As Of Filer Filing On/For/As Docs:Pgs Issuer Agent
10/11/96 Global Technologies Ltd S-3 5:50 Donnelley R R & S..05/FA
Registration Statement for Securities Offered Pursuant to a Transaction · Form S-3
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-3 Registration Statement for Securities Offered 37 232K
Pursuant to a Transaction
2: EX-5.1 Legal Opinion of Irell & Manella Llp 1 8K
3: EX-10.2 Employment Agreement for Steven M. Fieldman 10 55K
4: EX-23.2 Consent of Kpmg Peat Marwick Llp 1 5K
5: EX-23.3 Consent of Consent of Richard A. Eisner 1 6K
S-3 · Registration Statement for Securities Offered Pursuant to a Transaction
Document Table of Contents
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 11, 1996
REGISTRATION NO.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
· Download Table
DELAWARE 11-3197148
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
4041 N. CENTRAL AVENUE, SUITE 2000
PHOENIX, ARIZONA 85012
(602) 200-8900
---------------
MICHAIL ITKIS
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
4041 N. CENTRAL AVENUE, SUITE 2000
PHOENIX, ARIZONA 85012
(602) 200-8900
(AGENT FOR SERVICE)
---------------
It is requested that copies of communications be sent to:
THEODORE E. GUTH, ESQ.
IRELL & MANELLA LLP
1800 AVENUE OF THE STARS
SUITE 900
LOS ANGELES, CALIFORNIA 90067
(310) 277-1010
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of the Registration Statement as determined
by market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
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, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
---------------
CALCULATION OF REGISTRATION FEE
· Enlarge/Download Table
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PER WARRANT OR AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
-----------------------------------------------------------------------------------------------------
Redeemable Class B Warrants........... 275,000(2) $ 6.50(1) $1,787,500(1) $ 616.38
-----------------------------------------------------------------------------------------------------
Class A Common Stock ($.01 par
value)(3)............................ 275,000(3) $14.69(1) $4,039,750(1) $1,393.02
-----------------------------------------------------------------------------------------------------
Class A Common Stock ($.01 par
value)(4)............................ 8,775,000(4) $ -- $ -- -- (4)
-----------------------------------------------------------------------------------------------------
Redeemable Class B Warrants(5)........ 1,550,000(5) $ -- $ -- -- (5)
-----------------------------------------------------------------------------------------------------
Class A Common Stock ($0.1 par
value)(5)............................ 3,100,000(5) $ -- $ -- -- (5)
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
(1) Estimated solely for purpose of determining the registration fee pursuant
to Rule 457(c) on the basis of the average of the high and low prices per
share of the Redeemable Class B Warrants and the Class A Common Stock
reported on the Nasdaq SmallCap Market on October 8, 1996.
(2) Warrants issued in an April 1996 private placement and registered for
resale hereunder by the holders thereof.
(3) Shares issuable upon exercise of the Redeemable Class B Warrants described
in (2) above.
(4) Shares issuable upon exercise of up to 8,775,000 outstanding Class B
Warrants issued in prior public offerings and previously registered on
Form SB-2, Registration Nos. 33-86926 and 333-02044, for which
registration fees were previously paid. Pursuant to Rule 429, no
additional registration fee is due.
(5) Represents 1,550,000 Class B Warrants and 1,550,000 shares of Class A
Common Stock held by certain securityholders, and an additional 1,550,000
shares of Class A Common Stock issuable upon exercise of such warrants, in
each case previously registered for resale by the Selling Securityholders
on Form SB-2, Registration Nos. 33-86926 and 333-02044, for which
registration fees were previously paid. Pursuant to Rule 429, no
additional registration fee is due.
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 OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
EXPLANATORY NOTE
Pursuant to Rule 429 of the Securities Act of 1933, as amended, this
Registration Statement relates to three different offerings, as follows:
OFFERING #1: This Registration Statement relates to (i) 275,000 of the
Company's redeemable class B warrants ("Class B Warrants") acquired by certain
selling securityholders in a private placement in April 1996, and (iii)
275,000 shares of Class A Common Stock underlying such Class B Warrants, all
for resale from time to time by the selling securityholders.
The complete Prospectus relating to Offering #1 follows immediately after
this Explanatory Note.
OFFERING #2: This Registration Statement also relates to up to 8,775,000
shares of Class A Common Stock (the "Class B Warrant Stock") issuable upon
exercise of the Company's outstanding Class B Warrants (excluding Class B
Warrants held by the selling securityholders in Offerings #1 and #3). The
issuance of the Class B Warrant Stock was previously registered in the
Company's Registration Statement on Form SB-2, Registration No. 333-02044 (the
"SB-2"), and is included in this Registration Statement to satisfy the
Company's undertaking to file a post-effective amendment to the SB-2.
The complete Prospectus relating to Offering #1 follows immediately after
this Explanatory Note. Following the Prospectus for Offering #1 are pages
(denoted as Alternate Offering #2 Pages) of the Prospectus relating solely to
the Class B Warrant Stock, including an alternative cover page, and sections
entitled "Use of Proceeds," "Dilution," "Plan of Distribution," "Concurrent
Offerings" and "Legal Matters" to be used in lieu of the sections entitled
"Use of Proceeds," "Dilution," "Selling Securityholders," "Plan of
Distribution," "Blair Commission," "Concurrent Offerings" and "Legal Matters"
in the Prospectus relating to Offering #1.
OFFERING #3: This Registration Statement also relates to (i) 1,550,000 Class
B Warrants and 1,550,000 shares of Class A Common Stock issued upon exercise
of certain redeemable class A warrants acquired by certain selling
securityholders in connection with the Company's 1994 Bridge Financing and
(ii) an additional 1,550,000 shares of Class A Common Stock underlying the
aforementioned Class B Warrants, all for resale from time to time by the
selling securityholders. The resale of the selling securityholder securities
offered in Offering #3 was previously registered in the Company's Registration
Statement on the above-described SB-2, and is included in this Registration
Statement to satisfy the Company's undertaking to file a post-effective
amendment to the SB-2.
The complete Prospectus relating to Offering #1 follows immediately after
this Explanatory Note. Following the Prospectus for Offering #1 are pages
(denoted as Alternate Offering #3 Pages) of the Prospectus relating solely to
the resale of the selling securityholder securities offered in Offering #3,
including an alternative cover page, and sections entitled "Use of Proceeds,"
"Dilution," "Selling Securityholders," "Concurrent Offerings" and "Legal
Matters" to be used in lieu of the sections entitled "Use of Proceeds,"
"Dilution," "Selling Securityholders," "Concurrent Offerings" and "Legal
Matters" in the Prospectus relating to Offering #1.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER , 1996
PROSPECTUS
INTERACTIVE FLIGHT TECHNOLOGIES, INC.
