Filed Pursuant to Rule 424(b)(3)
Registration No. 333-7915
PROSPECTUS
INTERNATIONAL DISPENSING CORPORATION
1,620,834 UNITS
International Dispensing Corporation (the "Company") is offering (the
"Offering") 833,334 Units (the "Company Units") on a "best efforts, all-or-none"
basis at a price of $12.00 per Unit. Each Company Unit consists of two shares of
common stock, par value $0.001 per share, of the Company (the "Common Stock")
and two redeemable class A warrants (the "Class A Warrants"). Pending the sale
of all of the Company Units, all proceeds will be held in an escrow account. If
the Company Units are not sold within 90 days from the date of this Prospectus
(the "Effective Date"), which period (the "Offering Period") may be extended an
additional 30 days by mutual agreement of the Company and Stratton Oakmont, Inc.
(the "Underwriter"), all monies received will be promptly refunded to
subscribers in full without interest thereon.
This Offering also includes 787,500 Units (the "Bridge Units," and
together with the Company Units, the "Units") owned and offered by sixteen
non-affiliates of the Company (collectively, the "Selling Securityholders"). The
Bridge Units consist of an aggregate of 1,575,000 shares of Common Stock and
1,575,000 Class A Warrants. The Company will not receive any of the proceeds
from the sale of the Bridge Units by the Selling Securityholders. See
"Description of Capital Stock," "Selling Securityholders" and "Underwriting."
The Common Stock and the Class A Warrants underlying the Units are
detachable and may trade separately immediately upon issuance. The Class A
Warrants will be exercisable commencing one year after the Effective Date. Each
Class A Warrant entitles the holder thereof to purchase one share of Common
Stock at $7.00 per share (subject to certain adjustments) during the four-year
period commencing one year from the Effective Date. The Class A Warrants are
redeemable by the Company for $0.05 per Class A Warrant, at any time commencing
two years from the Effective Date, if the average closing bid price of the
Common Stock as reported by the National Association of Securities Dealers, Inc.
(the "NASD") OTC Bulletin Board equals or exceeds $8.00 per share for any 20
consecutive trading days ending within 10 days of the notice of redemption. Upon
30 days' prior written notice to all holders of the Class A Warrants, the
Company shall have the right to reduce the exercise price and/or extend the term
of the Class A Warrants in compliance with the requirements of Rule 13e-4 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to the
extent applicable. See "Description of Capital Stock."
The Selling Securityholders have agreed not to sell or transfer the
Bridge Units and its underlying securities (the "Bridge Securities") for a
period of 13 months from the Effective Date without the prior written consent of
the Underwriter. The Underwriter may release the Bridge Securities held by the
Selling Securityholders at any time after the Company Units have been sold. The
resale of the Bridge Securities is subject to prospectus delivery and other
requirements of the Securities Act of 1933, as amended (the "Securities Act").
If the Underwriter releases the Selling Securityholders' Bridge Securities
(which has happened in previous offerings underwritten by the Underwriter), then
sales of the Bridge Securities, as well as the potential of such sales at any
time, may have an adverse effect on the market prices of the securities offered
hereby. See "Selling Securityholders" and "Underwriting."
Prior to this Offering, there has been no public market for the
securities of the Company and there is no assurance that a market will develop
or, if a market should develop, that it will continue. See "Risk Factors--No
Prior Public Market for Securities." It is currently anticipated that the
initial public offering price will be $12.00 per Unit and $6.00 per share of
Common Stock. The price of the securities and the exercise price of the Class A
Warrants have been determined by negotiations between the Company and the
Underwriter and do not necessarily bear any relationship to the Company's
assets, book value, net worth or results of
<PAGE>
operations or any other established criteria of value. See "Risk
Factors--Arbitrary Offering Price" and "Under- writing."
The Company intends to apply for the inclusion of the Units, the Class
A Warrants and the Common Stock (collectively, the "Securities") on the OTC
Bulletin Board, an unorganized, inter-dealer, over-the-counter market which
provides significantly less liquidity than The Nasdaq Stock Market ("Nasdaq"),
and quotes for stocks included on the OTC Bulletin Board are not listed in the
financial sections of newspapers as are those for Nasdaq. In the event the
Securities are not included on the OTC Bulletin Board, quotes for the Securities
may be included in the "pink sheets" for the over-the-counter market. See "Risk
Factors--No Prior Public Market for Securities."
The Underwriter, from time to time, will become a market maker and
otherwise effect transactions in the securities of this Offering. The
Underwriter, if it participates in the market, may become an influence and
thereafter a factor of increasing importance in the market for the securities.
However, there is no assurance that the Underwriter will or will not continue to
be a dominating influence. The prices and liquidity of the Units, Common Stock
and Class A Warrants may be significantly affected by the degree, if any, of the
Underwriter's participation in such market as a market maker. The Underwriter
may discontinue such market making activities at any time or from time to time.
On February 28, 1995, the Underwriter became subject to a court-imposed
permanent injunction to comply with certain procedures recommended by an
independent consultant arising out of the settlement of a Securities and
Exchange Commission (the "Commission") proceeding. The failure by the
Underwriter to comply with such permanent injunction may adversely affect the
Underwriter's activities in that the court may issue a further order restricting
the ability of the Underwriter to act as a market maker of the Company's
securities. See "Risk Factors--Litigation Involvement of Underwriter May Have
Adverse Consequences."
-------------------------
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE COMMON
STOCK INCLUDED IN THE UNITS AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO
CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS"
BEGINNING ON PAGE 7 AND "DILUTION."
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY 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.
<TABLE>
<CAPTION>
==================================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SECURITYHOLDERS (3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Unit Offered by the Company(4)......... $12.00 $1.02 $10.98 $ --
- ----------------------------------------------------------------------------------------------------------------------------------
Per Unit Offered by Selling Securityholders $12.00 $ -- $ -- $12.00
- ----------------------------------------------------------------------------------------------------------------------------------
Total............................. $19,450,008.00 $850,000.68 $9,150,007.30 $9,450,000.00
==================================================================================================================================
</TABLE>
(Footnotes on next page)
The Units are being offered by the Underwriter when, as, and if
delivered to and accepted by the Underwriter and subject to various prior
conditions, including the right to reject orders in whole or in part. It is
expected that delivery of the Units will be made upon transfer of the funds in
escrow by the escrow agent to the Company's account.
-------------------------
STRATTON OAKMONT, INC.
The date of this Prospectus is October 3, 1996
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<PAGE>
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(Footnotes from previous page)
(1) Does not include additional compensation to be received by the Underwriter
in the form of (i) a $50,000 non-accountable expense allowance, (ii) an
option (exercisable for a period of four years commencing one year after
the Effective Date) entitling the Underwriter to purchase up to an
aggregate of 83,333 Units at an exercise price of $19.80 per Unit (the
"Underwriter's Unit Purchase Option"), (iii) in certain instances, a
warrant solicitation fee equal to 4% of the exercise price of the Class A
Warrants, beginning one year from the Effective Date, and (iv) a finder's
fee to the Underwriter, based on a formula that provides a maximum fee of
five percent, in connection with financing and/or merger and acquisition
activities of the Company. The Company has agreed to permit the Underwriter
to designate an individual as an observer to the Company's Board of
Directors for a period of three years commencing on the Effective Date. In
addition, the Company and the Underwriter have agreed to certain indemnity
and contribution arrangements regarding certain civil liabilities,
including liabilities under the Securities Act. See "Underwriting."
(2) Before deducting expenses of this Offering payable by the Company,
estimated at $470,000. See "Underwriting."
(3) The Company will not receive any of the proceeds from the sale of Bridge
Units offered by the Selling Securityholders. See "Selling
Securityholders."
(4) The 833,334 Company Units are being offered on a "best efforts,
all-or-none" basis. There is no assurance that any or all of these Company
Units will be sold. Pending the sale of all of the Company Units, all
proceeds of the Offering will be deposited in escrow in a non-interest
bearing account. Unless all of the Company Units are sold within a period
of 90 days from the date of this Prospectus, or a 30 day extension period
thereafter at the option of the Company and the Underwriter, the Offering
will terminate and all funds collected will be promptly returned to the
subscribers without deduction therefrom or interest thereon. Moreover,
during the period of escrow, subscribers will not be entitled to a return
of their subscriptions. There can be no assurance that any or all of the
Units being offered will be sold. See "Underwriting."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS,
COMMON STOCK AND CLASS A WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
THE SECURITIES TO BE SOLD IN THIS OFFERING MAY, IN THE ORDINARY COURSE
OF BUSINESS, BE SOLD ONLY TO CUSTOMERS OF THE UNDERWRITER, AND THE CONCENTRATION
OF SECURITIES IN CUSTOMERS OF THE UNDERWRITER MAY ADVERSELY AFFECT THE MARKET
FOR AND LIQUIDITY OF THE COMPANY'S SECURITIES SINCE THE UNDERWRITER MAY BE A
DAILY MARKET MAKER. IN THE EVENT THAT ONLY A LIMITED NUMBER OF ADDITIONAL
BROKER-DEALERS MAKE A MARKET IN THE COMPANY'S SECURITIES AND THE UNDERWRITER
BECOMES A MARKET MAKER, THE UNDERWRITER MAY BECOME A DOMINATING INFLUENCE ON THE
MARKET. THE UNDERWRITER DOES NOT HAVE ANY CURRENT PLANS OR AGREEMENTS TO OFFER
AND/OR SELL ANY OF THE SECURITIES TO A SPECIFIC CUSTOMER OR CUSTOMERS. SUCH
PURCHASERS, AS CUSTOMERS OF THE UNDERWRITER, SUBSEQUENTLY MAY ENGAGE IN
TRANSACTIONS FOR THE SALE OR PURCHASE OF THE SECURITIES THROUGH AND/OR WITH THE
UNDERWRITER, ALTHOUGH NO AGREEMENTS OR UNDERSTANDINGS, WRITTEN OR ORAL, EXIST
FOR SUCH TRANSACTIONS, AND SUCH TRANSACTIONS MAY FURTHER ENHANCE THE
UNDERWRITER'S DOMINATING INFLUENCE ON THE MARKET. SEE "RISK
FACTORS--UNDERWRITER'S INFLUENCE ON THE MARKET MAY HAVE ADVERSE CONSEQUENCES."
SPECIAL STANDARDS FOR SECURITIES SOLD IN CALIFORNIA
Each California investor, and each transferee thereof who also is a
California investor, must have an annual gross income of at least $65,000 and a
net worth, exclusive of home, furnishings and automobiles, of at least $250,000,
or in the alternative, a net worth exclusive of home, furnishings and
automobiles, of at least $500,000. In addition, an investor's total purchase may
not exceed 10% of such investor's net worth.
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<PAGE>
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the
more detailed information and the Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus.
THE COMPANY
The Company was incorporated in Delaware in October 1995 under the name
ReSeal Food Dispensing Systems, Inc. and changed its name to International
Dispensing Corporation on September 12, 1996. The Company was formed primarily
for the purpose of commercializing and marketing certain proprietary and
patented delivery and dispensing technologies (the "Technologies") which, when
utilized in dispensing flowable food and beverage products, are designed to
maintain the sterility, purity and freshness of such product throughout the
period of time it is being consumed (its "use life"), with the possibility of
eliminating or reducing the need for adding preservatives to the product to keep
it fresh and/or refrigeration throughout its use life.
The Company will focus its marketing activities on the application of
the Technologies in the Field of Use (as defined) set forth in that certain
Amended and Restated License Agreement (the "Company License Agreement") between
the Company and ReSeal International Corporation, a Florida corporation ("RIC"),
which encompasses the food and beverage industries as broadly defined. Within
such categories, the applications of the licensed technologies can be divided
into a number of potential markets, including but not limited to the following:
(i) beverages, which include milk/cream, coffee, tea (hot and cold), hot
chocolate, juices, sweeteners, baby formula, baby food (in puree form), wines
and water; (ii) foods, which include soups, liquid eggs, liquid butter, sauces,
yogurt, melted cheese (nachos), baby foods and hot toppings in liquid form; and
(iii) condiments, which include ketchup, barbecue sauce, mayonnaise, salad
dressings, oils and mustard. See "Business--Strategic Focus."
The Company licenses the Technologies from RIC, which technologies
consist of barrier oriented, closed delivery and dispensing systems (the
"Systems") composed of: (i) self-adjusting reservoir bodies, (ii) patented,
barrier capable, unidirectional flow valves (the "Valve Assemblies"), and (iii)
as required, mechanisms to activate and facilitate the product delivery and flow
functions (the "Pump Assemblies"). The self-adjusting reservoir body of a System
is designed to shrink in proportion to the amount of the product being dispensed
through the Valve Assembly. The Valve Assemblies are designed to dispense a
product without letting either air or contaminants flow back into the internal
reservoir in which the remaining product is held. The Company believes that by
maintaining the purity of the product that remains in the container, the Systems
will provide higher levels of freshness for significantly longer periods of time
and, if preservatives are eliminated, the level of purity, of a wide array of
packaged flowable products. See "Business."
The Company will undertake the formation of strategic alliances or
direct license/supply agreements with major food and beverage companies
currently generating substantial revenues from their existing markets. It is
further intended that these relationships will include co-development of new
products in tandem with the production of new dispensing systems which
incorporate the ReSeal Technologies. Upon successful consummation of a strategic
alliance or direct license/supply relationship, of which there can be no
assurance, the customer or strategic partner will utilize the Technologies in
conjunction with products that have an existing market share, as well as the
System associated with the new products. See "Business."
The Company's principal executive offices are at 342 Madison Avenue,
Suite 1034, New York, New York 10173 and its telephone number is (212) 682-2244.
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<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered
by the Company.................... 833,334 Company Units. Each such Unit consists of two shares of Common Stock and
two Class A Warrants. The Class A Warrants will be exercisable commencing one
year after the Effective Date. Each Class A Warrant entitles the holder thereof
to purchase one share of Common Stock at $7.00 per share during the four-year
period commencing one year from the Effective Date. The Class A Warrants are
redeemable upon certain conditions. Should all of the Class A Warrants
underlying the Company Units be exercised, of which there is no assurance, the
Company shall receive additional gross proceeds equal to $11,666,676. The
Offering of the Company Units is being made on a "best efforts, all-or-none"
basis. See "Description of Capital Stock" and "Underwriting."
Securities Offered by the
Selling Securityholders........... 787,500 Bridge Units. Each such Unit is identical to the Company
Units. See "Underwriting."
Public Offering Price............. $12.00 per Unit.
Common Stock Outstanding Prior to
the Offering(1)................... 7,900,000 shares.
Common Stock Outstanding After
Completion of the Offering(1)(2).. 9,566,668 shares.
Class A Warrants Outstanding after
Completion of the Offering(3).... 3,241,668 Class A Warrants.
Use of Proceeds................... The net proceeds of the Offering received by the Company will be used
(i) to repay certain indebtedness, (ii) to pay licensing fees, and (iii) for
general corporate purposes. See "Use of Proceeds."
Risk Factors...................... The Units offered hereby involve a high degree of risk and immediate
substantial dilution and should be purchased only by persons who can
afford to sustain a total loss of their investment. See "Risk Factors" and
"Dilution."
Proposed OTC Bulletin Board
Symbols(4)...................... Units: IDCOU
Common Stock: IDCOC
Class A Warrants: IDCOW
</TABLE>
(1) Does not include the 1,575,000 shares of Common Stock issuable upon the
exercise of the Class A Warrants contained in the Bridge Units.
(2) Does not include: (i) 1,666,668 shares of Common Stock issuable upon the
exercise of the Class A Warrants contained in the Company Units; (ii)
166,666 shares of Common Stock issuable upon the exercise of the
Underwriter's Unit Purchase Option; and (iii) 166,666 shares of Common
Stock issuable upon the exercise of the Class A Warrants included in the
Underwriter's Unit Purchase Option.
(3) Does not include 166,666 Class A Warrants issuable upon the exercise of the
Underwriters' Unit Purchase Option. See "Underwriting."
(4) Application will be made for the inclusion of the Units, Class A Warrants
and Common Stock on the OTC Bulletin Board. See "Risk Factors--No Prior
Public Market for Securities."
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<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial data is qualified in its entirety by,
and should be read in conjunction with, the Company's Financial Statements and
the Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
For the Period For the Period
from Inception from Inception
(October 10, 1995) (October 10, 1995)
through Six Months through
December 31, Ended June 30,
1995 June 30, 1996 1996
(unaudited) (unaudited)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Revenues $ -- $ -- $ --
General and administrative costs 244,768 451,491 696,259
Depreciation and amortization 882 441 1,323
Loss from operations 245,650 451,932 697,582
Interest expense 4,145 26,015 30,160
------------- ------------- -------------
Net loss before extraordinary loss $ 249,795 $ 477,947 $ 727,742
Extraordinary loss on retirement of debt $ -- $ 250,000 $ 250,000
------------- ------------- -------------
Net loss $ 249,795 $ 727,947 $ 977,742
============= ============= =============
Net loss per share before extraordinary item $ (.03) $ (.06)
Extraordinary loss per share $ -- $ (.03)
------------- -------------
Net loss per share $ (.03) $ (.09)
============ ============
Shares used in computing net loss per
share amounts 7,900,000 7,900,000
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
----------------- ------------------------
Actual As Adjusted (1)
------ ---------------
BALANCE SHEET DATA:
<S> <C> <C> <C>
Cash and cash equivalents $ 5,168 $ 488,379 $ 7,660,142
Working capital (3,840,377) (3,943,023) 4,758,740
Total assets 27,788 585,698 7,735,698
Current liabilities 3,845,545 4,431,402 2,901,402
Long term liabilities 175,000 -- --
Stockholder's equity (deficit) (3,992,757) (3,845,704) 4,834,296
- ------------
</TABLE>
(1) Adjusted to give effect to (a) the sale of the Units offered hereby, at an
assumed initial public offering price of $12.00 per Unit, and (b) the
application of the estimated net proceeds of this Offering, including (i)
the repayment of the loans the Selling Securityholders made to the Company
from October 1995 to April 1996 in the aggregate principal amount of
$1,050,000 (the "Bridge Loans") and interest thereon and (ii) payments to
the holders of certain convertible promissory notes issued by the Company
(the "Convertible Notes") in an aggregate amount of $400,000. See "Use of
Proceeds."
