As filed with the Securities and Exchange Commission on January 25, 2002
Registration No. 333-70374
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INTACTA TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
Nevada 7371 58-2488071
------------------------ ------------------------ ------------------------
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number
organization)
945 East Paces Ferry Road, N.E.
Suite 1445
Atlanta, Georgia 30326
(404) 880-9919
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Noel R. Bambrough
President and Chief Executive Officer
Intacta Technologies Inc.
945 East Paces Ferry Road, N.E.
Suite 1445
Atlanta, Georgia 30326
(404) 880-9919
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
Copies to:
Robert J. Mittman, Esquire
Brad L. Shiffman, Esquire
Blank Rome Tenzer Greenblatt LLP
The Chrysler Building
405 Lexington Avenue
New York, NY 10174
(212) 885-5000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
[ ]
--------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
[ ]
--------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
[ ]
--------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act, or until the registration statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDER MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT A
SOLICITATION TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Prospectus
SUBJECT TO COMPLETION, DATED JANUARY 25, 2002
4,000,000 SHARES
INTACTA TECHNOLOGIES INC.
COMMON STOCK
This prospectus relates to the sale by Corsa S.A. Holdings, the sole
selling stockholder, as set forth on page 55 of this prospectus, of up to
4,000,000 shares of our common stock. All of the shares of common stock
described in this paragraph are being offered for resale by the selling
stockholder pursuant to this prospectus.
The common stock may be offered from time to time by the selling
stockholder through ordinary brokerage transactions in the over-the-counter
markets, in negotiated transactions or otherwise, at market prices prevailing at
the time of sale or at negotiated prices and in other ways as described in the
section of this prospectus entitled Plan of Distribution. We will not receive
any of the proceeds from the sale of common stock by the selling stockholder.
Our common stock is currently quoted on the OTC Bulletin Board under the
symbol "ITAC.OB". The closing sale price of our common stock on January 24, 2002
was $.20 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
--------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is _________, 2001.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY........................................................... 3
THE OFFERING................................................................. 3
SUMMARY FINANCIAL DATA....................................................... 5
RISK FACTORS................................................................. 6
FORWARD-LOOKING STATEMENTS................................................... 10
USE OF PROCEEDS.............................................................. 10
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON STOCK............................ 11
SELECTED FINANCIAL DATA...................................................... 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................... 14
BUSINESS..................................................................... 23
MANAGEMENT................................................................... 37
PRINCIPAL STOCKHOLDERS....................................................... 45
CERTAIN TRANSACTIONS......................................................... 48
DESCRIPTION OF SECURITIES.................................................... 50
SHARES ELIGIBLE FOR FUTURE SALE.............................................. 52
SELLING STOCKHOLDER AND PLAN OF DISTRIBUTION................................. 53
LEGAL MATTERS................................................................ 55
EXPERTS...................................................................... 55
AVAILABLE INFORMATION........................................................ 56
2
PROSPECTUS SUMMARY
OUR COMPANY
We are a developer and marketer of software products based on our patented
INTACTA.CODE(TM) technology that utilizes a unique combination of compression,
encoding and error correction processes to transform any data format ranging
from text, graphic, audio or video from a binary file into a two-dimensional
graphical grid, which is language transparent and platform independent.
Our products and applications, which are based on our INTACTA.CODE
technology, include:
o INTACTA.CODE software development kits, or SDK's, which are a suite of
software products tailored for various end-users which are designed to
integrate INTACTA.CODE technology into existing legacy enterprise
systems as well as assist in the development of software and firmware
solutions requiring secure compression and transmission of data; and
o INTACTA Express and INTACTA Bridgeway software application products
which are designed to ensure privacy of patient information by
providing solutions for the secure transmission of data as required by
the new health-care information security regulations under HIPAA.
Our technology and software products are securely maintained on our
computer servers and distributed through our website upon payment of applicable
licensing fees. Our technology and software products are geared toward providing
solutions and applications that enable enterprises to bridge their
communications and information management systems across digital and non-digital
media, by enabling the secure bi-directional transmission and subsequent
recovery and storage of data.
Intacta Technologies Inc. and the names of our products are tradenames or
trademarks of Intacta. This prospectus also contains trademarks and tradenames
of other companies.
References in this prospectus, and the documents incorporated by reference
in this prospectus, to "Intacta," "we," "our" and "us" refer to Intacta
Technologies Inc., a Nevada corporation, and its subsidiaries.
THE OFFERING
Securities offered ......... The selling stockholder is offering up to
4,000,000 shares of common stock.
Common stock outstanding ... We currently have 20,345,924 shares of common
stock outstanding, exclusive of:
o an aggregate of 3,357,724 shares of common stock
reserved for issuance upon the exercise of
outstanding warrants;
o an aggregate of 2,241,750 shares of common stock
reserved for issuance upon the exercise of
3
outstanding options granted under our 1998 stock
option plan and our 2000 stock incentive plan, and
o an aggregate of 1,808,650 shares of common stock
issuable upon exercise of options reserved for
future grant under our 1998 stock option plan and
options and other stock based awards reserved for
future grant under our 2000 stock incentive plan
Use of proceeds ............ We will not receive any proceeds from the sale of
shares of common stock by the selling stockholder.
Risk factors ............... Investing in our common stock involves a high
degree of risk. You should carefully review and
consider the risks listed in the "Risk Factors"
section of this prospectus as well as the other
information contained in this prospectus, before
purchasing any shares of our common stock.
4
SUMMARY FINANCIAL DATA
The following selected financial data are qualified in their entirety by
reference to, and you should read them in conjunction with the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section of this prospectus and the audited consolidated financial statements and
notes to those financial statements included in and made part of this
prospectus. We have derived the statement of operations data for the years ended
December 31, 1996 and 1997 and the balance sheet data as of December 31, 1998
from our audited consolidated financial statements which are not included in
this prospectus and we have derived the statement of operations data for the
years ended December 31, 1998, 1999 and 2000, and the balance sheet data as of
December 31, 1999 and 2000 from our audited consolidated financial statements
included in and made a part of this prospectus. We have derived the statement of
operations data for the nine months ended September 30, 2000 and 2001 and the
balance sheet data as of September 30, 2001 from the unaudited consolidated
financial statements included in and made part of this prospectus. Results of
operations for the period ended September 30, 2001 are not necessarily
indicative of results which we will obtain for our fiscal year ending December
31, 2001.
STATEMENT OF OPERATIONS DATA: NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------- ------------------------
1996 1997 1998 1999 2000 2000 2001
---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
-----------
Revenues ..................... $ 1,019,600 $ 894,900 $ 137,800 $ 137,400 $ 794,500 $ 694,700 $ 125,800
Cost of revenues ............. 514,100 357,500 336,300 90,500 417,500 222,100 24,100
Research and development ..... 331,900 343,200 903,500 1,047,400 1,133,000 820,300 950,000
Sales and marketing .......... 528,800 297,000 113,100 113,200 1,182,100 844,600 637,400
General and administrative ... 1,605,200 1,353,100 1,699,400 2,619,800 2,306,500 1,567,300 1,304,900
Total operating expenses ..... 2,978,000 2,350,800 3,052,300 3,870,900 5,039,100 3,454,300 2,916,400
Net loss ..................... (2,529,800) (2,199,700) (3,145,800) (3,617,600) (4,551,200) (3,006,400) (2,722,700)
Basic and diluted net loss
per common share ........... $ (0.22) $ (0.19) $ (0.19) $ (0.20) $ (0.25) $ (0.17) $ (0.13)
Basic and diluted weighted
Average Common Stock
Outstanding ................ 11,486,000 11,486,000 16,701,583 17,790,000 18,483,179 17,909,000 20,345,924
BALANCE SHEET DATA:
SEPTEMBER 30,
DECEMBER 31, 2001
-------------------------------------- ----------
(UNAUDITED)
1998 1999 2000
---- ---- ----
Cash and cash equivalents . $3,047,100 $ 917,400 $3,904,500 $1,313,400
Working capital ........... 1,924,200 574,100 3,641,500 1,107,200
Total assets .............. 3,760,700 1,570,900 4,260,500 1,687,500
Long-term obligations ..... 0 0 0 0
Total stockholders' equity 2,268,600 841,500 3,865,200 1,316,600
5
RISK FACTORS
The shares offered by this prospectus are speculative and involve a high
degree of risk. You should carefully consider the risks described below and the
other information in this prospectus before making an investment decision.
AS AN EARLY-STAGE COMPANY, OUR LIMITED OPERATING HISTORY IS NOT A RELIABLE
PREDICTOR OF OUR FUTURE OPERATING RESULTS AND WE FACE MANY RISKS INCLUDING
LIQUIDITY PROBLEMS, DELAYS AND UNCERTAINTIES.
We were organized in October 1997 and did not commence active operations
until May 1998. In addition, during 1998, we shifted the focus of our business
from production and sale of facsimile-based products to the development of
advanced products based upon our proprietary technology. More recently we have
determined to focus on the commercial exploitation of our technology for
applications and solutions in the area of data compression and transmission.
Because our business has significantly changed and much of our historical
operating results do not reflect our current operations, we have a limited
relevant operating history upon which you can evaluate our performance and
prospects. Additionally, we face many of the risks, expenses, delays, problems
and uncertainties encountered by early-stage companies in rapidly evolving
markets, including generating and maintaining sufficient liquidity for operating
and capital expenses as well as identifying, developing and marketing
commercially viable products on a timely basis, which could materially adversely
affect our business and results of operations.
WE HAVE INCURRED LOSSES SINCE INCEPTION AND WE EXPECT TO INCUR LOSSES IN THE
FUTURE.
We have incurred significant net losses in each fiscal year since our
inception and expect losses to continue. During the year ended December 31,
2000, we had a net loss of approximately $4.5 million and for the nine months
ended September 30, 2001, we had a net loss of approximately $2.7 million. We
cannot assure you that our future operations will ever become profitable.
OUR INDEPENDENT AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN.
Primarily as a result of our recurring losses, our independent auditors
qualified their opinion on our 2000 financial statements and in the two
preceding years to include an explanatory paragraph expressing substantial doubt
about our ability to continue as a going concern.
BECAUSE OUR OPERATIONS DO NOT GENERATE CASH FLOW, IF WE ARE UNABLE TO OBTAIN
FINANCING WHEN NEEDED, WE MAY BE REQUIRED TO CURTAIL OR CEASE OPERATIONS.
Our operating requirements have been and will continue to be significant.
Our operations do not currently generate positive cash flow. Based upon current
estimates, we believe that we will be able to fund our operating activities and
capital requirements only through the end of the first fiscal quarter of 2002.
Unanticipated changes in economic conditions or other unforeseen circumstances
may cause us to expend our cash and cash equivalents in a shorter period of
time, in which case we may be required to seek additional financing sooner in
order to fund our capital and operating activities. We do not have any current
arrangements with respect to other potential sources of additional financing. We
cannot assure you that additional financing will be available to us on
commercially reasonable terms or at all. If we are unable to obtain financing
when needed, we may be required to curtail or cease operations.
6
WE MAY NOT BE ABLE TO ACHIEVE MARKET ACCEPTANCE FOR SOFTWARE PRODUCTS
INCORPORATING OUR TECHNOLOGY.
Because our technology and related software products have only recently
been introduced and are marketed in a rapidly evolving industry, market
acceptance of our technology is uncertain. Despite the expanding market for
secure data transmission and storage solutions, we have not been able to
increase our market acceptance and our revenues from software licensing has
declined. We will be required to expend a substantial amount of funds on
marketing efforts to inform end-users of the perceived benefits and advantages
of our technology and to update and enhance our existing products and technology
on a timely basis. We cannot assure you that we will have the funds or other
resources necessary to achieve our marketing and product-enhancement objectives
and successfully compete in our markets or that these increased efforts, if
engaged in, will result in successful commercialization and market acceptance of
our software products and technology. Moreover, potential customers may elect to
utilize competitive products and services embodying new technologies that they
believe to be more efficient and have other advantages over our technology.
OUR FUTURE REVENUE GROWTH DEPENDS SUBSTANTIALLY ON OUR ABILITY TO SUCCESSFULLY
IDENTIFY APPLICATIONS OR PRODUCTS FOR WHICH OUR TECHNOLOGY MAY BE DEVELOPED AND
MARKETED.
If we are unable to identify applications or products that will achieve
widespread commercial acceptance or adapt or enhance our technology for these
applications or products we will be unable to expand the market for our
technology. Adapting and enhancing technology as complex as ours will be subject
to risks of unanticipated technical or other problems and possible insufficiency
of funds which could result in a delay of introduction or abandonment of the
proposed application or product. We cannot assure you that we will be able to
identify applications or products, adapt our technology for specific
applications or products on a timely basis or be able to achieve significant
market acceptance of our technology.
WE FACE INTENSE COMPETITION IN THE MARKETS FOR OUR TECHNOLOGY, WHICH COULD
RESULT IN PRICE REDUCTIONS, LOWER GROSS MARGINS OR LOSS OF OUR MARKET SHARE.
The markets for our technology are characterized by rapidly changing
technological and industry standards. As a result, to compete effectively,
companies must be able to develop new products, technologies and applications to
respond to these changes. Because we have limited resources, we may not be able
to develop new products, technologies and applications or otherwise compete
successfully. Many of our competitors have substantially greater financial,
technical, personnel, and other resources than we do and have established
reputations for success in the development, licensing, and sale of their
products and technology. Additionally, future technologies or products could
render our technology obsolete or less marketable. As a result of our limited
resources, significant competition and the nature of the markets for our
technology, we may not be able to compete successfully.
WE HAVE LIMITED MARKETING CAPABILITIES AND WILL BE DEPENDENT UPON ARRANGEMENTS
WITH THIRD-PARTY SOLUTION PROVIDERS TO MARKET AND DISTRIBUTE OUR TECHNOLOGY.
We have limited marketing experience, as well as limited financial,
personnel and other resources, to undertake extensive marketing activities. As a
result, we rely to a large extent on arrangements with third party solution
providers for the marketing and distribution of our technology. We have only
recently entered into marketing arrangements with a limited number of
third-party solution providers and other strategic partners and, accordingly,
have not developed any meaningful sales through any of these marketing
arrangements. Our prospects will depend on our ability to develop and maintain
strategic relationships with additional solution providers and upon the
marketing and distribution efforts
7
of these solution providers. Additionally, the time and resources devoted to
these activities generally will be contributed to and controlled by these third
parties and not by us. A decline in the financial prospects of a third-party
solution provider or other strategic partner with whom we develop a significant
marketing relationship could adversely affect our sales efforts.
THE MAJORITY OF OUR RESEARCH AND DEVELOPMENT ACTIVITIES ARE CONDUCTED IN ISRAEL,
WHICH MAY BE SUBJECT TO ECONOMIC, MILITARY AND POLITICAL INSTABILITY.
Our principal research and development facility is located in Beer Sheva,
Israel. We are, therefore, directly influenced by the economic, political and
military conditions in Israel and the Middle East. Any major hostilities
involving Israel, the interruption or curtailment of trade between Israel and
its trading partners or a significant downturn in the economic or financial
condition of Israel could have a material adverse effect on our operations.
WE ARE THE SUBJECT OF A PATENT INFRINGEMENT CLAIM BY A THIRD PARTY.
In November 2001, Datastrip International Limited, an Ireland company,
filed a complaint in the United States District Court for the Northern District
of Georgia against us alleging patent infringement. In addition to preliminary
and permanent injunctions sought by Datastrip from further alleged infringement
of its patent, Datastrip seeks an unstated amount of monetary damages equal to
three times the amount the court would deem sufficient to compensate Datastrip
for the alleged infringement. Since this lawsuit is in an early stage, we cannot
predict the outcome and cannot assure you that it will be resolved in our favor
or that an outcome of any further litigation or settlement would not have a
material adverse effect on our operations or financial condition.
MOST OF OUR SHARES OF COMMON STOCK ARE CURRENTLY ELIGIBLE FOR SALE AND COULD BE
SOLD IN THE MARKET IN THE NEAR FUTURE, WHICH COULD DEPRESS OUR STOCK PRICE.
We currently have 20,345,924 shares of common stock outstanding, 12,358,920
of which are currently freely tradeable without restriction under the Securities
Act of 1933. Of the remaining 7,987,004 shares outstanding, 2,412,004 shares
have been previously registered for resale and 4,000,000 shares are registered
for resale under this prospectus. The balance of shares outstanding are
restricted securities, however, substantially all of these restricted securities
have been held for more than two years and are available for resale pursuant to
Rule 144 promulgated under the Securities Act.
The sale of a significant number of shares of common stock could adversely
affect the market price of our common stock. Moreover, as these shares are sold,
the market price could drop significantly if the holders of these restricted
shares sell them or if the market perceives that the holders intend to sell
these shares.
THE SIGNIFICANT NUMBER OF OUTSTANDING OPTIONS AND WARRANTS COULD DEPRESS THE
MARKET PRICE OF OUR COMMON STOCK AND COULD INTERFERE WITH OUR ABILITY TO RAISE
CAPITAL.
We currently have outstanding options and warrants to purchase an aggregate
of 5,599,474 shares of our common stock, at exercise prices ranging from $.75 to
$3.50 per share. To the extent that the outstanding options and warrants are
exercised, dilution to the percentage of ownership of our stockholders will
occur and any sales in the public market of our common stock underlying those
options and warrants may adversely affect prevailing market prices for our
common stock. Moreover, the terms upon which we will be able to obtain
additional equity capital may be adversely affected since the holders of
outstanding options and warrants can be expected to exercise them when we would,
in all likelihood,
8
be able to obtain any needed capital on terms more favorable to us than those
provided in the outstanding options and warrants.
OUR COMMON STOCK IS SUBJECT TO THE SEC'S PENNY STOCK RULES WHICH CAN EFFECT THE
MARKET LIQUIDITY AND THE ABILITY OF PURCHASERS TO SELL OUR COMMON STOCK.
At any time while our common stock is not listed on the Nasdaq National or
SmallCap markets or a national securities exchange and the trading price of our
common stock is below $5.00 per share, trading in our common stock will be
subject to the SEC's penny stock rules, which severely limit the market
liquidity of our common stock and the ability of purchasers to sell their
shares. As a result, a purchaser of our common stock could find it more
difficult to dispose of, or obtain accurate quotations as to the market value of
our common stock.
9
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact included in this
prospectus, including without limitation, statements regarding our expectations
of future sales revenue, financial position, business strategy, projected costs
and plans, objectives of our management for future operations and financial
data, are forward-looking statements. Forward-looking statements generally can
be identified by the use of forward-looking terminology such as "may," "will,"
"propose," "expect," "intend," "estimate," "anticipate," "believe," or
"continue" or the negative thereof or variations thereon or similar terminology.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we cannot assure you that such expectations will
prove to have been correct. These statements involve certain known and unknown
risks, uncertainties and other factors, which may cause our actual results,
performance or achievements to be materially different from our expectations.
Important factors that could cause actual results to differ materially from our
expectations are disclosed under "Risk Factors" and elsewhere in this
prospectus, including without limitation, in conjunction with the
forward-looking statements included in this prospectus. Also, subsequent written
and oral forward-looking statements attributable to us, or persons acting on our
behalf, are expressly qualified in their entirety by the cautionary statements.
We caution you not to place undue reliance on these forward-looking statements,
which speak only as of the date of this prospectus.
You should rely only on the information contained in this prospectus. We
have not, nor has the selling stockholder, authorized any other person to
provide you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, nor is the
selling stockholder, making any offer to sell these securities in any
jurisdiction where the offer and sale is not permitted. You should assume that
the information appearing in this prospectus is only accurate as of the date on
the front of this prospectus. Our business, financial condition, results of
operation and prospects may have changed since that date.
USE OF PROCEEDS
We will not receive any proceeds from the sale by the selling stockholder
of any of its shares of common stock, which shares may be sold in accordance
with this prospectus. We have agreed to bear the expenses in connection with
registration of the common stock being offered by the selling stockholder under
this prospectus.
10
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON STOCK
Our common stock has been quoted on the OTC Bulletin Board under the symbol
"ITAC.OB" since August 19, 1999. From May 28, 1998 to August 19, 1999, our
common stock was quoted on the OTC Bulletin Board under the symbol "ZFAX.OB."
The following table shows the high and low bid prices of our common stock as
reported by the OTC Bulletin Board for the fiscal years ended December 31, 2000
and 2001 and for the first quarter of fiscal 2002 through January 24, 2002:
HIGH LOW
---- ---
2000
First Quarter............................. 6.25 2.25
Second Quarter ........................... 4.88 2.38
Third Quarter ............................ 4.31 4.00
Fourth Quarter ........................... 3.75 .78
2001
First Quarter............................. 1.38 .30
Second Quarter............................ .58 .13
Third Quarter............................. .28 .14
Fourth Quarter............................ .62 .09
2002
First Quarter (through January 24, 2002).. .22 .11
The OTC Bulletin Board is a more limited trading market than the Nasdaq
SmallCap or Nasdaq National Markets, and timely, accurate quotations of the
price of our common stock may not always be available. You may expect trading
volume to be low in such a market. Consequently, the activity of only a few
shares may affect the market and may result in wide swings in price and in
volume. Additionally, the foregoing quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual retail transactions.
The trading price of our common stock may be highly volatile as a result of
factors specific to us or applicable to our market and industry in general.
These factors, include:
o variations in our annual or quarterly financial results or those of
our competitors;
o changes by financial research analysts in their recommendations or
estimates of our earnings;
o conditions in the economy in general or in the information technology
service sector in particular; and
o announcements or technological innovations or new products by us or
our competitors.
In addition, the stock market, particularly the Nasdaq SmallCap Market and
the OTC Bulletin Board, has recently been subject to extreme price and volume
fluctuations. This volatility has significantly affected the market prices of
securities issued by many companies for reasons unrelated to the operating
performance of these companies. In the past, following periods of volatility in
the market price of a company's securities, some companies have been sued by
their stockholders. If we were sued,
11
it could result in substantial costs and a diversion of management's attention
and resources, which could adversely affect our business.
On January 24, 2002, the last reported sale price of our common stock on
the OTC Bulletin Board was $.20 per share. As of January 24, 2002, there were
approximately 78 record owners of our common stock. We believe that there are
many beneficial owners of our common stock whose shares are held in "street
name".
We have never declared and do not anticipate declaring or paying any
dividends on our common stock in the near future. We intend to retain future
earnings, if any, that may be generated from our operations to finance our
future operations and any possible expansion. Any decision as to the future
payment of dividends will depend on our results of operations and financial
position and such other factors as our board of directors in its discretion
deems relevant.
12
SELECTED FINANCIAL DATA
The following selected financial data are qualified in their entirety by
reference to, and you should read them in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section of this prospectus and the audited consolidated financial statements and
notes to those financial statements included in and made part of this
prospectus. We have derived the balance sheet and statement of operations data
at and for the years ended December 31, 1996 and 1997 and the balance sheet data
as of December 31, 1998 from our audited consolidated financial statements which
are not included in this prospectus and we have derived the statement of
operations data for the years ended December 31, 1998, 1999 and 2000 and the
balance sheet data as of December 31, 1999 and 2000 from our audited
consolidated financial statements included in and made part of this prospectus.