275,000 REDEEMABLE CLASS B WARRANTS
275,000 SHARES OF CLASS A COMMON STOCK
This Prospectus relates to 275,000 Redeemable Class B Warrants (the "Class B
Warrants") of Interactive Flight Technologies, Inc., a Delaware corporation
(the "Company"), held by two holders (the "Selling Securityholders"), and the
275,000 shares of Class A Common Stock, $.01 par value ("Class A Common
Stock"), issuable upon the exercise of such 275,000 Class B Warrants. The
275,000 Class B Warrants held by the Selling Securityholders are sometimes
referred to herein as the "Selling Securityholder Warrants" and, together with
the shares of Class A Common Stock issuable upon exercise of the Selling
Securityholder Warrants, the "Selling Securityholder Securities." The Selling
Securityholder Warrants were issued to the Selling Securityholders in exchange
for certain services rendered to the Company. See "Selling Securityholders" and
"Plan of Distribution." Each Class B Warrant entitles the holder to purchase
one share of Class A Common Stock, at an exercise price of $9.75, subject to
adjustment, at any time until March 6, 2000. The Class B Warrants are subject
to redemption by the Company for $.05 per Warrant, upon 30 days' written
notice, if the average closing bid price of the Class A Common Stock exceeds
$13.65 per share (subject to adjustment) for 30 consecutive business days
ending within 5 days of the date of the notice of redemption.
-----------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
ON PAGE 6.
-----------
The Class A Common Stock and the Company's Class B Common Stock, $.01 par
value (the "Class B Common Stock"), are essentially identical, except that the
Class B Common Stock has six votes per share and the Class A Common Stock has
one vote per share on all matters upon which stockholders may vote. The holders
of Class B Common Stock, the majority of whom are executive officers, directors
and/or principal stockholders of the Company, control approximately 65% of the
total voting power and therefore are able to elect all of the Company's
directors and control the Company.
The securities offered by the Selling Securityholders by this Prospectus may
be sold from time to time by the Selling Securityholders or by their
transferees. The distribution of the Selling Securityholder Warrants and the
Class A Common Stock offered hereby by the Selling Securityholders may be
effected in one or more transactions that may take place on the over-the-
counter market, including ordinary brokers' transactions, privately negotiated
transactions or through sales to one or more dealers for resale of such
securities as principals, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. Usual
and customary or specifically negotiated brokerage fees or commissions may be
paid by the Selling Securityholders.
The Selling Securityholders, and intermediaries through whom such securities
are sold, may be deemed underwriters within the meaning of the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the securities
offered, and any profits realized or commissions received may be deemed
underwriting compensation. The Company has agreed to indemnify the Selling
Securityholders against certain liabilities, including liabilities under the
Securities Act.
The Company will not receive any of the proceeds from the sale of securities
by the Selling Securityholders. In the event all of the Selling Securityholder
Warrants are exercised, the Company will receive gross proceeds of $2,681,250,
less payment of applicable commissions to D.H. Blair Investment Banking Corp
("Blair"). See "Selling Securityholders," "Plan of Distribution" and "Blair
Commission."
The Class A Common Stock and the Class B Warrants are traded on the Nasdaq
SmallCap Market ("Nasdaq"). On October , 1996, the closing sale price of the
Class A Common Stock on Nasdaq was $ per share and the closing sale price of
the Class B Warrants on Nasdaq was $ .
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1996.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING SECURITYHOLDERS OR ANY
UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports and other information filed by
the Company with the Commission pursuant to the informational requirements of
the Exchange Act may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Offices at (i) Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, (ii) 7
World Trade Center, 13th Floor, New York, New York 10048, and (iii) 5757
Wilshire Boulevard, Suite 500, Los Angeles, California 90036. Copies of such
material may be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains a Web site that contains reports, proxy statements,
information statements and other information regarding registrants that file
electronically with the Commission. Such reports, proxy statements,
information statements and other information may be found the Commission's
site address, http://www.sec.gov. The Class A Common Stock and the Class B
Warrants are listed on the Nasdaq SmallCap Market ("Nasdaq") and reports,
proxy statements and other information regarding the Company can be inspected
at the offices of such exchange.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the Securities offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits thereto, as permitted by the rules
and regulations of the Commission. For further information with respect to the
Company and the Securities, reference is hereby made to the Registration
Statement, including the exhibits filed or incorporated as a part thereof.
Statements contained herein concerning the provisions of any document are not
necessarily complete and in each instance reference is made to the copy of the
document filed as an exhibit to the Registration Statement. Each such
statement is qualified in its entirety by reference to the copy of the
applicable documents filed with the Commission.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents heretofore filed by the Company under the Exchange
Act with the Commission are incorporated herein by reference: (1) the
Company's Annual Report on Form 10-KSB for the fiscal year ended October 31,
1995, and Amendment No. 1 to the Annual Report on Form 10-KSB/A for the fiscal
year ended October 31, 1995; (2) the Company's Quarterly Reports on Form 10-
QSB dated January 31, 1996, April 30, 1996 and July 31, 1996; and (3) the
description of the Company's Common Stock as set forth in the Company's
registration statement on Form 8-A filed with the Commission on December 31,
1994, as amended by the Company's registration statement on Form 8-A/A filed
with the Commission on March 8, 1995, and any other amendments or reports
thereto filed with the Commission for the purpose of updating such
description.
2
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the shares of Common Stock made hereby shall be
deemed to be incorporated in this Prospectus by reference and to be a part
hereof from the date of filing of such documents. Any statement incorporated
herein shall be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained herein or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company will provide, without charge, to each person to whom a copy of
this Prospectus has been delivered, on the request of such person, a copy of
any and all of the information that has been or may be incorporated by
reference in this Prospectus, other than exhibits thereto. Written or oral
requests for such copies should be directed to Interactive Flight
Technologies, Inc., 4041 N. Central Avenue, Suite 2000, Phoenix, Arizona
85012, Attention: Chief Financial Officer. The telephone number is (602) 200-
8900.