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<PAGE>
RISK FACTORS
The securities being offered hereby are highly speculative in nature
and involve a high degree of risk. In addition to the other information included
in this Prospectus, the following factors should be considered carefully in
evaluating the Company and its business before purchasing the securities offered
hereby.
1. LACK OF PRIOR HISTORY; CURRENT LOSSES; DEVELOPMENT STAGE BUSINESS.
The Company was recently formed for the purpose of licensing, marketing and
commercializing the Technologies in the food and beverage industries, solely in
the Field of Use (as defined). Since its inception, the Company's activities
have been limited to the completion of the Company License Agreement,
organizational and initial capitalization activities, product design and
business development. Consequently, the Company has not generated any revenues
to date and must be considered in its developmental stages. As of June 30, 1996,
the Company had an accumulated deficit of $4,977,742, a stockholder deficit of
$3,845,704 and a working capital deficit of $3,943,023.
Although the Company's management and consultants have extensive
experience in various aspects of the food and beverage industries, there can be
no assurance that the Company will derive sufficient revenues and have
sufficient funds available to develop the business contemplated in this
Prospectus successfully. The Company anticipates entering into license
agreements, sublicense agreements or other revenue generating agreements
relating to the Technologies. However, there can be no assurance that definitive
agreements will be consummated and if consummated, when and on what terms. The
operations of the Company will be subject to the risks inherent in the
establishment of a new enterprise and uncertainties arising from the absence of
an operating history. As a result of the start-up nature of the Company's
business, operating losses can be expected. There can be no assurance that the
Company can be operated profitably in the future.
2. SUFFICIENCY OF CAPITAL; NEED FOR ADDITIONAL FINANCING. The Company
is relying on the sale of the Company Units offered hereby and the receipt of
the net proceeds therefrom to fund its initial operations and implement its
proposed business plan. There can be no assurance, however, that the net
proceeds of this Offering received by the Company will be adequate for these
purposes. In the event that the net proceeds received by the Company from this
Offering are not sufficient for its purposes, the Company may have to seek
additional financing. There can be no assurance that such financing will be
available in amounts and on terms which will enable the Company to pursue its
business plan and which are otherwise satisfactory to the Company. The Company's
inability to raise sufficient financing could have a material adverse effect on
its business and on the value of the Company's securities. See "Use of
Proceeds."
As of June 17, 1996, according to the unaudited financial statements of
RIC, RIC had outstanding indebtedness of approximately $3,800,000 which includes
obligations with respect to the patents covered by the Company License
Agreement. RIC shall receive licensing fees out of the proceeds of this Offering
(see "Use of Proceeds") as well as possible licensing fees in connection with
other applications of the Technology. RIC may need to seek additional financing
to discharge the remaining indebtedness. There can be no assurance that such
financing will be available in amounts and on terms satisfactory to RIC. RIC's
inability to raise sufficient funds could affect its obligations in connection
with the patents covered in the Company License Agreement.
3. AUDITOR'S REPORT OF ACCOUNTANTS; COMPANY'S ABILITY TO CONTINUE AS A
GOING CONCERN. As a result of the Company's current financial condition, the
Company's independent auditors have modified their report on the Company's
financial statements for the period October 10, 1995 (inception) to December 31,
1995, to include explanatory language regarding the Company's ability to
continue as a going concern. The Company is in the development stage, and the
Company's ability to continue in the normal course of business is dependent upon
successful completion of this Offering to raise capital and the success of
future operations. The uncertainties raise substantial doubt about the Company's
ability to continue as a going concern. There can be no assurance that the
Company will not incur net losses in the future. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition" and "Financial
Statements and Notes."
4. UNCERTAINTY OF PATENT LICENSES AND PROPRIETARY RIGHTS IN EVENT OF
BANKRUPTCY; ENFORCEABILITY CONTINGENT ON FINANCIAL CAPABILITIES. Initially, the
Company's sole significant business activity will be dependent upon the Company
License Agreement relating to the Technologies. The financial status of ReSeal
International Limited Partnership, RIC's parent ("RILP"), RIC and the Company,
due to an insufficiency of funds, could limit their ability to honor certain
obligations under the Company License Agreement. See "--Sufficiency of Capital;
Need for Additional Financing." Further, in the event of the bankruptcy of RIC
or RILP, the status of the continuing obligations of the various parties to and
under the Company License Agreement is unclear since a court
- 7 -
<PAGE>
in a bankruptcy proceeding might not enforce such continuing obligations. In
addition, problems may arise relating to the Technologies or the patents held by
RILP or RIC which may inure to the Company's detriment. While the Company
intends to rely on the Company License Agreement and the patents and other
proprietary rights of RIC licensed to the Company pursuant thereto, existing
laws and regulations covering patents, trademarks and other intellectual
property and proprietary rights provide limited practical protection. It is
RILP's, RIC's and the Company's policy to file patents on improvements. However,
no assurance can be given that they will receive any patents in the future based
on its continuation of the technology. A patent for an invention registered in
the United States generally expires after a term of 17 years and grants the
holder of the patent the right to exclude others from making, using or selling
the invention in the United States, and if the invention is a process, the right
to exclude others from using or selling throughout the United States, products
made by that process. The duration of patents granted outside the United States
and the protections afforded thereby vary. Most of RILP and RIC's patents do not
expire before 2009. See "Business--Patents, Trademarks and Other Intellectual
Property."
The grant of a patent does not preclude the possibility of unlawful
infringement by third parties during the term of the patent or third parties
alleging infringement on their patents, which the Company may not be able to
prevent. While the Company believes its patent positions to be sound and
substantial, sublicense and confidentiality agreements entered into by RILP, RIC
or the Company with third parties may be difficult to enforce. Despite RILP, RIC
and the Company's precautions, third parties may copy or infringe upon aspects
of the Technologies and other products or technologies developed or licensed by
RIC to the Company, or otherwise obtain or use information that the Company
regards as proprietary, without the proper authorization of and remuneration to
the Company.
Even if an unlicensed competitor's products infringe upon the
Technologies, it may be too costly to enforce such rights. An infringement
action may require the diversion of funds from the Company's operations and may
require management to expend effort that might otherwise be devoted to the
Company's operations. Furthermore, there can be no assurance that the Company
will be successful in enforcing its patent rights. In addition, others may
develop and market competitive products or methods that do not use any of the
technology within the Technologies and yet are equivalent or superior to the
Technologies.
Furthermore, the use of the Technologies and other products or
technologies developed or licensed by RIC to the Company may infringe the
proprietary rights of third parties, who might be able to prevent the Company
from using the Technologies and such other products and technologies. In
addition, the Technologies may become obsolete by new technology that does not
infringe upon the patents licensed to the Company.
5. ABSENCE OF RESEARCH AND MANUFACTURING FACILITIES; DEPENDENCE ON
SUBCONTRACTORS. At the present time, the Company does not own any research
laboratories or manufacturing facilities. Therefore, the Company will need to
rely on subcontracting sources to support research and manufacturing. The
Company does not currently have any written or oral contracts with such
subcontractors and no assurance can be given that any will be entered into.
Also, there can be no assurance that the Company will construct or acquire
research and/or manufacturing facilities, and if any such facilities are
constructed or acquired, when this would occur or on what terms.
6. NO ASSURANCE OF COMMERCIALIZATION OF TECHNOLOGY. The Company and RIC
have produced prototypes using the System. The Company's engineers are in the
process of determining how to reduce the materials and assembly costs so that
the marketplace will perceive that the "value added" to a product by
incorporating the Technology is worth the increased cost. In the past, RIC has
conducted tests on early prototypes but there can be no assurance that, when
commercially produced, the current prototypes will meet the standards necessary
to be commercially successful.
7. LIMITED HUMAN RESOURCES. The Company currently has limited human
resources to market and sell the technology. As of September 11, 1996, the
Company had three full-time employees. To the extent that the Company is unable
to, or determines not to, enter into marketing agreements or third party
distribution agreements for its products, significant additional resources will
be required to develop a sales force and distribution organization. To the
extent that the Company enters into co-marketing or other licensing arrangements
with third parties, any revenues received by the Company will be shared with and
will be dependent on the efforts of such third parties, and there can be no
assurance that such efforts will be successful. See "Business--Marketing."
8. ABSENCE OF INDEPENDENT SYSTEMS EFFICACY TEST RESULTS. RILP and RIC
have utilized the services of a contract laboratory previously sponsored by
RILP, to conduct testing and efficacy studies of the
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Technologies. The System has been designed to maintain sterility, purity,
freshness and integrity of products with the possibility of eliminating or
reducing the need for preservatives and/or refrigeration. The System has been
tested with a range of material compositions. Although not all combinations have
proven to be effective, certain combinations of materials have proven to be
satisfactory under certain laboratory controlled conditions. Although management
believes that the Technologies can be adjusted to accommodate the specific
requirements of each product utilizing the System, there can be no assurance
that the System will be compatible or advantageous for use with any products
that may be submitted by potential licensees or end customers for development.
The Technologies have been subjected to numerous testing procedures. In
addition, in all likelihood, any licensee or strategic alliance partner will
assist in designing specific additional protocols for testing which relate to
the use of the Technologies in order to demonstrate its performance and efficacy
with respect to a specific product. There can be no assurance that the
Technologies will satisfy testing standards and objectives established by
potential licensees, end customers or strategic alliance partners.
9. PRODUCT LIABILITY CLAIM AND UNINSURED RISKS. In commercializing,
marketing and distributing the Technologies, Systems, or Valve Assemblies, the
Company may be exposed to potential liabilities resulting from the use of the
Technologies with particular products. Such liabilities might result from claims
made directly by consumers, the sublicensee, or other users or sellers of the
Technologies. The Company will seek to be named as a beneficiary under product
liabilities policies of third party manufacturers where appropriate. To date,
the Company does not have its own product liability insurance. While the Company
intends to obtain product liability insurance on a cost effective basis, there
can be no assurance that the Company will be able to obtain such insurance, or
that such insurance, if obtained, would be adequate to protect the Company
against potential liability.
10. GOVERNMENT REGULATION. New preservative-free formulations of
products which may be packaged utilizing the Technologies may likely require the
approval of the U.S. Food and Drug Administration (the "FDA") and/or various
state and local agencies in the United States. Products packaged for
distribution outside of the United States may also be subject to similar foreign
laws and regulation. Compliance with applicable laws and regulations could delay
or impair the distribution of the Technologies.
11. POTENTIAL ANTI-TAKEOVER EFFECTS. Certain provisions of the
Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation"), the Company's Bylaws and Delaware law could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions could diminish the opportunities for a
stockholder to participate in tender offers, including tender offers at a price
above the then current market value of the Common Stock. Such provisions may
also inhibit increases in the market price of the Common Stock that could result
from takeover attempts. The Company's Board of Directors has the authority to
issue "blank check" preferred stock with such designations, rights and
preferences as may be determined from time to time by the Board. Accordingly,
the Board of Directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
the Common Stock. In the event of issuance, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company. The possible impact on takeover
attempts could adversely affect the price of the Company's securities. Although
the Company has no present intention to issue any shares of its preferred stock,
there can be no assurance that the Company will not do so in the future. See
"Description of Capital Stock."
12. LITIGATION INVOLVEMENT OF UNDERWRITER MAY HAVE ADVERSE
CONSEQUENCES.
Recent NASD Actions Involving Stratton Oakmont, Inc.
The Company has been advised by the Underwriter that the NASD (District
10) filed a complaint (No. C10950081) on October 5, 1995 ("Complaint") against
the Underwriter, Steven Sanders, the head trader of the Underwriter, Daniel M.
Porush, the president of the Underwriter, and Paul F. Byrne, formerly the
Underwriter's director of compliance (collectively, the "Respondents"), alleging
various violations of the NASD Rules of Fair Practice. The Complaint consisted
of three causes. The first cause alleged that the Underwriter and Mr. Sanders
effected principal retail sales of securities at prices that were fundamentally
excessive. The second cause alleged that the Underwriter and Mr. Sanders charged
excessive markups. The third cause alleged the Underwriter and Messrs. Porush
and Byrne failed to establish, maintain and enforce reasonable supervisory
procedures designed to assure compliance with the NASD's rules and policies.
On April 15, 1996 the NASD in its decision found all of the
Respondents, except Paul Byrne, in violation of all three causes and imposed the
following sanctions:
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o Mr. Sanders was censured, fined $25,000 and was suspended from association
with any member of the NASD in any capacity for a period of one year.
o The Underwriter was censured, fined $500,000 and was required to disgorge
its excess profits to its customers, totaling $1,876,205, plus prejudgment
interest. In addition, the Underwriter was suspended for a period of one
year from effecting any principal retail transactions.
o Mr. Porush was censured, fined $250,000 and barred from association with
any member of the NASD in any capacity.
The Underwriter and Messrs. Porush and Sanders have appealed the NASD's
decision, thereby staying imposition of the sanctions.
If the sanctions imposed on the Underwriter are not reversed on appeal,
the Underwriter's ability to act as a market maker of the Company's securities
will be restricted. The Company cannot ensure that other broker dealers will
make a market in the Company's securities. In the event that other broker
dealers fail to make a market in the Company's securities, the possibility
exists that the market for and the liquidity of the Company's securities may be
adversely affected to such an extent that public security holders may not have
anyone to purchase their securities when offered for sale at any price. In such
event, the market for and liquidity of the Company's securities may not exist.
It should be noted that although the Underwriter may not be the sole market
maker in the Company's securities, it may likely be the dominant market maker in
the Company's securities.
In April 1996, the NASD settled an action whereby it fined the
Underwriter $325,000 for fraud and other violations (which were neither admitted
or denied) in connection with its underwriting of an initial public offering.
Steven Sanders was fined $50,000 and was suspended for a period of 45 days from
associating with an NASD member and agreed not to engage in any trading-related
activities for any NASD member for a period of 50 days. The settlement also
requires that the Underwriter file certain new supervisory procedures with the
NASD. The Underwriter filed with the NASD on April 11, 1996 procedures relating
to the conduct of associated persons during and preceding an initial public
offering, which were aimed at preventing violations of Section 5 of the
Securities Act and Rule 10b-6 violations and the type of arbitrary pricing which
occurred in connection with the trading of securities underwritten by the
Underwriter on January 16, 1991. These procedures have been in effect since
April 11, 1996. See "Underwriting."
The Company has been advised by the Underwriter that the NASD (District
10) filed a complaint (No. C10960080) on June 6, 1996 ("June 1996 Complaint")
against the Underwriter, Daniel Porush, Steven Sanders, Irving Stitsky, formerly
a registered representative of the Underwriter, and Jordan Shamah, a vice
president and director of the Underwriter (collectively, the "Respondents"),
alleging various violations of the Exchange Act and the NASD Rules of Fair
Practice. The June 1996 Complaint consists of seven causes of action. The first
cause alleges that the Underwriter, through Messrs. Porush and Sanders, engaged
in the use of fraudulent and manipulative devices in the failure to make bona
fide distributions in specified public offerings of securities underwritten by
the Underwriter. The second cause alleges that the Underwriter, through Messrs.
Porush, Sanders, Stitsky and Shamah, engaged in the use of fraudulent and
manipulative devices in the failure to make a bona fide distribution of common
stock of a company whose initial public offering was underwritten by the
Underwriter. The third cause alleges that the Underwriter, through Messrs.
Porush and Sanders for a period of three days, manipulated the common stock of
such company. The fourth cause alleges that the Underwriter, through Mr.
Sanders, charged fraudulently excessive markups in connection with the warrants
of such company. The fifth cause alleges that the Underwriter, through Mr.
Porush, violated the NASD's Free-Riding and Withholding Interpretation inasmuch
as he allegedly allocated securities in certain public offerings to persons
restricted from purchasing such securities. The sixth cause alleges that Messrs.
Porush and Stitsky failed to adequately supervise the Underwriter's activity
relating to the various alleged violations. The seventh cause alleges that the
Underwriter and Mr. Porush failed to establish and maintain reasonable
supervisory procedures to prevent the Underwriter's violative conduct. The
Respondents have filed answers to the June 1996 Complaint denying all material
allegations and alleged violations and are contesting the proceeding.
In addition, the Company has been advised by the Underwriter that the
NASD (District 10) filed a complaint (No. C10960068) on June 6, 1996
("Complaint") against the Underwriter and Patrick Gerard Hayes, the compliance
director of the Underwriter (collectively, the "Respondents"), alleging
violations of the NASD Rules of Fair Practice. The Complaint consists of two
causes of action. The first cause alleges that the Underwriter failed to report
information regarding at least 59 customer complaints the Underwriter received
during the relevant time
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periods as required by the NASD Rules of Fair Practice. The second cause alleges
that the Underwriter, through its compliance director, failed to establish,
maintain and enforce written procedures designed to ensure that the Underwriter
complied with the NASD Rules of Fair Practice. The Respondents have filed
answers to the Complaint and are contesting the proceeding.
On or about July 13, 1996, the District Business Conduct Committee for
District No. 10 ("District Committee") of the NASD issued a complaint against
the Underwriter alleging that the Underwriter violated Article III, Section 1
and Article IV, Section 5 of the NASD Rules of Fair Practice by entering into
settlement agreements with former customers which condition customers' ability
to cooperate with NASD investigations. The charges in the complaint were upheld
by the District Committee on this same date as well as the National Business
Conduct Committee of the NASD, and a fine of $20,000 was assessed and the
Underwriter was ordered to get the NASD's agreement on language used in certain
customer settlement agreements. The Underwriter also is required, if asked by
the NASD, to release customers from provisions in settlement agreements that
impose conditions on a customer's ability to provide information to the NASD.