We have derived the statement of operations data for the nine months ended
September 30, 2000 and 2001 and the balance sheet data as of September 30, 2001
from the unaudited consolidated financial statements included in and made part
of this prospectus. Results of operations for the period ending September 30,
2001 are not necessarily indicative of results which we will obtain for our
fiscal year ending December 31, 2001.
STATEMENT OF OPERATIONS DATA: NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------- ------------------------
1996 1997 1998 1999 2000 2000 2001
---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
-----------
Revenues ..................... $ 1,019,600 $ 894,900 $ 137,800 $ 137,400 $ 794,500 $ 694,700 $ 125,800
Operating expenses:
Cost of revenues ......... 514,100 357,500 336,300 90,500 417,500 222,100 24,100
Research and development .. 331,900 343,200 903,500 1,047,400 1,133,000 820,300 950,000
Sales and marketing ....... 526,800 297,000 113,100 113,200 1,182,100 844,600 637,400
General and administrative 1,605,200 1,353,100 1,699,400 2,619,800 2,306,500 1,567,300 1,304,900
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses ..... 2,978,000 2,350,800 3,052,300 3,870,900 5,039,100 3,454,300 2,916,400
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss from operations ......... (1,958,400) (1,455,900) (2,914,500) (3,733,500) (4,244,600) (2,759,600) (2,790,600)
Interest income (expense) .... (578,700) (755,300) (210,000) 95,300 (298,900) (245,900) 79,200
Taxes and other .............. 7,300 11,500 (21,300) 20,600 (7,700) (900) (11,300)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss ..................... $(2,529,800) $(2,199,700) $(3,145,800) $(3,617,600) $(4,551,200) $(3,006,400) $(2,722,700)
=========== =========== =========== =========== =========== =========== ===========
Basic and diluted net loss
per common share ........... $ (.22) $ (.19) $ (.19) $ (.20) $ (0.25) $ (0.17) $ (0.13)
=========== =========== =========== =========== =========== =========== ===========
Basic and diluted weighted
Average Common Stock
Outstanding ................ 11,486,000 11,486,000 16,701,583 17,790,000 18,483,179 17,909,000 20,345,924
=========== =========== =========== =========== =========== =========== ===========
BALANCE SHEET DATA: SEPTEMBER 30,
DECEMBER 31, 2001
------------------------------------------------------------------------------ ------------
(UNAUDITED)
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Cash and cash equivalents $ 58,000 $ 169,100 $ 3,047,100 $ 917,400 $ 3,904,500 $ 1,313,400
Working capital (deficit) (5,773,200) (9,693,400) 1,924,200 574,100 3,641,500 1,107,200
Total assets ............. 545,500 1,151,800 3,760,700 1,570,900 4,260,500 1,687,500
Long-term obligations .... 2,015,900 0 0 0 0 0
Total stockholders' equity
(deficit) ............ (5,677,800) (9,407,800) 2,268,600 841,500 3,865,200 1,316,600
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
We are engaged in the development and marketing of software products based
on our INTACTA.CODE technology which provides solutions and applications for the
secure storage and bi-directional transmission of data in digital and
non-digital media.
Our revenues were $137,800 for fiscal 1998, $137,400 for fiscal 1999,
$794,500 for fiscal 2000 and $125,800 for the nine months ended September 30,
2001.
Our revenues in fiscal 1998 and 1999 reflect the transition of our business
from the production and sale of facsimile storage and retrieval products to
development of software products based upon our core technology. Revenues from
the licensing of our technology increased by approximately 51% during fiscal
1999 to $73,400, representing approximately 53.4% of our total revenues for
fiscal 1999. The remainder of our revenues for each of fiscal 1998 and 1999 were
derived from the sale from our inventory of products and component parts
relating to our discontinued facsimile-based business.
Through the second quarter of fiscal 2000, primarily as a result of our
limited financial resources and personnel available for marketing activities, we
made limited progress in establishing further licensing arrangements for our
technology. The majority of our revenues during this time were generated
primarily from a consulting arrangement and the sale of discontinued hardware
products. This consulting project was a one-time service performed for one of
our clients and was completed during the second quarter of fiscal 2000.
Consulting fees from this project accounted for approximately 42% of our total
revenues for fiscal 2000. While we may perform certain consulting, maintenance
and other support services for prospective customers that license our technology
or software products, for which we anticipate generating additional fees, we do
not anticipate any meaningful portion of our revenues in the future to be
derived from these consulting and related services. Beginning in the second
quarter of fiscal 2000, as a result of increased resources and a shift of
personnel to marketing activities, we entered into two licensing arrangements
for our technology with third-party enterprises. For fiscal 2000, our licensing
revenues were $94,000. Although this represented an increase of approximately
28% from fiscal 1999, licensing revenues accounted for only approximately 12% of
our total revenues in fiscal 2000. Sales of certain test platforms constructed
principally from component parts from our discontinued facsimile business, the
production and sale of which has since been discontinued, together with sales of
other products from our inventory of discontinued facsimile business, accounted
in the aggregate for approximately 46% of our total revenues for fiscal 2000.
As a result of our continuing shift in business strategy toward licensing
of our technology and software applications combined with the depletion of the
remaining inventory of hardware and other non-proprietary computer processing
equipment from our discontinued facsimile business, our sales of products and
components decreased to $94,000 for the nine months ended September 30, 2001,
representing an approximate 66.8% decrease from the prior comparable period.
Further, as a result of reduced marketing resources resulting in our inability
obtain additional customers for our Developer's Edition and Enterprise Edition
SDK products as well as extended sales cycles for implementation of our
technology and related products to existing customers, royalties from licensing
arrangements deceased to $31,400 for the nine months ended September 30, 2001,
representing an approximate 61.3% decrease in such revenues from the prior
comparable period.
In March 2001, we launched a suite of INTACTA.CODE software development
kits, or SDK's, for integration by software developers in applications requiring
secure transmission and storage of
14
compressed data, and, in October 2001, we launched a suite of data
communications software products addressing security features in connection with
new privacy requirements under HIPAA. Although the release of our SDK products
generated increased activity to our web site and initiated downloads of our
INTACTA.CODE Trial Version SDK, we have not yet received any meaningful revenues
from this product line or from our data communications software products
addressing HIPAA regulations.
Our sales cycle for the licensing of our technology and related software
products which commences at the time a prospective customer demonstrates an
interest in licensing the technology or product and ends upon the delivery and
installation of the technology or product will vary depending upon the customer
and the product sought to be licensed. Sales of products such as the
INTACTA.CODE SDK Developer's Edition and the INTACTA Express-Healthcare Edition
may have shorter sales cycles resulting from their specific utilities wherein
sales cycles for products such as INTACTA.CODE SDK Enterprise Edition and
INTACTA Bridgeway-Healthcare Edition could extend for periods of nine months or
more, depending on the time required by the customer to evaluate the utility of
the product to its operations.
Our independent auditors have included an explanatory paragraph in their
report on our financial statements for each of the three years in the period
ended December 31, 2000, stating that recurring losses from operations and an
accumulated deficit at December 31, 2000 of $22,222,400 raise substantial doubt
our ability to continue as a going concern. Our accumulated deficit as of
September 30, 2001 was $24,945,100.
RESULTS OF OPERATIONS
Nine months ended September 30, 2001 as compared to the nine months ended
September 30, 2000
Revenues. Revenues decreased by $568,900 or 81.9% to $125,800 for the nine
months ended September 30, 2001, from $694,700 for the nine months ended
September 30, 2000. This decrease was primarily attributable to (i) consulting
revenue in the nine months ended September 20, 2000 of $329,300 from a one-time
consulting project completed in the second quarter of fiscal 2000, (ii) reduced
royalty revenues from existing licensing arrangements from $81,100 to $31,400
and (iii) more limited sales of products and components from our discontinued
facsimile-based business.
Cost of products and components. Cost of products and components was
$24,100 for the nine months ended September 30, 2001, a decrease of $84,100, or
77.7%, compared to $108,200 of such costs for the nine months ended September
30, 2000. The decrease in such costs was primarily attributable to the
corresponding reduction in sales of discontinued products and components.
Consulting fees expense. We did not incur any consulting fees expense for
the nine months ended September 30, 2001, compared to $113,900 of such
consulting fees expense for the nine months ended September 30, 2000 resulting
from the consulting project we performed in the second quarter of fiscal 2000.
Research and development expenses. Research and development expenses
increased by $129,700 or 15.8% to $950,000 for the nine months ended September
30, 2001, from $820,300 for the nine months ended September 30, 2000. The
increase was primarily attributable to the reclassification of $108,900 of these
costs as consulting fees expense and, to a lesser extent, from personnel, office
and other support facility costs related to research and development at our
Atlanta headquarters and additional research and development support at our
Israel facility in connection with the development of our new SDK and data
communications software products. This increase was partially offset by a
decrease in non-cash charges to $141,900 for the first nine months of fiscal
2001 from $271,200 for the first nine months of fiscal
15
2000, to account for options previously granted below fair market value as
compensation to employees and consultants.
Sales and marketing expenses. Sales and marketing expenses decreased by
$207,200 or 24.5%, to $637,400 for the nine months ended September 30, 2001,
from $844,600 for the nine months ended September 30, 2000. The decrease was
primarily attributable to the reduction of expenses related to marketing
materials, as well as consultants and other outside services, and the reduction
in non-cash charges to $5,900 for the first nine months of fiscal 2001 from
$61,800 for the first nine months of fiscal 2000, to account for options
previously granted below fair market value as compensation to employees and
consultants.
General and administrative expenses. General and administrative expenses
decreased by $262,400 or 16.7% to $1,304,900 for the nine months ended September
30, 2001, from $1,567,300 for the nine months ended September 30, 2000. This
decrease was attributable to the reduction in non-cash charges to $26,300 for
the first nine months of fiscal 2001 from $534,500 for the first nine months of
fiscal 2000 to account for options previously granted below fair market value as
compensation to employees and consultants. The foregoing decrease in expenses
was partially offset by (i) additional salaries and costs related to an increase
in our administrative staff, and (ii) third-party consulting and professional
fees in connection with business strategy development and management and
operation of our business.
Interest income (expense), net. Net interest income was $79,200 for the
nine months ended September 30, 2001 compared to ($245,900) of net interest
expense for the nine months ended September 30, 2000. The net increase was
primarily the result of interest earned during fiscal 2001 on cash balances
resulting from funds received from our October 2000 private placement, as
compared to interest expense related to debt incurred in our May and June 2000
bridge loan financing and accretion of related warrants recognized during fiscal
2000.
Net loss. As a result, our net loss decreased by $283,700 or 9.4% to
$2,722,700, or $(0.13) per share, for the nine months ended September 30, 2001,
as compared to our net loss of $3,006,400, or $(0.17) per share, for the nine
months ended September 30, 2000.
Year ended December 31, 2000 compared to year ended December 31, 1999
Revenues. Our revenues increased by $657,100 or 478.2% to $794,500 for the
year ended December 31, 2000, from $137,400 for the year ended December 31,
1999. This increase was primarily attributable to (i) consulting fees which we
earned in our second quarter of fiscal 2000 relating to a custom programming
project performed for an existing client, and (ii) sales of products and
components which increased by approximately 468% from the prior comparable
period primarily resulting from the sale of software development test platforms
and surplus memory chip inventory. In addition, revenues from licensing
arrangements increased by 28.1% to $94,000 for the year ended December 31, 2000
from $73,400 for the prior comparable period.
Cost of products and components. Cost of products and components was
$303,600 for the year ended December 31, 2000, representing an increase of
$213,100 or 235.5% compared to $90,500 of such costs for the year ended December
31, 1999. The increase in such costs was attributable to (i) purchase costs of
components consumed in the manufacture of test platforms sold, (ii) sales of
surplus non-proprietary computer processing chips held in inventory and sold in
the first quarter of 2000, and (iii) a write-off of obsolete inventory related
to discontinued hardware products.
16
Consulting fees expense: We incurred consulting fees expense of $113,900
for the year ended December 31, 2000, resulting from a consulting project we
performed in the second quarter of fiscal 2000. We did not incur any of such
costs for the year ended December 31, 1999.
Research and development expenses. Research and development expenses
increased by $85,600 or 8.2% to $1,133,000 for the year ended December 31, 2000,
from $1,047,400 for the year ended December 31, 1999. The increase was
attributable to (i) an increase in material costs consumed in operations as well
as an increase in personnel and related office and other support facility costs
related to research and development, and (ii), an increase in non-cash charges
to $361,600 for fiscal 2000 from $222,400 for 1999 to account for options
previously granted below fair market value as compensation to employees and
consultants. This increase was partially offset by the reclassification of
$108,900 of such costs as consulting fees expense.
Sales and marketing expenses. Sales and marketing expenses increased by
$1,068,900 or 944.3% to $1,182,100 for the year ended December 31, 2000, from
$113,200 for the year ended December 31, 1999. The increase in sales and
marketing expenses was primarily attributable to (i) increased salaries and
related costs resulting from the hiring of new personnel in connection with our
decision to renew the focus on marketing our Intacta technology, (ii) costs for
the development of marketing materials and related market research, and (iii) a
non-cash charge of $69,600 for fiscal 2000 to account for options previously
granted below fair-market value as compensation to certain employees and
consultants. No similar charge was required for fiscal 1999.
General and administrative expenses. General and administrative expenses
decreased by $313,300 or $12.0% to $2,306,500 for the year ended December 31,
2000, from $2,619,800 for the year ended December 31, 1999. The decrease in
general and administrative expenses was attributable to the reduction of the
non-cash stock option charge to $571,500 for fiscal 2000 from $1,016,000 for
fiscal 1999, partially offset by administrative costs associated with our bridge
loan financing and private placement during 2000.
Interest income (expense), net. Net interest expense was $(298,900) for the
year ended December 31, 2000 compared to $95,300 of net interest income for the
year ended December 31, 1999, primarily as a result of the short-term debt
incurred in the second and third quarters of 2000 in connection with our bridge
financing.
Net loss. As a result, our net loss increased by $933,600 or 25.8 % to
$4,551,200, or $(0.25) per share, for the year ended December 31, 2000, as
compared to a net loss of $3,617,600, or $(0.20) per share, for the year ended
December 31, 1999.
Year ended December 31, 1999 compared to year ended December 31, 1998
Revenues. Our revenues were relatively unchanged at $137,400 for the year
ended December 31, 1999, compared to $137,800 for the year ended December 31,
1998. Sales of products and components decreased by 28.3% to $64,000 for the
year ended December 31, 1999 compared to $89,300 for the year ended December 31,
1998. The decrease in product and component sales was primarily attributable to
our discontinuing sales and marketing efforts of our two facsimile based
products in the early part of fiscal 1998. This reduction was partially offset
by sales of excess non-proprietary computer processing chips from our inventory.
Revenues from licensing arrangements, however, increased by 51.3% to $73,400 for
the year ended December 31, 1999, compared to $48,500 for the year ended
December 31, 1998. This increase was attributable to increased royalties from a
licensing arrangement with a software developer for our technology.
17
Cost of products and components. Cost of products and components decreased
by $245,800 or 73.1% to $90,500 for the year ended December 31, 1999, compared
to $336,300 for the year ended December 31, 1998. This decrease was primarily
attributable to reduced product costs and certain inventory write-offs resulting
from our discontinuing sales of our facsimile based products in 1998.
Research and development expenses. Research and development expenses
increased by $143,900 or 15.9% to $1,047,400 for the year ended December 31,
1999, compared to $903,500 for the year ended December 31, 1998. The increase in
expenses was primarily attributable to an increase in non-cash charges to
$222,400 for fiscal 1999 from $129,700 for fiscal 1998 to account for options
previously granted below fair market value as compensation to employees and
consultants.
Sales and marketing expenses. Sales and marketing expenses remained nearly
unchanged at $113,200 for the year ended December 31, 1999, compared to $113,100
for the year ended December 31, 1998. We had substantially reduced our sales and
marketing staff in early 1998 in connection with our discontinuing sales of our
facsimile based products and our focusing on development of new product
applications for our technology. The majority of our sales and marketing costs
for each of 1999 and 1998 were from third party design and marketing companies
we retained to assist us in developing our business strategy and launching new
products.
General and administrative expenses. General and administrative expenses
increased by $920,400 or 54.2% to $2,619,800 for the year ended December 31,
1999, compared to $1,699,400 for the year ended December 31, 1998. This increase
was attributable to (i) additional salaries and costs related to an increased
administrative staff; (ii) third party consulting and professional fees in
connection with business strategy development and management and operation of
our business; and (iii) an increase in non-cash charges to $1,016,000 for fiscal
1999 from $632,100 for fiscal 1998 to account for options previously granted
below fair-market value as compensation to several employees.
Interest income (expense), net. We had net interest income of $95,300 for
the year ended December 31, 1999 primarily from interest on funds received in
connection with a private placement of our securities in December 1998. We had
net interest expense of $(210,000) for the year ended December 31, 1998,
primarily from advances from the parent company of the subsidiaries we acquired
in May 1998, which advances were extinguished prior to our acquisition of these
subsidiaries in May 1998.
Net loss. As a result, our net loss increased by 15.0% to $3,617,600 or
$(0.20) per share for the year ended December 31, 1999, compared to a net loss
of $3,145,800 or $(0.19) per share for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operating costs and capital
requirements primarily through:
o the private sale of our capital stock to various parties;
o non-interest-bearing loans from Valor Invest Limited, an affiliate of
our Chairman of the Board, substantially all of which was subsequently
repaid or converted into equity; and
o cash acquired in connection with the acquisition of our subsidiaries.
In April and May 1998, we sold, in two private placements, an aggregate of
150,000 shares of our common stock at a price of $3.00 per share, for aggregate
gross proceeds of $450,000.
18
In December 1998, we sold, in a private placement, 1,000,000 shares of our
common stock at a price per share of $4.00 for gross proceeds of $4,000,000.
From December 1997 through December 31, 1998, Valor made several
non-interest-bearing loans to us in the aggregate amount of $2,172,000. During
the first six months of 1999, we repaid $1,131,000 of these loans. In June 1999,
we converted $952,000 of these loans into 238,000 shares of our common stock at
the rate of $4.00 per share. At December 31, 1999, a balance of $89,000 of loans
from Valor remained outstanding.
During the first half of 2000, Valor made an additional $704,500 of
non-interest-bearing loans to us, of which we subsequently repaid $312,000. In
May 2000, Valor converted $250,000 of the unpaid balance of these loans into 2.5
units identical to the units offered by us in our bridge financing described
immediately below. Valor also agreed to subordinate the balance of its loans to
us to our repayment of the bridge notes issued in our bridge financing. As
discussed below, Valor converted the principal amount of the notes included in
the units it acquired in May 2000 as well as a substantial portion of its
subordinated loans into units offered in our October 2000 private placement.
In May and June 2000, we completed a bridge financing, in which we issued
25 units, each unit consisting of a $100,000 principal amount bridge note and
bridge warrants to purchase 25,000 shares of common stock at an exercise price
of $3.50 per share, for aggregate gross proceeds of $2,500,000.
In October 2000, we completed a private placement in which we issued an
aggregate of 2,333,310 units consisting of one share of our common stock and one
warrant to purchase one share of our common stock at an exercise price of $3.50,
for aggregate gross proceeds of $7,000,000. Approximately $2,267,000 of the
gross proceeds received in the private placement represented the conversion of
the principal and accrued interest of a majority of the outstanding bridge notes
into units in the private placement. A portion of the proceeds of the private
placement was used to repay the principal and accrued interest on the balance of
outstanding bridge notes not converted into units in the private placement.
After deduction of cash commissions and related expenses as well as the
conversion of the bridge notes, we received approximately $3,522,000 in net
proceeds from the private placement. In connection with the private placement,
Valor converted the principal amount of its notes into units in the private
placement. Valor also converted a substantial portion of its outstanding
subordinated loans into units in the private placement.
At September 30, 2001 we had $1,313,400 in cash and cash equivalents, the
majority of which represented the balance of proceeds remaining from our October
2000 private placement. At September 30, 2001, we had working capital of
$1,107,200 as compared to working capital of $3,641,500 at December 31, 2000.
Cash used in operating activities for the nine months ended September 30,
2001 was $2,539,600, primarily consisting of our net loss and an increase of
$106,600 in other current assets and partially offset by $174,100 of non-cash
compensation expense, a decrease in accounts receivable of $57,000 and an
increase in accounts payable of $89,100. Cash used in investing activities was
$51,500. As a result, we had a net decrease of $2,591,100 in cash and cash
equivalents during the nine months ended September 30, 2001.
Cash used in operating activities for the nine months ended September 30,
2000 was $1,952,900, primarily consisting of our net loss of $3,006,400 and a
decrease in accounts payable and accrued expenses of an aggregate of $139,900,
which was partially offset by $1,074,600 of non-cash compensation expense and
accretion of warrants and a decrease in inventory of $53,200. Cash used in
investing activities was $54,700. Cash provided by financing activities was
$2,802,100 representing the
19
proceeds from our bridge financing in May and June 2000 and the net of
non-interest bearing loans from Valor. As a result, we had a net increase in
cash and cash equivalents of $794,500 during the nine months ended September 30,
2000.
Cash used in operating activities for the year ended December 31, 2000 was
$3,158,600, primarily consisting of our net loss and a decrease of $411,000 in
accounts payable, partially offset by $1,002,700 of non-cash compensation
expense, and the interest accretion of common stock warrants related to our
bridge financing of $276,200, and the write-off of obsolete inventory related to
facsimile-based products of $222,900. Cash used in investing activities was
$61,300. Cash provided by financing activities was $6,207,000 primarily as a
result of net proceeds received in our bridge financing in May and June 2000 and
our private placement in October 2000. As a result, we had a net increase of
$2,987,100 in cash and cash equivalents during the year ended December 31, 2000.
Cash used in operating activities for the year ended December 31, 1999 was
$1,816,000, primarily consisting of our net loss, which was partially offset by
$1,238,400 of non-cash compensation expense and an increase of approximately
$468,800 in accounts payable. Cash used in investing activities was $33,800 and
cash used in financing activities was $279,900. As a result, we had a net
decrease in cash and cash equivalents of $2,129,700 during the year ended
December 31, 1999.
Cash used in operating activities for the year ended December 31, 1998 was
$2,324,700 primarily consisting of our net loss, which was partially offset by
non-cash compensation expense of $668,800 and as a result of the write-off of
inventory and other assets related to our discontinuing sales of our
facsimile-based products of $289,100. Cash provided by investing activities was
$1,224,800 resulting from cash acquired in connection with the acquisition of
our subsidiaries in May 1998. Cash provided by financing activities was
$3,977,900 primarily as a result of net proceeds received in our private
placement of securities in December 1998. As a result, we had a net increase of
$2,878,000 in cash and cash equivalents during the year ended December 31, 1998.
Other than the leases for our offices and research facilities in Atlanta,
Georgia and Beer Sheva, Israel, and certain computer equipment relating to our
research and development activities, we do not have any material capital
obligations and we do not anticipate making any material capital expenditures in
the immediate future. Our aggregate minimum commitments under our existing
operating leases for fiscal 2002, 2003 and 2004 are $153,000, $153,300 and
$144,500, respectively. Additionally, we do not carry any material short or long
term debt or other financing commitments. As a result, the majority of our
business costs are the direct result of our operating costs including personnel
expenses, such as payroll, and other facility maintenance and overhead expenses.