FORWARD-LOOKING INFORMATION
Except for historical information contained herein, the matters discussed in
this Prospectus and in the documents incorporated by reference herein are
forward-looking statements that are subject to certain risks and uncertainties
that could cause actual results to differ materially from those set forth in
such forward-looking statements. Such risks and uncertainties include, without
limitation, the failure of passenger use of the Entertainment Network to
generate sufficient revenues, the failure to execute definitive agreements
with additional airlines (or, in the case of Swissair, with the Swiss lottery
organization) on favorable terms or at all, the failure of the Company to
receive sufficient financing to perform its obligations under its existing and
contemplated agreements, the impact of competition and downward pricing
pressures, the effect of changing economic conditions, risks in technology
development, the risks involved in currency fluctuations, and the other risks
and uncertainties detailed in "Risk Factors" below and in the Company's
Registration Statement on Form SB-2 dated April 4, 1996, the Company's Annual
Report on Form 10-KSB and Amendment No. 1 to the Annual Report on Form 10-
KSB/A for the fiscal year ended October 31, 1995.
3
THE COMPANY
Interactive Flight Technologies, Inc. (the "Company") is engaged in the
development, assembly, installation and operation of a computer-based in-
flight entertainment network (the "Entertainment Network"). The first
generation of the Entertainment Network provided aircraft passengers the
opportunity to view movies, to play computer games and, in certain cases where
permitted by applicable law, to gamble through a high-resolution video touch
screen. The Company has also recently developed a second generation of the
Entertainment Network (the "IFEN-2") which includes additional features such
as secure casino gaming, in-flight shopping, a telephone interface system, the
ability for passengers to pay for IFEN-2 usage through their credit cards, and
increased video-on-demand capacity.
To date, the Company has entered into contracts to install and operate the
Entertainment Network on the aircraft of three airlines--Alitalia Airlines
S.p.A. ("Alitalia"), Debonair Airlines ("Debonair"), and Swissair VKB
("Swissair"). Under the Company's agreement with Alitalia (the "Alitalia
Agreement"), the first generation of the Entertainment Network system was
installed in November 1995 in the first class and business class seats of an
Alitalia MD-11 aircraft. Following completion of the test period of this first
installed Entertainment Network system, Alitalia accepted the remainder of the
Alitalia Agreement and the Company accordingly delivered first generation
Entertainment Network systems for installation on an additional four Alitalia
MD-11 aircraft. The agreement provides for the Company to operate the
Entertainment Networks on all five aircraft over a period of approximately
eight years. The Alitalia Agreement does not presently provide for, and is not
expected to provide for, passenger use of gambling features of the
Entertainment Network. Under the Alitalia Agreement, Alitalia is to pay an
aggregate of approximately $2.7 million for the hardware components of the
five Entertainment Network systems, of which $1.1 million has been paid to
date and $1.6 million is currently due and payable.
In March 1996, the Company entered into a second airline contract (the
"Debonair Agreement") with Debonair, a start-up European airline. The Debonair
Agreement provides for the Company to deliver and install IFEN-2 systems
(including video casino style gambling) for all seats on Debonair's entire
fleet, which consists of six RJ-146 aircraft. The aggregate purchase price to
be paid by Debonair for the hardware components of the six IFEN-2 systems and
related spare parts is approximately $5.8 million. However, the Debonair
Agreement provides that, provided Debonair utilizes the casino gaming feature
of the Entertainment Networks, Debonair is not required to pay any up-front
funds to the Company for the six Entertainment Networks. Instead, payments to
the Company will be made solely through a revenue-sharing arrangement, which
provides that the Company will receive a percentage of revenues generated by
the Entertainment Networks, principally casino gaming revenues, until the
aggregate purchase price plus accrued interest for all six Entertainment
Networks is paid, and thereafter the Company will receive a reduced percentage
of such revenues. The Debonair Agreement further provides that if the use of
the casino gaming features of the IFEN-2 systems is ordered by law to cease,
then no further payments of purchase price for each installed system shall be
due.
Effective July 18, 1996, the Company entered into an agreement with Swissair
to provide for delivery and installation by the Company of IFEN-2 systems on
sixteen Swissair MD-11 aircraft and five Swissair B-747 aircraft. The Company
will also provide various maintenance and operational services for the
installed IFEN-2 systems. Subject to execution of an agreement with
Interkantonale Landeslotterie ("ILL"), the operator of the Swiss lottery based
in Zurich, Switzerland, the IFEN-2 systems installed on Swissair aircraft will
allow passengers to participate in various Swiss lottery games, but are not
expected to allow use of the traditional casino style gaming features such as
slots or poker. In the event that no agreement is reached with ILL, either
Swissair or the Company may terminate the Swissair Agreement.
Under the Swissair Agreement, subject to the terms thereof, the Company is
entitled to receive an aggregate of approximately $72 million for the IFEN-2
hardware, plus the costs of installation and certain upgrades. The Company
will also be reimbursed for its projected costs in connection with maintaining
and operating the systems. However, the hardware purchase price and the
operating expenses are payable only out of net revenues received from
passenger participation in the aforementioned lottery games. Further, the
Company may receive
4
such amounts only after Swissair is first reimbursed from the net lottery
revenues for certain expenses incurred in connection with the installation and
operation of the IFEN-2 systems. Any amounts remaining after payment of the
Company's operating costs and the IFEN-2 purchase price will be paid over to
ILL. The Company will also receive a percentage of revenues and commissions
from advertising and shopping services available on the installed IFEN-2
systems.
The Company is aggressively marketing the Entertainment Network to numerous
additional airlines, focusing primarily on international carriers or domestic
carriers with international routes. However, no there can be no assurance that
definitive agreements will be executed with any other airlines. See "Risk
Factors."
On September 5, 1996, the Company signed a Letter of Intent to form a
strategic alliance (the "Alliance") with interests of the Pritzker family of
Chicago (the "Pritzker Interests"). The Letter of Intent contemplates that the
Pritzker Interests would use their marketing resources to enhance IFT's
relationship with international domestic air carriers. In addition, the Letter
of Intent provides for the Pritzker Interests to help develop and coordinate
financing sources for IFT.
Subject to the satisfaction of certain conditions, the Pritzker Interests
would invest up to $20 million in a proposed Joint Venture in order to raise
one-third of the money required for a potential future airline project
currently under consideration (which amount would not be available to fund the
Company's currently existing airline obligations). The Pritzker Interests
would also have the option to invest in up to six similar ventures for future
airline projects. Under the Alliance, the Pritzker Interests would purchase up
to $1 million of IFT stock in the open market, and would receive warrants to
purchase up to 10% of IFT (on a fully diluted basis). These warrants would be
issued in specified increments as future airline contracts are executed by
IFT. Finally, the Alliance would provide for John Pritzker, and one other
Pritzker nominee to join the Board of Directors of IFT, and for additional
Pritzker nominees if the size of the Board is increased.