The sanctions follow an appeal of findings that the firm used certain agreements
when settling customer complaints that precluded, restricted, or conditioned
customers' ability to cooperate with the NASD in connection with its
investigation of customer complaints. The Underwriter also failed to release a
customer from the restrictive provisions of such a settlement. This action had
been appealed to the Commission and the sanctions aren't in effect pending
consideration of the appeal. The Underwriter contests the charges and has
perfected an appeal to the Commission.
Permanent Injunction Granted--Stratton Oakmont, Inc. Enjoined to Comply
with Recommendations of an Independent Consultant and an Independent Auditor
Appointed Pursuant to an Administrative Order
The Company has been advised by the Underwriter that the Commission
instituted an action on December 14, 1994 in the United States District Court
for the District of Columbia against the Underwriter. The complaint alleged that
the Underwriter was not complying with the Administrative Order entered by the
Commission on March 17, 1994 ("Administrative Order") by failing to adopt the
recommendations of an independent consultant. The Administrative Order was
previously consented to by the Underwriter, without admitting or denying the
findings contained therein, as settlement of an action commenced against the
Underwriter by the Commission in March 1992, which found willful violations of
the securities laws such that the Underwriter:
o engaged in fraudulent sales practices;
o engaged in and/or permitted unauthorized trading in customer
accounts;
o knowingly and recklessly manipulated the market price of a
company's securities by dominating and controlling the market for
those securities;
o made improper and unsupported price predictions with regard to
recommended over-the-counter securities; and
o made material misrepresentations and omissions regarding certain
securities and its experience in the securities industry.
Pursuant to the Administrative Order, the Underwriter was censured and
an independent consultant (the "Stratton Consultant") was chosen by the
Commission to advise and consult with the Underwriter and to review and
recommend new supervisory and compliance procedures. The complaint sought:
o to enjoin the Underwriter from violating the Administrative
Order;
o an order commanding the Underwriter to comply with the
Administrative Order;
o to have a Special Compliance Monitor appointed to ensure
compliance with the Administrative Order; and
o the Underwriter claimed that the Stratton Consultant exceeded his
authority under the Administrative Order and had violated the
terms of the Administrative Order.
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On February 28, 1995, the court granted the Commission's motion for a
permanent injunction (the "Permanent Injunction") and ordered the Underwriter to
comply with the Administrative Order, which required the appointment of an
independent consultant and a separate independent auditor and required that all
recommendations be complied with, including the taping of all telephone
conversations between the Underwriter's brokers and their customers. In granting
the Commission's motion for a Permanent Injunction, the court determined that
the Underwriter's conduct unequivocally demonstrated that there is a substantial
likelihood that it will continue to evade its responsibilities under the
Administrative Order. On April 20, 1995, the Underwriter filed an appeal to the
United States Court of Appeals for the District of Columbia, and on April 24,
1995 filed a motion to stay the Permanent Injunction pending the outcome of the
appeal. The motion to stay was denied. Subsequently, the Underwriter voluntarily
dismissed its appeal. The failure by the Underwriter to comply with the
Administrative Order or Permanent Injunction may adversely affect the
Underwriter's activities in that the court may enter a further order restricting
the ability of the Underwriter to act as a market maker of the Company's
securities. The effect of such action may prevent the holders of the Company's
securities from selling such securities since the Underwriter may be restricted
from acting as a market maker of the Company's securities and, in such event,
will not be able to execute a sale of such securities. Also, if other broker
dealers fail to make a market in the Company's securities, the public security
holders may not have anyone to purchase their securities when offered for sale
at any price and the security holders may suffer the loss of their entire
investment.
Recent State Administrative Proceedings Involving Stratton Oakmont,
Inc.--Possible Loss of Liquidity
As a result of the Permanent Injunction, the States of Pennsylvania,
Indiana and Illinois have commenced administrative proceedings seeking, among
other things, to revoke the Underwriter's license to do business in such states.
In Indiana, the Commissioner suspended the Underwriter's license for a three
year period. The Underwriter has appealed the decision and has requested a stay
pending appeal. The requested stay would maintain the status quo pending appeal.
In Illinois, the Underwriter intends to file an answer to the administrative
complaint denying the basis for revocation. The District of Columbia suspended
the Underwriter's license pending the outcome of an investigation. The States of
North Carolina and Arkansas also have suspended the Underwriter's license
pending a resolution of the proceedings in those states. The States of Minnesota
and Nevada have served upon the Underwriter notices of intent to revoke the
Underwriter's license in such states. The State of Connecticut has served on the
Underwriter a notice of intent to suspend or revoke the Underwriter's
registration in that state with a notice of right to hearing. In the States of
Mississippi and Vermont, the Underwriter has agreed to a suspension of its
license pending resolution of certain claims and review of its procedures and
practices by such states authorities. In addition, the Underwriter withdrew its
registration in the State of New Hampshire (with the right of reapplication) and
in the State of Maryland. There may be further administrative action against the
Underwriter in Maryland. The Underwriter withdrew its registration in
Massachusetts with a right to reapply for registration after two years, withdrew
its registration in Delaware with a right to reapply in three years and agreed
to a temporary cessation of business in Utah pending an on-site inspection and
further administrative proceedings. The Underwriter's license in the State of
New Jersey was revoked by an administrative judge pursuant to an administrative
hearing, which revocation was affirmed by the New Jersey Bureau of Securities,
and an appeal has been filed with the appellate division of the New Jersey
Superior Court. The States of Georgia, Alabama, South Carolina and Rhode Island
have lifted their suspensions and have granted the Underwriter conditional
licenses. Such conditional licenses were granted pursuant to an order, which the
Underwriter has proposed to various states, which provides provisions for: (i)
the suspension of revocation, (ii) compliance with recommendations of the
Consultant, (iii) an expedited claims mediation arbitration process, (iv)
resolution of claims seeking compensatory damages, (v) restrictions on use of
operating revenue, (vi) the limitation on selling group members in offerings
underwritten by the Underwriter and the prohibition of participating as a
selling group member in offerings underwritten by certain other NASD member
firms, (vii) the periodic review of the Underwriter's agents, (viii) the
retention of an accounting firm, and (ix) supervision and training, restrictions
on trading, discretionary accounts and other matters.The State of Oregon, as a
result of the Permanent Injunction, has filed a notice of intent to revoke the
Underwriter's license subject to the holding of a hearing to determine
definitively the Underwriter's license status, and the Underwriter, in this
proceeding as well as other proceedings, expects to be able to demonstrate that
the Permanent Injunction is not of a nature as to be a lawful basis to revoke
the Underwriter's license permanently. Finally, the Underwriter has received an
order limiting its license in the State of Nebraska. Such proceedings, if
ultimately successful, may adversely affect the market for and liquidity of the
Company's securities if additional broker-dealers do not make a market in the
Company's securities. Moreover, should investors purchase any of the securities
in this Offering from the Underwriter prior to a revocation of the Underwriter's
license in their state, such investors will not be able to resell such
securities in such state through the Underwriter but will be required to retain
a new broker-dealer firm for such purpose. The Company cannot ensure that other
broker-dealers will make a market in the Company's
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securities. In the event that other broker-dealers fail to make a market in the
Company's securities, the possibility exists that the market for and the
liquidity of the Company's securities may be adversely affected to such an
extent that public security holders may not have anyone to purchase their
securities when offered for sale at any price. In such event, the market for,
and liquidity and prices of the Company's securities may not exist. It should be
noted that although the Underwriter may not be the sole market maker in the
Company's securities, it will most likely be the dominant market maker in the
Company's securities. In addition, in the event that the Underwriter's license
to do business is revoked in the states set forth above, the Underwriter has
advised the Company that the members of the selling syndicate in this Offering
may be able to make a market in the Company's securities in such states and that
such an event will not have a materially adverse effect on this Offering,
although no assurance can be made that such an event will not have a materially
adverse effect on this Offering. The Company has applied to register this
Offering for the offer and sale of its securities in the following states:
California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois,
Louisiana, New York, Rhode Island and Virginia. The offer and sale of the
securities of this Offering are not available in any other state, absent an
exemption from registration. See "Underwriting."
FOR ADDITIONAL INFORMATION REGARDING STRATTON OAKMONT, INC., INVESTORS
MAY CALL THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. AT 1-800-289-9999.
Paul Carmichael v. Stratton Oakmont, Inc.
The Company has been advised by the Underwriter that Honorable John E.
Sprizzo, United States Judge for the Southern District of New York, on May 6,
1994 denied the class certification motion in Paul Carmichael v. Stratton
Oakmont, Inc., et al., Civ. 0720 (JES), of the plaintiff Paul Carmichael. The
class action complaint alleges manipulation and fraudulent sales practices in
connection with a number of securities. The allegations were substantially
similar and involve much of the same time period as the Commission's civil
complaint (discussed above). The Company has further been informed that counsel
for the class action plaintiff sought to re-argue the motion for class
certification, which motion for re-argument was denied.
13. DEPENDENCE UPON KEY PERSONNEL. The success of the Company's
business is largely dependent upon the continued active participation of Jon
Silverman, currently a consultant to the Company. Upon the closing of this
Offering, the Company intends to engage the services of Mr. Silverman in the
capacity of Chairman, Chief Executive Officer and President, pursuant to a
three-year employment agreement. See "Management--Employment Agreements." In the
event his services are lost for any reason whatsoever, the Company's business,
financial condition and results of operations may be adversely affected.
14. IMMEDIATE AND SUBSTANTIAL DILUTION. An investor in this Offering
will experience immediate and substantial dilution. At June 30, 1996, the
Company had a negative net tangible book value of $(3,915,367), or approximately
$(.62) per share of Common Stock, based upon 6,325,000 shares outstanding. After
giving effect to the sale of the Units offered hereby at an assumed initial
public offering price of $12.00 per Unit ($6.00 per share) and the receipt and
application of the estimated net proceeds therefrom, pro forma net tangible book
value would have been $4,784,596 or approximately $.50 per share. The result
will be an immediate increase in net tangible book value to existing
stockholders of $1.12 per share and an immediate dilution to new investors of
$5.50 per share. As a result, new investors will bear most of the risk of loss
since their shares are being purchased at a cost substantially above the price
that existing stockholders acquired their shares. See "Dilution."
15. BEST EFFORTS OFFERING; ESCROW OF INVESTOR'S FUNDS. Since this
Offering is being made on a "best efforts, all-or-none" basis, there can be no
assurance that any of the Units will be sold. Under the terms of this Offering,
the Underwriter is offering the Company's Units for a period of 90 days which
may be extended up to an additional 30 days. Pending the sale of all Company
Units, all proceeds will be held in an escrow account. No commitment exists by
anyone to purchase all or any of the Units offered hereby. Consequently,
subscribers' funds may be escrowed for as long as 120 days and then returned
without interest thereon or deduction therefrom in the event all Company Units
are not sold within the Offering Period. Investors, therefore, will not have the
use of any subscription funds during the subscription period. See
"Underwriting."
16. ARBITRARY OFFERING PRICE. The initial public offering price of the
securities offered hereby and the exercise price of the Class A Warrants have
been arbitrarily determined by negotiations between the Company and the
Underwriter and bear no relationship to the Company's earnings, book value or
any other recognized criteria of value. See "Underwriting."
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17. FUTURE ISSUANCES OF STOCK BY THE COMPANY. The Company is authorized
to issue 40,000,000 shares of Common Stock. Upon consummation of this Offering,
there will be a total of 9,566,668 shares of Common Stock issued and
outstanding. This total number of shares of Common Stock issued and outstanding
does not include: (i) 1,666,668 shares of Common Stock issuable upon the
exercise of the Class A Warrants included as part of the Company Units; (ii)
166,666 shares of Common Stock issuable upon exercise of the Underwriter's Unit
Purchase Option; (iii) 166,666 shares of Common Stock issuable upon exercise of
the Class A Warrants included in the Underwriter's Unit Purchase Option; and
(iv) 1,575,000 shares of Common Stock issuable upon exercise of the Class A
Warrants included as part of the Bridge Units. See "Underwriting." The remaining
shares of Common Stock not reserved for issuance in connection with the
foregoing specific purposes, as well as 2,000,000 shares of Preferred Stock, may
be issued without any action or approval of the Company's stockholders. Although
there are no present plans, agreements or undertakings involving the issuance of
such shares, any such issuance could be used as a method of making acquisitions
of related businesses and for discouraging, delaying or preventing a change in
control of the Company. There can be no assurance that the Company will not
undertake to issue such shares if it deems it appropriate to do so. Any issuance
of additional shares of Common Stock or securities convertible into shares of
Common Stock may cause stockholders of the Company to suffer significant
dilution which may adversely affect the market price of the Company's
securities. See "Dilution," "Description of Capital Stock" and "Shares Eligible
for Future Sale."
18. UNDERWRITER'S UNIT PURCHASE OPTION. In connection with this
Offering, the Company will sell to the Underwriter, for nominal consideration,
the Underwriter's Unit Purchase Option to purchase up to an aggregate of 83,333
Units. The Underwriter's Unit Purchase Option will be exercisable for a period
of four years commencing one year after the Effective Date, at an exercise price
of 165% of the initial public offering price of the Units ($19.80 per Unit),
subject to certain adjustments. The exercise price of the Class A Warrants
included in the Units issuable upon exercise of the Underwriter's Unit Purchase
Option during the period of exercisability shall be 165% of the exercise price
of the Class A Warrants included in the Company Units and the Bridge Units
($11.55 per Unit). The holders of the Underwriter's Unit Purchase Option will
have an opportunity to profit from a rise in the market price of the Common
Stock, if any, without assuming the risks of ownership, with a resulting
dilution in the interests of other stockholders. The Company may find it more
difficult to raise additional equity capital while the Underwriter's Unit
Purchase Option remains outstanding. At any time when the holders thereof might
be expected to exercise this option, the Company would probably be able to
obtain additional capital on terms more favorable than that provided by the
Underwriter's Unit Purchase Option. The holders of the Underwriter's Unit
Purchase Option have the right to require the registration under the Securities
Act, of the Units, the Common Stock and the Class A Warrants included in such
Units, and the Common Stock issuable upon exercise of such Class A Warrants, as
well as certain "piggyback" registration rights. See "Description of Capital
Stock--Registration Rights." The cost to the Company of effecting a demand
registration may be substantial. See "Dilution" and "Underwriting."
19. IMPACT OF PENNY STOCK REGULATIONS ON MARKETABILITY OF SECURITIES;
BROKER-DEALER SALES OF THE UNITS. The Commission has adopted regulations which
generally define "penny stock" to be an equity security that has a market price
(as defined) of less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exceptions. Because the Company's securities
are not listed on Nasdaq or any national securities exchange, the Company's
securities will, if their market price decreases to less than $5.00 per share,
be subject to a rule, absent the availability of an exemption, that imposes
additional sales practice requirements on broker-dealers who sell such "penny
stocks" to persons other than established customers and accredited investors
(accredited investors are generally persons having net worth in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with a
spouse). For transactions covered by this rule, the broker-dealer must make a
special suitability determination for the purchaser and must have received the
purchaser's written consent to the transaction prior to sale, as well as
disclosing certain information concerning the risks of purchasing low-priced
securities on the market for such securities. The broker-dealer also must
disclose the commissions payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market maker, the broker dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Consequently, the
aforementioned regulations will adversely affect the ability of broker-dealers
to sell the Company's securities and the ability of purchasers in this Offering
to sell their securities in the secondary market.
20. NO OBLIGATION ON UNDERWRITER TO CONTINUE TO ACT AS MARKET MAKER. As
of the date of this Prospectus, several brokerage firms, including the
Underwriter, have indicated their intention to engage in market making
activities with respect to the securities. There is no obligation on the part of
such brokerage firms to act,
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or the Underwriter to continue to act, as a market maker. In the event that the
market makers cease to function as such, public trading in the Company's
securities will be adversely affected or may cease entirely.
21. NO PRIOR PUBLIC MARKET FOR SECURITIES. Prior to this Offering,
there has been no public market for the Company's securities. Although the
Company intends to apply for the inclusion of the Securities on the OTC Bulletin
Board, there can be no assurance that such application will be approved or that,
even if it is approved, a regular trading market for the Securities will develop
after this Offering or that, if developed, it will be sustained. The OTC
Bulletin Board is an unorganized, inter-dealer, over-the-counter market which
provides significantly less liquidity than Nasdaq and quotes for stocks included
on the OTC Bulletin Board are not listed in the financial sections of newspapers
as are those for Nasdaq. Therefore, prices for securities traded solely on the
OTC Bulletin Board may be difficult to obtain and purchasers of the Units may be
unable to resell the Securities offered hereby at or near their original
offering price or at any price. In the event the Securities are not included on
the OTC Bulletin Board, quotes for the Securities may be included in the "pink
sheets" for the over-the-counter markets. See "Underwriting."
22. CONTRACTUAL OBLIGATION TO UNDERWRITER. The Company has agreed to
pay fees to the Underwriter if the Underwriter arranges or assists with mergers
and acquisitions for the Company during a period of five years commencing on the
Effective Date. Further, in addition to an eight and one-half (8.5%) percent
underwriting discount available to the Underwriter, the Company has also agreed
to pay the Underwriter a non-accountable expense allowance of $50,000 and has
agreed that for a period of three years from the Effective Date, the Underwriter
shall be entitled to designate one individual as an observer to the Company's
Board of Directors. In addition, the Company has agreed to pay the Underwriter,
under certain circumstances, a fee of 4% of the exercise price of the Class A
Warrants when such warrants are exercised. To the extent the foregoing
compensation is paid from the proceeds of this Offering received from the sale
of the Company Units, the amounts available to the Company will be reduced. On
the closing date, the Company will sell to the Underwriter for nominal
consideration the Underwriter's Unit Purchase Option to purchase up to an
aggregate of 83,333 Units at 165% of the initial public offering price. See
"Underwriting."
23. CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE
CLASS A WARRANTS. The Class A Warrants may not be exercised by the holders
thereof unless at the time of exercise a registration statement covering the
shares of Common Stock issuable upon exercise of the Class A Warrants is
effective and such shares of Common Stock have been registered under the
Securities Act and qualified, or deemed to be exempt, under the securities laws
of the states of residence of the respective holders of such Class A Warrants.
While the Class A Warrants are being registered herewith, there can be no
assurance, however, that such registration statement will remain current or that
such Class A Warrants will be properly qualified under applicable state
securities laws, the failure of which may result in the exercise of the Class A
Warrants and the resale or other disposition of Common Stock issued upon such
exercise becoming unlawful. See "Description of Capital Stock--Class A
Warrants."
24. POTENTIAL ADVERSE EFFECT OF REDEMPTION OF CLASS A WARRANTS. The
Class A Warrants may be redeemed by the Company at any time commencing two years
from the Effective Date, at a redemption price of $.05 per Class A Warrant, upon
30 days' prior written notice, provided the closing bid price of the Common
Stock as reported by the OTC Bulletin Board for 20 consecutive trading days
ending within 10 days of the notice of redemption equals or exceeds $8.00 per
share, subject to adjustment. Redemption of the Class A Warrants could force the
holders to exercise the Class A Warrants and pay the exercise price at a time
when it may be disadvantageous for the holders to do so, to sell the Class A
Warrants at the then current market price when they might otherwise wish to hold
the Class A Warrants, or to accept the redemption price, which is likely to be
substantially less than the market value of the Class A Warrants at the time of
redemption. See "Description of Capital Stock--Class A Warrants."
25. EXERCISE OF CLASS A WARRANTS MAY HAVE DILUTIVE EFFECT ON MARKET.
The Class A Warrants issued in connection with this Offering will provide,
during their term, an opportunity for the holder to profit from a rise in the
market price, of which there is no assurance, with resulting dilution in the
ownership interest in the Company held by the then present stockholders. Holders
of the Class A Warrants most likely would exercise the Class A Warrants and
purchase the underlying Common Stock at a time when the Company may be able to
obtain capital by a new offering of securities on terms more favorable then
those provided by such Class A Warrants, in which event the terms on which the
Company may be able to obtain additional capital would be adversely affected.
See "Underwriting."
- 15 -
<PAGE>
26. UNDERWRITER'S INFLUENCE ON THE MARKET MAY HAVE ADVERSE
CONSEQUENCES. Although the Underwriter has no legal obligation to do so, it may,
from time to time in the future, make a market in and otherwise effect
transactions in the Company's securities. To the extent the Underwriter acts as
a market maker in the Units, the Common Stock or the Class A Warrants, it may be
a dominating influence in that market. The price and liquidity of such
securities may be affected by the degree, if any, of the Underwriter's
participation in the market, inasmuch as a significant amount of such securities
may be sold to customers of the Underwriter. Such customers subsequently may
engage in transactions for the sale or purchase of such securities through or
with the Underwriter. Such market making activities, if commenced, may be
discontinued at any time or from time to time by the Underwriter without
obligation or prior notice. If a dominating influence at such time, the
Underwriter's discontinuance may adversely affect the price and liquidity of the
securities.
Further, unless granted an exemption by the Commission to its Rule
10b-6, the Underwriter may be prohibited from engaging in any market making
activities with regard to the Company's securities for the period from two or
nine business days prior to any solicitation of the exercise of the Class A
Warrants until the later of the termination of such solicitation activity or the
termination, by waiver or otherwise, of any right that the Underwriter may have
to receive a fee for the exercise of the Class A Warrants following the
solicitation. As a result, the Underwriter may be unable to continue to provide
a market for the Company's securities during certain periods while the Class A
Warrants are exercisable, which may adversely affect the price and liquidity of
the securities.
27. ABSENCE OF DIVIDENDS. The Company intends to retain future
earnings, if any, to provide funds for the operations of its business and,
accordingly, does not anticipate paying any dividends on its Common Stock in the
reasonably foreseeable future. See "Dividend Policy."
28. SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.
All of the Company's 7,900,000 currently outstanding shares of Common Stock are
"restricted securities" and, in the future, may be sold upon compliance with
Rule 144 adopted under the Securities Act, or upon the filing and effectiveness
of a registration statement with respect thereto. Rule 144 provides, in essence,
that a person holding "restricted securities" for a period of two years may sell
an amount of such securities every three months equal to the greater of (i) one
percent of the Company's issued and outstanding shares, or (ii) the average
weekly volume of sales during the four calendar weeks preceding the sale. The
amount of "restricted securities" which a person who is not an affiliate of the
Company may sell is without volume limitation after the non-affiliate has held
such shares for three years.
The Company's stockholders and the Company have agreed not to sell,
transfer, assign or issue any securities of the Company for a period of 24
months from the Effective Date, without the prior consent of the Underwriter.
Prospective investors should be aware that the possibility of sales
may, in the future, have a depressive effect on the price of the Common Stock in
any market which may develop and, therefore, the ability of an investor to
market his shares may be dependent directly upon the number of shares that are
offered and sold. See "Shares Eligible for Future Sale."
This Offering includes 787,500 shares of Common Stock owned by the
Selling Securityholders. The shares of Common Stock held by the Selling
Securityholders may be sold commencing thirteen (13) months from the Effective
Date, subject to earlier release at the sole discretion of the Underwriter, and
such securities include a legend with such restrictions. The Underwriter may
release the securities held by the Selling Securityholders at any time after all
of the Company Units have been sold. The resale of the Bridge Securities is
subject to prospectus delivery and other requirements of the Securities Act. The
early release of the Selling Securityholders' Bridge Securities, which has
occurred in previous offerings underwritten by the Underwriter, or the potential
of such sales at any time, may have an adverse effect on the market prices of
the securities offered hereby. See "Certain Relationships and Related
Transactions," "Selling Securityholders" and "Underwriting."
- 16 -
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this Offering are estimated to be
approximately $8,670,000 (after deducting the Underwriter's discount and
commission, the non-accountable expense allowance and other estimated fees and
expenses). The Company will not receive any of the proceeds from the sale of
Bridge Securities by the Selling Securityholders.
The Company presently intends that the net proceeds it receives from
this Offering will be applied approximately as follows:
<TABLE>
<CAPTION>
Percentage of
Net
Description Amount Proceeds
----------- ------ -------------
Administrative Expenses
<S> <C> <C>
Management/Employee Compensation $1,200,000 13.8%
Consultant Compensation 400,000 4.6%
Bridge Loan Repayment(1) 1,130,000 13.0%
Payment of Convertible Notes 400,000 4.6%
Operating Costs and Working Capital
General Overhead 980,000 11.3%
Licensing Fees(2) 2,700,000 31.1%
Product Development/
Tooling/Equipment 1,870,000 21.5%
---------- ------
TOTAL $8,670,000 100.0%
- -------------
</TABLE>
(1) Approximately $1,130,000 of the proceeds of this Offering received by the
Company will be used to repay the principal from and interest on the Bridge
Loans . The Bridge Loans bear interest at the rate of 8% per year and are
due the earlier of the closing of this Offering or January 1, 1997.
(2) As of the Effective Date, the Company will have paid to RIC approximately
$1,300,000 of the $4,000,000 licensing fee owed under the Company License
Agreement. The remaining $2,700,000 shall be paid out of the proceeds of
this Offering received by the Company.
The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations, that the net proceeds of this Offering
received by the Company, together with cash flow from operations, will be
sufficient to satisfy its contemplated cash requirements for approximately
sixteen months following consummation of the Offering. In the event that (i) the
Company's plans change, (ii) the Company's assumptions change or prove to be
inaccurate or (iii) the amount of proceeds of this Offering received by the
Company or cash flow prove to be insufficient to fund operations (due to
unanticipated expenses, technical difficulties, problems or otherwise), the
Company would be required to seek additional financing sooner than anticipated.
The Company has no current arrangements with respect to, or sources of,
additional financing and there can be no assurance that additional financing
will be available to the Company on acceptable terms, or at all. Any inability
to obtain additional financing could possibly require the Company to
significantly curtail its operations.
The allocation of the net proceeds of the Offering set forth above
represents management's best estimates based upon its present plans and certain
assumptions regarding the Company's anticipated revenues and expenditures. If
any of these factors change, the Company may find it necessary or advisable to
reallocate some
- 17 -
<PAGE>
of the net proceeds within the above-described categories for other purposes,
including but not limited to acquisitions of companies in related businesses.
Proceeds received by the Company not immediately required for the
purposes set forth above will be invested principally in United States
government securities, short-term certificates of deposit, money market funds or
other interest-bearing investments.
DIVIDEND POLICY
The Company expects that it will retain all available earnings
generated by its operations for the development and growth of its business and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. Any future determination as to dividend policy will be made
at the discretion of the Board of Directors of the Company and will depend on a
number of factors, including the future earnings, capital requirements,
financial condition and business prospects of the Company and such other factors
as the Board of Directors may deem relevant.
DILUTION
The difference between the initial public offering price per share of
Common Stock and the pro forma net tangible book value per share after this
Offering constitutes the dilution to investors in the Offering. Net tangible
book value per share is determined by dividing the net tangible book value of
the Company (total tangible assets less total liabilities) by the number of
outstanding shares of Common Stock. At June 30, 1996, the net tangible book
value of the Company was $(3,915,367) or $(.62) per share.
Without taking into account any other changes in the net tangible book
value of the Company except for the sale of the Company Units offered hereby at
an assumed initial public offering price of $12.00 per Unit ($6.00 per share of
Common Stock) and the receipt and application of the estimated net proceeds
therefrom, and without ascribing any value to the Class A Warrants included in
the Units, the pro forma net tangible book value of the Company at June 30, 1996
would have been $4,784,596, or $.50 per share, representing an immediate
increase in net tangible book value of $1.12 per share to the existing
shareholders and an immediate dilution of $5.50 per share to new investors.
The following table illustrates the foregoing information with respect
to dilution to new investors on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share(1)........................................ $6.00
Net tangible book value before Offering.......................................... $(.62)
Increase attributable to purchase by new investors............................... $1.12
-------
Pro forma net tangible book value after offering.......................................... $.50
------
Dilution of net tangible book value to new investors...................................... $5.50
========
</TABLE>
- --------------
(1) Represents the initial public offering price per share, before deducting
underwriting discounts and offering expenses payable by the Company.
- 18 -
<PAGE>
The following table summarizes, as of the Effective Date, the
differences between existing stockholders and investors in this Offering with
respect to the number and percentage of shares of Common Stock purchased from
the Company (attributing no value to the Class A Warrants and not giving effect
to the sales by the Selling Securityholders of the 787,500 Bridge Units), the
amount and percentage of consideration paid and the average price paid per
share, before deduction of offering expenses and underwriting discounts:
<TABLE>
<CAPTION>
Shares Owned Consideration Price Per
Number Percent Amount Percent Share
<S> <C> <C> <C> <C> <C>
Present Stockholders............................ 7,900,000 82.6% $ 1,050,000 9.5% $0.13
New Investors................................... 1,666,668 17.4% 10,000,008 90.5% $6.00
----------- ------ ---------- -----
Total.................................. 9,566,668 100.0% $11,050,008 100.0%
=========== ====== ============= ======
</TABLE>
The foregoing computations do not include (i) 1,575,000 shares of
Common Stock issuable upon the exercise of the Class A Warrants contained in the
Bridge Units; (ii) 1,666,668 shares of Common Stock issuable upon exercise of
the Class A Warrants contained in the Company Units; (iii) 166,666 shares of
Common Stock issuable upon exercise of the Underwriter's Unit Purchase Option;
and (vi) 166,666 shares of Common Stock issuable upon exercise of the Class A
Warrants included in the Underwriter's Unit Purchase Option.
- 19 -
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as
of June 30, 1996, and (ii) as adjusted to reflect the sale of the Units offered
hereby at an assumed initial public offering price of $12.00 per Unit and the
application of the estimated net proceeds therefrom. For purposes hereof, no
value has been ascribed to the Class A Warrants included as part of the Units.
<TABLE>
<CAPTION>
June 30, 1996
Actual As Adjusted(1)
<S> <C> <C>
Short-term debt, including current portion
of long-term debt: ............................................ $1,450,000 $ --
Long-term debt.................................................... -- --
Stockholders' equity:
Preferred Stock, par value $.001 per share:
2,000,000 shares authorized, no shares
issued and outstanding................................... -- --
Common Stock, par value $.001 per share:
20,000,000 shares authorized, 6,325,000
shares issued and outstanding; 9,566,668 shares
issued and outstanding as adjusted(2) ................... 6,325 9,567
Additional paid-in capital...................................... 1,125,713 9,802,471
Accumulated deficit............................................. (4,977,742) (4,977,742)
---------------------------------------------------------------- ----------- -----------
Total stockholders' equity............................... $(3,845,704) $4,834,296
---------- -----------
Total capitalization................................. $(2,395,704) $4,834,296
=========- ============
</TABLE>
- ------------
(1) Adjusted to give effect to (a) the sale of the Units offered hereby, at an
assumed initial public offering price of $12.00 per Unit and (b) the
application of the estimated net proceeds of this Offering, including (i)
the repayment of the $1,050,000 Bridge Loan and (ii) payments to the
holders of the Convertible Notes. See "Use of Proceeds."
(2) Does not include (i) 1,575,000 shares of Common Stock issuable upon the
exercise of the Class A Warrants contained in the Bridge Units; (ii)
1,666,668 shares of Common Stock issuable upon exercise of the Class A
Warrants contained in the Company Units; (iii) 166,666 shares of Common
Stock issuable upon exercise of the Underwriter's Unit Purchase Option; and
(iv) 166,666 shares of Common Stock issuable upon exercise of the Class A
Warrants included in the Underwriter's Unit Purchase Option.
- 20 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company was incorporated in Delaware in October 1995 under the name
ReSeal Food Dispensing Systems, Inc. and changed its name to International
Dispensing Corporation on September 12, 1996. The Company was formed primarily
for the purpose of commercializing and marketing the Technologies licensed from
RIC, which technologies consist of the Systems composed of: (i) self-adjusting
reservoir bodies, (ii) the Valve Assemblies, and (iii) the Pump Assemblies. When
utilized in dispensing flowable food and beverage products like milk, juice,
wine, etc., Systems are designed to maintain the sterility, purity and freshness
of such product throughout its use life, with the possibility of eliminating or
reducing the need for adding preservatives to the product to keep it fresh
and/or refrigeration throughout its use life. The self-adjusting reservoir body
of a System is designed to shrink in proportion to the amount of the product
being dispensed through the Valve Assembly. The Valve Assemblies are designed to
dispense a product without letting either air or contaminants flow back into the
internal reservoir in which the remaining product is held. The Company believes
that by maintaining the purity of the product that remains in the container, the
Systems will provide higher levels of freshness for significantly longer periods
of time and, if preservatives are eliminated, the level of purity, of a wide
array of packaged flowable products. See "Business."
The Company will focus its marketing activities on the application of
the licensed technologies in the Field of Use set forth in the Company License
Agreement, which encompasses the food and beverage industries as broadly
defined. Within such categories, the applications of the licensed technologies
can be divided into a number of potential markets, including but not limited to
the following: (i) beverages, which include milk/cream, coffee, tea (hot and
cold), hot chocolate, juices, sweeteners, baby formula, baby food (in puree
form), wines and water; (ii) foods, which include soups, liquid eggs, liquid
butter, sauces, yogurt, melted cheese (nachos), baby foods and hot toppings in
liquid form; and (iii) condiments, which include ketchup, barbecue sauce,
mayonnaise, salad dressings, oils and mustard.
The Company will undertake the formation of strategic alliances or
direct license/supply agreements with major food and beverage companies
currently generating substantial revenues from their existing markets. It is
further intended that these relationships will include co-development of new
products in tandem with the production of new dispensing systems which
incorporate the ReSeal Technologies. Upon successful consummation of a strategic
alliance or direct license/supply relationship, of which there can be no
assurance, the customer or strategic partner will utilize the Technologies in
conjunction with products that have an existing market share, as well as the
System associated with the introduction of new products. See "Business."
RESULTS OF OPERATIONS
The Company has not generated any revenues to date and must be
considered in the development stage. The activities of the Company since
inception in October 1995 have been primarily directed at formational activities
including the completion of initial capitalization, pursuant to which the
Company obtained aggregate capital of $2,250,000. These funds were procured
through the issuance by the Company of the Convertible Notes, the Bridgeholder
Options and the sale of Common Stock. See "Description of Capital Stock."
In addition, the Company has engaged in on-going marketing discussions
with a number of potential strategic alliance partners, licensees and end users
of the ReSeal Technologies. In this regard, discussions have been conducted with
major companies in Canada and the United States to explore opportunities in the
product categories.
See "Business."
The Company has reported a net loss from operations of $977,742 since
inception.
FINANCIAL CONDITION
As reflected in the financial statements, the Company has experienced
continuing net losses and negative cash flows from operations and has maintained
negative working capital and negative equity at June 30, 1996. The Company's
continuing existence is dependent on its ability to raise additional capital and
achieve and maintain profitable operations. The Company continues to be in the
development stage and does not foresee operating revenue until fiscal year 1997.
Management plans to finance the Company by obtaining additional financing
through either this Offering or additional private placements of equity. As of
June 30, 1996, the Company had liquid assets of $488,379.