We are not currently generating sufficient revenues from our operations to
fund our operating costs and expenses. We have incurred losses to date resulting
in an accumulated deficit as of September 30, 2001 of $24,945,100. We anticipate
losses to continue. Since September 30, 2001 we have reduced our personnel by
approximately 30% and we have recently instituted a firm-wide reduction of
salaries by 20%. As of November 30, 2001, we had cash and cash equivalents of
approximately $840,000. Based upon our recent cost-reduction efforts, management
estimates that cash and cash equivalents will be sufficient to fund our
operating activities and capital requirements through the end of our first
quarter of 2002. Unanticipated changes in economic conditions or other
unforeseen circumstances may cause us to expend our cash and cash equivalents in
a shorter period of time.
In addition to our cost-reduction efforts, we have engaged in, or are
currently engaging in, the following activities in an effort to increase
revenues and obtain financing to supplement our cash and cash equivalents in
order to meet our operating costs over the next 12 months:
20
o Conducting a marketing program involving several pilot sites in which
we have installed our data communications software products for
application solutions under HIPAA's privacy regulations. We anticipate
that we will begin to generate revenues from one or more of these
sites in the first quarter of fiscal 2002;
o Developing a qualified value-added reseller program for our INTACTA
Bridgeway product;
o Seeking to establish additional business alliances for the integration
of our technology into firmware products in the area of secure data
storage, transmission and retrieval, and obtaining financing from
these business alliances.
Our ability to continue as a going concern is substantially dependent upon
our ability to obtain additional financing or generate increased revenues to
support our current operating activities as well as research and development and
marketing of our new products. At this time we do not have any current
arrangements with respect to other potential sources of additional financing and
cannot assure you that additional financing will be available to us on
commercially reasonable terms or at all. If we are unable to increase our
revenue from existing sources, develop revenues from those potential sources
listed above or obtain additional financing over the next few months and as
subsequently needed, we may be required to curtail or cease operations.
INFLATION
We do not believe that inflation has had a material impact on revenues or
expenses during our last three fiscal years.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards, SFAS, No. 144, "Accounting for Impairment of
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 221,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of," and addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement is effective for
fiscal years beginning after December 15, 2001. We do not expect the adoption of
SFAS No. 144 to have a material impact on our financial statements.
In June 2001, the Financial Accounting Standards Board finalized issued
SFAS No. 141, Business Combinations and No. 142, Goodwill and Other Intangible
Assets. SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also requires that
companies recognize acquired intangible assets apart from goodwill if the
acquired intangible assets meet certain criteria. SFAS 141 applies to all
business combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon adoption
of SFAS 142, that companies reclassify the carrying amounts of intangible assets
and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that companies identify reporting units for the
purpose of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning
21
after December 15, 2001 to all goodwill and other intangible assets recognized
at that date, regardless of when those assets were initially recognized. SFAS
142 requires companies to complete a transitional goodwill impairment test six
months from the date of adoption. Companies are also required to reassess the
useful lives of other intangible assets within the first interim quarter after
adoption of SFAS 142. The adoption of SFAS No. 141 and SFAS No. 142 is not
expected to have a material effect on Intacta's financial position, results of
operations and cash flows in 2002 and subsequent years.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments imbedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. SFAS No. 137 delayed the effective date of SFAS No.
133 to fiscal years beginning after June 15, 2000. SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, Amendment of SFAS
No. 133, liberalized the application of SFAS No. 133 in a number of areas. The
adoption of SFAS No. 133 did not have a material impact on our consolidated
financial position or results of operations.
The Financial Accounting Standards Board issued Interpretation No. 44,
Accounting for Certain Transactions involving Stock Compensation, an
Interpretation of APB Opinion No. 25 which became effective on July 1, 2000.
Interpretation No. 44 clarifies (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a stock
compensation plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. Adoption of the provisions of Interpretation
No. 44 did not have a significant impact on Intacta's financial statements.
We believe that we are in compliance with Staff Accounting Bulletin No.
101, Revenue Recognition, which outlines the basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements filed
with the Securities and Exchange Commission.
22
BUSINESS
OVERVIEW
We are a developer and marketer of software products based on our patented
technology that, through its unique combination of compression, encoding and
error correction processes, transforms any data format ranging from text,
graphic, audio or video from a binary file into INTACTA.CODE, which is language
transparent and platform independent. We believe that our technology provides
solutions and applications that enable enterprises to bridge their
communications and management information systems across digital and non-digital
media, by providing the secure bi-directional transmission and subsequent
recovery and storage of data.
INDUSTRY
Today's computer-based business environment has accelerated the transition
of enterprises from the historical paper-based business model to a digital
model, allowing these enterprises to manage, authenticate, archive and transmit
data electronically. This rapid transition, however, has heightened the need for
establishing and maintaining the privacy, security and control of data which is
stored and transmitted across a wide range of evolving and legacy digital
communications and information management systems.
A report by IDC, a leading provider of technology industry analysis and
market data to builders, providers and users of information technology,
forecasts that the worldwide market for encryption software will grow from
approximately $184 million in 2000 to approximately $365 million in 2005. The
report by IDC also indicates the following key market trends that are expected
to provide enhanced revenue opportunities for software developers who deliver
encryption and security related technologies:
o Security. As the reliance upon the digital medium for the storage and
transmission of data continues to grow, businesses, professionals and
individual consumers utilizing this medium are becoming increasingly
sensitive to unauthorized access and use of proprietary or personal
information. Enterprises are particularly seeking increased security
in the following areas:
- "data at rest" and other stored data protection, for information
such as credit care numbers, addresses, social security
information; and
- copyright protection, from unauthorized access to and subsequent
use of copyrighted materials.
o Privacy and government regulation. Newly introduced government
regulations such as the Health Insurance Portability and
Accountability Act and the Gramm-Leach-Bliley Financial Modernization
Act are requiring improved security and privacy protection for the
storage and transmission of certain information.
o Wireless initiatives. The number of mobile computing devices that can
access the Web continues to increase, extending traditional enterprise
tiers for maintaining and communicating data utilizing wireless
technologies. Revenues from developer toolkits in the encryption area
are expected to increase as companies develop applications for the
wireless market. File encryption may provide additional protection for
data stored on mobile devices that are more prone to being lost or
stolen.
23
Increased sensitivity to security requirements has resulted in a search for
more comprehensive methods of individual identification, particularly with
respect to controlling or monitoring access by persons to secure areas,
databases, and software applications. In an attempt to meet enhanced security
requirements, biometric data such as fingerprint, iris scans, and facial
recognition technologies are receiving greater scrutiny and development efforts
as an added layer of identification to the more recognized forms of security
control such as passwords, personal identification numbers and smartcards.
We believe that the flexibility and scalability of our technology provides
the building blocks for creating a range of solutions addressing the secure
communication and management of data in the digital environment.
EVOLUTION OF OUR BUSINESS
We were organized in October 1997 to acquire two companies that marketed
and developed two related facsimile storage and retrieval products that
incorporated an early version of our technology. Development and production of
the facsimile products were performed in Israel by Intacta Labs Ltd., and
marketing and distribution were performed in the United States by Intacta
Delaware, Inc. We acquired these companies in May 1998 in exchange for
approximately 70% of our outstanding capital stock immediately after the
acquisition. The acquisition was treated, for accounting purposes, as a reverse
acquisition.
During 1997 and part of 1998 we derived substantially all of our revenues
from the sale of facsimile-based products. Beginning in the latter part of 1997
and continuing into 1998 we began to wind down our production and active
marketing of the facsimile-based products due to reduced profit margins and our
anticipation of further deterioration of profit margins from increased
competition and costs of marketing these products to the retail market. At that
time, we initiated research and development of advanced products and software
applications based on our technology. We also began, on a very limited basis,
licensing our technology for integration with applications and solutions to
end-users.
In the middle of 1999, due to competitive pressures and our re-evaluation
of our business model and revenue/cost projections, we determined, except with
respect to certain of the advanced products that were at or near completion of
development, to forego further development of these products which were based
upon our technology and to focus on direct marketing of our technology for
licensing to large enterprises and third party solution providers. Our limited
financial and other marketing resources and the further evolution of our
business model toward the licensing of our technology prevented us from engaging
in a full-scale marketing program for the advanced products that were nearing
completion.
In March 2001, we launched a suite of INTACTA.CODE software development
kits, or SDK's, making our technology available to software developers for
integration into both existing and new applications requiring features that
provide for the secure transmission and storage of compressed data across
various platforms and operating devices. We anticipate that the licensing of
SDK's to software developers will create an additional revenue stream to our
technology licensing arrangements with large enterprises and third-party
solution providers, independent software vendors and original equipment
manufacturers. Additionally in October 2001, we launched a suite of data
communications software products targeted to the health-care industry addressing
the secure transmission of confidential patient information under the new
privacy regulations promulgated by HIPAA.
OUR PRODUCTS
In order to maximize our product flexibility and our ability to respond to
market developments and individual customer requirements, our product
development objectives include:
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o designing a comprehensive suite of developer toolkits enabling the
embedding and integration of our core technology into both firmware
and software applications and solutions of third-party original
equipment manufacturers, systems integrators and independent software
vendors; and
o leveraging our developer toolkits and core technology to quickly
develop and deliver software products to vertical markets such as
healthcare and biometric security.
Our suite of INTACTA.CODE SDK software products are designed to provide
rapid integration of our technology into existing legacy enterprise systems as
well as assist application developers in creating or extending software and
firmware solutions requiring the secure compression of data for management and
transmission across any medium regardless of platform, device or location.
These software products may be downloaded from our website and certain
other participating websites that have entered into exclusive arrangements with
us to provide for the online purchase and distribution of our products. Other
than with respect to the Trial Version product, which is a sample product
available at no charge, our SDK products are only downloadable pursuant to
licensing fees paid prior to downloading, at prices ranging from $500 for the
Developer's Edition to $25,000 for the Enterprise Edition. In addition, our SDK
products are also subject to a royalty payment to the extent that the
application developer or other end-user modifies the SDK product for further
distribution. These royalty fees will be negotiated on a per contract basis,
based upon transaction usage measurements such as amount of data processed,
amount of transactions processed and the number of installed licenses or sites
utilizing our software. Support for these software products is also provided
from our website.
o INTACTA.CODE SDK Trial Version is currently only available for Windows
platforms and allows application developers to experience the
INTACTA.CODE process by facilitating testing, benchmarking and
prototyping of 1 kilobyte data files for encoding and decoding. This
SDK is free of charge and is used as a promotional tool to educate
software application developers with respect to the benefits of our
technology.
o INTACTA.CODE SDK Developer's Edition is supportable on platforms such
as Windows 9x, 2000 and NT, Windows CE, Palm OS and MAC and allows
application developers to integrate the INTACTA.CODE encoding and
compression engines to process data files.
o INTACTA.CODE SDK Enterprise Edition is a custom development services
package, geared directly to the enterprise, designed to provide custom
access to INTACTA.CODE encoding and decoding engines. This software
supports data and image read and write capabilities using comparison,
authentication and encryption in digital or print media. Digital form
includes support for all platforms, unlimited data size and custom
encryption.
In the beginning of October 2001, we released two data communication
software application products based on our INTACTA.CODE technology that are
designed to ensure the privacy of patient information by providing solutions for
the secure transmission of data as required by the new health-care information
security regulations under HIPAA. These products are:
o INTACTA Express - Healthcare Edition, a Windows application that
integrates with Microsoft OfficeTM software, provides secure faxing
and e-mail and supports scanning of existing paper-based information,
all with detailed audit reporting.
o INTACTA Bridgeway - Healthcare Edition, a client/server communications
solution that can be used to maintain the privacy and security of
confidential patient information among
25
physician practices, hospitals, third-party payors and administrative
clearing houses. This software supports existing fax servers and email
systems such as Microsoft OutlookTM and Symantec's WinFax PROTM,
automatically converts any external file type into INTACTA.CODE and
supports back-end open database communication conduits and
custom-developed application program interfaces, or API's, via
INTACTA.CODE SDK products. It also includes built in and configurable
archive and auditing tools.
Additionally, in the beginning of October 2001, we completed development of
XPRESS.ID 2000, a software product designed to combine biometric facial
recognition technology with our encoding technology to provide an integrated
verification solution for the security market. XPRESS.ID-2000 works by creating
a digital image of an individual that is then processed as a facial template.
The image is then securely encoded with INTACTA.CODE and the individual's
personal data is then embedded along with the facial image. We believe that with
the increase in the use of false identification obtained through the internet
and the need to implement more secure programs to verify identities,
XPRESS.ID-2000 will provide the biometric identification marketplace with an
easy-to-use solution to ensure that information and imaging cannot be tampered
with and will remain secure in mobile applications. Identified applications for
XPRESS.ID-2000 include visas and passports, drivers licenses, access cards,
smartcards, and social security cards.
INTACTA.CODE TECHNOLOGY
Our core technology is a unique integration of compression, encryption and
form factor. The compression engine compresses binary files comprised of text,
graphics, audio or video. The encoding engine simultaneously embeds a
proprietary error correction algorithm in the INTACTA.CODE to aid in the
accurate recovery of the content and format of the original digital file, as
well as security features to protect against unauthorized access or use of the
INTACTA.CODE. The resulting INTACTA.CODE is a secure, damage resistant graphical
representation of the original digital file, which may be maintained or
transmitted in digital format or transferred to paper format for storage and/or
facsimile transmission. The following is a graphical representation of the
functions of our technology:
26
[GRAPHIC OMITTED]
BINARY DATA
|
INTACTA CODE ENCODER
|
COMPRESSION
|
PASSWORD ---- ENCRYPTION ENGINE TIME STAMP ---- USER ID
| REGISTER EXPIRATION DATE
ENCRYPTION |
2048-BIT | INTACTA CODE
128-BIT ERROR CORRECTION
56-BIT | TIME STAMP
40-BIT |
SIGNATURE _ ENCODER ENGINE EXPIRATION DATE
|
INTACTA CODE ENCRYPTED DATA
The key features of our technology are:
o Compression. The compression capability of our technology decreases
the amount of bandwidth required to transmit data, and the amount of
space required to store data. The recipient of a compressed and
encoded file may then restore the data to its original format for
further review and/or editing.
o Security. The security features of our technology enable users to
protect information contained within INTACTA.CODE. The security
features include the ability to restrict access to particular users
only, and the ability to verity the sender and content of an
INTACTA.CODE file containing sensitive information. Protection can
also be layered so that a reader would require a separate and distinct
password to access successive layers of information.
o Error Correction. Our technology offers a robust error correction
process, which maintains the integrity of the content and format of
the original compressed data in the event of degradation to the medium
over which the data is being transmitted. The user can choose the
level of error correction required depending on the reliability of the
medium being used to transmit or store the data.
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o Transmission and Restoration of Data In Any Form. Our technology
enables the encoding and transmission of data from any form, including
paper based or digital forms, and across diverse operating platforms,
such as PDA's and other mobile computing devices, personal computers,
mainframes, servers and databases. With our technology, the recipient
of the transmission can decode the data without further manipulation,
translation or reconfiguration of the content or format.
An additional feature of our technology is the interchangeability of
certain individual functions such as the compression and encryption modules.
These functions may be substituted with the potential customer's legacy
compression and encryption programs required by the customer's existing systems.
INTACTA.CODE's flexibility and adaptability makes it highly compatible with
existing applications and information systems without sacrificing functionality.
We believe that our core technology provides the following benefits:
o protects sensitive data such as patient records and business documents
from unauthorized access or use through security features, including
encoding and authentication;
o enhances hardware products and software applications of an
enterprise's existing communication and information management systems
at a cost that is much less than a conversion to a new system but with
similar functionality;
o reduces bandwidth required for storage and transmission of data
allowing enterprises to transmit the information in a faster, more
cost-effective manner, and requires less space in both digital and
paper-based media for the storage and archiving of documents;
o improves performance of wireless communications and utility of mobile
computing devices such as personal digital assistants, notebook and
palm-size computers and smart cellular phones by enhancing their
ability to receive, store and transmit data; and
o maintains compatibility with existing software toolkits.
STRATEGY
Our strategy is to market our software products and technology directly to
software application developers for large enterprises, as well as through
strategic relationships with third party solution providers and distributors,
independent software vendors and original equipment manufacturers with
established distribution channels and with reputations for marketing or
integrating value added technology such as ours. In order to implement our
strategy, we intend to:
o establish the value of our software products and technology with
software developers for integration in various enterprise-based
horizontal applications such as mobile computing, Intranet/Internet
and e-commerce, customer relationship management and supply chain
management;
o identify vertical markets such as healthcare, security,
telecommunications and financial services which require applications
incorporating our software products and technology or for which our
technology may be adapted or enhanced; and
o establish an empowered partner base with third-party solution
providers that may utilize our developer toolkits and applications.
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Large Enterprises. A number of large enterprises rely upon internal
resources for systems integration and product development with respect to
information management and communications. We intend to market our software
products and technology as an enhancement to an enterprise's legacy hardware and
software products by more efficient means than conversion to a new system.
Third Party Solution Providers. Third party solution providers such as
application service providers and systems integrators as well as independent
software vendors and original equipment manufacturers have the ability to
integrate value-added technology such as ours. Through strategic relationships
with these entities, we intend to directly market and distribute or bundle our
technology as a value added service with other software or hardware products to
be sold or licensed to end-users.
MARKETING
Our marketing efforts are directed at promoting our software products and
technology, creating market awareness and generating leads through print and
website advertising campaigns and promotional activities at industry trade
shows, events and conferences. Our target markets for marketing and promoting
our software products and technology are:
Healthcare
A key component of our marketing plan is to establish key industry
alliances and market our software products and technology as HIPAA-compliant
solutions for healthcare organizations. Among other things, the final privacy
rule under HIPAA is requiring healthcare organizations to provide for the secure
transmission and maintenance of their patient healthcare information. For these
organizations to implement or reinforce and support these security efforts,
solutions for their legacy paper-based and automated digital systems will be
required to integrate paper records, which account for substantially all of
their current healthcare records, with electronic media.
A number of legacy information systems remain in use in the healthcare
industry that are difficult to integrate with newer systems or redesign to work
with new applications. Additionally, the highly fragmented healthcare
information technology market limits the ability to build interfaces between
disparate information systems from different vendors making it more difficult to
implement a seamless cross-enterprise security system. A December 2000 study by
First Consulting Group prepared for the American Hospital Association,
supplemented by a March 2001 report by First Consulting Group subsequent to the
issuance of the final privacy rule under HIPAA, indicates the potential cost to
hospitals attempting to meet the provisions of the privacy rule under HIPAA.
These costs, which depend in part on the compliance efforts to be taken by these
organizations and the complexity of their information systems, are estimated to
be approximately $4 billion over five years for hospitals generally seeking to
comply by modifying current information systems and approximately $22.5 billion
over the same five-year period for hospitals required to invest in new
information systems. We believe that the pervasive security protocol of our core
technology provides the capabilities necessary to implement internal integration
automation solutions enabling healthcare organizations to utilize their existing
communications infrastructure to perform, among other things, secure
HIPAA-complaint transmissions via paper-based facsimile as well as e-mail.
Security Software
The security software industry is highly fragmented and rapidly evolving,
marked by a substantial number of companies developing core competencies in
their chosen security segments and start-up and small niche companies seeking to
introduce advanced security products. We believe that the compression,
encryption and form factor features of our core technology make it attractive
for enhancing
29
existing security products or for integrating with advanced products in
development, particularly in the biometric identification market, and we have
established relationships with security technology providers, analysts, and
consultants. A September 2001 report by International Biometric Group projects
that the market for biometric technologies is expected to grow from
approximately $399 million of revenues in 2000 to approximately $1.9 billion of
revenues by 2005, primarily attributable to network access and e-commerce in the
private sector and large-scale public sector investment such as by law
enforcement agencies. We believe that our core technology can be integrated as
an add-on application to existing as well as evolving facial recognition systems
or other biometric client-server solutions enabling the integrity of compressed
data as well as the secure transmission of biometric information over standard
communication systems.
LICENSING
Software Products
In March 2001, we released a suite of INTACTA.CODE SDK software products
which are designed to provide rapid integration of our technology into existing
legacy enterprise systems as well as assist application developers in creating
or extending software and firmware solutions requiring the secure compression of
data for management and transmission across any medium regardless of platform,
device or location.
Our INTACTA.CODE SDK Developer's and Enterprise Editions are marketed to
application developers and large enterprises for an initial licensing fee
together with royalty fees in the event of subsequent modification for further
distribution, which royalty fees will be negotiated on a per contract basis,
based upon transaction usage measurements.
Our INTACTA Express - Healthcare Edition and INTACTA Bridgeway - Healthcare
Edition products, designed for secure transmission and maintenance of
information in the healthcare industry and are marketed to end-users in the
healthcare industry for a one-time licensing fee, with potential additional fees
for subsequent upgrades and enhancements.
Technology
During 2000, we entered into licensing arrangements for our technology with
two large enterprises, enabling such enterprises to further license or utilize
the compression and security features of our technology in their communications
and information management operations.
Our goal is to enter into additional licensing agreements for our
technology with large enterprises that utilize internal resources for systems
integration and development, and with third party solution providers such as
application service providers, independent software vendors and original
equipment manufacturers that can market our technology as a module or
incorporate or embed our technology into hardware and/or software applications
for sale to end users. We anticipate these licensing arrangements to involve an
up-front payment by the enterprise or solution provider for configuration and
installation services, with the potential for additional license fees for
subsequent updates and enhancements.
CUSTOMERS
As a result, primarily of the recent transition of our business from
facsimile-based products to licensing of technology and software based upon
INACTA.CODE, we have entered into a limited number of licensing agreements with
third parties. The following is a list of our customers who have licensed our
technology or software applications based on our technology:
30
o DataLode, Inc. In July 1999, we entered into a non-exclusive license
agreement with DataLode, Inc. to license a software product based upon
INTACTA.CODE. DataLode provides warranty registration services to
Hewlett Packard and others for products in Europe and North America
and utilizes our product to eliminate manual data entry and the need
for optical character recognition.
o Systems Nakashima Co., Ltd. In April 2000, we entered into an
agreement with Systems Nakashima Co., Ltd. pursuant to which we
granted Fujitsu Limited, a developer of advanced technologies for
electronics and telecommunications and one of the largest providers of
electronic equipment to the print industry in Japan, a non-exclusive
right to license our technology to a certain number of newspapers in
Japan. Fujitsu has licensed applications incorporating INTACTA.CODE to
Yomiuri Shimbun, a daily newspaper published in Japan with one of the
largest daily circulations in the world, allowing its readers to
receive multimedia content as part of their paper.
o Intertek Testing International Ltd. In September 2000 we entered into
an agreement to license INTACTA.CODE to Intertek Testing International
Ltd., a worldwide products testing inspection and certification
company, in connection with a pilot program engaged in by Intertek to
evaluate the utility of our products and technology in creating secure
electronic certificates, which may be e-mailed or downloaded to a
paper based format and subsequently scanned back into electronic
format. We believe that these solutions are particularly useful in the
import/export industry on account of the fact that results of
inspections or assessments of shipments may be encoded, filed
electronically and added to the certificates.