Completion of the transaction and formation of the Alliance are subject to
customary conditions precedent, including the negotiation and execution of
definitive documentation. There can be no assurance that the parties will
agree upon and execute such definitive documents or that the Alliance, if
formed, will produce the desired results.
Since commencement of operations, the Company has developed a substantial
catalogue of proprietary technology and know-how relating to the Entertainment
Network and its related systems. In addition, the Company has an exclusive
license (the "FortuNet License") for technology for airline use from FortuNet,
Inc. ("FortuNet"), a gaming equipment manufacturer that distributes video
gaming networks to casinos and other gaming establishments. The Chief
Executive Officer of the Company, who is also a director and principal
stockholder of the Company, is a former employee of FortuNet and was a
substantial contributor to the development of the technology licensed from
FortuNet.
In July 1996, the Company relocated its principal executive offices and its
primary manufacturing and development facilities from Las Vegas, Nevada to
Phoenix, Arizona.
The Company was incorporated in Delaware in August 1994 and is the successor
by merger to In-Flight Entertainment Services Corp., a New York corporation
incorporated in February 1994. The Company completed an initial public
offering of its securities in March 1995. Unless the context requires or as
otherwise indicated, all references to the "Company" include the predecessor
company. The Company's principal executive offices are located at 4041 N.
Central Avenue, Suite 2000, Phoenix, Arizona 85012, and its telephone number
is (602) 200-8900.
5
RISK FACTORS
An investment in the securities offered hereby involves a high degree of
risk. In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors
before purchasing the securities offered hereby.
Limited Operating History; Unproven Viability of Entertainment Network. The
Company was organized in February 1994 and completed its initial public
offering in March 1995. To date, the Company has secured agreements with
Alitalia (for the provision of five first generation Entertainment Network
systems for a total purchase price of approximately $2.7 million plus amounts
received from the sale of service parts, if any), with Debonair (for the
provision of six IFEN-2 Entertainment Networks for a total purchase price of
approximately $5.8 million) and with Swissair (for the provision of twenty-one
IFEN-2 Entertainment Networks for a total purchase price of $72 million), in
the last case subject to agreement with ILL (the Swiss lottery organization).
However, as of the date hereof, the Company has installed systems and received
revenues only under the Alitalia agreement and, with respect to the other
agreements and any future agreements, may experience many of the problems,
delays, expenses and difficulties commonly encountered by early stage
companies, many of which are beyond the Company's control. These include, but
are not limited to, unanticipated problems related to product development,
regulatory compliance, manufacturing, marketing, additional costs and
competition and technological obsolescence, as well as problems associated
with sales or operations in foreign countries. There can be no assurance that
the Company will be able to market the IFEN-2 Entertainment Network to
additional airlines or that once installed, the IFEN-2 Entertainment Networks
will function as intended, meet with customer acceptance or generate any
revenue, or that the Company will ultimately achieve profitability. The
Company has incurred significant development and marketing operating losses to
date and there can be no assurance of future revenues or profits.
The acceptance of the Entertainment Network is dependent on a number of
factors, including the technological quality and features of such product
compared to competitive products, the actual and the perceived ability of the
Company to service the Entertainment Network, consumer demand and the
purchasing patterns of airlines. Many of these factors are beyond the
Company's control. As a result of all of these factors, as well as
unanticipated problems which may be experienced by the Company, the Company is
unable to predict when, if ever, the Entertainment Network will be
commercially successful.
Accumulated Deficit; Operating Losses and Charges to Operations. At July 31,
1996, the Company had an accumulated deficit of approximately $13.3 million.
The Company will be required to continue to expend significant funds in
connection with continued development, manufacturing and marketing activities
with respect to the Entertainment Network which to date have resulted in, and
are expected to continue to result in, operating losses and reductions in
working capital. The extent of future losses and the time required to achieve
profitability are highly uncertain. There can be no assurance that the Company
will be able to achieve profitability on a sustained basis, if at all.
Need for Additional Financing; Potential Cash Shortages. At July 31, 1996,
the Company had working capital of approximately $25.0 million. The Company
increased its working capital in May 1996 from the proceeds of its Class A
Warrant Exercise Offer, its third financing, from which the Company received
net proceeds of approximately $25.2 Million. However, the Company has incurred
additional losses since the Exercise Offer which have again reduced working
capital, and the Company expects that losses will continue for the foreseeable
future. As a result, unless funds are received from additional financing,
working capital is expected to continue to decrease following the initial
increase attributable to receipt of proceeds from the aforementioned Exercise
Offer.
The Company's revenues have been generated, and are anticipated to be
generated in the future, from sales, installation and servicing of the
Entertainment Network aboard commercial and charter aircraft. The contracts
the Company has executed and is currently negotiating generally provide for
the Company to install the Entertainment Network on an aircraft and to be paid
for the equipment and for its installation and maintenance out of revenue
generated by passenger use of the installed network on the aircraft. As a
result, the Company
6
must expend significant capital amounts for the assembly, installation and
maintenance of the Entertainment Network on each aircraft, but revenue as
payment for the system will be received, if at all, only as a result of the
use of the system over a potentially significant period of time. The Company
will be required to incur substantial up-front costs required to perform the
Debonair Agreement and the Swissair Agreement. Moreover, the Company may also
enter into commitments to purchase equipment necessary for additional
installations, even in the absence of a purchase commitment from an airline,
if such action is determined to be necessary or desirable to pursue business
opportunities. The Company also expects its cash requirements to increase in
future periods due to higher expenses associated with increased sales and
marketing activities and financing of inventory purchases, installations and
accounts receivable.
As a consequence, the Company will need additional financing to perform
under its existing contracts (i.e., the Alitalia Agreement, the Debonair
Agreement and the Swissair Agreement) in addition to any future contracts that
it may enter into, including those it is currently negotiating. Although the
Company has been in discussions with a number of external sources of capital
to raise portions of the funds needed, there can be no assurances that such
funds will be available in the near future when they will be needed for the
contracts involved. Without additional funding from external capital sources
or from exercise of the Company's outstanding warrants, the Company will not
have sufficient cash to complete all of its existing and pending contracts.
Risks Relating to Growth and Expansion. Growth of the Company's business may
place significant pressure on the Company's management, operational and
technical resources. The Company believes that for competitive reasons, it is
important to obtain an installed customer base as early as possible and,
accordingly, the failure to expand operations in the early years of the
Company's business may hinder or preclude significant future growth. If the
Company is successful in obtaining additional agreements with airlines
relating to the installation of Entertainment Networks, the Company will be
required to raise substantial additional funds and deliver large volumes of
quality products to its airline customers on a timely basis at a reasonable
cost to the Company. The Company has no experience in delivering large volumes
of its products and does not have the capacity and may not have the capital
resources to meet wide scale production requirements. The Company currently
has contracts with domestic manufacturers for high-volume production, and may
enter into additional contracts with such domestic and foreign manufacturers.