- 21 -
<PAGE>
BUSINESS
OVERVIEW
The Technologies consist of the Systems composed of (i) self-adjusting
reservoir bodies, (ii) the Valve Assemblies and (iii) the Pump Assemblies. When
utilized in dispensing flowable food and beverage products, Systems are designed
to maintain the sterility, purity and freshness of such product throughout its
use life, with the possibility of eliminating or reducing the need for adding
preservatives to the product to keep it fresh and/or refrigeration throughout
its use life. The self-adjusting reservoir body of a System is designed to
shrink in proportion to the amount of the product being dispensed through the
Valve Assembly. The Valve Assemblies are designed to dispense a product without
letting either air or contaminants flow back into the internal reservoir in
which the remaining product is held. The Company believes that by maintaining
the purity of the product that remains in the container, the Systems will
provide higher levels of freshness for significantly longer periods of time and,
if preservatives are eliminated, the level of purity, of a wide array of
packaged flowable products.
HISTORICAL SUMMARY
Conceptualized in 1968 and initially patented in the early 1970's by
RILP's predecessor, the technology underlying the creation of the Systems was
acquired by RILP for further development and testing. By 1982, implementation of
the Technologies resulted in the creation of Valve Assemblies composed of up to
seventeen different parts. From 1982 to the present many modifications and
improvements were made to the initial Technology in order to produce a
commercially and economically viable product. Such modifications and
improvements have resulted in the development of Valve Assemblies that to date
are composed of only three principal parts and, therefore, have resulted in the
current generation of Systems which the Company believes to be cost effective
and commercially viable. Throughout more than fifteen years of development, RILP
and RILP's predecessor corporation engaged in testing programs in an attempt to
demonstrate the integrity and efficacy of the Technologies for its intended
purposes, including, but not limited to, dye immersion tests and microbial
challenge tests to define broadscale barrier function, and dispensing and
delivery trials to define in use issues and factors. At various stages of the
development of the Technologies, RILP obtained patents on the Technologies.
Additionally, RILP maintains various trademarks. See "--Patents, Trademarks and
Other Intellectual Property."
Based upon certain limited market research and laboratory test results,
the Company believes that the Technologies have application in numerous product
areas. For example, the Company's initial marketing and commercialization
efforts in the food and beverage area include wine, water, juices, coffee, tea,
milk and other dairy products. The Company is working to develop Systems for
these markets. The Company is also pursuing marketing opportunities with Systems
that the Company intends to develop to dispense soups, condiments, sauces,
edible oils and salad dressings. In addition, the Company believes that the
range of products which can be dispensed through Systems is expanding as the
Company identifies additional materials and structures which can be combined to
produce Systems that are applicable to a greater number of products in the food
and beverage industries. The most recent generation of Systems employs the
Technologies for the first time within traditional packaging formats, including
tubes, bags or "bag-in-a-box," and pouches. In all such cases, these basic
systems would be adapted in a manner appropriate to specialized utilization
within the Company's targeted markets which may include consumer, institutional
and industrial applications. Consequently, distributors of flowable products
should have the ability to employ the Technologies without significantly
altering the outward appearance of their existing packaging.
Previously, RILP had engaged research and development laboratory
services to perform a variety of tests (including, but not limited to, dye
immersion and microbial challenge tests), in accordance with basic
scientifically accepted protocols, to determine the reliability of the
Technologies to provide barrier capabilities in order to maintain contamination
free and intact contents throughout the product's designated use-life. This is
achieved by the dispensing of product without allowing contaminants to enter the
self-adjusting reservoir to which Valve Assemblies are attached. The Company,
based on such test results, believes that Systems, when structured appropriately
for product and use specific objectives, should effectively protect the contents
of the System from contamination under static and repeat use conditions for
extended periods. See "Risk Factors--Systems Efficacy Test."
- 22 -
<PAGE>
LICENSE AGREEMENT
The Company was organized primarily for the purpose of licensing the
Technologies in the Field of Use (as defined below) from RIC. The Technologies
are licensed by RIC from RILP, on a worldwide exclusive basis in all of their
applications, pursuant to a License Agreement dated November 16, 1992 (the "RIC
License Agreement"). The Company has licensed the Technologies from RIC, on a
worldwide exclusive basis, solely in the Field of Use pursuant to the Company
License Agreement, and will endeavor to commercialize and market the
Technologies to third parties for its implementation in the food and beverage
industries.
Pursuant to the Company License Agreement, RIC granted the Company a
royalty-free exclusive worldwide license for an aggregate of $4,000,000 and
2,900,000 shares of Common Stock, to (i) directly or indirectly make (or
subcontract to make), use, sell and otherwise commercially exploit the
Technology, solely in the Field of Use, and (ii) grant sublicenses to affiliated
and non-affiliated third parties, solely in the Field of Use, provided, however,
that the Company shall not be permitted to sublicense the right to manufacture
the Valve Assemblies. "Field of Use" means the use of the Technology to make,
use, lease, sell or distribute (a) any food or beverage dispensers or containers
that embody the Technology or the manufacture, use, lease, sale or distribution
of which uses the Technology (collectively, the "Product") intended for use in
any acceptable food and beverage application. This includes but is not limited
to an industrial or commercial place of business in the preparation of food or
beverage at such place of business, (b) any food or beverage Product intended
for use in an industrial or commercial place of business by a customer
purchasing food or beverage at such place of business for consumption on or off
the premises of such place of business, or (c) any food or beverage Product
intended to be sold to or by food or beverage wholesale price discounters,
retailers and similar establishments that sell food or beverage to consumers.
The Company is primarily responsible for all research and development
activities necessary to exploit fully the commercial possibilities of the
Technology. The research and development activities shall include testing of
proposed Products and ongoing technical support for the modification,
improvement, enhancement, development or variation of existing Products and the
development of new Products. RIC is responsible for causing RILP to manage all
intellectual property associated with the Technology, including patents and
trademarks, in order to maximize its commercial potential. This obligation
includes the prosecution of all patent and trademark applications, subject to
the Company's approval of budgets and expenditures in advance, and, in the sole
discretion of RIC (or upon receipt by RIC of the Company's commitment to pay
100% of the related reasonable costs and expenses), all suits against third
parties for infringement of patents or trademarks. If RIC or RILP is unwilling
or unable to undertake such patent obligations, then the Company is authorized
to undertake such obligations on behalf of RILP.
The Company License Agreement may not be assigned by either party
thereto without the express written consent of the other party, except that the
Company may sublicense applications of the Technologies within the Field of Use
at its own discretion and may subcontract, but not sublicense, for the
manufacturing of components incorporating the Technologies in the Field of Use.
STRATEGIC FOCUS
The Company will focus its marketing activities on the application of
the Technologies to the food and beverage industries, specifically the food
service and consumer products markets. First, the Company plans to market the
Technologies to the food service industry, which purveys bulk foods and
beverages such as milk, juices, wine and condiments to restaurants, fast food
chains and institutions. In this industry, there is a trend, away from the
traditional large tins for condiments and the cartons for milk and juice, to
one, two and three gallon plastic bags that are shipped in corrugated boxes to
the food outlet, where they are inserted into a permanent counter-
dispenser-unit for customer and/or kitchen food preparation use. The Company
intends to market the Valve and the System for application to the products
mentioned above, on a worldwide basis. The Company will approach companies that
already are marketing their products in a bag-in-a-box. The Company believes
that the System is ideal for the bag-in-a-box format since the bag is already a
collapsible container and thus only minimum alterations in the production line,
if any, will need to be made to incorporate it into the System.
Second, the Company plans to market the Technology to companies that
sell food and beverage products directly to the consumer through supermarkets,
grocery stores and other retail outlets. For example, sellers of wines and fruit
juices in the bag-in-a-box format can utilize the Technology since these
products tend to spoil quickly after being opened and exposed to air and
airborne contaminants, which is what the Systems are designed to prevent. Also,
the System would enable many consumer products to be marketed in larger, economy
sizes, which would otherwise spoil. While in many cases the bag-in-a-box format
would be used, the System can be
- 23 -
<PAGE>
used with a variety of tubes and pouches, and thereby is applicable to
condiments, salad dressings and baby foods. The Company believes that the System
also has the potential to be used with concentrated liquid products (i.e., teas,
coffees, juices, etc.) packaged without the use of preservatives.
In addition, in many countries around the world, the milk market is
dominated by ultra high temperature ("UHT") milk, which if unopened will remain
fresh without refrigeration for up to one year. Once opened, UHT milk must be
refrigerated and has the same shelf-life as regular pasteurized milk, a number
of days. With the System, various bag-in-a-box sizes of UHT milk can be sold,
dispensed from, and still remain fresh, without refrigeration, for a longer
period of time.
The Company has engaged in preliminary marketing discussions with a
number of potential strategic alliance partners, licensees and end users of the
Technologies and has had preliminary discussions with a substantial dairy
company which supplies milk products in a food service capacity to the
restaurant industry, including fast food franchise operations and commercial
establishments throughout Canada. Management has also had discussions regarding
the use of Technologies in connection with a bag-in-a-box creamer for offices,
fast food outlets and coffee bars, as well as possible applications for yogurt
and the baby food industry. Based upon discussions that have taken place between
the Company and potential users, the Company intends to focus its initial
marketing efforts in the areas of wine, milk and condiments for the food service
industry.
Management anticipates that the Technology will prove capable of
accomplishing these objectives at commercially viable cost structures. There can
be no assurance, however, that any agreement will be entered into between the
Company and any products provider, or that if such agreement is reached that the
products marketed utilizing the Technology will ultimately obtain commercial
success.
To oversee product development, the Company has engaged the services of
Michael Handler, a product development engineer, to create bag-in-a-box
prototype systems for application in the wine, milk, condiment and baby-bottle
design industries. It is anticipated that these prototype systems will embody
the fundamental approach to the Systems. It is anticipated that various Systems
will be prepared in advanced prototypical form during the third and fourth
quarters of 1996.
COMPETITION AND OPPORTUNITIES IN THE PACKAGING INDUSTRY
Most competing dispensing technology is designed to inhibit the
contamination of various products, minimally. When a can, bottle or other
dispenser, such as a bag-in-a-box, is initially used and a portion of its
contents is dispensed, the remaining contents becomes contaminated as air is
drawn into the vessel to fill the space created by the displaced contents or the
dispensing mechanisms are simply not capable of functioning as an adequate
barrier. Air transports various types of contaminants which can lead to the
degradation of a product, as well as basic oxidation processes initiated or
accelerated by the air itself. In effect, a System dispenses in an outward
direction as product leaves the package, but the system seals itself closed when
the dispensing is completed. Thus, Systems are designed to maintain a product's
purity throughout the product's use-life by virtue of being closed and by
providing appropriate mechanical barriers to contamination while the product is
being dispensed. The Company believes that the Technologies provide the only
commercially viable closed delivery and dispensing system, which allows for
continuous delivery of a product in the desired metered or measured amounts
while maintaining the product's purity.
Competition
The Company's competition are the manufacturers of all existing
packages and bottles that contain flowable food and beverage products.
Typically, large sizes of beverages and other flowable products, such as
condiments, certain fruit juices and wine, will remain fresh without
refrigeration for a relatively long period of time before being opened; however,
once the container is opened, the contents will spoil within a short period of
time. In the case of containers with general purpose valves, where the product
is dispensed by applying pressure with a finger, the product flows out at the
same time air enters the container, thereby accelerating the spoilage of the
remainder of the product, and the repeated use of fingers directly adjacent to
the spout also can lead to unsanitary conditions. There are several faucet-type
valves that eliminate some of the sanitary problems described above, but they
are costly and not widely used. Also, there are soda-fountain-type pumps
utilized for various condiments employing stainless steel or plastic containers
into which the condiments are poured and which may encounter spillage onto the
dispensing mechanism during the course of a day and require frequent servicing.
To be sanitary, these pumps need to be disassembled, cleaned and sterilized
daily.
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The System should offer a distinct advantage over each of these systems
in that it is designed to prohibit the flow of air and contaminants back into
the system when product is being dispensed and it is anticipated that it will
require no cleanup, since the product will always be contained in a bag or a
pouch and the entire system will be disposable and recyclable. A self-contained
system, like the System, provides the opportunity for considerably more product
purity and cleanliness.
Design Advantages
The Technology is designed to keep products fresher and purer while
being consumed, potentially with less preservatives and sometimes without
refrigeration. In instances where available on premises, additional precise
temperature control in conjunction with the Systems will provide vendors with
the ability to serve and sell perishable products at their optimum temperature.
Possible Future Alliances
The Company plans to enter into strategic alliances, supply agreements,
direct license agreements and joint ventures with leaders in the food and
beverage industry. However, to date, the Company has not entered into any such
alliances, agreements or ventures and there can be no assurance that the Company
will be able to in the future. Under such agreements, the Company anticipates
that under some circumstances the sublicensee will pay a license fee of a
negotiated sum to the Company upon entering into the sublicense. Thereafter, the
Company would receive income from sale of Valve Assemblies or other components
of the Systems and, under certain circumstances, royalties and profits from the
sale of products employing the Technologies. The Company may provide the
relevant Technologies to its customers and, with input from the customers,
assist in transferring and adapting the Technologies to specific product
requirements. As some customers may choose to take a more active role in
adapting the Technologies to their specific product, a portion of development
and marketing costs and a portion of the costs of adapting the Technologies to a
particular application may be borne by the sublicensees or supply partners. The
particular relationship between the customer and the Company will vary depending
on each party's resources and needs. Therefore, a variety of structuring and
cost sharing alternatives may be used by the Company in commercializing the
Technologies.
All component parts of the Systems must be made of materials which are
compatible with the specific contents or formulation to be dispensed. Systems
must be adapted to meet the specific requirements of the particular product and
to the desired type of delivery to allow the dispensing of a flowable product in
accordance with such customer's needs. In light of the potentially undesirable
health effects of preservatives in certain products and other market factors and
the adaptability of the Technologies in the dispensing of non-preserved products
in a variety of applications, the Company believes that significant marketing
opportunities exist in the United States and around the world for the
establishment of strategic alliances involving Systems for various applications
and product categories. The Company will endeavor to integrate other existing
technology with Systems which can be commercialized, marketed and manufactured
in a wide variety of applications, worldwide. The Company anticipates that, in
many cases, the Technologies will facilitate positive changes in the nature of
product formulation, quality and efficacy.
In addition to all the advantages inherent in a barrier system, the
Company believes that the System will offer basic mechanical advantages,
including without limitation portion control and a pumping mechanism that will
enable customers to mix concentrates (such as teas and juices) with water when
being served.
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
RILP has been granted numerous patents and trademarks covering Systems
and their component parts.
The Company License Agreement includes all of the patents RIC licensed
from RILP. These patents encompass a broad range of delivery and dispensing
technologies and product applications for food and beverages. The following sets
forth a summary of certain key patents.
1. A valve assembly for a container permitting the easy dispensing of
fluid while preventing backflow of contaminants through the valve
assembly into the container holding the remaining fluid.
U.S. Patent No. Re. 34,243 (Expiration Date:
July 11, 2006)
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2. An enclosing sleeve for a one-way valve presses an elastomeric sheath
against the valve body to provide a seal between the sheath and the
valve body. In addition, the sleeve can form a closure over the outlet
end of the valve body protecting it from contamination or contact with
contaminating surfaces.
U.S. Patent No. 5,092,855 (Expiration Date:
March 3, 2009)
3. An elastomeric sleeve stretched over the valve body with ring-shaped
enlargements on each end forming "molded o-rings" in tight sealed
contact to the valve body.
U.S. Patent No. 5,305,783 (Expiration Date:
April 26, 2011)
4. A fluid dispensing unit includes a collapsible reservoir with a one-way
valve at its outlet for directing flow into a metering chamber. The
metering chamber has an outlet connected to another one-way valve which
prevents backflow of contaminants into the container after fluid is
dispensed. Both the collapsible reservoir and the metering chamber can
be completely collapsed to ensure that the dispensing unit is
completely empty.
U.S. Patent No. 5,279,447 (Expiration Date:
January 18, 2011)
5. A disc shaped valve body enclosed circumferentially by an elastomeric
membrane. Fluid flows through separate passageways between the
circumferential edge of the valve body and the elastomeric membrane.
U.S. Patent No. 5,279,330 (Expiration Date:
January 18, 2011)
6. A one-way valve assembly with a cover member which encloses an
expandable elastomer sleeve and valve body and which presses the sleeve
into fluid-tight contact with the valve body at two axially spaced
locations.
U.S. Patent No. 5,305,786 (Expiration Date:
April 26, 2011)
7. A dispenser with two separate collapsible chambers, each holding a
component or substance to be mixed before use with at least one
component being in a flowable condition. A one-way valve permits flow
of the flowable component into the other chamber and prevents any
backflow, thereby providing the dispensing of a mixture having a short
use lifetime where the components of the mixture are capable of being
stored separately for an extended period.
U.S. Patent No. 5,353,961 (Expiration Date:
October 11, 2011)
8. An embodiment that replaces the tubular or disc shaped valve core with
a flat valve platform more appropriate for higher speed and lower cost
manufacturing. The elastomeric sheath can be executed as a flat sheet
from roll stock. A housing component protects the sheath while
providing the necessary sealing and resistance needed for successful
functioning.
U.S. Patent Pending/Allowed;Application No.
08/327,608
9. A one-way vacuum actuated sheath valve with a flat elastic membrane
held in tension over a convex valve platform under a conforming cover
with inlet and outlet channels. The cover includes an expansion area on
the cover surface adjacent to the membrane and between the inlet and
outlet. Liquid flows through the valve when it is drawn by a vacuum.
The vacuum operates on both the flow path exit, but also above the
membrane, lifting it to open the flow path. Discontinuance of the
vacuum allows the membrane to seal the inlet and outlet, thus again
preventing any flow between them.
U.S. Patent Pending/Allowed; Application No.