Other than consulting related revenues from our agreement with Systems
Nakashima, which accounted for 42% of our revenues for fiscal 2000, we have not
generated significant revenues from our third-party licensing agreements.
For our fiscal year 2000 Systems Nakashima Co. Ltd., Cybro Medical, Ltd.
and InterLearn, Ltd accounted for approximately 46%, 30% and 13%, respectively,
of our revenues. For our fiscal year 1999, Brother Industries, Ltd. and Cybro
Medical, Ltd. accounted for approximately 53% and 40%, respectively, of our
revenues. For our fiscal year ended 1998, Brother Industries, Ltd., Multiple
Zones International, Rexton Corporation and SkyMall Inc. accounted for
approximately 27%, 26%, 15% and 12%, respectively, of our revenues. Other than
Systems Nakashima Co. Ltd., all of the sales to the customers listed above were
from products and components related to our discontinued facsimile-based
business.
While substantially all of our marketing efforts are currently to U.S.
customers, primarily in the healthcare industry for our HIPPA-based products, we
have, in the past, had sales to customers in the Mid-East and Far East. To the
extent that marketing and sales of our core technology and related products to
customers in foreign countries increases, we may be subject to a number of risk
and uncertainties which could reduce our margins and, consequently, our
operating results, including:
o collection of accounts receivable;
o trade restrictions;
o fluctuations in currency exchange rates;
o export duties and tariffs; and
o uncertain political, economic or military developments.
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STRATEGIC RELATIONSHIPS
We have established non-financial relationships with a number of solution
providers, software developers and advanced product manufacturers in an effort
to increase awareness of our technology. These relationships range from
membership in a third-party's product design program to partnering arrangements
for the further research and development of viable products or applications
integrating our technology. We have not generated revenues at this time from
these relationships and while we do not rely on these third parties for the sale
of our technology or products, management believes that they assist in
increasing market recognition and interest in our technology. These
relationships include:
o IBM Corporation. We are a member in IBM's PartnerWorld for Developers,
which is a marketing and enablement program designed to provide for
the sharing of information with respect to the development of advanced
technologies within the portfolio of IBM products.
o Compaq Computer Corporation. We are a member of Compaq Solutions
Alliance, a worldwide partnering program for the development of
applications for all Compaq platforms. Our technology is made
available to the extent applications utilizing our technology are
being developed.
o Microsoft Corporation. We are a certified Microsoft developer under
the Microsoft Solution Provider program that allows independent
companies to team with Microsoft to solve business challenges for
organizations of all sizes. As a certified developer we can be called
upon to provide software solutions on Microsoft operating systems such
as Windows NT and Windows CE.
o ComponentSource. We have a reseller arrangement with ComponentSource,
a global eBusiness and the world's largest marketplace and community
for software components and tools for download via its website of our
INTACTA.CODE SDK Developer's Edition and related products.
ComponentSource's customer base spans over 100 countries.
o Fujitsu Limited. Beginning in December 2000, Fujitsu made our
technology available on their website to provide encoding and decoding
services to their users, as part of a test program through the end of
March 2001. In February 2001, Fujitsu pre-installed a version of our
INTACTA.CODE capable of decoding color images, text and hyperlinks in
HTML format, in approximately 1,000,000 newly manufactured personal
computers.
o Imagis Technologies, Inc. In October 2001, we entered into a business
alliance with Imagis Technologies, Inc., an affiliated company
involved in biometric and facial recognition technology, for the
development of an application for the secure encoding, storage and
access of images and data for identification purposes. Imagis has
installed versions of its biometric facial recognition technology at
Pearson International Airport in Toronto, in several Royal Canadian
Mounted Police facilities in Canada and in several cities in
California, and Mexico.
o EMSi, Inc. We have a co-marketing relationship with EMSi, Inc., for
the delivery of INTACTA.CODE embedded solutions to the healthcare
marketplace. EMSi provides development tools to enable data
translation and interchange among disparate systems. Their client base
includes SafeCo, Xcare, Blue Cross/Blue Shield of Massachusetts, and
HealthPlus PHSP of Brooklyn.
32
o Investigative Solutions Inc. We have a marketing arrangement with
I.S.I., which is comprised of former and retired law enforcement
officers from the FBI and from state and local law enforcement
authorities, for the introduction of our technology to the public
sector including law enforcement agencies.
o Sanyo Semiconductor Corporation. In January 2002, we entered into a
memorandum of understanding with Sanyo and Imagis Technologies, Inc.
for the formation of a business alliance aimed at integrating systems
and technologies to develop, manufacture and market security-based
products and systems.
RESEARCH AND DEVELOPMENT
Our research and development efforts are conducted at our Israel subsidiary
and at our U.S. headquarters. At our Israel facility we engage in demonstrations
and feasibility tests of our software products and technology for prospective
customers and in customizing or configuring our technology to a customer's
specific application or product. At our U.S. headquarters we perform certain
feasibility testing of potential applications and non-complex adaptation of our
technology, as well as provide a liaison between our existing and prospective
clients and our research and development team in Israel.
Our research and development groups work closely with representatives of
prospective customers in order to assure optimal performance of our technology
for the customer's specific application or product. We intend to engage in
further research efforts to refine and enhance our technology and develop
additional software products based on our technology for commercial marketing
and distribution.
For our fiscal years 1998, 1999 and 2000 and for the nine months ended
September 30, 2001, our research and development expenses were $903,500,
$1,047,400, $1,133,000 and 950,000, respectively representing 29.6%, 27.1%,
22.5% and 32.6%, respectively, of our aggregate operating expenses for each of
those periods.
INVENTORY AND DISTRIBUTION
Our software products and technology are securely maintained on our
computer servers and may be distributed through our website and certain
participating websites in an electronic format. We do not engage in any
manufacturing or product packaging nor do we maintain physical inventory of our
software products. Licensees receive our software product or technology and
related documentation through a download sequence directly to their computer
from our website.
COMPETITION
The market for digital communication and data management applications and
solutions is characterized by intense competition and rapidly changing business
conditions, customer requirements and technologies. We believe that the primary
competitive factors for technologies and software products addressing secure
compression, storage and transmission of data are price, functionality and
compatibility, adaptability to evolving products, performance, timelines of
enhancements and customer support.
Our core technology and related products integrate several features
including encryption, compression and error-correction which extend the value of
such technology and products beyond traditional bar codes and provide
value-added communication applications not necessarily available from encryption
software providers. Consequently, while we may compete in the data encryption
sector with companies such as RSA Security Inc., Certicom Corp. and Checkpoint
Systems Inc. and companies in the
33
digital communications sector such as Symantec Corp. and Bsquare Corporation, as
well as smaller development companies, many of whom are well established
companies with reputations for success in the development, licensing and sale of
their products and technology that have substantially greater financial,
technical, personnel and other resources than we do, management believes that
there is no direct competitor that currently offers products with the unique
characteristics and capabilities provided by our technology and software
products. However, as a result of our business transition from facsimile based
products, our recent commercial development of products and our limited
marketing resources, we have not established a meaningful market share for our
products and technology. Moreover, to the extent that other companies develop
functionally equivalent or superior products or technologies to INTACTA.CODE,
our technology could become obsolete or less marketable. Our ability to compete,
therefore, will depend on our ability to successfully market and continually
enhance our software products and technology.
INTELLECTUAL PROPERTY
Our success is dependent upon our ability to protect our intellectual
property rights. We rely principally on a combination of patent, copyright and
trademark registrations and trade secrets and non-disclosure agreements to
establish and maintain our intellectual property rights. We hold the following
five Israel patents and two United States patents, with corresponding foreign
patents in Canada, Europe, Australia and South Africa, as well as the following
patent applications pending registration:
Description of Registered Patents Patent No. Expiration Date
--------------------------------- ---------- ---------------
Process for making printed matter and matter obtained Israel #96118 October 25, 2010
by said process
Process and device for authenticating documents Israel #96969 January 11, 2011
Process and apparatus for transmitting messages Israel #96973 January 16, 2011
Process for transmitting and/or storing information Israel #103755 November 15, 2012
Process and apparatus for transmitting and/or storing Israel #105493 April 22, 2013
compressed information
Graphic matter and process and apparatus for producing, U.S. #5,313,564 July 10, 2011
transmitting and reading the same
Apparatus and method for storing and transmitting data U.S. #5,790,640 July 21, 2016
between a computer, a facsimile machine and a telephone
network
Country Filed/ Corresponding
Description of Pending Patents Application No. Applications
------------------------------ --------------- ------------
Process for transmitting and/or storing information Japan / 5-285375
Process for transmitting, receiving and/or storing Israel / 124152 Japan, Canada,
information France, Germany
and United Kingdom
34
As part of our operating procedures, we generally enter into intellectual
property rights, confidentiality and nondisclosure agreements with each of our
key employees and consultants and limit access to and distribution of our
technology and related documentation and information. Our confidentiality and
non-disclosure agreements include provisions with regard to our maintaining
ownership of technological developments.
Notwithstanding the precautions we take, third parties may copy or obtain
and use information that we regard as proprietary without our authorization or
independently develop technologies similar or superior to our technology. Other
parties may breach confidentiality agreements and other protective contracts we
have entered into. We may not become aware of, or have adequate remedies, in the
event a breach or unauthorized use occurs. Policing unauthorized use of our
technology is difficult, particularly because the global nature of the
electronic communications market makes it difficult to control the final
destination or security of software or other data transmissions. Furthermore,
the laws of other jurisdictions may afford little or no protection of our
intellectual property rights. Our business, financial condition and operating
results could be adversely affected if we are unable to protect our intellectual
property rights.
There is a risk that our technology may infringe upon the proprietary
rights of third parties. In addition, whether or not our technology infringes on
proprietary rights of third parties, infringement or invalidity claims may be
asserted or prosecuted against us and we could incur significant expense in
defending them. If any claims or actions are asserted against us, we may be
required to modify our technology or seek licenses for these intellectual
property rights. We may not be able to modify our technology or obtain licenses
on commercially reasonable terms, in a timely manner or at all. Our failure to
do so could adversely affect our business.
EMPLOYEES
As of the date of this prospectus, we employed a total of 16 employees. Of
such employees, 11 are full time and 5 are part-time, including 9 in research
and development, 2 in marketing and sales and 5 in administration. If the need
arises for additional research and development employees and we are unable to
hire qualified employees in a timely manner, we may outsource non-critical
research and development projects to third parties. None of our employees are
represented by a union or covered by collective bargaining agreements. We
believe that our relations with our employees are good.
FACILITIES
Our principal administrative and marketing facility is located in Atlanta,
Georgia and consists of approximately 4,000 square feet of office space pursuant
to a lease that expires in February 2006. We also conduct a limited amount of
research and development activities at this facility.
Our principal research and development facility is located in Beer Sheva,
Israel and consists of approximately 2,300 square feet pursuant to a lease that
expires in July 2005. We believe that our current administrative, marketing and
research facilities are adequate for our planned future operations.
LEGAL PROCEEDINGS
In November 2001, Datastrip International Limited, an Ireland company,
filed a complaint in the United States District Court for the Northern District
of Georgia against Intacta alleging patent infringement by Intacta. Datastrip
claims that our INTACTA.CODE technology and its production, use, marketing and
sales infringes upon certain bar-code technology claimed by a patent purported
to be
35
owned by Datastrip. In addition to preliminary and permanent injunctions sought
by Datastrip against Intacta from further alleged infringement of its patent,
Datastrip seeks an unstated amount of monetary damages equal to three times the
amount the court would deem sufficient to compensate Datastrip for the alleged
infringement.
Intacta believes that Datastrip's claims are without merit and intends to
vigorously defend this lawsuit. We have filed a counterclaim against Datastrip
seeking, among other things, preliminary and permanent injunctive relief,
declaratory judgments as to the invalidity and unenforceability of Datastrip's
purported patent and its claim of infringement against Intacta, as well as
monetary damages, reasonable attorney's fees and litigation expenses.
Since this lawsuit is in an early stage, however, we cannot predict the
outcome and cannot assure you that it will be resolved in our favor or that an
outcome of any further litigation or settlement would not have a material
adverse effect on our operations or financial condition.
Other than the proceeding noted above we are not aware of any other pending
or threatened litigation.
36
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are:
NAME AGE POSITION
---- --- --------
Altaf S. Nazerali 48 Chairman of the Board
Charles C. Johnston 66 Vice Chairman of the Board
Noel R. Bambrough 63 President, Chief Executive Officer and Director
Graham E. Argott 38 Chief Financial Officer
Ross Wilmot 57 Director
Bernard F. Girma 54 Director
Altaf S. Nazerali has served as an executive officer and director of
Intacta since its inception in October 1997, most recently as Chairman of the
Board of Directors. Mr. Nazerali currently serves in the following capacities of
other publicly held companies:
o Chief Executive Officer (since November 1995), President and Director
(each from October 1995 to present) of Multivision Communications Corp, the
operator of MMDS TV systems in Bolivia; and
o Director of Imagis Technologies Inc., formerly Colloquium Capital
Corp. (since July 1998), a technology company that develops and markets
biometric and imaging software to law enforcement, gaming and security sectors.
Mr. Nazerali is also an executive officer of Valor Invest Limited, a money
manager and financial advisor to high net worth institutional investors; the
President and director of Pensbreigh Holdings Ltd., an independent contractor
that provides various corporate and consulting services; and President and a
director of International Portfolio Management Inc., a private holding company
that provides corporate finance and other management services to private and
public companies. From November 1994 to October 1995, Mr. Nazerali served as
Chief Executive Officer and President of Canbras Communications Corp., an
operator of pay television and telephone systems in Brazil.
Charles C. Johnston currently serves as Vice Chairman of the Board of
Directors of Intacta. Mr. Johnston served as Chairman of each of AFD
Technologies Inc., a manufacturer of fuel additives, J&C Resources, LLC, a
business management and investment company, and UltraClenz Corporation, a
manufacturer of touch-free soap dispensers and hand-wash monitoring systems,
since 1992. In 1969, Mr. Johnston founded ISI Systems, Inc. ("ISI"), a developer
of software systems and related services. Mr. Johnston was Chief Executive
Officer of ISI when it went public on the American Stock Exchange in 1987. ISI
was subsequently acquired by Teleglobe Corporation of Montreal, Canada in 1989.
Mr. Johnston continued to serve as Chief Executive Officer of ISI until 1992.
Mr. Johnston currently serves as the chairman of the Board of Ventex Technology,
Inc. and as a member of the board of directors of each of the following
companies: Bitwise Designs, Inc., Internet Commerce Corporation, Hydron
37
Technologies, and McData Corporation. He also serves as a Trustee on the
President's Advisory Council for the Worcester Polytechnic Institute, and as a
Trustee for the Institute of Psychiatric Research at the University of
Pennsylvania.
Noel R. Bambrough has served as an executive officer and a director of
Intacta since April 1, 1999. Currently, Mr. Bambrough serves as the President
and Chief Executive Officer of Intacta. From November 1998 through April 1999,
Mr. Bambrough served as a consultant to Hunt Power Corporation, a Texas-based
utility company where he was responsible for developing a business plan for the
launch of telephone, internet and cable television service to a mixed
residential and industrial development owned by Hunt's real estate subsidiary.
From April 1995 through November 1998, Mr. Bambrough was Executive
Vice-President and Chief Operating Officer of Triax Telecommunications Company
L.L.C. From July 1993 to April 1995, he served as Senior Vice-President of Shaw
Communications, Inc., a major cable television corporation. In January 1993, Mr.
Bambrough was appointed Interim CEO of Microcell Telecommunications, Inc., a PCS
service provider, and served until July 1993. Mr. Bambrough continues to serve
as a member of the Board of Directors of Microcell. From 1984 until its
acquisition by Shaw Communications, Inc. in January 1993, Mr. Bambrough served
as President and Chief Executive Officer of Cablecasting Ltd.
Graham E. Argott was appointed Chief Financial Officer of Intacta as of May
31, 2001, and has been with Intacta since October 2000. From February to
September 2000, Mr. Argott served as a consultant to Rodeer Systems, an
e-commerce medical transcription and data management company. In September 1997
he joined Preferred Networks Inc., a wireless communications company as
Corporate Controller and Director of Information Technology. In July 1998 Mr.
Argott was appointed Vice President - Finance of Preferred Networks' subsidiary,
EPS Wireless Inc., a device remanufacturing and distribution company, and served
in that position until the acquisition of EPS Wireless by Celestica Corporation
in December 1999. Thereafter, Mr. Argott served as interim General Manager of
Celestica. From April 1994 through September 1997, Mr. Argott served as
Corporate Controller of MRC Group, a medical transcription and records company.
Mr. Argott is a certified public accountant with more than fifteen years of
finance and accounting experience, including twelve years in the technology and
communications industries.
Ross Wilmot served as an executive officer of Intacta from its inception
through May 31, 2001. Mr. Wilmot has also served as a director of Intacta since
its inception in October 1997. Mr. Wilmot is a chartered accountant and has
provided financial management services as an independent consultant to public
companies since August 1991. He has special expertise in international
operations and high tech start-ups, and has completed numerous business
valuations and acquisitions in this sector. Mr. Wilmot is also experienced in
public company reporting practices in both the United States and Canada. Mr.
Wilmot currently serves in the following capacities of other publicly held
operating companies:
o Vice President, Finance and director of Multivision
Communications Corp. (since August 1995);
o Vice President, Finance of CTF Technologies, Inc. (since July
1996);
o Chief Financial Officer of Imagis Technologies, Inc. (since
February 1999);
o Vice President, Finance and director of Botex Industries Corp., a
manufacturer of plastic materials (since June 1996); and
o President and director of Plata Minerals Corp. (since April
1999).
38
Mr. Wilmot is also an officer and director of the following non-operating
public companies: Breckenridge Resources, Ltd., Harambee Mining Corp., Orko Gold
Ltd. and Paloma Ventures Ltd.
Bernard F. Girma currently serves as a director of Intacta. Mr. Girma is a
founder and the President of DigiTech Strategy a recent start-up company to
provide digital imaging management consulting. Prior, thereto, from September
1996 to January 2000, Mr. Girma was Chief Executive Officer of Vivid Image
Technology, Inc., a developer of imaging controllers for color printers. In
November 1995, Mr. Girma, together with several other individuals acquired a
controlling interest in Newgen Systems, a manufacturer of digital imaging
products, at which Mr. Girma served as Chief Executive Officer until the merger
of Newgen Systems with Imaging Technologies, Inc., in August 1996. From 1991 to
1995, Mr. Girma served as Vice President and General Manager of Calcomp
Corporation, a subsidiary of Lockheed-Martin Corporation. Mr. Girma currently
serves on the board of directors of BrightCube Inc., a public company as well as
two privately held companies involved in printing and publishing and digital
photo imaging, respectively. Mr. Girma is the co-founder of the Digital Printing
and Imaging Association and served on its board of directors for nine years
including as Chairman from 1996 to 1997.
Each director serves until the next annual meeting of stockholders or until
his successor is duly elected and qualified. The executive officers serve at the
discretion of the board. There are no family relationships among any of our
directors and executive officers.
BOARD COMMITTEES
We have established a compensation committee and an audit committee each of
which is currently composed of Messrs. Johnston, Girma and Nazerali. The
function of the compensation committee is to evaluate and determine the
compensation of our executive officers and employees. The function of the audit
committee is to review and monitor our corporate financial reporting, external
audits and internal control functions. In addition, the audit committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, our independent auditors.
SPECIAL ADVISORS
We have entered into an agreement with Martin Singer whereby Mr. Singer
acts, on an independent consultant basis, as an advisor to our board of
directors. Mr. Singer is currently the President and CEO of SAFCO Technologies,
Inc. Prior thereto, from 1990 to 1997, Mr. Singer held executive office
positions with various divisions of Motorola, Inc., ultimately as Vice President
and General Manager of its Wireless Access Business Development division. Mr.
Singer has also held management positions with Tellabs, Inc. and AT&T. We have
granted Mr. Singer options to purchase an aggregate of 50,000 shares of our
common stock, which options vest in one-third increments on each anniversary of
the date of grant and we have agreed to pay Mr. Singer a fee of 2% of revenues
generated from any sales, licensing or royalty arrangements generated or
introduced to Intacta by Mr. Singer.
Yechiel Sharabi, Yehoshua Sagi and Amnon Shai, each a former director of
Intacta, and Menachem Tassa, formerly the Executive Vice President - Research
and Development, continue to serve as advisors to Intacta pursuant to oral
arrangements. Each of Messrs. Sharabi, Sagi and Shai has been granted options,
under our 1998 stock option plan, to purchase 50,000 shares of our common stock
at a price of $.75 per share and Mr. Tassa has been granted options to purchase
150,000 shares of our common stock, also at a price of $.75 per share. All of
the options granted to Messrs. Sharabi, Sagi, Shai and Tassa are fully vested.
39
DIRECTOR COMPENSATION
We do not currently pay any cash compensation to directors for serving on
our board, but we do reimburse directors for out-of-pocket expenses incurred for
services rendered as members of the board including, but not limited to,
attending board meetings.
Each of our directors is eligible to be granted options or other
stock-based awards under either of our 1998 stock option plan or our 2000 stock
incentive plan.
We have entered into an arrangement with Charles C. Johnston, our Vice
Chairman, which provides for the grant to Mr. Johnston of options to purchase an
aggregate of 25,000 shares of common stock, at the then current market price of
our common stock, on each successive anniversary of Mr. Johnston's election to
our board of directors, provided that, upon such anniversary date, Mr. Johnston
is then a member of our board of directors.
In January 2001, we entered into an agreement with Bernard F. Girma
pursuant to which we agreed to pay Mr. Girma a commission of ten percent (10%)
of all revenues, net of certain taxes, costs and fees, received by Intacta from
clients introduced by Mr. Girma. The agreement also provides for our reimbursing
Mr. Girma for certain expenses he incurs in connection with the promotion of
Intacta to prospective clients. To date, no commissions have been paid to Mr.
Girma in accordance with this agreement.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to our chief executive
officer and two other executive officers whose compensation exceeded $100,000
for the years indicated. No other executive officer of Intacta earned a salary
and bonus for the fiscal year ended December 31, 2000 in excess of $100,000.
None of the executive officers set forth below received compensation in the form
of a bonus during the years presented in the table below.