However, there can be no assurance that any manufacturing arrangement will be
entered into or will be successful, that the Company's efforts to conduct
manufacturing activities will be successful or that the Company or any
supplier will be able to satisfy commercial scale production requirements on a
timely and cost-effective basis. The Company's success will also depend in
part upon its ability to provide its airline customers with timely service and
support. The Company will also be required to develop and improve operational,
management and financial systems and controls. Failure to manage growth would
have a material adverse effect on the business of the Company. Expenses
arising from Company activities to increase market penetration and support
growth will have a negative impact on operating results.
Risks Relating to the Debonair and Swissair Agreements. There are numerous
risks associated with the Debonair Agreement and the Swissair Agreements of
which investors should be aware. First, the Company will be required to incur
substantial up-front costs to perform under these agreements in advance of
receiving any significant payments from Debonair or Swissair. Further, the
Debonair Agreement provides that the only funds to be received by the Company
from Debonair will be in the form of revenue-sharing of the revenues from the
six Entertainment Networks (primarily revenues from the casino gaming).
Likewise, the Swissair Agreement provides that the purchase price for the
hardware, as well as the Company's operating costs, will be paid only out of
lottery revenues from the twenty-one Entertainment Networks (with ILL first
receiving a portion thereof and Swissair then receiving first priority for its
expenses prior to payment of the Company's expenses and the purchase price for
the hardware). Thus, the Company's ability to recoup its up-front costs and/or
derive any profit under the either of these agreements will be dependent upon
a number of factors, including the success of the airlines' respective
businesses, the extent to which passengers utilize the casino and lottery
gaming features of the Entertainment Networks and numerous other factors, most
of which are beyond the Company's control. In fact, Debonair is a start-up
airline and, consequently, there is no assurance that it will ever commence
operations or, if it does, that its operations will be successful. To the
extent that there are any unanticipated problems
7
relating to product development, regulatory compliance, manufacturing and
other factors, the costs estimates described above to perform the Debonair
Agreement and the Swissair Agreement may increase significantly, thereby
utilizing a substantially higher amount of the Company's working capital than
currently contemplated.
Second, since these agreements contemplate that the Entertainment Network
will be installed in coach class and will feature casino gaming, the Company
must install and operate the newly-developed IFEN-2 system on both Debonair
and Swissair aircraft. These will represent the first commercial installations
of the IFEN-2 system, and there can be no assurance that the IFEN-2 systems,
once installed, will function properly or meet with customer acceptance.
Third, both of the contracts are subject to the gaming laws of various
jurisdictions. See "--Regulatory Restrictions on Gaming Devices."
Dependence Upon Limited Number of Potential Customers. The sole market for
the Company's products is expected to be commercial airlines. There are a
limited number of major commercial airlines worldwide. Accordingly, even
assuming a sustained commercial viability and the successful marketing of the
Entertainment Network, the Company expects to have contracts with only a
limited number of customers, each of which may account for a substantial
portion of the Company's revenues. The inability to generate new contracts to
replace completed contracts could result in substantial losses in future
fiscal periods. Moreover, because gaming is prohibited on all United States
air carriers and on aircraft operated to or from the United States by foreign
carriers, the Entertainment Network may be commercially less attractive to a
significant segment of the commercial airline market.
Regulatory Restrictions on Gaming Devices. United States law, with certain
exceptions, currently prohibits the knowing transportation of gaming devices
on aircraft operated in interstate air transportation. In addition, states may
prohibit the transportation and use of gaming devices on flights operating
between two points in a single state. Federal law also prohibits the
installation, transportation or operation of gaming devices by any U.S. or
foreign air carrier or for such carriers to permit their use on aircraft
operated to or from the United States in foreign air transportation. The
United States Secretary of Transportation has conducted a study and has
reported to Congress in March 1996, regarding the safety, commercial and
operational issues posed by gaming devices aboard commercial aircraft.
However, this report did recommend that Congress take immediate action to
modify Federal law regarding gaming devices on commercial aircraft and it is
uncertain what effect the report will have, if any. Moreover, the laws
regarding the transmission of gaming data into, out of, or within United
States territory, even where such data was lawfully obtained in another
jurisdiction, are unclear. As a result, there can be no assurance that the
transmission of such data will not be restricted or prohibited. Because gaming
can generally be expected to generate significantly greater revenues and
profitability than other entertainment options expected to be available on the
Entertainment Network, the inability to offer gaming on flights would have a
material adverse impact on the Company's business and on the market acceptance
by airlines of the Entertainment Network. The Company will also be subject to
the laws of foreign jurisdictions which may similarly restrict or prohibit the
gaming or other activities offered on the Entertainment Network.
Requirement For and Uncertainty of Regulatory Approval of Entertainment
Network. The installation and use of the Entertainment Network in each
aircraft type will require prior certification and approvals from the Federal
Aviation Administration ("FAA") and from aeronautical agencies of foreign
governments. Prior to certification and approval, the Entertainment Network
must be installed on an aircraft and tested, including an in-flight test. The
Company has received FAA certification for the Entertainment Network on
Alitalia MD-11 aircraft, and has completed delivery of the Entertainment
Network for installation on five Alitalia MD-11 aircraft. The Company will
require FAA and comparable foreign certification prior to installing the
Entertainment Network on the Debonair RJ-146 and the Swissair MD-11 and B-747
aircraft, and the aircraft of any other airlines with which the Company may
execute agreements in the future. However, there can be no assurance that
further FAA and foreign certifications and approvals will be obtained, or
obtained in a timely fashion in connection with the Swissair Agreement or
thereafter. In addition, even if FAA certification is obtained, federal
8
law grants to the FAA the authority to reexamine at any time the basis upon
which certification and approval of the Entertainment Network may be granted
and, if appropriate, to amend or revoke such certifications and approvals,
subject to certain appeal rights.