08/398,771
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<PAGE>
PROPERTIES
The Company currently leases, from a non-affiliated third party,
approximately 3,716 square feet of space for its principal executive office at
342 Madison Avenue, New York, New York 10173. The monthly rental on this
property is $7,509. Management believes that this facility is adequate for the
Company's intended activities in the foreseeable future. The lease terminates on
November 20, 1997. If this lease is not renewed, the Company does not anticipate
any significant problems in finding suitable alternative space.
EMPLOYEES
As of September 11, 1996, the Company employed three persons. The
Company anticipates that the number of employees will increase to seven persons
upon completion of this Offering, as it expects to hire Jon Silverman as its
Chief Executive Officer, as well as to add a senior marketing person, engineer
and office manager.
Jon Silverman, as a consultant, and Joseph Koster, have been
specifically dedicating time to the marketing of the Technologies to food and
beverage industries. In addition, Michael Handler has been hired as a
consultant. The backgrounds and experience of these individuals are set forth in
the section entitled "Management."
LITIGATION
The Company is not a party to any legal proceedings. However, certain
affiliates of RIC and the Company were named as defendants in a complaint filed
on or about October 31, 1994, alleging, among other things, breach of fiduciary
duty, mismanagement, waste and fraud. A settlement in connection therewith has
been entered into, which includes the dismissal with prejudice of the lawsuit.
See "Certain Relationships and Related Transactions--Settlements of Legal
Proceedings--Stanson Settlement."
In addition, certain affiliates of RIC and the Company were named as
defendants in a complaint filed on or about December 11, 1992, alleging, among
other things, violation of certain federal securities laws, common law fraud and
negligent misrepresentation. A settlement in connection therewith has been
entered into, which provides for the eventual dismissal with prejudice of the
lawsuit upon satisfaction of certain conditions. See "Certain Relationships and
Related Transactions--Settlements of Legal Proceedings--Banco Settlement."
MANAGEMENT
The executive officers, directors and significant employees of the
Company are as follows:
Name Age Position(s)
---- --- -----------
David W. Brenman 40 President, Treasurer and Director
Joseph F. Koster, Jr. 61 Secretary and Director
George V. Kriste 49 Director
Gregory B. Abbott 46 Director
Jon D. Silverman 55 Consultant
Michael D. Handler 46 Consultant
David W. Brenman has been the President, Treasurer and a director of
the Company since its inception. He also has served as a member of the Executive
Committee, Chief Financial Officer and Treasurer of RIC from May 1993 through
September 12, 1996 and has been a director of RIC since May 1993. Mr. Brenman
has been a self-employed attorney and financial consultant since 1988. Prior
thereto, he was a Vice President of Lloyds International Corporation, the
merchant banking subsidiary of Lloyds Bank Plc from 1986 to 1988. Mr. Brenman
served as President of Cogenco International, Inc., a publicly held corporation
engaged in the energy industry, from 1984 to 1986 and is currently a member of
the Board of Directors and an executive officer of that company. Mr. Brenman is
a member of the Board of Directors and serves as President of Taltos SpA, an
Italian corporation engaged in the production of ultra-thin stone products.
Prior to 1986, Mr. Brenman was an associate with the law firm of Brenman,
Raskin, Friedlob, and Tenenbaum P.C. of Denver, Colorado, where he specialized
in the fields of taxation and securities law. Mr. Brenman is also a member of
the Board of Directors of U.S. Energy Corp., a corporation engaged in the mining
and mineral industry.
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<PAGE>
Joseph F. Koster, Jr. will serve as Executive Vice President of the
Company as of the closing of this Offering. He has been the Secretary and a
director of the Company since October 26, 1995. From January 1992 through
October 1995, he was a consultant to RIC, RPS, RILP and ReSeal Technologies and
Advancements, Inc., RILP's general partner, where he principally worked in
marketing and in setting up their investment banking relationships. From 1964 to
1966, Mr. Koster worked at Colgate Palmolive, where he reached the level of
National Brand Manager. From 1966 to 1974, he was a partner at Brown Elders
Koster Enterprises, a marketing company. Thereafter, prior to 1992, he was a
self-employed business consultant and writer.
George V. Kriste has served as a director of the Company since October
26, 1995. He has been the Chairman and Chief Executive Officer of New Century
Media, a radio station owner, since January 1992. Prior thereto, he had been the
Chief Operating Officer of Cook Inlet Region, an investment company formed by
the Federal government for Alaska natives, since 1977.
Gregory B. Abbott has served as a director of the Company since October
26, 1995. Mr. Abbott has been a private investor and a writer for more than the
past five years. From 1973 to 1986 he was employed by Ithaca Industries
("Ithaca"), a private label manufacturer of pantyhose, men's and women's
underwear, and T-shirts. From 1979 to 1986 he served as Chairman and CEO of
Ithaca, during which time the company grew from having just one major customer
to over 400, and in the process became the largest private label maker in the
U.S. in each of its product lines. Mr. Abbott also negotiated a leveraged buyout
of Ithaca with Merrill Lynch and Butler Capital.
Jon D. Silverman has served as a consultant to the Company since its
inception. It is the present intention of the Company to engage the services of
Mr. Silverman as its Chairman, President, Chief Executive Officer and director
of the Company upon completion of this Offering. Since 1980 he has served as the
principal of Tilis Products, Inc., his own specialized international business
consulting, mergers and acquisitions firm (including capital formation) in the
food, beverages and other consumer products and services industries. He has
served on the Board of Trustees of the United Hospital, Port Chester, New York
for the past 15 years (he is currently an Honorary Trustee) and for a number of
years, prior to May 1995, had served as Vice Chairman thereof; is a director of
Pastificio Gazzola, Mondovi, Italy, a leading pasta exporter; and a past
director of Combined Moretti/Prinz Brau Breweries, a subsidiary of John Labatt,
Ltd. From 1979 to 1980, he was Executive Vice President of Esquire, Inc., an
educational, magazine and music publishing firm, manufacturer of lighting
equipment and importer of sporting goods. Before that he was employed by the
Seagram Company, Ltd. from 1965 to 1979, where he held numerous positions,
including President of Seagram, Germany, and Executive Vice President of Seagram
Overseas Sales Company, the international division of Seagram.
Michael D. Handler has served as a consultant to the Company since
March 1996. Since January 1994, he has been the President and Chief Executive
Officer of Nologies, Inc. ("Nologies"), a product and technology development
company. From May 1993 through January 1994, he held various positions with RIC
and its affiliates, including Vice President of Research and Development. Prior
thereto he worked at a private contract research and development consulting
company for 19 years. He has 25 years of experience in the management and
implementation of research and development activities.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
for services, in all capacities for fiscal 1995, of those persons who were, at
the end of fiscal 1995, the Chief Executive Officer and the most highly
compensated executive officers of the Company (collectively, the "Named
Officers").
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
Other
Name and Annual Restricted Securities All
Principal Fiscal Compensation Stock Underlying Other
Position(1) Year Salary($) Bonus($) ($)(2) Awards($) Options(#) Compensation($)
----------- ---- --------- -------- ------ --------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
David Brenman 1995 $18,000 -- -- -- -- --
President
</TABLE>
-----------------
(1) No executive officer earned more than $100,000 in fiscal 1995.
(2) The Company has concluded that the aggregate amount of perquisites and
other personal benefits paid to each of the Named Officers did not exceed
the lesser of (i) 10% of such officer's total annual salary and bonus for
fiscal 1995 and (ii) $50,000. Thus, such amounts are not reflected in the
table.
The Company plans to submit for approval of its stockholders, in the
near future, a stock option plan covering 1,200,000 shares of Common Stock.
EMPLOYMENT AND NON-COMPETE AGREEMENTS
Jon D. Silverman
It is anticipated that the Company will enter into a three-year
employment agreement with Jon Silverman upon the closing of this Offering.
Pursuant to such proposed employment agreement, Mr. Silverman will receive a
monthly salary of $15,000. In addition, the Company will be obligated to pay the
premium on his $1,000,000 life insurance policy, to which his estate is the
beneficiary. This insurance policy is in addition to the $1,000,000 key-man life
insurance policy to be maintained by the Company on the life of Mr. Silverman.
He will also be entitled to customary benefits and perquisites.
Michael D. Handler
The Company has entered into an agreement, dated March 5, 1996, with
Nologies, under which Nologies will assist in (i) the directing and managing of
product and technology development, (ii) licensing and strategic alliance
pursuits, and (iii) other related services that the Company may request from
time to time, in the area of food and beverage dispensing and delivery systems.
The term of such agreement is for twelve months and may be terminated upon 30
days written notice. The Company shall pay Nologies $8,000 per month and
reimburse it for reasonable documented business expenses. Pursuant to the terms
of such agreement, Nologies agrees (a) not to disclose, at any time, any
confidential business or technical information or trade secrets acquired during
its association with the Company and which relates to the present or
contemplated business of the Company, whether or not conceived of, discovered,
developed or prepared by Nologies, (b) during the term of the agreement and for
a one year period thereafter, it will not represent, consult, serve, or be
employed by any competing enterprise, and (c) never to divulge any confidential
information to any third party.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
permits indemnification by a corporation of certain officers, directors,
employees and agents. Consistent therewith, Article Eighth of the Certificate of
Incorporation requires that the Company indemnify all persons whom it may
indemnify pursuant thereto to the fullest extent permitted by Section 145.
In addition, Article Seventh of the Certificate of Incorporation
provides that directors and officers of the Company shall not be personally
liable for monetary damages to the Company or its stockholders for a breach of
fiduciary duty as a director, except for liability as a result of (i) a breach
of the director's duty of loyalty to the Company or its stockholders, (ii) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) an act related to the unlawful stock repurchase
or payment of a dividend under Section 174 of Delaware General Corporation Law,
and (iv) transactions from which the director derived an improper personal
benefit.
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<PAGE>
The Company intends to procure and maintain a policy of insurance under
which the directors and officers of the Company will be insured, subject to the
limits of the policy, against certain losses arising from claims made against
such directors and officers by reason of any acts or omissions covered under
such policy in their respective capacities as directors or officers, including
liabilities under the Securities Act. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Commission
that such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
COMPENSATION OF DIRECTORS
Non-employee directors of the Company will be reimbursed for reasonable
travel and lodging expenses incurred in attending meetings of the Board of
Directors and any committees on which they may serve. Directors do not presently
receive any fees for attendance or participation at Board or committee meetings.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LICENSE AGREEMENT
The Company has licensed the Technologies from RIC, on a worldwide
exclusive basis, solely in the Field of Use pursuant to the Company License
Agreement, and will endeavor to commercialize and market the Technologies to
third parties for its implementation in the food and beverage industries.
Pursuant to the Company License Agreement, RIC granted the Company a
royalty-free exclusive worldwide license for an aggregate of $4,000,000 and
2,900,000 shares of Common Stock, to (i) directly or indirectly make (or
subcontract to make), use, sell and otherwise commercially exploit the
Technology, solely in the Field of Use, and (ii) grant sublicenses to affiliated
and non-affiliated third parties, solely in the Field of Use, provided, however,
that the Company shall not be permitted to sublicense the right to manufacture
the Valve Assemblies. From October 1995 to the Effective Date, the Company has
paid RIC $750,000 and has advanced an aggregate of approximately $550,000 to
RIC, which shall be offset against the $4,000,000 license fee discussed above.
The remaining $2,700,000 shall be paid out of the proceeds of this Offering
received by the Company.
The Company is primarily responsible for all research and development
activities necessary to exploit fully the commercial possibilities of the
Technology. The research and development activities shall include testing of
proposed Products and ongoing technical support for the modification,
improvement, enhancement, development or variation of existing Products and the
development of new Products. RIC is responsible for causing RILP to manage all
intellectual property associated with the Technology, including patents and
trademarks, in order to maximize its commercial potential. This obligation
includes the prosecution of all patent and trademark applications, subject to
the Company's approval of budgets and expenditures in advance, and, in the sole
discretion of RIC (or upon receipt by RIC of the Company's commitment to pay
100% of the related reasonable costs and expenses), all suits for infringement
of patents or trademarks. If RIC or RILP is unwilling or unable to undertake
such patent obligations, then the Company is authorized to undertake such
obligations on behalf of RILP.
The Company License Agreement may not be assigned by either party
thereto without the express written consent of the other party, except that the
Company may sublicense applications of the Technologies within the Field of Use
at its own discretion and may subcontract, but not sublicense, for the
manufacturing of components incorporating the Technologies in the Field of Use.
See "Business--License Agreement."
PRIVATE PLACEMENT; BRIDGE FINANCING
Between October 1995 and April 1996, the Company (i) sold an aggregate
of 525,000 shares of Common Stock to the Selling Securityholders for a total of
$1,050,000 (the "Private Placement") and (ii) entered into the Bridge Loan with
the Selling Securityholders in the aggregate amount of $1,050,000. Each Selling
Securityholder participated in both the Private Placement and the Bridge Loan.
The Bridge Loan bears interest at the rate of eight (8%) percent per annum and
will be repaid out of the proceeds of this Offering received by the Company. As
further consideration for the Bridge Loan, the Selling Securityholders were
given the right to acquire, commencing on the Effective Date, the 787,500 Bridge
Units which are comprised of 1,575,000 shares of Common Stock and 1,575,000
Class A Warrants. The Class A Warrants included in the Bridge Units are
identical to the Class A Warrants included in the Company Units. The Company and
the Selling Securityholders are in the process of
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<PAGE>
amending the Bridge Loan agreements to reflect that all of the 787,500 Bridge
Units will be outstanding prior to this Offering and will be included in the
Registration Statement. The Registration Statement, of which this Prospectus
forms a part, also covers the registration of (i) the 1,575,000 shares of Common
Stock included as part of the Bridge Units, (ii) the Class A Warrants to
purchase 1,575,000 shares of Common Stock included as part of the Bridge Units,
and (iii) the 1,575,000 shares of Common Stock issuable upon exercise of the
Class A Warrants included in the Bridge Units. The Bridge Securities held by the
Selling Securityholders may be sold commencing thirteen (13) months from the
Effective Date; however, the Underwriter may release the Bridge Securities held
by the Selling Securityholders at any time after the Company Units have been
sold. If the Underwriter releases the Bridge Securities (which has happened in
previous offerings underwritten by the Underwriter), then sales of such
securities, as well as the potential of such sales at any time, may have an
adverse effect on the market prices of the securities offered hereby. The resale
of the Bridge Securities of the Selling Securityholders are subject to
prospectus delivery and other requirements of the Securities Act. The Company
will not receive any of the proceeds from the sale of the Bridge Securities.
Should the Class A Warrants offered by the Selling Securityholders be exercised,
of which there is no assurance, the Company will receive the proceeds therefrom
aggregating up to an additional $11,025,000. The Class A Warrants are redeemable
upon certain conditions.
Prior to making the Bridge Loan to the Company and purchasing shares of
Common Stock in the Private Placement, the Selling Securityholders did not own
any other securities of the Company. None of the Selling Securityholders were
otherwise affiliated with the Company at the time of making the Bridge Loan, at
the Effective Date or at any other time. The Company believes that its financial
transactions with the Selling Securityholders served a legitimate business
purpose, i.e., providing needed working capital for the Company, and were fair
and reasonable under the circumstances. The Company's financial transactions
with the Selling Securityholders were managed by the Underwriter and no
commissions or other remuneration were paid to the Underwriter in connection
with such transactions. To the extent that the Underwriter acts as a
broker-dealer for the Selling Securityholders in connection with effecting the
sale of their securities, the Underwriter would receive brokerage and commission
income. See "Selling Securityholders," "Description of Capital Stock" and
"Underwriting."
CONVERTIBLE NOTES
In November and December 1995, the Company issued to each of Ross
Portenoy and ATG Group, Inc. a Convertible Note in the principal amount of
$100,000 (the "Portenoy Note") and $50,000 (the "ATG Note"), respectively. The
notes bear interest at an annual rate of 8%. The Portenoy Note came due on April
15, 1996 and the ATG Note comes due on December 20, 1996. On June 28, 1996, in
accordance with an agreement with the Company, the holder of the ATG Note, which
contained the right to convert into 1.2 million shares of Common Stock, agreed
to transfer such note to the Company for cancellation in return for the Company
agreeing to pay it $300,000. The amounts owed by the Company to the holders of
the Convertible Notes shall be paid out of the proceeds of this Offering
received by the Company. See "Use of Proceeds" and "Underwriting."
SETTLEMENTS OF LEGAL PROCEEDINGS
Stanson Settlement
In October 1995, in connection with a settlement of actions and claims
against certain affiliates of RIC and RIC's officers and directors, including
David Brenman (the "Stanson Settlement"), the licensor of the Technology, the
Company agreed to issue (i) 2,900,000 shares of Common Stock to RIC, as partial
compensation under the Company License Agreement, (ii) an aggregate of 1,500,000
shares of Common Stock (the "Investor Shares") to certain investors in RILP,
including Gregory Abbott (422,000 shares) and George Kriste (130,000 shares),
and (iii) an aggregate of 450,000 shares of Common Stock to certain individuals
for services rendered, including Joseph Koster (58,000 shares), David Brenman
(53,000 shares) and Jon Silverman (50,000 shares). In addition, the Company
agreed that its Board of Directors would consist of Jon Silverman, David
Brenman, Joseph Koster, Gregory Abbott and George Kriste.
Pursuant to such settlement, the holders of the Investor Shares may
require the Company to file a Registration Statement under the Securities Act
with respect to 25% of such shares of Common Stock, commencing one year from the
Effective Date, subject to certain conditions and limitations. Further, if the
Company proposes to register any shares of Common Stock under the Securities
Act, other than pursuant to an initial public offering or the previous sentence,
then the holders of the Investor Shares are entitled to include an additional
25% of their shares of Common Stock in such registration. See "Description of
Capital Stock--Registration Rights."
