant.
By their respective signatures below, each of the
Shareholders expressly grant to the Trustees all of the rights
set forth herein, subject to the terms of this Agreement.
19. Trustees' Acceptance.
The Trustees, by signing this Agreement or a counterpart
thereof, accepts the trust herein created.
Executed the day and year first above written.
AGREED AND ACCEPTED:
TRUSTEES
/s/_______________________________
Arthur R. Medici, President and
Chief Executive Officer
/s/_______________________________
William N. Walker, Director
/s/_______________________________
Frank Schwab, Jr., Director
/s/_______________________________
Charles C. Johnston, Director
SHAREHOLDERS:
/s/______________________________ /s/______________________________
Thomas H. Lipscomb Dilyara T. Timergazina
/s/______________________________ /s/______________________________
Peter S. Lipscomb Thomas V. Alpern
/s/______________________________ /s/______________________________
Adrienne Voorhis Laura A. Zimerman
/s/______________________________
Alan N. Alpern
<TABLE>
EXHIBIT A
<CAPTION>
B SHARES
-----------------------------
NON TOTAL E-1 E-2 TOTAL TOTAL
ESCROW ESCROW B SHARES VOTING VOTING E VOTING A VOTING SHARES
------- ------- --------- ------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
THOMAS H. LIPSCOMB 427,410 385,716 813,126 410,312 410,312 820,624 - 1,633,750
PETER S. LIPSCOMB 21,020 19,338 40,358 20,179 20,179 40,358 - 80,716
ADRIENNE VOORHIS 21,020 19,338 40,358 20,179 20,179 40,358 - 80,716
TOTAL LIPSCOMB 469,450 424,392 893,842 450,670 450,670 901,340 - 1,795,182
------- ------- --------- ------- ------- -------- -------- ---------
ALAN N. ALPERN 94,591 20,773 115,364 87,682 87,682 175,364 - 290,728
DILYARA T. TIMERGAZINA 18,218 - 18,218 17,488 17,488 34,976 - 53,194
THOMAS V. ALPERN 18,218 - 18,218 17,488 17,488 34,976 - 53,194
LAURA A. ZIMERMAN 18,218 - 18,218 17,488 17,488 34,976 - 53,194
------- ------- --------- ------- ------- --------- -------- ---------
TOTAL ALPERN 149,244 20,773 170,017 140,146 140,146 280,292 - 450,309
------- ------- --------- ------- ------- --------- -------- ---------
TOTAL LIPSCOMB
& ALPERN 618,693 445,165 1,063,858 590,816 590,816 1,181,632 - 2,245,490
------- ------- --------- ------- ------- --------- -------- ---------
</TABLE>
EXHIBIT B
VOTING TRUST CERTIFICATE
Certificate No. Number of Shares
INFOSAFE SYSTEMS, INC.
a Delaware corporation
This certifies that ____________________ ("Depositor") is
entitled to all of the benefits arising from the deposit with the
Trustee, under the Voting Trust Agreement hereinafter mentioned,
of certificate(s) for shares of the capital stock of INFOSAFE
SYSTEMS, INC., a Delaware corporation (the "Company") as provided
in the Voting Trust Agreement, dated as of _____________, 1997,
among _______________________ and their successors or additional
persons who may be appointed as Trustees, as Trustees, Depositor
and the holders of Common Stock of the Company who are listed on
Exhibit A thereto (together with the Depositor, the
"Shareholders") (the "Voting Trust Agreement"), and subject to
the terms and conditions thereof. The registered holder or his or
her permitted assign(s), is entitled to receive dividends and
other distributions received by the Trustee upon the number of
shares of capital stock of the Company in respect of which this
Certificate is issued, other than dividends or other
distributions received by the Trustee in common or other shares
of capital stock of the Company having general voting powers.