Risks of Patent Infringement. The use of the Company's technology, including
the patented technology licensed from FortuNet, may give rise to claims that
the Company's products infringe the patents of others. The Company is aware of
a number of United States and foreign patents which include claims relating to
technologies similar to those included in the Entertainment Network. Although
the Company is aware of a foreign patent (and a corresponding U.S.
application) that may cover the Entertainment Network, the Company believes
that this patent is currently unenforceable and cannot be revived because of
the failure to pay certain renewal fees and that, even if this patent were to
become enforceable, the Company can take steps to help ensure that its
activities would not be infringing. However, in the event such patent became
enforceable and an infringement claim were brought against the Company and any
such claim were successful, in addition to any potential liability for
damages, the Company could be required to obtain a license in order to
continue to market the Entertainment Network. There can be no assurance that
the Company would prevail against any such claim or that any license required
would be made available on acceptable terms or at all. In addition, if the
Company becomes involved in any such litigation, it could consume a
substantial portion of the Company's resources and management time and any
resulting liability of the Company may have a material adverse effect on the
Company's results of operations and financial condition. The Company has
agreed to pay all costs and damages associated with any patent infringement
litigation initiated against Alitalia, Debonair, Swissair and ILL.
Uncertainty of Patent Protection; No Assurance of Significant Competitive
Advantage. The Entertainment Network is dependent upon unpatented proprietary
technology and know-how developed by the Company and, to a lesser extent,
patented technology that the Company has licensed from FortuNet. There can be
no assurance that FortuNet's issued patents (or any issued to the Company in
the future) will provide the Company with any significant competitive
advantage or that challenges will not be instituted against the validity or
enforceability of any patent licensed or owned by the Company or, if
instituted, that such challenges will not be successful. The cost of
litigation to uphold the validity and protect against infringement of patents
can be substantial. FortuNet's obligations to indemnify the Company under the
FortuNet License are limited to the amount of license fees payable to FortuNet
under the FortuNet License. Furthermore, there can be no assurance that others
will not independently develop substantially equivalent or more advanced
proprietary information and techniques or otherwise gain access to the
Company's trade secrets or obtain such technology or duplicate the
Entertainment Network. In addition, to the extent that consultants (including
FortuNet), key employees or other third parties apply technological
information developed by them or by others to Company projects, disputes may
arise as to the proprietary rights to such information which may not be
resolved in favor of the Company. There can also be no assurance that the
Company can meaningfully protect its intellectual property (particularly in
countries where there are no patents corresponding to those patents licensed
from FortuNet).
Risks of Foreign Operations; Dependence on Foreign Sales
Representatives. Because the Company believes the Entertainment Network is
commercially more viable on international flights, the Company's principal
customers are expected to be foreign airlines. Moreover, the Company uses and
intends to continue to use the services of sales representatives to negotiate
contracts with foreign airlines. As a result, the Company may become obligated
to pay significant fees to such representatives, who typically charge a
percentage of the contract purchase price. Accordingly, the Company's control
over the negotiating process may be reduced. Further, a substantial portion of
the Company's operations will be subject to various factors characteristic of
conducting business outside the United States, such as import duties, trade
restrictions, work stoppages, foreign currency fluctuations, export controls
or license requirements, political or economic instability, imposition of
government controls and other factors, any or all of which could have a
material adverse effect on the business of the Company. Agreements may also be
more difficult to enforce and receivables more difficult to collect through a
foreign country's legal or currency expatriation systems. In addition, the
laws of certain countries relating to proprietary rights do not protect the
Company's products and intellectual property rights to the same extent as do
the laws of the United States.
9
Capital Intensive Purchase; Extensive Sales Cycle; Fluctuations in Revenues
and Operating Results. The outright purchase of an Entertainment Network by an
airline would represent a significant capital investment by such airline.
Airlines are generally faced with increasing pressures to cut costs,
particularly in non-safety related areas, and their ability to pass increased
costs to consumers is limited. Accordingly, the Company anticipates that an
extensive time period will be involved in negotiating and obtaining any actual
purchase commitments from airlines, which may include a test installation in
addition to an evaluation of the technology. In addition, installations are
expected to be conducted in incremental deployments and revenues expected to
be recognized as the installations are completed, so that related receivables
may not be collected for an extended period after installation. As a result,
the Company is unable to predict whether or when any additional purchase
agreements with airlines will be entered into, and the Company may experience
significant fluctuations in revenue and cash flow or periods in which no
revenues are recognized and cash flow shortages are experienced. In addition,
if anticipated sales and installations do not occur when expected,
expenditures and inventory levels could be disproportionately high and the
Company's operating results for that quarter may be adversely affected.
Particularly during the early years of operations, if the Company obtains any
such additional purchase agreements, a limited number of customers may account
for all or substantially all of the Company's revenues.
Seasonality. Because the installation of the Entertainment Network requires
that the aircraft be taken out of service temporarily, and because the
grounding of an aircraft represents a significant lost revenue opportunity for
an airline, the Company believes that a significant portion of installations
will occur during the winter months when air traffic is typically reduced.
Additional variability in revenues and operating results may arise from
budgeting and purchasing patterns of airlines.
Competition. The Company currently competes and will compete with a number
of companies offering in-flight entertainment systems, most of whom (including
but not limited to Sony Transcom, Hughes Avicom, BE Aerospace, Matsushita and
TNCI) have substantially greater financial, management, technical and other
resources than the Company and who offer products, systems or services similar
to the Entertainment Network. There can be no assurance that the Company will
compete effectively with such other companies, or that other companies will
not develop products which are superior to the Company's or which achieve
greater market penetration.
Rapid Technological Change; Need to Introduce New Programming Software. The
markets for in-flight entertainment systems and interactive products are
characterized by rapid technological developments and changes in customer
preferences and requirements. As a result, the Company's success is dependent
upon its ability to update on a regular basis and enhance the Entertainment
Network and to develop or acquire and introduce in a timely manner new
entertainment options and programming software for incorporation in the
Entertainment Network. There can be no assurance that the Company will be
successful in developing or licensing and marketing enhancements of the
Entertainment Network on a timely basis, or at all, that any enhancements will
adequately address changing airline or passenger preferences and demands or
gain the acceptance of the Company's customers or that the cost of licensing
programming software from third parties or developing its own software will
not become prohibitive. If the Entertainment Network does not incorporate
newer technologies and programming software, the Company's business and
operating results may be adversely affected.
Dependence on Programming Software and Product Distributors. The Company
will be required to obtain rights from vendors of programming software to
include such programming software on the Entertainment Network. The Company
has arrangements with certain movie distributors pursuant to which the Company
chooses from lists of available movies from each distributor and compiles the
lists for presentation to the airlines. In addition, in order to provide
shopping channel services, the Company will be required to enter into
arrangements with distributors capable of providing delivery of products
throughout international markets. There can be no assurance that the Company
will be able to negotiate any such agreements or that such agreements will be
on terms favorable to the Company.