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<PAGE>
Banco Settlement
In May 1996, in connection with the settlement of a lawsuit (the "Banco
Settlement") brought by Banco Inversion, S.A. and Administratadora General de
Patrimonios, S.A. (collectively, "Banco") against certain affiliates of RIC, RIC
entered into an agreement pursuant to which it agreed, among other things, (i)
to transfer an aggregate of 300,000 of its shares of the Company's Common Stock
(the "Settlement Shares") to Banco, (ii) to pay Banco $50,000 at the closing of
such settlement and $150,000 out of the licensing fees RIC receives from the
proceeds of this Offering and (iii) to exchange mutual releases with the parties
of such lawsuit.
The number of Settlement Shares, subject to certain anti-dilution
adjustments, may be increased up to 600,000 shares in the event that 30 months
after the Effective Date the market value of the 300,000 Settlement Shares is
less than $2,800,000.
The Company has granted to the holders of such Settlement Shares, the
right to register such shares along with shares registered by the Company in a
public offering, whether on behalf of the Company or other holders of Common
Stock, subject to customary market factor limitations. Such registration rights
terminate upon the earlier of (i) the date that all Settlement Shares have been
either registered or sold, or (ii) the date that all such shares may be sold
pursuant to Rule 144(k) under the Securities Act. See "Description of Capital
Stock--Registration Rights."
EMPLOYMENT AND NON-COMPETE AGREEMENTS
It is anticipated that the Company will enter into a three-year
employment agreement with Jon Silverman upon the closing of this Offering.
Pursuant to such proposed employment agreement, Mr. Silverman will receive a
monthly salary of $15,000. In addition, the Company will be obligated to pay the
premium on his $1,000,000 life insurance policy, to which his estate is the
beneficiary. This insurance policy is in addition to the $1,000,000 key-man life
insurance policy to be maintained by the Company on the life of Mr. Silverman.
He will also be entitled to customary benefits and perquisites.
The Company has entered into an agreement, dated March 5, 1996, with
Nologies, under which Nologies will assist in (i) the directing and managing of
product and technology development, (ii) licensing and strategic alliance
pursuits, and (iii) other related services that the Company may request from
time to time, in the area of food and beverage dispensing and delivery systems.
The term of such agreement is for twelve months and may be terminated upon 30
days written notice. The Company shall pay Nologies $8,000 per month and
reimburse it for reasonable documented business expenses. Pursuant to the terms
of such agreement, Nologies agrees (a) not to disclose, at any time, any
confidential business or technical information or trade secrets acquired during
its association with the Company and which relates to the present or
contemplated business of the Company, whether or not conceived of, discovered,
developed or prepared by Nologies, (b) during the term of the agreement and for
a one year period thereafter, it will not represent, consult, serve, or be
employed by any competing enterprise, and (c) never to divulge any confidential
information to any third party. Michael D. Handler is the President and Chief
Executive Officer of Nologies.
RENTAL SHARING
The Company may, at its own discretion, make payments for certain
expenses incurred by RIC and withhold such amounts from the licensing fees due
to RIC under the Company License Agreement. Such expenses, if advanced, may
include certain salaries, patent costs, insurance, medical plans, rent, phone
and office supplies, which in the past has aggregated approximately $21,000 per
month.
All of the transactions indicated above are on terms no less favorable
to the Company than those which could reasonably have been obtained from
non-affiliated third parties. In addition, any future transactions with
affiliates will be on terms no less favorable to the Company than those which
could reasonably be obtained from non-affiliated third parties.
- 32 -
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Common Stock as of September 11, 1996, and
as adjusted to reflect the sale of shares offered hereby, for (i) each person or
group that is known by the Company to be a beneficial owner of more than 5% of
the outstanding shares of Common Stock, (ii) each of the Named Officers and
directors, and (iii) all directors and executive officers of the Company as a
group. Except as otherwise indicated, the Company believes that such beneficial
owners, based on information furnished by such owners, have sole investment and
voting power with respect to such shares, subject to community property laws,
where applicable.
<TABLE>
<CAPTION>
Percent Owned(2)
----------------
Name and Address Number
of Beneficial Owner(1) of Shares Before Offering(3) After Offering(4)
- ---------------------- --------- ------------------ -----------------
<S> <C> <C> <C>
ReSeal International Corporation 2,375,000(5) 30.1% 24.8%
342 Madison Avenue, Suite 1034
New York, New York 10173
Jon Silverman 500,000 6.3% 5.2%
c/o International Dispensing Corporation
342 Madison Avenue, Suite 1034
New York, New York 10173
Gregory Abbott 422,000 5.3% 4.4%
c/o International Dispensing Corporation
342 Madison Avenue, Suite 1034
New York, New York 10173
David Brenman 253,000(6) 3.2% 2.6%
Joseph Koster 158,000 2.0% 1.7%
George Kriste 130,000 1.6% 1.4%
All directors and executive officers as a group 963,000 12.2% 10.1%
(4 persons)
</TABLE>
- ------------
(1) Address provided for beneficial owners of more than 5% of the Common Stock.
(2) For purposes of computing the percentage of outstanding shares of Common
Stock held by each person or group of persons named above, any security
which such person or persons have or have the right to acquire within 60
days is deemed to be outstanding but is not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.
(3) Does not include the 1,575,000 shares of Common Stock issuable upon the
exercise of the Class A Warrants contained in the Bridge Units.
(4) Does not include (i) 1,575,000 shares of Common Stock issuable upon the
exercise of the Class A Warrants contained in the Bridge Units; (ii)
1,666,668 shares of Common Stock issuable upon the exercise of the Class A
Warrants contained in the Company Units; (iii) 166,666 shares of Common
Stock issuable upon the exercise of the Underwriter's Unit Purchase Option;
and (iv) 166,666 shares of Common Stock issuable upon the exercise of the
Class A Warrants included in the Underwriter's Unit Purchase Option.
(5) This number may be reduced by 150,000 shares in the near future, since RIC
anticipates transferring such number of shares to one of its stockholders
in exchange for shares of RIC that such individual owns.
(6) Includes 200,000 shares of Common Stock owned of record by Venture
Financial Limited Partnership, a limited partnership of which David Brenman
is the sole shareholder of the General Partner, Venture Financial, Inc.
- 33 -
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 40,000,000
shares of Common Stock, par value $0.001 per share (the "Common Stock"), of
which 7,900,000 shares are currently outstanding, and 2,000,000 shares of
Preferred Stock, par value $0.001 per share (the "Preferred Stock"), of which no
shares are currently outstanding. At September 11, 1996, there were
approximately 40 record holders of the Common Stock.
UNITS
Each of the Units offered hereby consists of two shares of Common Stock
and two redeemable Class A Warrants. Each Class A Warrant entitles the holder
thereof to purchase one share of Common Stock. The Class A Warrants shall be
exercisable commencing one year from the Effective Date and shall be evidenced
by separate certificates. The Common Stock and Class A Warrants are detachable
and may trade separately immediately upon issuance.
COMMON STOCK
Each share of Common Stock entitles the holder thereof to one vote.
Holders of the Common Stock have equal ratable rights to dividends from funds
legally available therefor, when, as and if declared by the Board of Directors
and are entitled to share ratably, as a single class, in all of the assets of
the Company available for distribution to holders of shares of Common Stock upon
the liquidation, dissolution or winding up of the affairs of the Company.
Holders of Common Stock do not have preemptive, subscription or conversion
rights. There are no redemption or sinking fund provisions for the benefit of
the Common Stock in the Certificate of Incorporation. The Company's stockholders
do not have the right to cumulative voting in the election of directors. All
outstanding shares of Common Stock are, and those shares of Common Stock
included in the Units offered hereby and issuable upon exercise of the Class A
Warrants included in such Units will be, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
The Preferred Stock may be issued in series, and shares of each series
will have such rights and preferences as are fixed by the Board of Directors in
the resolutions authorizing the issuance of that particular series. In
designating any series of Preferred Stock, the Board of Directors may, without
further action by the holders of Common Stock, fix the number of shares
constituting that series and fix the dividend rights, dividend rate, conversion
rights, voting rights (which may be greater or lesser than the voting rights of
the Common Stock), rights and terms of redemption (including any sinking fund
provisions) and the liquidation preferences of the series of Preferred Stock.
Holders of any series of Preferred Stock, when and if issued, may have priority
claims to dividends and to any distributions upon liquidation of the Company,
and other preferences over the holders of the Common Stock.
The Board of Directors may issue a series of Preferred Stock without
action by the stockholders of the Company. The issuance of Preferred Stock may
adversely affect the rights of the holders of the Common Stock. For example, the
issuance of Preferred Stock may be used as an "anti-takeover" device without
further action on the part of the stockholders. In addition, the issuance of
Preferred Stock may dilute the voting power of holders of Common Stock (such as
by issuing Preferred Stock with supervoting rights) and may render more
difficult the removal of current management, even if such removal may be in the
stockholders' best interests. The Company has no current plans to issue any of
the Preferred Stock.
CLASS A WARRANTS
The Class A Warrants will be issued in registered form pursuant to an
agreement, dated the Effective Date (the "Warrant Agreement"), between the
Company and American Stock Transfer & Trust Company (the "Warrant Agent"). The
following discussion of certain terms and provisions of the Class A Warrants is
qualified in its entirety by reference to the detailed provisions of the Warrant
Agreement, the form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
Each Class A Warrant represents the right of the registered holder to
purchase one share of Common Stock at an exercise price equal to $7.00, subject
to adjustment (the "Purchase Price"). The Class A Warrants will be
- 34 -
<PAGE>
entitled to the benefit of adjustments in the Purchase Price and in the number
of shares of Common Stock and/or other securities deliverable upon the exercise
thereof in the event of a stock dividend, stock split, reclassification,
reorganization, consolidation, merger or the issuance of Common Stock or options
to purchase Common Stock at a price below the Purchase Price then in effect. The
Company has the right to reduce the Purchase Price or increase the number of
shares of Common Stock issuable upon the exercise of the Class A Warrants.
Unless previously redeemed, the Class A Warrants may be exercised at
any time commencing one year from the Effective Date and prior to the close of
business on the fifth anniversary of the Effective Date (the "Expiration Date").
On and after the Expiration Date, the Class A Warrants become wholly void and of
no value. The Company may, upon 30 days written notice to all holders of the
Class A Warrants, reduce the exercise price or extend the Expiration Date of all
outstanding Class A Warrants for such increased period of time as it may
determine. The Class A Warrants may be exercised at the office of the Warrant
Agent.
The Company has the right at any time after the second anniversary of
the Effective Date to redeem the Class A Warrants at a price of $.05 each, by
written notice mailed 30 days prior to the redemption date to each Class A
Warrant holder at his address as it appears on the books of the Warrant Agent.
Such notice shall only be given within 10 days following any period of 20
consecutive trading days during which the average closing bid price of the
shares of Common Stock as reported by the OTC Bulletin Board exceeds $8.00,
subject to adjustments for stock dividends, stock splits and the like. If the
Class A Warrants are called for redemption, they must be exercised prior to the
close of business on the date prior to the date of any such redemption or the
right to purchase the applicable shares of Common Stock will lapse.
The Warrants may be exercised by filling out and signing the
appropriate notice of exercise form attached to the Warrant and mailing or
delivering it (together with the Warrant) to American Stock Transfer & Trust
Company of New York, New York, the Warrant Agent, in time to reach the Warrant
Agent prior to the time fixed for termination or redemption of the Warrants,
accompanied by payment of the full warrant exercise price.
No holder, as such, of Class A Warrants shall be entitled to vote or
receive dividends or be deemed the holder of shares of Common Stock for any
purpose whatsoever until such Class A Warrants have been duly exercised and the
Purchase Price has been paid in full. Although the Company intends to apply for
the Warrants to be included for quotation on the OTC Bulletin Board, of which
there can be no assurance, at the present time there is no market for the
Warrants and there can be no assurance that a trading market for the Warrants
will ever develop.
If required, the Company will file a new registration statement with
the Commission with respect to the securities underlying the Class A Warrants
prior to the exercise of the Class A Warrants and deliver a prospectus with
respect to such securities to all Class A Warrant holders as required by Section
10(a)(3) of the Securities Act. See "Risk Factors--Current Prospectus and State
Registration Required to Exercise Class A Warrants."
BRIDGE UNITS
In connection with the Bridge Loans, the Company issued to the Selling
Securityholders options to receive an aggregate of 787,500 Bridge Units. Each
Bridge Unit contains two shares of Common Stock and two Class A Warrants. The
Class A Warrants included in the Bridge Units are identical to the Class A
Warrants included in the Company Units. The Selling Securityholders and the
Company have amended the Bridge Loan agreements to reflect that all of the
787,500 Bridge Units are outstanding prior to this Offering. The Registration
Statement, of which this Prospectus forms a part, covers the 787,500 Bridge
Units, the 1,575,000 shares of Common Stock and the 1,575,000 Class A Warrants
contained in the Bridge Units, and the 1,575,000 shares of Common Stock
underlying the Class A Warrants contained in the Bridge Units, although the
Company will not receive any of the proceeds from the sale of such securities.
The Bridge Securities are not transferable until the earlier of 13 months
following the Effective Date or at such earlier date as may be permitted by the
Underwriter. The securities underlying the Bridge Units may trade separately.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company will be subject to the provisions of Section 203 of the
General Corporation Law of Delaware. Section 203 prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless, among
other exceptions, the business combination is approved by (i) the Board of
- 35 -
<PAGE>
Directors prior to the date the interested stockholder obtained such status or
(ii) the holders of two-thirds of the outstanding shares of each class or series
of stock entitled to vote generally in the election of directors, not including
those shares owned by the interested stockholder. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or, more of the
corporation's voting stock.
The Company's Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violating of
law. The Company's Certificate of Incorporation also contains provisions to
indemnify its directors and officers to the fullest extent permitted by the
General Corporation Law of Delaware. These provisions have the practical effect
in certain cases of eliminating the ability of stockholders to collect damages
from such individuals. The Company believes that these provisions have assisted
the Company in attracting and retaining qualified individuals to serve as
directors and officers.
REGISTRATION RIGHTS
Pursuant to the terms of the Stanson Settlement, the holders of the
Investor Shares may require the Company to file a Registration Statement under
the Securities Act with respect to 25% of such shares of Common Stock,
commencing one year from the Effective Date, subject to certain conditions and
limitation. Further, if the Company proposes to register any shares of Common
Stock under the Securities Act, other than pursuant to an initial public
offering or the previous sentence, then the holders of the Investor Shares are
entitled to include an additional 25% of their shares of Common Stock in such
registration. See "Certain Relationships and Related Transactions--Settlement of
Legal Proceedings."
Under the terms of a Registration Rights Agreement entered into in
connection with the Banco Settlement, if the Company proposes to register any
shares of Common Stock, either for its own account or the account of holders of
shares having registration rights, other than pursuant to an initial public
offering or the registration of any of the Bridge Units and its underlying
securities, then Banco or their successors are entitled to notice of such
registration and to include their shares of Common Stock in such registration.
These rights are subject to certain conditions and limitations, including the
right of the underwriter to limit the number of shares included in such
registration. See "Certain Relationships and Related Transactions--Settlements
of Legal Proceedings."
Upon the consummation of this Offering, the Company will issue, for
nominal consideration, an Underwriter's Unit Purchase Option to acquire up to an
aggregate of 83,333 Units, which Units contain certain registration rights under
the Securities Act relating to the shares of Common Stock constituting a portion
of such Units and the shares of Common Stock issuable upon exercise of the Class
A Warrants that make up the remainder of such Units (collectively, the "Option
Shares"). Under the terms of the Underwriter's Unit Purchase Option, the Company
is obligated to register all or part of the Option Shares if it receives a
request to do so by the holders owning or entitled to purchase at least 50% of
the Option Shares, provided that the request is made 12 months after the
Effective Date. The Underwriter's Unit Purchase Option provides for one such
request, which will be at the Company's expense, other than legal fees and
expenses of the holders, and underwriting discounts and commissions on
securities sold by such holders. The demand registration rights contained in the
Underwriter's Unit Purchase Option will expire no later than five years from the
Effective Date. In addition, if the Company proposes to register any of its
securities under the Securities Act for its own account, holders of the
Underwriter's Unit Purchase Option or Option Shares are entitled to notice of
such registration and the Company is obligated to use all reasonable efforts to
cause the Option Shares to be included, provided that the underwriter of any
such offering shall have the right to limit the number of shares included in the
registration. The Company is responsible for all expenses incurred in connection
with any such piggyback registration of the Option Shares, other than legal fees
and expenses of the holders, and underwriting discounts and commissions on
securities sold by such holders. The piggyback registration rights contained in
the Underwriter's Unit Purchase Option will expire no later than five years from
the Effective Date.
Prior to this Offering, there has been no public market for the
Company's securities. The Company can make no prediction as to the effect, if
any, that sales of the Company's securities or the availability of such
securities for sale will have on the market price prevailing from time to time.
Sales of substantial amounts of the Company's securities in the public market,
or the perception that such sales could occur, could adversely affect the
- 36 -
<PAGE>
market price of the Company's securities and could impair the Company's future
ability to raise capital through an offering of its equity securities.
STOCK TRANSFER AGENT, WARRANT AGENT AND REGISTRAR
The stock transfer agent, warrant agent and registrar for the Units,
Common Stock and Class A Warrants is American Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
All of the 7,900,000 shares of Common Stock currently outstanding may
be deemed "restricted securities" as that term is defined under the Securities
Act, and in the future may be sold pursuant to a registration under the
Securities Act, in compliance with Rule 144 under the Securities Act, or
pursuant to another exemption therefrom. Rule 144 provides, that, in general, a
person holding restricted securities for a period of two years and any affiliate
of the Company may, every three months, sell in brokerage transactions an amount
of shares which does not exceed the greater of one percent of the Company's then
outstanding Common Stock or the average weekly trading volume of the Common
Stock during the four calendar weeks prior to such sale. Rule 144 also permits,
under certain circumstances, the sale of shares without any quantity limitations
by a person who is not an affiliate of the Company and was not an affiliate at
any time during the 90 day period prior to sale and who has satisfied a three
year holding period. Sales of the Common Stock by certain present stockholders
under Rule 144 may, in the future, have a depressive effect on the market price
of the Company's securities.