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------
LONG TERM COMPENSATION ALL
SECURITIES UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) OPTION/SARS (#) COMPENSATION
-----------------------------------------------------------------------------------------
Altaf S. Nazerali, 2000 100,000 -- --
Chairman of the Board of 1999 100,000 150,000 --
Directors 1998 25,000 -- --
-----------------------------------------------------------------------------------------
Noel Bambrough 2000 250,000 -- --
President and Chief Executive 1999 154,165 200,000 --
Officer 1998 -- -- --
-----------------------------------------------------------------------------------------
Menachem Tassa, 2000 120,000 -- --
Executive Vice President, 1999 120,000 150,000 --
Research and Development 1998 170,000 -- --
-----------------------------------------------------------------------------------------
o Mr. Nazerali served as our President and Chief Executive Officer for
each of the years presented in the table and through May 31, 2001. Mr. Nazerali
currently serves as our Chairman of the Board of Directors. The compensation to
Mr. Nazerali in each of 2000, 1999 and 1998 was paid directly to Mr. Nazerali
from Pensbreigh Holdings Ltd. and represents a portion of the monthly consulting
fee we pay to Pensbreigh. These amounts exclude $88,000, $94,000 and $61,000
paid for administrative services provided to Intacta during 2000, 1999 and 1998
by International Portfolio Management Inc., of
40
which Mr. Nazerali is a stockholder and President and a director. See
"Employment and Consulting Agreements" and "Certain Transactions."
o Mr. Bambrough became an executive officer effective as of April 1,
1999 and served as our Executive Vice President and Chief Operating Officer
through May 31, 2001. Mr. Bambrough currently serves as our President and Chief
Executive Officer. The compensation to Mr. Bambrough in 1999 included an
aggregate of $41,665 which was accrued and unpaid. We have since repaid such
accrued salary from a portion of the proceeds of our October 2000 private
placement.
o Mr. Tassa resigned his position as our Executive Vice President,
Research and Development, effective as of July 1, 2001. Mr. Tassa continued to
serve Intacta as a consultant through July 31, 2001. The compensation to Mr.
Tassa for each of 2000, 1999 and 1998 was paid to Mr. Tassa pursuant to a
consulting arrangement. See "Certain Transactions."
OPTION GRANTS IN THE LAST FISCAL YEAR
We did not grant any options to the executive officers set forth in the
above compensation table during the fiscal year ended December 31, 2000.
OPTION EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 2000
The executive officers set forth on the compensation table above did not
exercise any options during the fiscal year ended December 31, 2000. The
following table sets forth information concerning the number of options owned by
each of those executive officers and the value of any in-the-money unexercised
options held at December 31, 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT DECEMBER 31, MONEY OPTIONS AT
2000 DECEMBER 31, 2000
SHARES
ACQUIRED
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
Altaf S. Nazerali -- -- 150,000 -- -- --
Noel Bambrough -- -- 200,000 -- -- --
Menachem Tassa -- -- 100,000 -- -- --
o As of December 31, 2000, none of the unexercised options held by the
executive officers set forth in the table above were in-the-money.
o On June 1, 2001, the options held by Messrs. Nazerali and Tassa, none
of which had been exercised, terminated by their terms. We have since granted
the same number of new options to Messrs. Nazerali and Tassa under our 1998
stock option plan.
EMPLOYMENT AND CONSULTING AGREEMENTS
We entered into a consulting agreement with Pensbreigh Holdings Ltd., an
independent contractor engaged in the business of providing various corporate
and consulting services to businesses, of which Mr. Nazerali is a stockholder
and officer, dated as of March 1, 1999. Under the agreement,
41
Pensbreigh provides us with the services of Mr. Nazerali and Arie Halpern, an
affiliate of Intacta and the controlling stockholder of Corsa. During the
initial term of the agreement, we agreed to pay Pensbreigh a monthly fee of
$16,666. Effective June 1, 2001, the monthly fee we paid to Pensbreigh under the
consulting agreement was reduced to $12,500. This agreement was extended, in
accordance with its terms, for a one-year period through October 1, 2002, with a
monthly fee of $12,500. In January 2002, Pensbreigh agreed to defer
approximately $4,167 of its monthly fee payments until Intacta is capable of
generating sufficient revenues to enable full payment of the monthly fees. Since
Mr. Nazerali does not have an employment contract with us, he is therefore not
entitled to participate in any benefit plans to which regular employees are
eligible.
We entered into an employment agreement with Noel Bambrough in March 1999,
which provided for a salary of $12,500 per month from April 1, 1999 through July
31, 1999 and a salary of $20,833 per month thereafter. However, we had paid Mr.
Bambrough only $12,500 per month through June 30, 2000. The balance of accrued
but unpaid salary of approximately $91,633 was paid to Mr. Bambrough from a
portion of the proceeds of our October 2000 private placement. Since June 1,
2000, Mr. Bambrough has been receiving $20,833 per month. In October 2001, in
connection with our cost-reduction efforts, Mr. Bambrough agreed to defer
payment of approximately 40% of his monthly salary until we are able to generate
sufficient revenue to enable full payment of his salary. Mr. Bambrough is also
eligible for a bonus not to exceed $100,000 per year based on the achievement of
specific agreed upon business goals and targets. Under the agreement, we granted
Mr. Bambrough an option, under our 1998 stock option plan, to purchase 200,000
shares of common stock at a price of $4.00 per share. In addition, subject to
our board of directors' approval, we must issue to Mr. Bambrough options to
purchase a number of shares at least equal to 10% of the aggregate number of
options available for grant under any subsequent option plan. Accordingly, as of
June 1, 2001, we have granted Mr. Bambrough an option, under our 2000 stock
incentive plan, to purchase 240,000 shares of common stock at a price of $.75
per share.
STOCK OPTION PLAN
On June 1, 1998, our board of directors approved the creation of our 1998
stock option plan. Under our 1998 stock option plan, our board of directors may
grant incentive and non-qualified options to acquire up to a total of 1,667,100
shares of common stock to our directors, officers, employees and consultants. As
of the date of this prospectus, options to acquire 1,300,000 shares at a price
of $.75 per share were outstanding.
On July 21, 2000, our board of directors adopted our 2000 stock incentive
plan, which was subsequently approved by our stockholders at our annual meeting
in May 2001. Our 2000 stock incentive plan provides for the grant of any or all
of the following types of awards:
o stock options, which may be either incentive stock options or
non-qualified stock options;
o restricted stock;
o deferred stock; and
o other stock based awards.
A total of 2,400,000 shares of common stock have been reserved for
distribution under our 2000 stock incentive plan. As of the date of this
prospectus, options to acquire 941,750 shares at a price of $.75 per share were
outstanding.
42
Of the options granted under our 1998 stock option plan, options to
purchase an aggregate of 425,000 shares have been granted to the following
executive officers and directors:
o options to purchase 350,000 shares were granted to Altaf Nazerali, our
Chairman of the board of directors; and
o options to purchase 75,000 shares were granted to Ross Wilmot, a
member of our board of directors.
An aggregate of 250,000 options granted to Messrs. Nazerali and Wilmot are
fully vested and the balance of options will vest in one-third increments
annually beginning on June 1, 2002.
Of the options granted under our 2000 stock incentive plan, options to
purchase an aggregate of 690,000 shares have been granted to the following
executive officers and directors:
o options to purchase 440,000 shares were granted to Noel Bambrough, our
President and Chief Executive Officer and a member of our board of directors;
o options to purchase 100,000 shares were granted to Charles C.
Johnston, our Vice Chairman of the board of directors;
o options to purchase 75,000 shares were granted to Bernard F. Girma, a
member of our board of directors; and
o options to purchase 75,000 shares were granted to Graham Argott, our
Chief Financial Officer.
An aggregate of 144,000 options granted to Mr. Bambrough are fully vested
and the remaining options to purchase 546,000 shares will vest incrementally
over the next three years.
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
The Nevada Private Corporation Law provides for the indemnification of
directors, officers, agents or employees for expenses including attorneys' fees,
judgments and fines incurred in connection with any civil or criminal action,
suit or proceeding to which such person was or is made a party, provided that
such person acted in good faith and reasonably believed that his actions were in
the best interests of the corporation and, with respect to a criminal action,
had no reasonable cause to believe that his conduct was unlawful.
Nevada law also provides for the indemnification of directors, officers,
agents or employees for some, but not all, expenses incurred in connection with
any action or suit by or in the right of the corporation to procure a judgment
in its favor, provided that such person acted in good faith and reasonably
believed that his actions were in the best interests of the corporation.
Under Nevada law, discretionary indemnification by a corporation may be
made only as authorized by (i) the stockholders; (ii) a majority vote of a
quorum of directors that were not party to the action, suit or proceeding; or
(iii) independent legal counsel in a written opinion if so ordered by a majority
of a quorum of directors not party to the action, suit or proceeding or in the
event that a quorum of such directors cannot be obtained.
43
Nevada law allows corporations to provide, either in their articles,
by-laws or by agreement, for the mandatory payment of expenses of officers and
directors, as they are incurred in defending a criminal or civil action, suit or
proceeding in advance of a final disposition, provided that the officer or
director submits an undertaking to repay any advances if a court of competent
jurisdiction ultimately determines that the officer or director was not entitled
to be indemnified by the corporation.
Our articles of incorporation provide, to the fullest extent permitted by
Nevada law, for the mandatory indemnification of our officers and directors for
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement incurred in connection with a civil or criminal action, suit or
proceeding to which the officer or director is or was or is threatened to be
made a party.
Our by-laws further provide for the contractual right to officers and
directors to receive mandatory payment of expenses as they are incurred in
connection with defending a civil a criminal action, suit or proceeding in
advance of final disposition provided that the officer or director provides a
written undertaking to repay the advances in the event a court of competent
jurisdiction ultimately determines that such officer or director is not entitled
to be indemnified by us.
44
PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the beneficial
ownership of our outstanding common stock as the date of this prospectus for:
o each person or group that we know owns beneficially more than 5% of our
common stock;
o each of our directors and named executive officers individually; and
o all directors and executive officers as a group.
We believe that all persons named in the table have sole voting and
investment power with respect to all shares of common stock beneficially owned
by them except as noted.
A person is deemed to be the beneficial owner of securities that can be
acquired by that person within 60 days from the date of this prospectus upon the
exercise of options, warrants or convertible securities. Each beneficial owner's
percentage ownership is determined by assuming that options, warrants or
convertible securities that are held by that person, but not those held by any
other person, and which are exercisable within 60 days of this prospectus have
been exercised and converted. The information presented in the following table
assumes approximately 20,345,924 shares of common stock outstanding before any
consideration is given to outstanding options, warrants or convertible
securities.
Unless otherwise noted below, the address for each named individual or
group is in care of Intacta Technologies Inc., 945 East Paces Ferry Road, N.E.,
Suite 1445, Atlanta, Georgia 30326-1372.
NAME AND ADDRESS AMOUNT AND NATURE OF OUTSTANDING STOCK
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP BENEFICIALLY OWNED
------------------- -------------------- ------------------
Corsa S.A. Holdings
Arie Halpern................. 4,000,000 19.7%
Altaf S. Nazerali............... 278,000 1.4
Noel R. Bambrough............... 203,000 *
Charles C. Johnston............. 183,332 *
Ross Wilmot..................... 50,000 *
Bernard F. Girma................ --- ---
All officers and directors as
a group (6 persons)............. 714,332 3.4
--------------------
* Indicates a percentage beneficial ownership of less than 1% of the shares
outstanding.
Corsa S.A. Holdings is a Luxembourg holding company with an address at 8
rue Notre Dame, L-2240 Grand Duchy, Luxembourg, of which 90% is controlled by
Mr. Arie Halpern and 10% is controlled by Shira Advising, Communication and
Investments Ltd., a company controlled by Mr. Yechiel Y. Sharabi, a former
director of Intacta, and his wife Hadassa Y. Sharabi. Mr. Halpern is also a
director of Corsa S.A. Holdings and exercises sole voting and dispositive power
over the shares held by Corsa S.A. Holdings. This amount does not include
150,000 shares underlying currently exercisable options held by Mr. Halpern.
45
Mr. Nazerali's beneficially owned shares include
o 128,000 shares held by Mr. Nazerali; and
o 150,000 shares underlying currently exercisable options.
Mr. Nazerali's beneficially owned shares do not include:
o 200,000 shares underlying options which are not currently exercisable;
and
o an aggregate of 282,090 shares and 244,590 shares underlying currently
exercisable warrants held by Valor Invest Limited.
Mr. Nazerali is a director of Valor but has entered into an agreement with
the principal owner of Valor not to exercise voting or dispositive power with
respect to securities of Intacta held by Valor.
Mr. Bambrough's beneficially owned shares include:
o 3,000 shares held by Mr. Bambrough; and
o 200,000 shares underlying currently exercisable options.
Mr. Bambrough's beneficially owned shares do not include an aggregate of
240,000 shares underlying options which are not currently exercisable.
Mr. Johnston's address is c/o Ventex Technologies, 7830 Byron Drive, Suite
10, Riviera Beach, Florida 33404. Mr. Johnson's beneficially owned shares
include:
o 66,666 shares held by J & C Resources, LLC, over which Mr. Johnson
exercises sole voting and dispositive power; and
o 116,666 shares underlying currently exercisable warrants held by J & C
Resources, LLC, over which Mr. Johnston exercises sole voting and
dispositive power.
Mr. Johnston's beneficially owned shares do not include 100,000 shares
underlying options which are not currently exercisable.
Mr. Wilmot's beneficially owned shares include 50,000 shares underlying
currently exercisable options, but exclude 25,000 shares underlying options
which are not currently exercisable.
Mr. Girma's address is c/o Digitech Strategy, 26072 Spur Branch Lane,
Laguna Hills, California 92653. Mr. Girma is the beneficial owner of 75,000
shares underlying options which are not currently exercisable.
The beneficially owned shares of our officers and directors as a group
includes:
o 197,666 shares of our common stock;
o 400,000 shares of our common stock underlying currently exercisable
options; and
o 116,666 shares of our common stock underlying currently exercisable
warrants.
46
The beneficially owned shares of our officers and directors as a group does
not include:
o an aggregate of 715,000 shares underlying options which are not
currently exercisable; and
o 282,090 shares and 244,590 shares underlying currently exercisable
warrants held by Valor.
47
CERTAIN TRANSACTIONS
On May 31, 1998, we consummated an exchange agreement with Corsa S.A.
Holdings, an entity organized under the laws of Luxembourg. Corsa owned 69% of
our Common Stock upon closing of the exchange agreement. Corsa is 90% controlled
by Mr. Arie Halpern and 10% controlled by Shira Advising, Communication and
Investment Ltd., an Israeli corporation controlled by Yechiel Y. Sharabi, a
former director of Intacta, and Hadassa Y. Sharabi, Mr. Sharabi's wife. Under
the exchange agreement, Corsa transferred 100% of the outstanding shares of
Intacta Delaware Inc. and 99% of the outstanding shares of Intacta Labs Ltd. to
us. In exchange, we issued 11,486,000 shares of Common Stock to Corsa. Corsa
subsequently sold 7,486,000 of those shares in private transactions, resulting
in a decrease of Corsa's ownership to 4,000,000 shares.
Under the exchange agreement, we agreed with Corsa that our board of
directors would be increased from three to seven persons, of which Corsa had the
right to appoint five of the initial seven directors. Of those directors,
Messrs. Shai, Sagi and Tassa were designated by Corsa. Under the exchange
agreement, we agreed to do the following:
o enter into a stockholders' agreement (which terminated on June 1,
2000) governing the election of directors;
o implement an equity incentive plan; and
o raise $5,000,000 through the sale of our common stock.
To date we have implemented an equity incentive plan and we have raised
approximately $11,450,000 through (i) the sale of 1,000,000 shares of our common
stock to MFC Merchant Bank SA in December 1998 for a total of $4,000,000, (ii)
the conversion in June 1999 of approximately $952,000 of outstanding
non-interest-bearing loans made to us by Valor Invest Limited, an affiliate of
our Chairman of the Board, into 238,000 shares of our common stock (described
below) and (iii) the sale of 2,333,310 shares of our common stock included in
units sold in our private placement which closed in October 2000, for cash and
the conversion of substantially all of the principal and accrued interest on
bridge notes issued in our bridge financing in May and June 2000.
From December 1997 through November 1998, Valor made non-interest-bearing
loans to us in the aggregate amount of $2,172,000. During 1998 and 1999, we
repaid a total of $1,131,000 of these loans. On June 30, 1999, we issued 238,000
shares of common stock to Valor in repayment of $952,000 of outstanding loans,
at the rate of $4.00 per share, leaving a balance of $89,000 owed to Valor.
During the first half of 2000, Valor made an additional $704,500 of
non-interest-bearing loans to us, of which $312,000 was subsequently repaid. In
May 2000, Valor converted $250,000 of the unpaid balance of these loans into 2.5
units, identical to the units issued in our bridge financing in May and June
2000 and subordinated the balance of such loans to our repayment of the
promissory notes we issued in our bridge financing. Thereafter, Valor converted
the principal amount of the notes included in the units acquired in May 2000 as
well as the balance of its subordinated loans into an aggregate of 160,483 units
in our private placement. Upon the closing of our private placement we paid
Valor the amount of interest that had accrued on the notes that Valor had
converted into units in the private placement.
During 1998, 1999 and 2000 we paid consulting, management and marketing
fees to some of our directors or stockholders and/or their affiliates in the
following amounts:
o Pensbreigh Holdings Ltd., of which Mr. Nazerali is President and a
stockholder, $25,000 during 1998, $200,000 during 1999 and $200,000
during 2000; and
48
o Menachem Tassa, our Executive Vice President, Research and Development
- $170,000 during 1998 (including accrued fees of $50,000), $120,000
during 1999 and $120,000 during 2000. Mr. Tassa subsequently resigned
his position of Executive Vice President, Research and Development,
effective July 1, 2001. Mr. Tassa continued to serve Intacta as a
consultant through July 31, 2001. Mr. Tassa currently serves as an
advisor to Intacta pursuant to an oral arrangement.
We paid approximately $61,000, $94,000 and $88,000 during 1998, 1999 and
2000, respectively, to International Portfolio Management Inc., in connection
with administrative services provided to us. Altaf S. Nazerali, our Chairman of
the Board, is the sole stockholder of International Portfolio Management Inc.,
Ross Wilmot, our director, is the Vice President, Finance of International
Portfolio Management Inc., and Sandra E. Buschau, our corporate secretary, is a
Vice President of International Portfolio Management Inc.
Valor Invest Limited, an affiliate of our Chairman of the Board,
participated in the offering of our private placement for which it received,
upon consummation of the private placement in October 2000, aggregate
commissions of approximately $194,460 and approximately 21,607 in-kind units,
which units were similar in all respects to the units sold in the private
placement.
49
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue 100,000,000 shares of common stock, $.0001 par
value per share.
As of the date of this prospectus, 20,345,924 shares of our common stock
were issued and outstanding and held of record by approximately 78 stockholders.
Holders of shares of our common stock are entitled to one vote per share on
all matters to be voted on by the stockholders. Subject to preferences of any
outstanding preferred stock, the holders of shares of common stock are entitled
to receive any dividends the board of directors declares out of funds legally
available for the payment of dividends. Upon our liquidation, dissolution or
winding up, the holders of shares of common stock are entitled to share all of
our assets remaining after payment of liabilities and after giving effect to the
liquidation preferences of any outstanding preferred stock. All outstanding
shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
We are authorized to issue 50,000,000 shares of preferred stock, $.0001 par
value per share. As of the date of this prospectus, no shares of preferred stock
were outstanding.
WARRANTS
We currently have an aggregate of 3,357,724 warrants outstanding, of which
an aggregate of 937,500 warrants were issued in connection with our bridge
financing in May and June 2000 and an aggregate of 2,420,224 were issued in
connection with our October 2000 private placement.
Each warrant entitles its holder to purchase one share of our common stock
at a price of $3.50, subject to adjustment in certain circumstances, described
below. The warrants issued in connection with the bridge financing may be
exercised until May 30, 2005 and the warrants issued in connection with the
private placement may be exercised until October 6, 2005, in each case unless
earlier redeemed by Intacta.
Each holder may exercise his warrant upon surrender of the warrant
certificate during the exercise period at our offices, with the exercise form on
the reverse side of the warrant certificate completed and executed as indicated,
accompanied by full payment of the exercise price in cash or by check payable to
Intacta for the number of warrants being exercised. In the event that the
exercise of a warrant results in the issuance of a fractional share, we will
round such fractional interest up to the nearest whole number. Warrant holders
do not have the rights or privileges of our stockholders. The exercise price and
number of shares of our common stock or other securities issuable on exercise of
the warrants are subject to adjustment in certain circumstances, including in
the event we:
o pay a dividend or make a distribution of our common stock;
o subdivide or combine our outstanding common stock;
o reclassify or change our outstanding common stock;
o consolidate or merge with another company and we are not the surviving
entity.
50
We may redeem the warrants in the event that (a) the closing sale price of
our common stock for a period of 20 consecutive trading days on the principal
market in which our common stock is then traded equals or exceeds 200% of the
then-effective exercise price of the warrants, and (b) the shares of our common
stock issuable upon exercise of the warrants are publicly tradeable pursuant to
a registration statement filed with, and declared effective by, the Securities
and Exchange Commission under the Securities Act.
All of the warrant shares underlying the foregoing warrants have previously
been registered for resale by the holders of the warrants.
REGISTRATION RIGHTS
In April 2001, we entered into an agreement with Corsa S.A. Holdings,
pursuant to which we agreed to file a registration statement, of which this
prospectus forms a part, for the public resale of up to 4,000,000 shares of our
common stock held by Corsa.
ANTI-TAKEOVER EFFECTS OF NEVADA LAW
Nevada law provides that any agreement providing for the merger,
consolidation or sale of all or substantially all of the assets of a corporation
be approved by the owners of at least the majority of the outstanding shares of
that corporation, unless a different vote is provided for in our Articles of
Incorporation. Our Articles of Incorporation do not provide for a super-majority
voting requirement in order to approve any such transactions. Nevada law also
gives appraisal rights for some mergers or exchanges. Under Nevada law, a
stockholder does not have the right to dissent with respect to:
o a sale of assets or reorganization, or
o any plan of merger or any plan of exchange, if the shares held by the
stockholder are part of a class of shares which are listed on a national
securities exchange or the Nasdaq National Market System, or are held of record
by not less than 2,000 stockholders, and the stockholder is not required to
accept for his shares any consideration other than shares of a corporation that,
immediately after the effective time of the merger or exchange, will be part of
a class of shares which are listed on a national securities exchange or the
Nasdaq National Market System, or are held of record by not less than 2,000
holders.
The Nevada Private Corporation Law also has three provisions designed to
deter take-over attempts:
Control Share Acquisition Provisions. Under Nevada law, when a person has
acquired or offers to acquire one-fifth, one-third or a majority of the stock of
a corporation, a stockholders meeting must be held after delivery of an
"offeror's" statement, at the offeror's expense, so that the stockholders of the
corporation can vote on whether the shares proposed to be acquired can exercise
voting rights. Except as otherwise provided in a corporation's articles of
incorporation, the approval of the majority of the outstanding stock not held by
the offeror is required so that the stock held by the offeror will have voting
rights. The control share acquisition provisions are applicable to any
acquisition of a controlling interest, unless the articles of incorporation or
by-laws of a corporation in effect on the tenth day following the acquisition of
a controlling interest by an acquiring person provides that the control share
acquisition provisions do not apply. We have not elected out of the control
share acquisition provisions of Nevada law.