10
Dependence on Third Party Suppliers and Contractors. The Company assembles
the hardware constituting its Entertainment Network from components purchased
from third party suppliers, and its dependence on such suppliers will reduce
its control over the manufacturing process. In addition, the Company currently
uses single suppliers for certain of the hardware comprising the Entertainment
Network. Although the Company believes that other sources of supply are
available, delays or increased costs associated with locating and procuring
such supplies could have a material adverse effect on the Company.
Further, because the Company lacks the FAA authorization to perform these
functions, the Company must contract with third parties to obtain FAA
certifications of the Entertainment Network on each proposed type of host
aircraft, and to install the Entertainment Networks on customers aircraft. The
Company has contracted with Elsinore Aerospace Services ("Elsinore"), an FAA-
designated engineering representative experienced in flight entertainment
systems, to assist the Company in the application and approval process in
connection with the Debonair systems. Similarly, the Company has contracted
with Hollingsead International to assist with such process in connection with
the Swissair systems and to perform the installation of the Entertainment
Networks on Swissair aircraft. Any breach or delay in performance by either of
these contractors could have a material adverse effect on the Company's
results of operations and its relationships with its airline customers.
Dependence on Key Personnel. The Company's success depends upon the
continued contributions of its executive officers, most of whom are also
principal stockholders of the Company. Because of a medical disability, Steven
M. Fieldman, the Company's Vice President--Business Development, devotes
approximately 20 hours per week to business activities, all of which relate to
the affairs of the Company. The Company does not have key man insurance on Mr.
Fieldman. The Company has obtained key man insurance on the life of Michail
Itkis, the Company's Chief Executive Officer. The loss of services of, or a
material reduction in the amount of time devoted to, the Company by its
executive officers could adversely affect the business of the Company.
Control by Existing Stockholders; Potential Anti-takeover Provisions. The
Company's executive officers and/or directors (together with their relatives)
control approximately 65% of the total voting power of the Company, reflecting
the multiple votes afforded to the Class B Common Stock. As a result, such
stockholders are able to elect all of the Company's directors and otherwise
control the Company's operations. The Company and each of its principal
stockholders have entered into a stockholders' agreement (the "Stockholders'
Agreement") which grants to such stockholders certain rights with respect to
the sale of shares by the other stockholders and the Company and other matters
affecting corporate governance, including an agreement by such stockholders to
vote for the current members of the Board of Directors of the Company or
nominees of such stockholders. The existence of such rights will solidify the
control over the Company by its executive officers and directors. The
Company's Board of Directors is also authorized to issue from time to time,
without stockholder authorization, shares of preferred stock, in one or more
designated series or classes. The Company is also subject to a Delaware
statute regulating business combinations. Any of these provisions could
discourage, hinder or preclude an unsolicited acquisition of the Company and
could make it less likely that stockholders would receive a premium for their
shares as a result of any such attempt.
Charge to Earnings in the Event of Release of Escrow Shares. Currently,
3,200,000 shares of Class B Common Stock owned by officers, directors and
principal stockholders of the Company are held in escrow (the "Escrow
Shares"), and such shares will be released from escrow if the Company attains
certain earnings levels over the next two years or if the Class A Common Stock
trades at certain levels over the next year. In addition, in accordance with
the terms of the governing escrow agreement, Blair has consented to the
modification of the terms of such release of the Escrow Shares, subject to
obtaining the approval therefor from the holders of a majority of the
Company's Class A Common Stock (other than holders of Escrow Shares). The
position of the Securities and Exchange Commission (the "Commission") with
respect to such escrow arrangements provides that in the event any shares are
released from escrow to the stockholders of the Company who are officers,
directors, employees or consultants of the Company, a compensation expense to
the Company will be recorded for financial reporting purposes. Accordingly,
the Company will, in the event of the release of the Escrow Shares, recognize
during the period in which the earnings thresholds are met or such stock
levels achieved, a substantial
11
noncash charge to earnings equal to the fair value of such shares on the date
of their release, which would have the effect of significantly increasing the
Company's loss or reducing or eliminating earnings, if any, at such time. The
recognition of such compensation expense may have a depressive effect on the
market price of the Company's securities. Notwithstanding the foregoing
discussion, there can be no assurance that the Escrow Shares will be released
from escrow.
Outstanding Warrants and Options. The Company has outstanding (i) 10,590,209
Class B Warrants (including the Selling Securityholder Warrants) to purchase
10,590,209 shares of Class A Common Stock; (ii) 165,000 Class C Warrants held
by the Selling Securityholders, each of which entitles the holder to purchase
one share of Class A Common Stock for an exercise price of $11.00; (iii)
165,000 Class D Warrants held by the Selling Securityholders, each of which
entitles the holder to purchase one share of Class A Common Stock for an
exercise price of $14.00 and (iv) unit purchase options granted to Blair and
its affiliates in connection with the Company's initial public offering (the
"Unit Purchase Options") to purchase an aggregate of 1,120,000 shares of Class
A Common Stock, assuming exercise of the underlying Warrants. In addition, as
of August 6, 1996, the Company had 545,000 shares of Class A Common Stock
reserved for issuance upon exercise of options granted under the Company's
Stock Option Plan, and 492,000 options were then outstanding under the Stock
Option Plan. Holders of such warrants and options are likely to exercise them
when, in all likelihood, the Company could obtain additional capital on terms
more favorable than those provided by warrants and options. Further, while
these warrants and options are outstanding, the Company's ability to obtain
additional financing on favorable terms may be adversely affected.
Potential Adverse Effect of Redemption of Class B Warrants. The Class B
Warrants are subject to redemption by the Company at a redemption price of
$.05 per Warrant upon not less than 30 days' prior written notice if the
closing bid price of the Class A Common Stock shall have averaged in excess of
$13.65 per share for 30 consecutive trading days ending within 5 days of the
notice. Redemption of the Class B Warrants could force the holders to exercise
the Class B Warrants and pay the exercise price therefor at a time when it may
be disadvantageous for the holders to do so, to sell the Class B Warrants at
the then current market price when they might otherwise wish to hold the Class
B Warrants, or to accept the redemption price which, at the time the Class B
Warrants are called for redemption, is likely to be substantially less than
the market value of the Class B Warrants.