Any such Common or other shares of capital stock having general
voting powers shall be represented by voting trust certificates,
in form similar hereto. Until the Trustees have delivered the
stock held under such Voting Trust Agreement to the holders of
the Voting Trust Certificates, as specified in such Voting Trust
Agreement, the Trustee shall possess and shall be entitled to
exercise all rights and powers of an absolute owner of such
shares, including the right to vote thereon for every purpose,
and to execute consents in respect thereof for every purpose,
subject to such limitations as shall be provided in the Voting
Trust Agreement, it being expressly stipulated that no voting
right passes to the owner hereof under this Certificate or any
agreement, expressed or implied.
This Certificate is issued, received, and held hereunder,
and the rights of the owner hereof are subject to, the terms of
the Voting Trust Agreement, copies of which, and every agreement
amending or supplementing the same, are on file in the principal
office of the Company in New York, New York, and all of which
shall be open to the inspection of any stockholder of the
Company, or any permitted beneficiary of the trust under such
agreement, daily, upon reasonable notice during normal business
hours. All of the provisions of which Voting Trust Agreement the
holder of this Certificate, by acceptance hereof, assents.
If any dividend or distribution in cash or stock of the
Company not having general voting powers is received by the
Trustees, the Trustees shall distribute the same to the
registered holder of the Voting Trust Certificate on the date of
such distribution, or the registered Certificate holder at the
close of business on the date fixed by the Trustees for taking a
record to determine the Certificate holders entitled to such
distribution. Such distribution shall be made to the Certificate
holders ratably in accordance with the number of shares
represented by Shares Deposited as set forth in their respective
voting trust certificates. Any (i) dividends consisting of voting
stock or (ii) distributions of or conversions into additional
voting shares with respect to the Shares Deposited shall be
issued in the name of the Trustees as additional deposits under
the Voting Trust Agreement and the Trustees shall issue
additional voting trust certificates therefor.
Stock certificates issued in the name of the Depositor or
his or her designee and representing the number of shares of
capital stock then represented by this Certificate shall be due
and deliverable hereunder upon the termination of such Voting
Trust Agreement as provided therein.
The Voting Trust Agreement shall continue in full force and
effect for the term provided in the Voting Trust Agreement.
THIS VOTING TRUST CERTIFICATE IS SUBJECT TO LIMITATIONS ON
TRANSFER SET FORTH IN THE VOTING TRUST AGREEMENT AND MAY ONLY BE
TRANSFERRED IN ACCORDANCE WITH THE APPLICABLE PROVISIONS OF THE
VOTING TRUST AGREEMENT.
IN WITNESS WHEREOF, the Trustees have executed this
Certificate this ____ day of ___________________, 1997.
TRUSTEES:
___________________________________
___________________________________
___________________________________
EXHIBIT 11.1
Year Ended July 31,
--------------------------
1997 1998
------------ ------------
Net (loss) attributable to common shareholders $(3,068,066) $(2,997,181)
------------ ------------
Weighted average number of Class A common
shares outstanding 725,135 944,735
Weighted average number of Class B common
shares outstanding 281,094 130,983
Less escrow shares (156,249) 0
------------ ------------
Weighted average number of common shares
- basic and diluted 849,980 1,075,718
------------ ------------
Basic and diluted (loss) per common share $ (3.61) $ (2.79)
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 178,287
<SECURITIES> 0
<RECEIVABLES> 7,231
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 286,400
<PP&E> 939,727
<DEPRECIATION> 406,539
<TOTAL-ASSETS> 1,535,086
<CURRENT-LIABILITIES> 1,200,739
<BONDS> 0
0
0
<COMMON> 17,153
<OTHER-SE> 120,307
<TOTAL-LIABILITY-AND-EQUITY> 1,535,086
<SALES> 19,481
<TOTAL-REVENUES> 19,481
<CGS> 11,315
<TOTAL-COSTS> 11,315
<OTHER-EXPENSES> 3,060,919
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,041
<INCOME-PRETAX> (2,997,181)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,997,181)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,997,181)
<EPS-PRIMARY> (2.79)
<EPS-DILUTED> (2.79)
</TABLE>