Combination Moratorium Provision. Nevada law provides that a corporation
may not engage in any "combinations," which is broadly defined to include
mergers, sales and leases of assets, issuances of
51
securities and similar transactions with an "interested stockholder," which is
defined as the beneficial owner of 10% or more of the voting power of the
corporation, and affiliates of their associates for three years after an
interested stockholder's date of acquiring the shares, unless the combination or
the purchase of the shares by the interested stockholder is first approved by
the board of directors. After the initial three-year period, any combination
must still be approved by a majority of the voting power not beneficially owned
by the interested stockholder or the interested stockholder's affiliates or
associates, unless the aggregate amount of cash and the market value of the
consideration other than cash that could be received by stockholders as a result
of the combination is at least equal to the higher of the highest bid per share
of each class or series of shares, including the Common Stock, on the date of
the announcement of the combination or on the date the interested stockholder
acquired the shares, or for holders of preferred stock, the highest liquidation
value of the preferred stock.
Other Provisions. Under Nevada law, the selection of a period for achieving
corporate goals is the responsibility of the directors. In addition, the
directors and officers, in exercising their respective powers with a view to the
interest of the corporation may consider the interest of the corporation's
employees, suppliers, creditors and customers, the economy of the state and the
nation, the interests of the community and of society and the long-term, as well
as short-term, interests of the corporation and its stockholders, including the
possibility that those interests may be best served by the continued
independence of the corporation. The directors may also resist any change or
potential change of control of the corporation if the directors, by majority
vote of a quorum, determine that a change or potential change is opposed to or
not in the best interest of the corporation "upon consideration of the interests
of the corporation's stockholders," or for one of the other reasons described
above. The directors may also take action to protect the interests of the
corporation's stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Corporate Stock
Transfer, 3200 Cherry Creek Drive South, Denver, Colorado 80209.
SHARES ELIGIBLE FOR FUTURE SALE
We have 20,345,924 shares of our common stock issued and outstanding.
Approximately 12,358,920 of our outstanding shares are freely tradable without
restriction or further registration under the Securities Act.
All of the remaining approximately 7,987,004 of our outstanding shares of
common stock are restricted shares under the terms of the Securities Act,
however, 2,412,004 shares have been previously registered for resale and
4,000,000 shares are registered for resale under this prospectus. The balance of
restricted shares are not registered for resale, but have been held for more
than two years and are available for resale pursuant to Rule 144 promulgated
under the Securities Act.
In addition, up to 3,357,724 shares issuable upon exercise of warrants have
previously been registered for resale and, when sold, will become freely
tradable shares.
We have granted options to purchase an aggregate of 1,300,000 shares of
common stock under our 1998 stock option plan. All of the shares underlying
these options have previously been registered and, subject to the applicable
vesting requirements, upon exercise of these options the underlying shares may
be resold into the public market.
We have also granted options to purchase an aggregate of 941,750 shares of
common stock under our 2000 stock incentive plan.
52
Sales of substantial amounts of our common stock in the public market or
the perception that such sales may occur, could materially and adversely affect
prevailing market prices of our common stock and our ability to raise equity
capital in the future.
RULE 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
o 1% of the number of shares of our common stock then outstanding; or
o the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks, preceding the filing
of a notice on Form 144 with the SEC concerning that sale.
Sales under Rule 144 are also subject to specific manner-of-sale
provisions, notice requirements and to the availability of current public
information about us.
Under Rule 144(k) as currently in effect, a person who is not one of our
affiliates at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than one of our
affiliates, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted, Rule 144(k) shares may be sold
immediately upon completion of this offering.
SELLING STOCKHOLDER AND PLAN OF DISTRIBUTION
We have agreed to register the public offering of up to 4,000,000 shares
held by the selling stockholder listed below, under the Securities Act, and to
pay all expenses in connection with registering these shares. The shares may be
offered and sold pursuant to this prospectus by the selling stockholder. Arie
Halpern, a director and the principal stockholder of Corsa S.A. Holdings, the
selling stockholder, has been a director of Intacta Labs Ltd., a wholly-owned
subsidiary of Intacta, during the past three years. In addition, Yechiel
Sharabi, an indirect minority shareholder of Corsa S.A. Holdings, served as a
member of Intacta's Board from May 1998 through April 2001. Mr. Sharabi
continues to serve as a non-compensated advisor to the Board pursuant to an oral
arrangement. Other than the foregoing, neither the selling stockholder nor any
affiliate of the selling stockholder has held any position or office with us or
had any other material relationship with us. We will not receive any of the
proceeds from the sale of the shares by the selling stockholder. The table set
forth below is based upon information available to Intacta as of December 31,
2001 and provides the following information with respect to the selling
stockholder:
o the number of shares of common stock beneficially owned by the selling
stockholder;
o the number of shares to be sold by the selling stockholder; and
o the number of shares (as percentage of the class) to be beneficially
owed by such selling stockholder after the completion of the offering assuming
all shares included in this prospectus have been sold by the selling
stockholder.
The number of shares shown in the following table as being offered by the
selling stockholder does not include such presently indeterminate number of
additional shares of our common stock that may
53
be issuable as a result of stock splits, stock dividends and similar
transactions or, in the case of warrant shares, the operation of any
anti-dilution provisions. Pursuant to Rule 416 under the Securities Act,
however, those shares are included in the registration statement of which this
prospectus is a part.
The selling stockholder may sell any or all of its shares listed below from
time to time. Accordingly, we cannot estimate how many shares the selling
stockholder will own upon consummation of such sales. Also, the selling
stockholder may have sold, transferred or otherwise disposed of all or a portion
of its shares since the date on which the information was provided, in
transactions exempt from the registration requirements of the Securities Act.
Beneficial
Ownership of
Beneficial Ownership Shares to be Common Stock Percent
Selling Stockholders of Common Stock Sold After Offering of Class
------------------------------ -------------------- ------------ -------------- --------
Corsa S.A. Holdings........... 4,000,000 4,000,000 0 --
PLAN OF DISTRIBUTION
We are registering the shares of common stock offered under this prospectus
on behalf of the selling stockholder. As used herein, "selling stockholder"
includes donees, pledgees, distributees, transferees or other successors in
interest selling shares received from the selling stockholder after the date of
this prospectus. We will pay all expenses of registration of the shares offered
hereby, other than commissions, discounts and concessions of underwriters,
broker-dealers, dealers or agents. Brokerage commissions and similar selling
expenses, if any, attributable to the sale of the shares by the selling
stockholder will be borne by the selling stockholder. As described under "Use of
Proceeds" above, we will not receive any of the proceeds from the sale of shares
by the selling stockholder.
The shares to be sold by the selling stockholder may be offered and sold
from time to time as market conditions permit in the over-the-counter market, or
otherwise, at prices and terms then prevailing or at prices related to the
then-current market price, or in negotiated transactions. These shares may be
sold, without limitation, by:
o a block trade in which a broker or dealer, so engaged will attempt to
sell the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by that broker
or dealer for its account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
o privately negotiated transactions between sellers and purchasers
without a broker/dealer;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholder may effect these transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. These broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholder and/or the
purchasers of shares for whom these broker-dealers may act as agents or to whom
they sell as
54
principal, or both (which compensation as to a particular broker-dealer might be
in excess of customary commissions).
The selling stockholder and any broker-dealers that act in connection with
sales of the shares might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act of 1933. Consequently, any commissions
received by these broker-dealers and any profit on the resale of the shares sold
by them while acting as principals might be deemed to be underwriting discounts
or commissions under the Securities Act of 1933.
Because the selling stockholder may be deemed to be an "underwriter" within
the meaning of Section 2(11) of the Securities Act of 1933, the selling
stockholder will be subject to the prospectus delivery requirements of the
Securities Act of 1933. We have informed the selling stockholder that the
anti-manipulative provisions of Regulation M under the Securities Exchange Act
of 1934 may apply to it.
The selling stockholder also may resell all or a portion of the shares in
reliance upon Rule 144 under the Securities Act of 1933, provided that the
selling stockholder meets the criteria and conforms to the requirements of that
Rule.
Upon being notified by the selling stockholder that it has entered into any
material arrangement with a broker-dealer for the sale of the shares through a
block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, we will file a supplement to this
prospectus, if required, pursuant to Rule 424(b) under the Securities Act of
1933, disclosing:
o the name of the selling stockholder and the participating
broker-dealers;
o the number of shares involved;
o the price at which the shares were sold;
o the commissions paid or discounts or concessions allowed to these
broker-dealers, where applicable;
o that the broker-dealers did not conduct any investigation to verify
the information set out or incorporated by reference in this prospectus; and
o other facts material to the transaction.
In order to comply with certain states' securities laws, if applicable, the
shares may be sold in those jurisdictions only through registered or licensed
brokers or dealers. In certain states the shares may not be sold unless the
shares have been registered or qualified for sale in such state, or unless an
exemption from registration or qualification is available and is obtained.
LEGAL MATTERS
The legality of the common stock offered in the prospectus has been passed
upon for Intacta by McDonald Carano Wilson McCune Bergin Frankovich & Hicks,
LLP, Reno, Nevada.
EXPERTS
The consolidated financial statements of Intacta and its subsidiaries
included in this prospectus and in the registration statement have been audited
by BDO Seidman, LLP, independent certified public
55
accountants, to the extent and for the periods set forth in their report (which
contains an explanatory paragraph regarding our ability to continue as a going
concern), appearing in this prospectus and in the registration statement, and is
included in reliance upon such report given upon the authority of said firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission (the "SEC") a
registration statement on Form S-1 under the Securities Act with respect to the
securities offered by this prospectus. This prospectus, filed as part of the
registration statement, does not contain all of the information set forth in, or
annexed as exhibits to, the registration statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC.
Our SEC filings including the registration statement of which this
prospectus forms a part and the exhibits filed with it are available to the
public over the Internet at the SEC's website at www.sec.gov. You may also read
and copy any document we file with the SEC at its Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. You can also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of its Public Reference
Room.
56
INDEX TO FINANCIAL STATEMENTS
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
PAGE
Audited Consolidated Financial Statements:
Report of Independent Certified Public Accountants ..................... F-2
Consolidated Balance Sheets - December 31, 2000 and December 31, 1999 .. F-3
Consolidated Statements of Operations for the years ended December
31, 2000, December 31, 1999 and December 31, 1998 .................... F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, December 31, 1999 and December 31, 1998 ........... F-6
Consolidated Statements of Cash Flows for the years ended December
31, 2000, December 31, 1999 and December 31, 1998 .................... F-7
Notes to Consolidated Financial Statements ............................. F-8
Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2001 (unaudited)
and December 31, 2000 (audited) ...................................... F-24
Consolidated Statements of Operations (unaudited) for the nine
months ended September 30, 2001 and 2000 ............................. F-26
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended September 30, 2001 and 2000 ............................. F-27
Notes to Consolidated Financial Statements (unaudited) ................. F-28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors and Shareholders of
Intacta Technologies Inc.
We have audited the accompanying consolidated balance sheets of Intacta
Technologies Inc. and subsidiaries as of December 31, 2000 and 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted
in the United States. These standards require that we plan and perform our 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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Intacta
Technologies Inc. and subsidiaries as of December 31, 2000 and 1999, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and, at December 31, 2000, has an accumulated deficit that raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ BDO Seidman, LLP
Atlanta, Georgia
March 9, 2001
F-2
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
================================================================================
December 31, 2000 1999
================================================================================
ASSETS
CURRENT
Cash and cash equivalents $ 3,904,500 $ 917,400
Accounts receivable 63,500 31,700
Inventories 55,700 278,600
Related party and employee receivables 13,100 45,000
Other -- 30,800
--------------------------------------------------------------------------------
Total current assets 4,036,800 1,303,500
PROPERTY AND EQUIPMENT, net 104,800 156,100
PATENTS, net 118,900 111,300
--------------------------------------------------------------------------------
$ 4,260,500 $ 1,570,900
================================================================================
F-3
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
================================================================================
December 31, 2000 1999
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 61,400 $ 472,400
Accounts payable - related parties 127,400 90,200
Loans from shareholder -- 89,000
Accrued expenses 206,500 77,800
--------------------------------------------------------------------------------
Total current liabilities 395,300 729,400
--------------------------------------------------------------------------------
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value; 50,000,000
shares authorized; no shares issued or
outstanding -- --
Common stock, $.0001 par value; 100,000,000
shares authorized; 20,345,924 and
17,909,000 shares issued and outstanding,
respectively 2,035 1,791
Additional paid-in capital 26,336,865 19,710,553
Deficit (22,222,400) (17,671,200)
Unamortized stock compensation (251,300) (1,199,644)
--------------------------------------------------------------------------------
Total stockholders' equity 3,865,200 841,500
--------------------------------------------------------------------------------
$ 4,260,500 $ 1,570,900
================================================================================
See accompanying notes to consolidated financial statements.
F-4
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
================================================================================
Years ended December 31, 2000 1999 1998
===========================================================================================================
REVENUES
Products and components $ 363,400 $ 64,000 $ 89,300
Royalties from licensing arrangements 94,000 73,400 48,500
Consulting fees 337,100 -- --
-----------------------------------------------------------------------------------------------------------
Total Revenues 794,500 137,400 137,800
-----------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of products and components 303,600 90,500 336,300
Consulting fees expenses 113,900 -- --
Research and development (including non-cash
Compensation expense of $361,600, $222,400
and $129,700 in 2000, 1999 and 1998 respectively) 1,133,000 1,047,400 903,500
Sales and marketing(including non-cash
Compensation expense of $69,600 in 2000) 1,182,100 113,200 113,100
General and administrative (including non-cash
Compensation expense of $571,500, $1,016,000
and $632,100 in 2000, 1999 and 1998 respectively) 2,306,500 2,619,800 1,699,400
-----------------------------------------------------------------------------------------------------------
Total operating expenses 5,039,100 3,870,900 3,052,300
-----------------------------------------------------------------------------------------------------------
Loss from operations (4,244,600) (3,733,500) (2,914,500)
-----------------------------------------------------------------------------------------------------------
Other income (expense)
Interest income 90,600 104,000 --
Interest (expense) (389,500) (8,700) (210,000)
Other -- 21,400 (19,600)
-----------------------------------------------------------------------------------------------------------
Total other income (expense) (298,900) 116,700 (229,600)
-----------------------------------------------------------------------------------------------------------
Loss before provision for income taxes (4,543,500) (3,616,800) (3,144,100)
PROVISION FOR INCOME TAXES 7,700 800 1,700
-----------------------------------------------------------------------------------------------------------
Net loss $ (4,551,200) $ (3,617,600) $ (3,145,800)
===========================================================================================================
Basic and diluted loss per common share $ (0.25) $ (0.20) $ (0.19)
===========================================================================================================
BASIC AND DILUTED WEIGHTED - AVERAGE
COMMON SHARES OUTSTANDING 18,483,179 17,791,630 16,701,583
===========================================================================================================
See accompanying notes to consolidated financial statements.
F-5
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================
================================================================================
Common Stock Additional Unamortized
------------------------ Paid-in Stock
Shares Amount Capital Compensation Deficit Total
===============================================================================================================================
BALANCE, December 31, 1997 11,486,000 $ 1,149 $ 1,498,851 $ -- $(10,907,800) $ (9,407,800)
Contributed capital -- -- 183,600 -- -- 183,600
Contributed capital from
principal stockholder for
retirement of debt -- -- 8,929,800 -- -- 8,929,800
Common stock issued in
connection with reverse
acquisition 5,185,000 518 1,439,482 -- -- 1,440,000
Issuance of common stock
in Private Placement, net of
issuance costs of $400,000 1,000,000 100 3,599,900 -- -- 3,600,000
Stock options granted -- -- 2,840,566 (2,840,566) -- --
Amortization of stock
Options -- -- -- 668,800 -- 668,800
Net loss -- -- -- -- (3,145,800) (3,145,800)
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 17,671,000 1,767 18,492,199 (2,171,766) (14,053,600) 2,268,600
Conversion of debt to equity -
Stockholder 238,000 24 952,076 -- -- 952,100
Stock options granted -- -- 266,278 (266,278) -- --
Amortization of stock options -- -- -- 1,238,400 -- 1,238,400
Net loss -- -- -- -- (3,617,600) (3,617,600)
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1999 17,909,000 1,791 19,710,553 (1,199,644) (17,671,200) 841,500
Conversion of debt to equity -
Stockholder 160,483 16 481,484 -- -- 481,500
Conversion of debt to
equity 755,778 76 2,267,224 -- -- 2,267,300
Issuance of common stock in
Private Placement, net of
issuance costs of
$1,054,000 1,503,963 150 3,522,050 -- -- 3,522,200
Stock options exercised 16,700 2 24,998 -- -- 25,000
Amortization of stock options -- -- -- 1,002,700 -- 1,002,700
Stock options granted -- -- 46,800 (46,800) -- --
Other -- -- 7,556 (7,556) -- --
Discount on debt with
convertible warrant feature -- -- 276,200 -- -- 276,200
Net loss -- -- -- -- (4,551,200) (4,551,200)
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 2000 20,345,924 $ 2,035 $ 26,336,865 $ (251,300) $(22,222,400) $ 3,865,200
===============================================================================================================================
See accompanying notes to consolidated financial statements.
F-6
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
================================================================================
Years ended December 31, 2000 1999 1998
===========================================================================================================
OPERATING ACTIVITIES
Net loss $ (4,551,200) $ (3,617,600) $ (3,145,800)
Adjustments to reconcile net loss to cash
used in operating activities:
Amortization of stock options 1,002,700 1,238,400 668,800
Depreciation and amortization 99,300 110,800 107,400
Interest accretion on warrants 276,200 -- --
Write-down of inventory 222,900 46,100 240,100
Loss on equipment disposals 5,700 -- 49,000
Changes in operating assets and liabilities:
Accounts receivable (31,800) (20,300) 184,400
Inventories -- (26,000) (64,100)
Accounts receivable - related parties 31,900 (600) (35,100)
Other current assets 30,800 (16,100) 2,600
Accounts payable (411,000) 468,800 (168,000)
Accounts payable - related parties 37,200 -- --
Accrued expenses 128,700 500 (112,700)
Deferred revenue -- -- (51,300)
-----------------------------------------------------------------------------------------------------------
Cash used in operating activities (3,158,600) (1,816,000) (2,324,700)
-----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash acquired in purchase of business -- -- 1,440,000
Capital expenditures (34,600) (18,600) (191,900)
Patents (26,700) (15,200) (23,300)
-----------------------------------------------------------------------------------------------------------
Cash provided by (used in) investing activities (61,300) (33,800) 1,224,800
-----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Contributed capital -- -- 183,600
Exercise of stock options 25,000 -- --
Net proceeds from private placement 3,522,200 -- 3,600,000
Loans from shareholder 704,500 -- 3,062,000
Bridge loan financing, net 2,267,300 -- --
Repayment of shareholder loans (312,000) (279,900) (2,731,000)
Repayment of notes payable -- -- (136,700)
-----------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities 6,207,000 (279,900) 3,977,900
-----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH 2,987,100 (2,129,700) 2,878,000
EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of year 917,400 3,047,100 169,100
-----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 3,904,500 $ 917,400 $ 3,047,100
===========================================================================================================
See accompanying notes to consolidated financial statements.
F-7
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
================================================================================
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF OPERATIONS
Intacta Technologies Inc. (the "Company"), a Nevada corporation, is a developer
and marketer of software products based on its patented technology that, through
its unique combination of compression, encoding and error correction processes,
the technology transforms any data format ranging from text, graphic, audio or
video from a binary file into INTACTA.CODE(TM) which is language transparent and
platform independent. The Company believes that its technology provides
solutions and applications that enable enterprises to bridge their
communications and management information systems across digital and non-digital
media by providing the secure bi-directional transmission and subsequent
recovery and storage of data.
Intacta Labs Ltd., an Israeli corporation and wholly owned subsidiary (Intacta
Labs), primarily conducts product research and development in the high tech area
of Beer Sheva, Israel, and is currently conducting new research projects
expected to produce significant time and cost savings through continued
development of a medium for transmitting and storing data in secure formats.
From late 1997 and through 1998, the Company ceased production and marketing of
its facsimile-based products used for transmitting and storing information, as a
result of changes in the fax market, which resulted in reduced demand for its
fax related products. The Company altered its strategy to emphasize the
licensing of its core technology rather than the development and sale of
consumer products.
THE COMPANY
On May 31, 1998, the Company completed the acquisition of 100% of the
outstanding common stock of Intacta Delaware Inc. (Intacta), a Delaware
corporation, and Intacta Labs in exchange for 11,486,000 shares of the Company's
$.0001 par value common stock valued at $1. The value of Intacta and Intacta
Labs at the time of the acquisition approximated the aggregate accumulated
deficits of the two companies to that date. The companies agreed that the value
per common stock share contemplated in the agreement approximated the market
trading value at the time of the initial discussions and the signing of the
letter of intent. For accounting purposes, the acquisition has been treated as
an acquisition of the Company by Intacta and Intacta Labs, with the combined
entity of Intacta and Intacta Labs, companies under common control, as the
acquirer (reverse acquisition). As such, in conjunction with the acquisition,
the historical financial statements of the acquirer replaced the historical
financial statements of the Company.
Since the Company, prior to the reverse acquisition, was a public shell
corporation with no significant operations, pro forma information giving effect
to the acquisition is not presented. All share and per share data, prior to the
acquisition, have been restated to reflect the stock issuance as a
F-8
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
================================================================================
recapitalization of Intacta. The shares held by the shareholders of the Company,
prior to the acquisition (5,185,000 shares), have been recognized as if they
were issued in connection with the acquisition of the Company by Intacta. Since
the former shareholder of Intacta and Intacta Labs received approximately 69% of
the shares in the Company immediately after the acquisition, the financial
statements for periods prior to the recapitalization are those of Intacta and
Intacta Labs.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements for the years ended December
31, 2000 and 1999 include the accounts of the Company and its wholly owned
subsidiaries. All intercompany accounts and transactions have been eliminated.
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 reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments with original maturities of three months or less
to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, generally ranging from three to seven
years.
PATENTS
Patents are amortized on a straight-line basis over the estimated useful life of
the patents, generally ten years. As of December 31, 2000 and 1999, accumulated
amortization amounted to approximately $91,200 and $72,100, respectively.
F-9
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
================================================================================
LONG-LIVED ASSETS
Long-lived assets, such as patents and property and equipment, are evaluated for
impairment when events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through the estimated undiscounted
future cash flows resulting from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed, costs related to the research and development of new products and
enhancements to existing products are expensed as incurred until technological
feasibility of the product has been established, at which time such costs are
capitalized, subject to expected recoverability. Therefore, the Company has not
capitalized any software development costs related to its products, since the
time period between technological feasibility and the general release of a
market accepted product is not significant.
REVENUE RECOGNITION
The Company's revenue recognition policies are in compliance with generally
accepted accounting principles including Statement of Position (SOP) 97-2,
Software Revenue Recognition. As such, the Company recognizes product revenue
upon shipment if persuasive evidence of an arrangement exists, delivery has
occurred, the fees are fixed and determinable and collectibility is probable.
During 1998, a majority of revenues were derived from the shipment of product, a
portion of which was sold through resellers and distributors. Appropriate
reserves were considered to effectively defer revenue recognition when material
amounts of inventory had not been sold through to the end user. Generally, the
right of return of these products was of short duration (90 days). No provision
for estimated product returns was necessary based on historical experience.
Revenues, if any, from arrangements to provide maintenance, bug fixing, support,
upgrades and enhancements are recognized over the period in which such
arrangements exist. While such arrangements were made available to some
customers on a limited basis during the reporting periods presented, SOP 97-2
allows for full revenue recognition upon delivery if certain criteria are met.