Current Prospectus and State Registration to Exercise Class B
Warrants. Holders of Class B Warrants will only be able to exercise the Class
B Warrants if (i) a current prospectus under the Securities Act relating to
the securities underlying the Class B Warrants is then in effect, and (ii)
such securities are qualified for sale or exempt from qualification under the
applicable securities laws of the states in which the various holders of
Class B Warrants reside. With respect to the Selling Securityholder Warrants,
this Prospectus is the prospectus required to be in effect. Although the
Company has undertaken and intends to use its best efforts to maintain a
current prospectus covering the securities underlying the Class B Warrants to
the extent required by Federal securities laws, there can be no assurance that
the Company will be able to do so. The value of the Class B Warrants may be
greatly reduced if a prospectus covering the securities issuable upon the
exercise of the Class B Warrants is not kept current or if the securities are
not qualified, or exempt from qualification, in the states in which the
holders of Class B Warrants reside. If and when the Class B Warrants become
redeemable by the terms thereof, the Company may exercise its redemption right
even if it is unable to qualify the underlying securities for sale under all
applicable state securities laws. Holders of Class B Warrants called for
redemption residing in states where the underlying securities have not been
qualified for sale would generally still be able to sell their Class B
Warrants at the then market price thereof.
Possible Delisting of Securities from the Nasdaq Stock Market. While the
Company's Class A Common Stock and Class B Warrants are listed on the Nasdaq
SmallCap Market, there can be no assurance that the Company will meet the
criteria for continued listing. Continued inclusion on Nasdaq generally
requires that (i) the Company maintain at least $2,000,000 in total assets and
$1,000,000 in capital and surplus, (ii) the minimum bid price of the Class A
Common Stock be $1.00 per share, (iii) there be at least 100,000 shares in the
public float valued at $1,000,000 or more, (iv) the Class A Common Stock have
at least two active market makers, and (v) the Class A Common Stock be held by
at least 300 holders.
12
If the Company is unable to satisfy Nasdaq's maintenance requirements, its
securities may be delisted from Nasdaq. In such event, trading, if any, in the
Class A Common Stock and Class B Warrants would thereafter be conducted in the
over-the-counter market in the so-called "pink sheets" or the NASD's
"Electronic Bulletin Board." Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of transactions,
reduction in security analysts' and the news media's coverage of the Company
and lower prices for the Company's securities than might otherwise be
attained.
Possible Adverse Effect on Liquidity of the Company's Securities Due to the
Investigation of D.H. Blair Investment Banking Corp. and D.H. Blair & Co.,
Inc. by the Securities and Exchange Commission. The Commission is conducting
an investigation concerning various business activities of Blair and D.H.
Blair & Co., Inc. ("Blair & Co."), the dominant market maker in the Company's
securities. The investigation appears to be broad in scope, involving numerous
aspects of Blair's and Blair & Co.'s compliance with the Federal securities
laws and compliance with the Federal securities laws by issuers whose
securities were underwritten by Blair or Blair & Co., or in which Blair or
Blair & Co. make over-the-counter markets, persons associated with Blair or
Blair & Co., such issuers and other persons. The Company has been advised by
Blair that the investigation has been ongoing since at least 1989 and that it
is cooperating with the investigation. Blair cannot predict whether this
investigation will ever result in any type of formal enforcement action
against Blair or Blair & Co., or, if so, whether any such action might have an
adverse effect on Blair or the Company's securities. An unfavorable resolution
of the Commission's investigation could have the effect of limiting Blair &
Co.'s ability to continue to make a market in the Company's securities, which
could affect the liquidity or price of such securities.
Shares Eligible for Future Sale. Future sales of Class A Common Stock by
existing stockholders pursuant to Rule 144 under the Securities Act of 1933,
as amended (the "Securities Act"), or pursuant to a separate prospectus
included a registration statement filed by the Company or otherwise, could
have an adverse effect on the price of the Company's securities. In addition
to the registration statement of which this Prospectus forms a part, the
Company has filed a registration statement under the Securities Act for the
benefit of certain other security holders and which currently covers the
resale of 1,550,000 Class B Warrants and up to 3,100,000 shares of Class A
Common Stock (including those shares purchasable upon exercise of the such
1,550,000 Class B Warrants). In addition, the Company has registered for
resale 545,000 shares of Class A Common Stock issuable upon exercise of
options granted or to be granted under the Company's Stock Option Plan. As of
August 6, 1996, 492,000 options were outstanding under the Stock Option Plan.
Further, all of the shares of Class A Common Stock issuable upon conversion of
the 3,960,000 shares of Class B Common Stock are eligible for resale under
Rule 144, subject to volume and manner of sale limitations. Blair has demand
and "piggy-back" registration rights covering the securities underlying the
Unit Purchase Option, and the holders of Class C and Class D Warrants have
"piggy-back" registration rights covering the shares underlying such warrants.
Sales of Class A Common Stock, or the possibility of such sales, in the public
market in any of the foregoing manners may adversely affect the market price
of the securities offered hereby.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale by the
Selling Securityholders of the Selling Securityholder Securities offered
hereby; however, to the extent that the Selling Securityholder Warrants are
exercised, the Company will receive proceeds equal to the exercise price
thereof multiplied by the number of warrants exercised. If all of the Selling
Securityholder Warrants are exercised, the Company would receive gross
proceeds of $2,681,250, less payment of the Blair Commission. The Company
presently intends to use such proceeds for working capital and general
corporate purposes.
13
DILUTION
The net tangible book value of the Company as of July 31, 1996 was
$27,201,088 million or $2.27 per share. Net tangible book value per share
represents the amount of total tangible assets less total liabilities of the
Company, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale of the 275,000 shares of Common Stock offered hereby
(and after deduction of estimated commissions and offering expenses), the pro
forma net tangible book value of the Company at July 31, 1996 would have been
$29,703,238 million, or $2.42 per share. This represents an immediate increase
in such net tangible net book value of $0.15 per share to existing
stockholders and an immediate dilution of $7.33 per share to new investors
purchasing shares in this offering. The following table illustrates this per
share dilution:
· Download Table
Assumed offering price........................................ $9.75
Net tangible book value before this offering................ $2.27
Increase attributable to new investors...................... .15
-----
Pro forma net tangible book value after this offering......... $2.42
-----
Dilution of net tangible book value to new investors.......... $7.33
=====
The foregoing excludes 492,000 shares that are issuable upon the exercise of
outstanding employee options under the Company's Stock Option Plan as of
August 6, 1996. To the extent that these and other options, stock awards or
warrants that may be issued are exercised in the future, there will be further
dilution to new investors.
The following table summarizes, on a pro forma basis as of August 31, 1996,
the differences between existing stockholders and new investors with respect
to the number of shares of Class A Common Stock purchased from the Company,
the total consideration paid to the Company, and the average consideration
paid per share (before deduction of underwriting discounts and commissions and
estimated offering expenses):
· Download Table
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