Such criteria include such factors as insignificant costs of providing such
arrangements and minimal and infrequent upgrades and enhancements, among other
things. The Company met the conditions of such criteria and, as a result, was
not required to defer the recognition of revenue for arrangements described
above.
F-10
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
================================================================================
License revenues are recognized based on actual sales of licensed software by a
customer/licensee and are not recognized by the company as revenue until the
final sale is reported by the customer/licensee. This is the time at which the
Company believes that revenue recognition in accordance with SOP 97-2, as
described above, has occurred. Support revenue is not integral to the
functionality of the licensed software and is billed and recognized as incurred.
The Company recognized consulting fee revenue during 2000 that was derived from
certain software development and programming projects performed on behalf of
customers. Revenue was recorded as the services were performed and these
projects were started and completed within the year.
The Company believes that it is in compliance with Staff Accounting Bulletin
("SAB") No. 101, Revenue Recognition, which outlines the basic criteria that
must be met to recognize revenue and provides guidance for presentation of
revenue and for disclosure related to revenue recognition policies in financial
statements filed with the SEC.
ADVERTISING COSTS
The cost of advertising is expensed as incurred. Advertising costs for the years
ended December 31, 2000, 1999 and 1998 were approximately $34,900, $0 and
$48,100, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which requires
an asset and liability approach. This approach results in the recognition of
deferred tax assets (future tax benefits) and liabilities for the expected
future tax consequences of temporary differences between the book carrying
amounts and the tax basis of assets and liabilities. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be deductible or taxable when the assets and liabilities are
recovered or settled. Future tax benefits are subject to a valuation allowance
when management believes it is more likely than not that the deferred tax assets
will not be realized.
LOSS PER SHARE
Basic earnings per share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the period. Shares
issued during the year are weighted for the portion of the year that they were
outstanding. Diluted earnings per share is computed in a manner consistent with
that of basic earnings per share while giving effect to all potentially dilutive
common shares outstanding during the period.
F-11
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
================================================================================
As a result of losses, all stock options and warrants outstanding at December
31, 2000, 1999 and 1998 were antidilutive and accordingly, were excluded from
the computation of loss per share.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments imbedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. SFAS No. 137 delayed the effective date of SFAS No.
133 to fiscal years beginning after June 15, 2000. SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, Amendment of SFAS
No. 133, liberalized the application of SFAS No. 133 in a number of areas. The
Company expects that the adoption of SFAS No. 133 will not have a material
impact on its consolidated financial position or results of operations.
The Financial Accounting Standards Board issued Interpretation No. 44,
Accounting for Certain Transactions involving Stock Compensation, an
Interpretation of APB Opinion No. 25 (the "Interpretation") which is effective
July 1, 2000. The Interpretation clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a
stock compensation plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. Adoption of the provisions of the
Interpretation did not have a significant impact on the Company's financial
statements.
FOREIGN CURRENCY
The Company has designated the U.S. dollar as its functional currency for
Intacta Labs, a foreign subsidiary. Financial statements of this subsidiary are
translated into U.S. dollars for consolidation purposes using current rates of
exchange for monetary assets and liabilities and historical rates of exchange
for non-monetary assets and related elements of expense. Sales and other
expenses are translated at rates that approximate the rates in effect on the
translation dates. Immaterial translation gains and losses are included in the
consolidated statement of operations.
F-12
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
================================================================================
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash and cash equivalents and short-term debt approximate cost
due to the short period of time to maturity.
RECLASSIFICATIONS
Certain 1998 and 1999 amounts have been reclassified to conform to the 2000
presentation.
2. GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the consolidated
financial statements, the Company has a cumulative deficit of $22,222,400
through December 31, 2000, and has incurred losses of $4,551,200, $3,617,600 and
$3,145,800 for the years ended December 31, 2000, 1999 and 1998, respectively.
These losses were primarily the result of the decision by the Company in late
1997 to curtail further production and marketing of its facsimile-based products
upon realization that the market potential for such products was diminished, and
by the significant overhead costs required to support research, development and
marketing efforts for the Company's INTACTA.CODE related technology. These
conditions give rise to substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of assets or the
amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
Through the first half of 2000, the Company's marketing and sales efforts were
reduced and the Company focused its efforts on design revisions to its core
applications without the benefit of significant cash flow from operations. In
the second half of 2000, primarily as a result of additional resources,
marketing efforts increased and, in addition to marketing its technology for
licensing arrangements, the Company focused on the marketing of its suite of
INTACTA.CODE Software Developments Kits (SDK) products, which were subsequently
launched in March 2001. As a result of the foregoing, the Company has absorbed
significant cash in its day-to-day operations and expects to continue to absorb
cash in its operations during 2001 as it brings this new suite of products to
market.
The Company's continuation as a going concern is dependent upon its ability to
actively market its new suite of products, as well as its technology, which it
believes will lead to increased revenues, positive cash flows from operations,
and ultimately to profitability. The Company may seek additional financing as
may be required to fund research and development and marketing of its new
products. If this plan materializes as expected, the Company anticipates
viability for the year 2001 and beyond, though there can be no assurance that
the Company will be successful in these efforts.
F-13
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
================================================================================
3. INVENTORIES
Inventories consisted of the following:
December 31, 2000 1999
================================================================================
Components $ 55,700 $233,600
Work in process -- 45,000
--------------------------------------------------------------------------------
$ 55,700 $278,600
================================================================================
Inventories at December 31, 2000 and 1999 related substantially to computer
chips and boards appropriately capitalized in accordance with SFAS No. 2,
Accounting for Research and Development Costs which allows for the
capitalization of materials if they have alternative future uses. The Company
believes this to be the case in regards to these inventories.
During 2000, 1999 and 1998, the Company wrote-off approximately $222,900,
$46,100 and $240,100, respectively, of its inventory due to reduced sales and
obsolescence, which is included in cost of products and components.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31, 2000 1999
================================================================================
Equipment $287,800 $459,300
Furniture and fixtures 63,400 48,100
Vehicles -- 14,100
--------------------------------------------------------------------------------
351,200 521,500
Less accumulated depreciation (246,400) (365,400)
--------------------------------------------------------------------------------
$104,800 $156,100
================================================================================
Depreciation expense was $80,200, $94,200, and $92,100 for the years ended
December 31, 2000, 1999 and 1998.
5. ACCRUED EXPENSES
Accrued expenses consisted of the following:
DECEMBER 31, 2000 1999
================================================================================
Salaries and related expenses $ 60,300 $ 32,900
Severance 51,700 27,800
Vacation -- 16,900
Deferred compensation 94,500 200
--------------------------------------------------------------------------------
$206,500 $ 77,800
================================================================================
F-14
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
================================================================================
6. COMMITMENT
LEASES
The Company leases its facilities and certain equipment under operating leases,
which expire through February 2006. The facility leases require the Company to
pay certain maintenance and operating expenses, such as utilities, property
taxes, and insurance costs.
At December 31, 2000, aggregate minimum rent commitments under operating leases
with initial or remaining terms of one year or more were as follows:
Year Amount
================================================================================
2001 $133,600
2002 153,000
2003 153,300
2004 144,500
2005 134,000
Thereafter 17,800
--------------------------------------------------------------------------------
$736,200
================================================================================
Rent expense related to these operating leases was $127,600, $135,709 and
$111,400 for the years ended December 31, 2000, 1999 and 1998, respectively.
7. STOCKHOLDERS' EQUITY
During 2000, the Company completed a bridge financing in which 25 bridge units
were issued. Each bridge unit consisted of a $100,000 bridge note and warrant to
purchase 25,000 shares of common stock at an exercise price of $3.50 per share.
Aggregate gross proceeds in connection with this issue were $2,500,000.
Additionally, a related party converted $250,000 of debt into 2.5 units, similar
in all respects to the bridge units. A discount of $276,200 for the fair value
of detachable warrants was recognized concurrent with this transaction. The fair
value was determined using the Black Schole's option pricing model, with the
following assumptions: Dividend yield of 0%; expected volatility of 40%;
risk-free interest rate of 6.17%; and an expected life of one year. These
warrants expire in 2005. These warrants expire in 2005.
During 2000, the Company issued an aggregate of 250,000 warrants to a third
party and its designees, which are exercisable at a price of $3.50 per share and
were valued and expensed for services rendered in their entirety during 2000.
The fair value ($92,000) was determined using the Black Schole's option pricing
model with the following assumptions: Dividend
F-15
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
================================================================================
yield of 0%; expected volatility of 40%; risk-free interest rate of 6.17%; and
an expected life of one year. These warrants expire in 2005.
On October 16, 2000, the Company completed a private placement of 2,333,310
equity units each consisting of one share of common stock and one warrant to
purchase one share of common stock at a price of $3.50 per share resulting in
net proceeds of approximately $3.5 million after the conversion of the
aforementioned bridge units, accrued interest and other loans into equity units.
All warrants issued in connection with the bridge financing (687,500) remain
outstanding at December 31, 2000. The Company issued 86,914 units, similar in
all respects to the equity units, as a commission in connection with the private
placement to certain parties. A related party received 21,600 of these units and
cash commission of approximately $194,000. All warrants issued in connection
with the private placement expire in 2005.
8. STOCK OPTION PLANS
The Company has a 1998 Stock Option Plan and a 2000 Incentive Stock Option Plan
(collectively the "Plans") that provide for, among other things, the granting of
non-qualified and incentive stock options to employees, directors, officers,
outside consultants and other third parties. Options vest over a maximum of five
years and expire in a maximum of ten years. The Company has reserved 1,667,100
and 1,400,000 shares, respectively of its common stock for issuance under the
Plans. As the 2000 Plan is subject to further approval by the Company's
shareholders at its 2001 Annual Meeting, no shares have been granted from this
Plan.
F-16
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
================================================================================
A summary of stock option transactions for the above plans are as follows:
Weighted average
Number of shares exercise price
================================================================================
Outstanding at December 31, 1997 -- --
Granted 1,005,000 $ 1.50
--------------------------------------------------------------------------------
Outstanding at December 31, 1998 1,005,000 1.50
Granted 370,000 3.49
--------------------------------------------------------------------------------
Outstanding at December 31, 1999 1,375,000 2.03
Granted 96,800 3.03
Exercised (16,700) 1.50
Forfeited (78,300) 1.50
--------------------------------------------------------------------------------
Outstanding at December 31, 2000 1,376,800 $ 2.14
================================================================================
Weighted average
Options exercisable Number of shares exercise price
================================================================================
December 31, 1999 410,000 $ 1.50
December 31, 2000 854,000 1.82
================================================================================
Required disclosures for options outstanding at December 31, 2000 are as
follows:
Weighted average
Exercise Number outstanding at remaining Weighted average
price December 31, 2000 contractual life exercise price
================================================================================
$1.50 985,000 .43 $1.50
2.00 46,800 5.01 2.00
4.00 345,000 1.43 4.00
--------------------------------------------------------------------------------
1,376,800 .83 2.14
--------------------------------------------------------------------------------
The weighted average fair value of all options, calculated using the
Black-Scholes Option Pricing Model, granted during 2000, 1999, and 1998 is
$1.04, $1.38 and $2.98 per share, respectively.
The Company applies both Accounting Principles Board Opinion No. 25 (APB No.
25), Accounting for Stock Issued to Employees and related interpretations and
SFAS No. 123, Accounting for Stock-Based Compensation in accounting for its
stock option plans. Options granted to employees and directors are accounted for
under APB No. 25 and compensation expense is recognized for the intrinsic value
of the options granted. Options granted to all others are accounted for in
accordance with SFAS No. 123 and compensation expense is recognized for the fair
value of the options granted.
F-17
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
================================================================================
SFAS No. 123 also requires that the Company provide pro forma information
regarding the net loss as if the compensation cost for the Company's Plans had
been determined in accordance with the fair market value method for all options.
The Company estimates the fair value of all stock options at the grant date
using the Black Schole's option pricing model with the following weighted
average assumptions for 2000, 1999 and 1998: Dividend yield of 0 in all years;
expected volatility of 75% in 2000 and 40% in 1999 and 1998; risk-free interest
rate of 6.36% in 2000, 5.23% in 1999 and 5.47% in 1998; and an expected life of
4.00 years in 2000, 2.61 years in 1999 and 2.55 years in 1998.
Under the accounting provisions of SFAS No. 123, the Company's net loss and
basic and diluted loss per common share would have been adjusted to the pro
forma amounts indicated below:
Years ended December 31, 2000 1999 1998
================================================================================
Net loss, as reported $ (4,551,200) $ (3,617,600) $ (3,145,800)
Pro forma (4,690,885) (3,736,400) (3,183,000)
--------------------------------------------------------------------------------
Basic and diluted loss per
share, as reported $ (0.25) $ (0.20) $ (0.19)
Pro forma (0.25) (0.21) (0.19)
--------------------------------------------------------------------------------
9. RELATED PARTY
TRANSACTIONS
During 2000, 1999 and 1998, the Company received administrative, consulting,
management and marketing services from several organizations that are owned by
directors or shareholders of the Company. These services aggregated
approximately $592,100, $346,300 and $294,200 for the years ended December 31,
2000, 1999 and 1998, respectively of which $472,100, $226,300 and $229,500 have
been included in general and administrative expenses and $120,000, $120,000 and
$64,700 have been included in research and development expenses.
F-18
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
================================================================================
10. INCOME TAXES
Provisions for federal, foreign and state income taxes (benefits) in the
consolidated statements of operations consist of the following components:
Years ended December 31, 2000 1999 1998
================================================================================
Current:
Federal $ -- $ -- $
State 7,700 800 1,700
--------------------------------------------------------------------------------
7,700 800 1,700
--------------------------------------------------------------------------------
Deferred
Federal (1,256,272) 150,977 (772,006)
State (186,944) 22,467 (114,882)
--------------------------------------------------------------------------------
(1,443,216) 173,444 (886,888)
--------------------------------------------------------------------------------
Change in valuation
Allowance 1,443,216 (173,444) 886,888
--------------------------------------------------------------------------------
Total income tax provision $ 7,700 $ 800 $ 1,700
================================================================================
Deferred tax assets (liabilities) were comprised of the following:
December 31, 2000 1999
================================================================================
Net operating loss $ 4,183,780 $ 3,322,461
carryforward
Stock option compensation
not currently deductible 1,123,227 736,185
Accumulated depreciation,
amortization and other 10,053 12,661
--------------------------------------------------------------------------------
Total deferred tax assets 5,317,060 4,071,307
--------------------------------------------------------------------------------
Reserves not currently
Deductible -- (197,463)
--------------------------------------------------------------------------------
Total deferred tax liabilities -- (197,463)
--------------------------------------------------------------------------------
Net deferred tax asset 5,317,060 3,873,844
Valuation allowance (5,317,060) (3,873,844)
--------------------------------------------------------------------------------
$ -- $ --
================================================================================
F-19
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
================================================================================
The effective tax rate on income before taxes differs from the U.S. statutory
rate. The following summary reconciles taxes at the U.S. statutory rate with the
effective rates:
December 31, 2000 1999
================================================================================
Taxes on income at U.S. statutory rate (34.0)% (34.0)%
State income taxes, net of federal benefit (2.6) (4.0)
Foreign and U.S. tax effect attributable
to foreign operations 14.5 21.9
Change in valuation allowance 21.2 16.0
Other 1.1 0.1
--------------------------------------------------------------------------------
0.2% 0.0%
================================================================================
The Company has federal net operating loss carryforwards available to reduce
future taxable income, if any, of approximately $11,865,000. The benefits from
these carryforwards expire through 2020. As of December 31, 2000, management
believes it cannot be determined that it is more likely than not that these
carryforwards and its other deferred tax assets will be realized, and
accordingly, fully reserved for these deferred tax assets.
11. EMPLOYEE PROFIT SHARING PLAN
The Company has a profit sharing plan covering all eligible employees meeting
certain age and length of service requirements. Under the profit sharing plan,
the Board of Directors, at their election, can authorize contributions up to a
maximum of 3% of eligible participants' total compensation. For the years ended
December 31, 2000 and 1999 the Company made no discretionary contributions. For
the year ended December 31, 1998 the Company made $2,500 in discretionary
contributions.
12. SEGMENT INFORMATION
During 1999, the Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for the way that
public business enterprises report information about operating segments in their
financial statements. The standard defines operating segments as components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Based on these standards the
Company has determined that it operates in a single operating segment: the
development, marketing and licensing of software and sale of ancillary
components.
Major Customers
During 2000, three customers accounted for approximately 46%, 30% and 13% of net
sales.
F-20
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
================================================================================
During 1999, two customers accounted for approximately 53% and 40% of net sales.
During 1998, four customers accounted for approximately 27%, 26%, 15% and 12% of
net sales.
Geographic Segments
The following table presents revenues and other financial information for the
years ended December 31, 2000, 1999 and 1998:
Years ended December 31, 2000 1999 1998
================================================================================
Long-lived assets (gross)
- United States $ 69,500 $ 157,800 $ 177,700
- Israel 281,700 363,700 325,200
================================================================================
Revenues
Asia $ 389,089 $ 68,516 $ 39,225
Africa/Mid-East 376,588 54,437 --
North America 28,823 14,447 98,575
--------------------------------------------------------------------------------
$ 794,500 $ 137,400 $ 137,800
================================================================================
Revenues attributable to geographic areas are based on the location of the
customer.
13. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist principally of cash and cash equivalents and trade
receivables. The Company places its cash and cash equivalents with high quality
financial institutions and, as a matter of policy, limits the amounts of credit
exposure to any one financial institution.
As of December 31, 2000 the Company's accounts receivable are limited. However,
the Company believes any risk of accounting loss is significantly reduced due to
provisions for returns recorded at the date of sale, and ongoing analysis of its
customers' financial condition. The Company generally does not require cash
collateral or other security to support customer receivables.
F-21
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
================================================================================
14. QUARTERLY DATA (UNAUDITED)
The following table sets forth, for the fiscal periods indicated, selected
consolidated financial data.
Year ended December 31, 2000
================================================================================
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------
Revenues $ 153,600 $ 480,200 $ 60,900 $ 99,800
Operating expenses 937,600 1,182,000 1,334,700 1,584,800
Net loss (766,700) (706,600) (1,533,100) (1,544,800)
--------------------------------------------------------------------------------
Loss per share
-Basic and diluted (0.04) (0.04) (0.09) (0.08)
--------------------------------------------------------------------------------
Year ended December 31, 1999
================================================================================
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------
Revenues $ 59,500 $ 33,000 $ 38,500 $ 6,400
Operating expenses 809,000 944,400 1,006,600 1,110,900
Net loss (722,100) (885,500) (962,500) (1,047,500)
--------------------------------------------------------------------------------
Loss per share
-Basic and diluted (0.04) (0.05) (0.05) (0.06)
================================================================================
F-22
INTACTA TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
================================================================================
15. STATEMENT OF CASH FLOWS
Cash paid during the year consists of the following:
Year ended December 31, 2000 1999 1998
================================================================================
Income taxes $ 7,700 $ 800 $ 1,700
Interest $ 113,300 $ -- $ 68,300
================================================================================
During the years ended December 31, 2000, 1999 and 1998, the Company's non-cash
financing activities included increases of additional paid-in capital in
exchange for the retirement of debt in the amount of approximately $2,748,800,
$952,100 and $8,929,800, respectively.
F-23
INTACTA TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
2001 December 31,
(Unaudited) 2000
================================================================================
ASSETS
CURRENT
Cash and cash equivalents $ 1,313,400 $ 3,904,500
Accounts receivable 6,500 63,500
Inventories 51,600 55,700
Related party and employee receivables -- 13,100
Other 106,600 --
--------------------------------------------------------------------------------
Total current assets 1,478,100 4,036,800
PROPERTY AND EQUIPMENT, net 88,400 104,800
PATENTS, net 121,000 118,900
--------------------------------------------------------------------------------
$ 1,687,500 $ 4,260,500
================================================================================
See accompanying notes to consolidated financial statements.
F-24
INTACTA TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
2001 December 31,
(Unaudited) 2000
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 150,500 $ 61,400
Accounts payable - related parties 11,100 127,400
Accrued expenses 209,300 206,500
--------------------------------------------------------------------------------
Total current liabilities 370,900 395,300
--------------------------------------------------------------------------------
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value; 50,000,000
shares Authorized; no shares issued or
outstanding -- --
Common stock, $.0001 par value; 100,000,000
shares Authorized; 20,345,924 shares issued
and outstanding 2,035 2,035
Additional paid-in capital 26,336,865 26,336,865
Deficit (24,945,100) (22,222,400)
Unamortized stock compensation (77,200) (251,300)
--------------------------------------------------------------------------------
Total stockholders' equity 1,316,600 3,865,200
--------------------------------------------------------------------------------
$ 1,687,500 $ 4,260,500
================================================================================
See accompanying notes to consolidated financial statements.
F-25
INTACTA TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, September 30,
2001 2000
=============================================================================================
REVENUES
Products and components (less returns of $20,000 in 2001) $ 94,400 $ 284,300
Royalties from licensing arrangements 31,400 81,100
Consulting fees -- 329,300
---------------------------------------------------------------------------------------------
Total revenues 125,800 694,700
---------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of products and components 24,100 108,200
Consulting fees expense -- 113,900
Research and development (including non-cash
compensation expense of $141,900 and $271,200
in 2001 and 2000 respectively) 950,000 820,300
Sales and marketing (including non-cash
compensation expense of $5,900 and $61,800 in 2001
and 2000, respectively) 637,400 844,600
General and administrative (including non-cash
compensation expense of $26,300 and $534,500
in 2001 and 2000 respectively) 1,304,900 1,567,300
---------------------------------------------------------------------------------------------
Total operating expenses 2,916,400 3,454,300
---------------------------------------------------------------------------------------------
Loss from operations (2,790,600) (2,759,600)
---------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 79,200 57,500
Interest expense -- (303,400)
Other (5,500) --
---------------------------------------------------------------------------------------------
Total other income 73,700 (245,900)
---------------------------------------------------------------------------------------------
Loss before provision for income taxes (2,716,900) (3,005,500)
PROVISION FOR INCOME TAXES 5,800 900
---------------------------------------------------------------------------------------------
Net loss $ (2,722,700) $ (3,006,400)
=============================================================================================
Basic and diluted loss per common share $ (0.13) $ (0.17)
=============================================================================================
Basic and diluted weighted - average
COMMON SHARES OUTSTANDING 20,345,924 17,909,000
=============================================================================================
See accompanying notes to consolidated financial statements.
F-26
INTACTA TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, September 30,
2001 2000
=============================================================================================
OPERATING ACTIVITIES
Net loss $ (2,722,700) $ (3,006,400)
Adjustments to reconcile net loss to cash
used in operating activities:
Non-cash compensation expense 174,100 867,500
Depreciation and amortization 65,900 80,200
Accrestion of warrants -- 207,100
Changes in operating assets and liabilities:
Accounts receivable 57,000 (14,600)
Inventories 4,100 53,200
Accounts receivable - related parties 13,100 --
Other current assets (106,600) --
Accounts payable 89,100 (214,800)
Accounts payable - related parties (116,400) --
Accrued expenses 2,800 74,900
---------------------------------------------------------------------------------------------
Cash used in operating activities (2,539,600) (1,952,900)
---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (36,900) (54,700)
Patents (14,600) --
---------------------------------------------------------------------------------------------
Cash used in investing activities (51,500) (54,700)
---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Exercise of stock options -- 25,000
Loans from shareholder -- 704,500
Bridge loan financing, net -- 2,384,600
Repayment of shareholder loans -- (312,000)
---------------------------------------------------------------------------------------------
Cash provided by financing activities -- 2,802,100
---------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH (2,591,100) 794,500
EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period 3,904,500 917,400
---------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 1,313,400 $ 1,711,900
=============================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash received during the period for:
Interest $ 79,200 $ 57,500
---------------------------------------------------------------------------------------------
Cash received during the period for:
Taxes $ 5,400 $ 900
---------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-27
INTACTA TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Intacta Technologies Inc. (the "Company"), a Nevada corporation, is a
developer and marketer of software products based on its patented technology
that, through its unique combination of compression, encoding and error
correction processes, the technology transforms any data format ranging from
text, graphic, audio or video from a binary file into INTACTA.CODE(TM) which is
language transparent and platform independent. The Company believes that its
technology provides solutions and applications that enable enterprises to bridge
their communications and management information systems across digital and
non-digital media by providing the secure bi-directional transmission and
subsequent recovery and storage of data.
Intacta Labs Ltd., an Israeli corporation and wholly owned subsidiary
(Intacta Labs), primarily conducts product research and development in the high
tech area of Beer Sheva, Israel, and is currently conducting new research
projects expected to produce significant time and cost savings through continued
development of a medium for transmitting and storing data in secure formats.
From late 1997 and through 1998, the Company ceased production and
marketing of its facsimile-based products used for transmitting and storing
information, as a result of changes in the fax market, which resulted in reduced
demand for its fax related products. The Company altered its strategy to
emphasize the licensing of its core technology rather than the development and
sale of consumer products.
THE COMPANY
On May 31, 1998, the Company completed the acquisition of 100% of the
outstanding common stock of Intacta Delaware Inc. (Intacta), a Delaware
corporation, and Intacta Labs in exchange for 11,486,000 shares of the Company's
$.0001 par value common stock valued at $1. The companies agreed that the value
per common stock share contemplated in the agreement approximated the market
trading value at the time of the initial discussions and the signing of the
letter of intent. For accounting purposes, the acquisition has been treated as
an acquisition of the Company by Intacta and Intacta Labs, with the combined
entity of Intacta and Intacta Labs, companies under common control, as the
acquirer (reverse acquisition). As such, in conjunction with the acquisition,
the historical financial statements of the acquirer replaced the historical
financial statements of the Company.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements for the nine months
ended September 30, 2001 and 2000, and the year ended December 31, 2000 include
the accounts of the Company and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated.
F-28
INTACTA TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards (SFAS) No.
86, Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed, costs related to the research and development of new
products and enhancements to existing products are expensed as incurred until
technological feasibility of the product has been established, at which time
such costs are capitalized, subject to expected recoverability. Therefore, the
Company has not capitalized any software development costs related to its
products, since the time period between technological feasibility and the
general release of a market accepted product is not significant.
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142. The adoption of SFAS No. 141
and SFAS No. 142 is not expected to have a material effect on the Company's
financial position, results of operations and cash flows in 2002 and subsequent
years.
F-29
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards, SFAS, No. 144, "Accounting for Impairment of
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 221,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of," and addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement is effective for
fiscal years beginning after December 15, 2001. We do not expect the adoption of
SFAS No. 144 to have a material impact on our financial statements.
REVENUE RECOGNITION
The Company's revenue recognition policies are in compliance with generally
accepted accounting principles including Statement of Position (SOP) 97-2,
Software Revenue Recognition. As such, the Company recognizes product revenue
upon shipment if persuasive evidence of an arrangement exists, delivery has
occurred, the fees are fixed and determinable and collectibility is probable.
During 1998, a majority of revenues were derived from the shipment of product, a
portion of which was sold through resellers and distributors. Appropriate
reserves were considered to effectively defer revenue recognition when material
amounts of inventory had not been sold through to the end user. Generally, the
right of return of these products was of short duration (90 days). No provision
for estimated product returns was necessary based on historical experience.
Revenues, if any, from arrangements to provide maintenance, bug fixing,
support, upgrades and enhancements are recognized over the period in which such
arrangements exist. While such arrangements were made available to some
customers on a limited basis during the reporting periods presented, SOP 97-2
allows for full revenue recognition upon delivery if certain criteria are met.
Such criteria include such factors as insignificant costs of providing such
arrangements and minimal and infrequent upgrades and enhancements, among other
things. The Company met the conditions of such criteria and, as a result, was
not required to defer the recognition of revenue for arrangements described
above.
License revenues are recognized based on actual sales of licensed software
by a customer/licensee and are not recognized by the company as revenue until
the final sale is reported by the customer/licensee. This is the time at which
the Company believes that revenue recognition in accordance with SOP 97-2, as
described above, has occurred. Support revenue is not integral to the
functionality of the licensed software and is billed and recognized as incurred.
The Company recognized consulting fee revenue during 2000 that was derived
from certain software development and programming projects performed on behalf
of customers. Revenue was recorded as the services were performed and these
projects were started and completed within the year.
The Company believes that it is in compliance with Staff Accounting
Bulletin ("SAB") No. 101, Revenue Recognition, which outlines the basic criteria
that must be met to recognize revenue and provides guidance for presentation of
revenue and for disclosure related to revenue recognition policies in financial
statements filed with the SEC.
F-30
INTACTA TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
LOSS PER SHARE
Basic earnings per share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the period. Shares
issued during the period are weighted for the portion of the period that they
were outstanding. Diluted earnings per share is computed in a manner consistent
with that of basic earnings per share while giving effect to all potentially
dilutive common shares outstanding during the period. As a result of losses, all
stock options and warrants outstanding for the periods presented were
antidilutive and accordingly, were excluded from the computation of loss per
share.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
The consolidated balance sheet as of September 30, 2001; the consolidated
statements of operations for the nine months ended September 30, 2001 and
September 30, 2000; and the consolidated statements of cash flows for the nine
months ended September 30, 2001 and September 30, 2000 have been prepared
without audit. The consolidated balance sheet as of December 31, 2000 has been
audited by independent certified public accountants. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures herein are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements and
related notes be read in conjunction with the consolidated financial statements
and notes thereto, included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
In the opinion of the Company, the statements for the unaudited interim
periods presented included all adjustments that were of a normal recurring
nature necessary to present a fair statement of the financial condition and
results of operations for such interim periods. The results of operations for
the interim periods presented are not necessarily indicative of the results of
operations for the entire year.
F-31
INTACTA TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. GOING CONCERN
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
consolidated financial statements, the Company has a cumulative deficit of
$24,945,100 through September 30, 2001, and has incurred losses of $4,551,200,
$3,617,600 and $3,145,800 for the years ended December 31, 2000, 1999 and 1998,
respectively and $2,722,700 for the nine months ended September 30, 2001. These
losses were primarily the result of the decision by the Company in late 1997 to
curtail further production and marketing of its facsimile-based products upon
realization that the market potential for such products was diminished, and by
the significant overhead costs required to support research, development and
marketing efforts for the Company's INTACTA.CODE related technology. These
conditions give rise to substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of assets or the
amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
Through the first half of 2000, the Company's marketing and sales efforts
were reduced and the Company focused its efforts on design revisions to its core
applications without the benefit of significant cash flow from operations. In
the second half of 2000, primarily as a result of additional resources,
marketing efforts increased and, in addition to marketing its technology for
licensing arrangements, the Company focused on the marketing of its suite of
INTACTA.CODE Software Development Kit (SDK) products, which were subsequently
launched in March 2001. This marketing generated increased activity to its web
site and initiated downloads of the offered Trial SDK. There is not yet any
revenue impact from this product line. In addition to the above, at the end of
third quarter 2001 the Company launched a suite of data communications products
targeted to the health-care industry addressing new health-care information
security regulations; the Health Insurance Portability and Accountability Act of
1996 (HIPAA).
The Company's capital requirements continue to be significant and it is not
currently generating revenues from operations to fund its operating activities.
The Company anticipates incurring continuing losses in the future as it expands
the development and marketing of its software products and technology. Based
upon current estimates, management believes that cash and cash equivalents will
be sufficient to fund the Company's operating activities and capital
requirements through the end of its first quarter of 2002. Unanticipated changes
in economic conditions or other unforeseen circumstances may cause the Company
to expend its cash and cash equivalents in a shorter period of time.
As a result of the above, the Company's continuation as a going concern is
substantially dependent upon its ability to obtain additional financing that
will be required to fund research and development and marketing of its new
products as well as to fund its current operating activities. If significant
revenues materialize and adequate financing is obtained, the Company anticipates
viability for the year 2001 and beyond, though there can be no assurance that
the Company will be successful in these efforts. At this time the Company does
not have any current arrangements with respect to other potential sources of
additional financing and cannot assure you that additional financing will be
available to it on commercially reasonable terms or at all.
F-32
3. SEGMENT INFORMATION
During 1999, the Company adopted SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information" which establishes standards for the
way that public business enterprises report information about operating segments
in their financial statements. The standard defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Based on these
standards the Company has determined that it operates in a single operating
segment: the development, marketing and licensing of software and sale of
ancillary components.
F-33
INTACTA TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
GEOGRAPHIC SEGMENTS:
The following table represents revenues and other financial information at
and for the periods designated below. Revenues attributable to geographic areas
are based on the location of the customer.
September 30, 2001 December 31, 2000
------------------ -----------------
Long-lived assets
- United States $ 97,000 $ 69,500
- Israel 291,100 281,700
NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
---- ----
Revenues
Asia $ 12,000 $ 378,800
Africa/Mid-East 84,800 280,700
North America 29,000 35,200
---------- ----------
$ 125,800 $ 694,700
========== ==========
4. STOCK OPTION PLANS
The Company at its Annual Meeting in May 2001 voted to increase the reserve
of its common stock for issuance under the 2000 Stock Option Plan to a total of
2,400,000 shares. During June 2001, the Company granted 1,325,000 and 1,003,000
options to purchase its common stock under its 1998 and 2000 Plans,
respectively. These stock options were granted with an exercise price of $0.75,
with vesting over a maximum of three years, and an expiration of five years. A
total of 953,000 of these options were issued to consultants and are accounted
for in accordance with EITF 96-18, "Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services". As such, the fair value of such options as determined by the
Black Schole's option pricing model will be marked to market at the end of each
reporting period.
F-34
INTACTA TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. QUARTERLY DATA (UNAUDITED)
The following table sets forth, for the fiscal periods indicated, selected
consolidated financial data.
NINE MONTHS ENDED SEPTEMBER 30, 2001
First Quarter Second Quarter
------------- --------------
Revenues $ 92,900 $ 5,200
Operating expenses 1,020,200 1,009,600
Net loss (896,400) (976,900)
Loss per share
- Basic and diluted $ (0.04) $ (0.05)
Third Quarter
-------------
Revenues $ 28,600
Operating expenses 886,600
Net loss (849,300)
Loss per share
- Basic and diluted $ (0.04)
F-35
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table indicates the expenses to be incurred in connection
with the offering described in this registration statement, all of which will be
paid by Intacta Technologies Inc. The selling stockholder will not be
responsible for any expenses in connection with the offering described in this
registration statement. All amounts are estimates, other than the SEC
registration fee.
SEC Registration fee............................. $ 190.00
Accounting fees and expenses..................... $ 10,000.00
Legal fees and expenses.......................... $ 25,000.00
Miscellaneous expenses (including printing costs) $ 2,810.00
-------------
Total....................................... $ 38,000.00
=============
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Nevada Private Corporation Law ("Nevada Law") provides for the
indemnification of directors, officers, agents or employees for expenses
including attorneys' fees, judgments and fines incurred in connection with any
civil or criminal action, suit or proceeding to which such person was or is made
a party, provided that such person acted in good faith and reasonably believed
that his actions were in the best interests of the corporation and, with respect
to a criminal action, had no reasonable cause to believe that his conduct was
unlawful.
Nevada Law also provides for the indemnification of directors, officers,
agents or employees for some, but not all, expenses incurred in connection with
any action or suit by or in the right of the corporation to procure a judgment
in its favor, provided that such person acted in good faith and reasonably
believed that his actions were in the best interests of the corporation.
Under Nevada Law, discretionary indemnification by a corporation may be
made only as authorized by (i) the stockholders; (ii) a majority vote of a
quorum of directors that were not party to the action, suit or proceeding; or
(iii) independent legal counsel in a written opinion if so ordered by a majority
of a quorum of directors not party to the action, suit or proceeding or in the
event that a quorum of such directors cannot be obtained.
Nevada Law allows corporations to provide, either in their articles,
by-laws or by agreement, for the mandatory payment of expenses of officers and
directors, as they are incurred in defending a criminal or civil action, suit or
proceeding in advance of a final disposition, provided that the officer or
director submits an undertaking to repay any advances if a court of competent
jurisdiction ultimately determines that the officer or director was not entitled
to be indemnified by the corporation.
Our Articles of Incorporation provide, to the fullest extent permitted by
Nevada Law, for the mandatory indemnification of our officers and directors for
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement incurred in connection with a civil or a criminal action, suit or
proceeding to which the officer or director is or was or is threatened to be
made a party.
Our By-Laws further provide for the contractual right to officers and
directors to receive mandatory payment of expenses as they are incurred in
connection with defending a civil or a criminal action, suit or proceeding in
advance of final disposition provided that the officer or director provides a
II-1
written undertaking to repay the advances in the event a court of competent
jurisdiction ultimately determines that such officer or director is not entitled
to be indemnified by us.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On November 8, 1997, we issued 4,000,000 common shares on a private
placement basis to seventeen institutional investors for an aggregate offering
price of $600,000 in cash. We issued an additional 60,000 common shares to two
agents, West America and Christopher Dieterich, as payment for commissions and
fees in connection with the offering.
On December 8, 1997, we issued 975,000 common shares on a private placement
basis to eight institutional investors for an aggregate offering price of
$390,000 in cash.
On April 30, 1998, we issued 117,000 common shares on a private placement
basis to Gestibroker Consulting for an aggregate offering price of $351,000 in
cash.
On May 12, 1998, we issued 33,000 common shares on a private placement
basis to Francis Pizzulli for an aggregate offering price of $99,000 in cash.
On May 31, 1998, under an Exchange Agreement between us and Corsa S.A.
Holding ("Corsa"), we issued 11,486,000 common shares on a private placement
basis to Corsa in exchange for the transfer of 100% of the outstanding shares of
Intacta Delaware Inc. and 99% of the outstanding shares of Intacta Labs Ltd.
On December 31, 1998, we issued 1,000,000 common shares in a private
placement to MFC Merchant Bank S.A. for an aggregate offering price of
$4,000,000 in cash. Under an Agency Agreement dated October 23, 1998, we paid
$400,000 to Barons Financial Services (U.K.) Ltd., the agent for the offering.
On June 30, 1999, we issued 238,000 shares of common stock in a private
placement to Valor Invest Limited in repayment of a loan of $952,000 pursuant to
a loan conversion at the rate of $4.00 per share.
In May and June 2000, we issued 25 Bridge Units for aggregate gross
proceeds of $2,500,000. Each Bridge Unit was comprised of (i) a 12% senior
promissory note in the principal amount of $100,000 and (ii) 25,000 warrants,
each to purchase one share of our common stock at a price of $3.50 per share. In
connection with the sale of Bridge Units, we issued Harmonic Research, Inc., the
placement agent for such offering, 250,000 warrants each to purchase one share
of our common stock at $3.50 per share as consideration for its services and for
performing other consulting services for us.
In June of 2000, Valor Invest Limited converted an aggregate of $250,000 of
debt into 2.5 Valor Units which were similar in all respects to the Bridge Units
issued in May and June 2000.
In October 2000, we issued an aggregate of 2,333,310 Private Placement
Units for aggregate gross proceeds of $7,000,000. Each Private Placement Unit
was comprised of (i) one share of our common stock, and (ii) one warrant to
purchase one share of our common stock at a price of $3.50 per share. In
connection with the Private Placement we issued an aggregate of 86,914 units,
similar in all respects to the Private Placement Units, to certain persons and
entities as an "In-Kind" commission for their participation in the placement of
the offering.
II-2
With the exception of (i) the May 12, 1998 offer and sale of securities,
(ii) the bridge financing in May and June 2000, and (iii) the October 2000
private placement, we relied on the exclusion from registration provided by
Regulation S under the Securities Act of 1933, in connection with the offer and
sale of securities in the above transactions. In connection with (i) the May 12,
1998 offer and sale of securities, (ii) the bridge financing in May and June
2000, and (iii) the October 2000 private placement we relied on the exemption
from registration provided by Section 4(2) and Regulation D under the Securities
Act for transactions by an issuer not involving a public offering.
II-3
ITEM 16. EXHIBITS
Exhibit Description of Exhibit
------- ----------------------
3.1 Articles of Amendment and Articles of Incorporation of Intacta
Technologies Inc. (1)
3.2 Bylaws of Intacta Technologies Inc. (1)
4.1 Specimen Stock Certificate (1)
4.2 Form of warrant issued pursuant to the registrant's bridge financing
in May and June 2000 (3)
4.3 Form of warrant issued pursuant to the registrant's private placement
in October 2000 (3)
5.1 Opinion of McDonald Carano Wilson McCune Bergin Frankovich & Hicks
LLP
10.1 Licensing Agreement dated July 19, 1999, between registrant and
DataLode Inc. (1)+
10.2 Form of Lease Agreement dated November 17, 2000, between the
registrant and North Atlanta Realty Acquisition Company, Inc. (3)
10.3 Form of Tenancy Agreement dated August 1, 2000, between Intacta Labs
Ltd. and Hakirya Towers Beer Sheva Ltd.(3)
10.4 1998 Stock Option Plan (1)
10.5 Consulting Agreement dated October 1, 1998, between registrant and
Pensbreigh Holdings Ltd. (1)
10.6 Agreement dated June 30, 1999, between registrant and Noel R.
Bambrough (1)
10.7 Exchange Agreement dated May 31, 1998 between registrant and Corsa
S.A. Holdings (1)
10.8 Consulting Agreement dated March 1, 1999 between registrant and
Pensbreigh Holdings Ltd. (1)
10.9 2000 Stock Incentive Plan, as amended (2)
10.10 License Agreement dated April 17, 2000 between the registrant and
Systems Nakashima Co., Ltd. (3)+
10.11 License Agreement dated June 30, 2000 between the registrant and
Intertek Testing Systems International Ltd. (3)+
21.1 List of subsidiaries of registrant (3)
23.1 Consent of BDO Seidman, LLP
23.2 Consent of McDonald Carano Wilson McCune Bergin Frankovich & Hicks LLP
(included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)*
-----------------
* Previously filed.
(1) Incorporated by reference to the exhibit filed with the registrant's
registration statement on Form S-1 (SEC File No. 333-30400).
(2) Incorporated by reference to Exhibit A to the registrant's Definitive Proxy
Statement on Schedule 14A dated April 27, 2001.
(3) Incorporated by reference to the exhibit filed with the registrant's
registration statement on Form S-1 (SEC File No. 333-51210).
+ Filed in redacted form pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended (the "Securities Act"). Copies of the
exhibit containing the redacted portions have been filed separately with
the Securities and Exchange Commission subject to a request for
confidential treatment pursuant to Rule 406 under the Securities Act.
II-4
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In the event that a claim for
indemnification by the registrant against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1)
II-5
or (4) or 497 (h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Atlanta, State of Georgia on January 24, 2002.
INTACTA TECHNOLOGIES, INC.
By: /s/ Noel R. Bambrough
------------------------------------
Name: Noel R. Bambrough
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the registration statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Altaf S. Nazeral Chairman of the Board of January 24, 2002
----------------------------- Directors
Altaf S. Nazerali
* Vice Chairman of the Board January 24, 2002
----------------------------- of Directors
Charles C. Johnston
/s/ Noel R. Bambrough President, Chief Executive January 24, 2002
----------------------------- Officer and Director
Noel R. Bambrough (Principal executive
officer)
/s/ Graham E. Argott Chief Financial Officer January 24, 2002
----------------------------- (Principal accounting
Graham E. Argott and financial officer)
/s/ Ross Wilmot Director January 24, 2002
-----------------------------
Ross Wilmot
* Director January 24, 2002
-----------------------------
Bernard F. Girma
*By: /s/ Noel R. Bambrough
------------------------
Noel R. Bambrough
President and Chief Executive
Officer
II-7
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
3.1 Articles of Amendment and Articles of Incorporation of Intacta
Technologies Inc. (1)
3.2 Bylaws of Intacta Technologies Inc. (1)
4.1 Specimen Stock Certificate (1)
4.2 Form of warrant issued pursuant to the registrant's bridge financing
in May and June 2000 (3)
4.3 Form of warrant issued pursuant to the registrant's private placement
in October 2000 (3)
5.1 Opinion of McDonald Carano Wilson McCune Bergin Frankovich & Hicks LLP
10.1 Licensing Agreement dated July 19, 1999, between registrant and
DataLode Inc. (1)+
10.2 Form of Lease Agreement dated November 17, 2000, between the
registrant and North Atlanta Realty Acquisition Company, Inc. (3)
10.3 Form of Tenancy Agreement dated August 1, 2000, between Intacta Labs
Ltd. and Hakirya Towers Beer Sheva Ltd. (3)
10.4 1998 Stock Option Plan (1)
10.5 Consulting Agreement dated October 1, 1998, between registrant and
Pensbreigh Holdings Ltd. (1)
10.6 Agreement dated June 30, 1999, between registrant and Noel R.
Bambrough (1)
10.7 Exchange Agreement dated May 31, 1998 between registrant and Corsa
S.A. Holdings (1)
10.8 Consulting Agreement dated March 1, 1999 between registrant and
Pensbreigh Holdings Ltd. (1)
10.9 2000 Stock Incentive Plan, as amended (2)
10.10 License Agreement dated April 17, 2000 between the registrant and
Systems Nakashima Co., Ltd. (3)+
10.11 License Agreement dated June 30, 2000 between the registrant and
Intertek Testing Systems International Ltd. (3)+
21.1 List of subsidiaries of registrant (3)
23.1 Consent of BDO Seidman, LLP
23.2 Consent of McDonald Carano Wilson McCune Bergin Frankovich & Hicks LLP
(included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)*
_________________
* Previously filed.
(1) Incorporated by reference to the exhibit filed with the registrant's
registration statement on Form S-1 (SEC File No. 333-30400).
(2) Incorporated by reference to Exhibit A to the registrant's Definitive Proxy
Statement on Schedule 14A dated April 27, 2001.
(3) Incorporated by reference to the exhibit filed with the registrant's
registration statement on Form S-1 (SEC File No. 333-51210).
+ Filed in redacted form pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended (the "Securities Act"). Copies of the
exhibit containing the redacted portions have been filed separately with
the Securities and Exchange Commission subject to a request for
confidential treatment pursuant to Rule 406 under the Securities Act.