The Company has agreed that, with certain exceptions, it will not
offer, sell, grant any option to purchase or otherwise issue any of its
securities for a period of 24 months after this Offering is complete without the
prior consent of the Underwriter. In addition, the holders of all of the
restricted securities have agreed not to offer, sell, grant any option to
purchase or otherwise dispose of any securities of the Company for a period of
24 months after this Offering is completed without the prior consent of the
Underwriter other than certain transfers between related parties or entities.
See "Risk Factors--Shares Eligible for Future Sale" and "Underwriting."
This Offering includes 787,500 shares of Common Stock owned by the
Selling Securityholders. The shares of Common Stock held by the Selling
Securityholders may be sold commencing thirteen (13) months from the Effective
Date, subject to earlier release at the sole discretion of the Underwriter, and
such securities include a legend with such restrictions. The Underwriter may
release the securities held by the Selling Securityholders at any time after all
of the Company Units have been sold. The resale of the Bridge Securities is
subject to prospectus delivery and other requirements of the Securities Act. The
early release of the Selling Securityholders' Bridge Securities, which has
occurred in previous offerings underwritten by the Underwriter, or the potential
of such sales at any time, may have an adverse effect on the market prices of
the securities offered hereby. See "Certain Relationships and Related
Transactions," "Selling Securityholders" and "Underwriting."
- 37 -
<PAGE>
SELLING SECURITYHOLDERS
This Offering includes the 787,500 Bridge Units, consisting of
1,575,000 shares of Common Stock and 1,575,000 Class A Warrants. The Class A
Warrants included in the Bridge Units are identical to the Class A Warrants
included in the Company Units. The Bridge Securities are all being registered
for resale under the Registration Statement, of which this Prospectus forms a
part, but may not be sold for a period of 13 months from the Effective Date
without the prior written consent of the Underwriter. The Underwriter may
release the Bridge Securities held by the Selling Securityholders at any time
after the Company Units have been sold. The resale of the Bridge Securities is
subject to prospectus delivery and other requirements of the Securities Act. If
the Underwriter releases the Selling Securityholders' Bridge Securities (which
has happened in previous offerings underwritten by the Underwriter), then sales
of the Bridge Securities, as well as the potential of such sales at any time,
may have an adverse effect on the market prices of the securities offered
hereby. See "Underwriting."
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF COMMON STOCK
SHARES OF CLASS A OWNED NUMBER OF
COMMON STOCK WARRANTS PRIOR TO SHARES COMMON STOCK OWNED
BRIDGE UNDERLYING UNDERLYING OFFERING(1) TO BE AFTER OFFERING (1)(3)
UNITS BRIDGE UNITS BRIDGE UNITS NUMBER PERCENT OFFERED(2) NUMBER PERCENT
<S> <C> <C> <C> <C> <C> <C> <C>
NAME OF INVESTOR
Armstrong Industries 131,250 262,500 262,500 612,500 7.5% 525,000 87,500 *
Harvey Bibicoff 37,500 75,000 75,000 175,000 2.2 150,000 25,000 *
Calvin Caldwell 46,875 93,750 93,750 218,750 2.7 187,500 31,250 *
Edward Ferree 18,750 37,500 37,500 87,500 1.1 75,000 12,500 *
Andre Van Gils 37,500 75,000 75,000 175,000 2.2 150,000 25,000 *
Daryl Hagler 18,750 37,500 37,500 87,500 1.1 75,000 12,500 *
Irving Kraut 93,750 187,500 187,500 437,500 5.4 375,000 62,500 *
David Landau 37,500 75,000 75,000 175,000 2.2 150,000 25,000 *
Steven Madden 75,000 150,000 150,000 350,000 4.3 300,000 50,000 *
Roger Oppenheimer 9,375 18,750 18,750 43,750 * 37,500 6,250 *
Plus One Finance Ltd. 56,250 112,500 112,500 262,500 3.3 225,000 37,500 *
Douglas Preston 37,500 75,000 75,000 175,000 2.2 150,000 25,000 *
Rotanes Inc. 18,750 37,500 37,500 87,500 1.1 75,000 12,500 *
Raphael Schneiderman 93,750 187,500 187,500 437,500 5.4 375,000 62,500 *
Harry Shuster 37,500 75,000 75,000 175,000 2.2 150,000 25,000 *
Lloyd Solomon 37,500 75,000 75,000 175,000 2.2 150,000 25,000 *
-------- ----------- ----------- ------- -------
Total 787,500 1,575,000 1,575,000 3,150,000 525,000
======= ========= ========= ========= =======
</TABLE>
* less than 1%
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares of Common Stock which such person has
the right to acquire after the Effective Date. For purposes of computing
the percentage of outstanding shares of Common Stock held by each person or
group of persons named above, any security which such person or persons has
or have the right to acquire after the Effective Date is deemed to be
outstanding but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person. Except as indicated
in the footnotes to this table and pursuant to applicable community
property laws, the Company believes based on information supplied by such
persons, that the persons named in this table have sole voting power with
respect to all shares of Common Stock which they beneficially own.
(2) Includes the shares of Common Stock included in the Bridge Units and the
shares of Common Stock underlying the Class A Warrants included in the
Bridge Units.
(3) Assumes the sale of all Bridge Units registered in this Offering.
The Bridge Securities offered hereby may be sold from time to time
directly by the Selling Securityholders. Alternatively, the Selling
Securityholders may from time to time offer such securities through
underwriters, dealers or agents. The distribution of Bridge Securities by the
Selling Securityholders may be effected in one or more transactions that may
take place on the over-the-counter market, including ordinary broker's
transactions, privately-negotiated transactions or through sales to one or more
broker-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
- 38 -
<PAGE>
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Securityholders in connection with such
sales of Bridge Securities. The Selling Securityholders and intermediaries
through whom such securities are sold may be deemed "underwriters" within the
meaning of the Securities Act with respect to the Bridge Securities offered, and
any profits realized or commission received may be deemed underwriting
compensation.
Under the Exchange Act and the regulations thereto, any person engaged
in a distribution of the Securities offered by this Prospectus may not
simultaneously engage in market-making activities with respect to such
securities during the applicable "cooling off" period (nine days) prior to the
commencement of such distribution. In addition, and without limiting the
foregoing, the Selling Securityholders will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including without
limitation, Rule 10b-6 and 10b-7, in connection with transactions in such
securities, which provisions may limit the timing of purchases and sales of such
securities by the Selling Securityholders.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a
copy of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Underwriter has agreed to sell on behalf of the
Company 833,334 Company Units on a "best efforts, all-or-none" basis during the
Offering Period. The Underwriter has made no commitment to purchase or take down
all or any part of the Units offered hereby. The Underwriter has agreed to use
its best efforts to find purchasers for the Company Units offered hereby within
a period of 90 days from the Effective Date, subject to an extension by mutual
agreement of the parties for an additional period of 30 days. Each subscriber
will receive from the Underwriter confirmation of his subscription to purchase
Company Units with instructions to forward their funds to the escrow agent. All
proceeds raised in this Offering from sales of Company Units will be deposited
by noon of the next business day following receipt, in an escrow account. All
subscriber checks will be made payable to the escrow agent, as escrow agent for
the Company. If all the Company Units are not sold within 90 days from the
Effective Date (which may be extended an additional 30 days) and the offering is
cancelled, all monies received and held in the escrow account will be promptly
returned to the investor without interest thereon. In addition, during the
period of escrow, subscribers will not be entitled to a refund of their
subscription.
The Underwriter has advised the Company that it proposes to offer the
Units to the public at $12.00 per Unit as set forth on the cover page of this
Prospectus and that it may allow to certain dealers who are NASD members
concessions not to exceed $.30 per Unit. The Units will be sold on a fully paid
basis only. Common Stock and Warrant certificates will be issued to purchasers
only if the proceeds from the sale of all Company Units are released to the
Company. Until such time as the funds have been released by the escrow agent,
such purchasers, if any, will be deemed subscribers and not stockholders. The
funds in escrow will be held for the benefit of those subscribers until released
to the Company, and will not be subject to creditors of the Company or the
expenses of this Offering. After the initial public offering, the public
offering price, concession and allowance may be changed by the Underwriter. The
Underwriter has informed the Company that it does not intend to confirm sales to
any accounts over which it exercises discretionary authority.
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriter against certain liabilities in
connection with the Registration Statement, including liabilities under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be provided to officers, directors or persons controlling the
Company, the Company has been informed that in the opinion of the Commission,
such indemnification is against public policy and is therefore unenforceable.
The Company has agreed to pay the Underwriter, in addition to
underwriting discounts and commissions of eight and one-half (8.5%) percent of
the proceeds from sales of Company Units, a non-accountable expense allowance of
$50,000. The Underwriter's expenses in excess of the stated expense allowance
will be borne by the Underwriter. To the extent that the expenses of the
Underwriter are less than the stated expense allowance, the difference may be
deemed compensation to the Underwriter in addition to the sales commission
payable to the Underwriter. The Company has also agreed to pay to the
Underwriter a fee of four (4%) percent of the exercise price of the Class A
Warrants on all Class A Warrants exercised one year after the Effective Date
(not including Class A Warrants exercised by the Underwriter), provided, among
other things, that the exercising warrantholder identifies the Underwriter in
writing as having solicited the exercise of such Class A Warrants and that the
fees paid are in compliance with Rule 2710(c)(6)(B)(xi) of the NASD Conduct
Rules.
In December, 1995, the Company issued to ATG Group, Inc. the ATG Note.
The note bears interest at an annual rate of 8%. The ATG Note comes due on
December 20, 1996. On June 28, 1996, in accordance with an agreement with the
Company, the holder of the ATG Note, which contained the right to convert into
1.2 million shares of Common Stock, agreed to transfer such note to the Company
for cancellation in return for the Company agreeing to pay it $300,000. Andrew
T. Greene, a former officer and director of the Underwriter is the sole officer,
director and stockholder of ATG Group, Inc. Accordingly, the difference between
the $50,000 principal amount of the ATG Note and the $300,000 payment ($250,000)
has been deemed compensation paid a connection with this Offering. The amounts
owned to the holder of the ATG Note shall be paid out of the proceeds of this
Offering received by the Company.
- 39 -
<PAGE>
The Company has agreed to sell to the Underwriter, or its designees,
for a purchase price of $.001 per underlying Unit, the Underwriter's Unit
Purchase Option to purchase up to an aggregate of 83,333 Units. The
Underwriter's Unit Purchase Option shall be exercisable for a term of four (4)
years commencing twelve (12) months after the Effective Date. The Underwriter's
Unit Purchase Option may not be assigned, transferred, sold or hypothecated by
the Underwriter until twelve (12) months after the Effective Date, except to
officers of the Underwriter. Any profits realized by the Underwriter upon the
sale of the Units issuable upon exercise of the Underwriter's Unit Purchase
Option may be deemed to be additional underwriting compensation. The exercise
price of the Units issuable upon exercise of the Underwriter's Unit Purchase
Option during the period of exercisability shall be 165% of the initial public
offering price of the Units ($19.80 per Unit). The exercise price of the Class A
Warrants included in the Units issuable upon exercise of the Underwriter's Unit
Purchase Option during the period of exercisability shall be 165% of the
exercise price of the Class A Warrants included in the Company Units and the
Bridge Units ($11.55 per Unit). The exercise price of the Underwriter's Unit
Purchase Option and the Class A Warrants included thereunder, as well as the
number of shares covered thereby, are subject to adjustment in certain events to
prevent dilution. For the life of the Underwriter's Unit Purchase Option, the
holders thereof are given, at a nominal cost, the opportunity to profit from a
rise in the market price of the Company's Units, Common Stock and Class A
Warrants with a resulting dilution in the interest of other stockholders. The
Company may find it more difficult to raise capital for its business if the need
should arise while the Underwriter's Unit Purchase Option is outstanding. At any
time when the holders of the Underwriter's Unit Purchase Option might be
expected to exercise it, the Company would probably be able to obtain additional
capital on more favorable terms. See "Description of Capital Stock--Registration
Rights."
For a period of five (5) years following the Effective Date, if the
Company enters into a transaction (including a merger, joint venture or the
acquisition of another entity) introduced to the Company by the Underwriter, the
Company has agreed to pay the Underwriter a finder's fee equal to (i) 5.0% of
the first $3,000,000 of consideration involved in the transaction, (ii) 4.0% of
the next $3,000,000 of such consideration, (iii) 3.0% of the next $2,000,000 of
such consideration, (iv) 2.0% of the next $2,000,000 of such consideration and
(v) 1.0% of such consideration in excess of $10,000,000.
As of the Effective Date, all of the Company's stockholders have agreed
that with respect to all of the shares held by them, they will not sell,
transfer, pledge or otherwise encumber any securities of the Company for a
period of 24 months from the Effective Date, without the Underwriter's prior
written consent. Moreover, except for the issuance of shares of capital stock by
the Company in connection with a dividend, recapitalization, reorganization or
similar transaction or as a result of the exercise of warrants or outstanding
options disclosed in the Registration Statement, the Company shall not, for a
period of 24 months following the Effective Date, directly or indirectly, offer,
sell or issue any shares of its Common Stock, or any security exchangeable or
exercisable for, or convertible into, shares of Common Stock, without the prior
written consent of the Underwriter.
In accordance with the Underwriting Agreement, the Underwriter is
entitled to designate an observer (the "Board Observer") to the Board of
Directors, who will be kept apprised of all material activities conducted by the
Board, including being in attendance at all meetings of the Board. The Board
Observer will not be reimbursed for expenses incurred by him in connection with
his activities.
Following the consummation of this Offering, the Underwriter intends to
seek others to make a market in the Company's securities in addition to the
Underwriter. As of the Effective Date, no such others have been identified and
the Underwriter has not entered into any agreements, contracts, understandings
or guarantees with respect thereto. The failure of others to make a market in
the Company's securities will likely have an adverse impact on the ability of
the holders of such securities to sell them.
The foregoing is a summary of certain provisions of the Underwriting
Agreement and the Underwriter's Unit Purchase Option which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
The Company has been advised by the Underwriter that the NASD (District
10) filed a complaint (No. C10950081) on October 5, 1995 ("Complaint") against
the Underwriter, Steven Sanders, the head trader of the Underwriter, Daniel M.
Porush, the president of the Underwriter, and Paul F. Byrne, formerly the
Underwriter's director of compliance (collectively, the "Respondents"), alleging
various violations of the NASD Rules of Fair Practice. The Complaint consisted
of three causes. The first cause alleged that the Underwriter and Mr. Sanders
effected principal retail sales of securities at prices that were fundamentally
excessive. The second cause alleged that the Underwriter and Mr. Sanders charged
excessive markups. The third cause alleged the Underwriter and
- 40 -
<PAGE>
Messrs. Porush and Byrne failed to establish, maintain and enforce reasonable
supervisory procedures designed to assure compliance with the NASD's rules and
policies.
On April 15, 1996 the NASD in its decision found all of the
Respondents, except Paul Byrne, in violation of all three causes and imposed the
following sanctions:
o Mr. Sanders was censured, fined $25,000 and was suspended from
association with any member of the NASD in any capacity for a
period of one year.
o The Underwriter was censured, fined $500,000 and was required to
disgorge its excess profits to its customers, totaling
$1,876,205, plus prejudgment interest. In addition, the
Underwriter was suspended for a period of one year from effecting
any principal retail transactions.
o Mr. Porush was censured, fined $250,000 and barred from
association with any member of the NASD in any capacity.
The Underwriter and Messrs. Porush and Sanders have appealed the NASD's
decision, thereby staying imposition of the sanctions.
If the sanctions imposed on the Underwriter are not reversed on appeal,
the Underwriter's ability to act as a market maker of the Company's securities
will be restricted. The Company cannot ensure that other broker dealers will
make a market in the Company's securities. In the event that other broker
dealers fail to make a market in the Company's securities, the possibility
exists that the market for and the liquidity of the Company's securities may be
adversely affected to such an extent that public security holders may not have
anyone to purchase their securities when offered for sale at any price. In such
event, the market for and liquidity of the Company's securities may not exist.
It should be noted that although the Underwriter may not be the sole market
maker in the Company's securities, it may likely be the dominant market maker in
the Company's securities.
In April 1996, the NASD settled an action whereby it fined the
Underwriter $325,000 for fraud and other violations (which were neither admitted
or denied) in connection with its underwriting of an initial public offering.
Steven Sanders was fined $50,000 and was suspended for a period of 45 days from
associating with an NASD member and agreed not to engage in any trading-related
activities for any NASD member for a period of 50 days. The settlement also
requires that the Underwriter file certain new supervisory procedures with the
NASD. The Underwriter filed with NASD on April 11, 1996 procedures relating to
the conduct of associated persons during and preceding an initial public
offering, which were aimed at preventing violations of Section 5 of the
Securities Act and Rule 10b-6 violations and the type of arbitrary pricing which
occurred in connection with the trading of securities underwritten by the
Underwriter on January 16, 1991. These procedures have been in effect since
April 11, 1996.
The Company has been advised by the Underwriter that the NASD (District
10) filed a complaint (No. C10960080) on June 6, 1996 ("June 1996 Complaint")
against the Underwriter, Daniel Porush, Steven Sanders, Irving Stitsky, formerly
a registered representative of the Underwriter, and Jordan Shamah, a vice
president and director of the Underwriter (collectively, the "Respondents"),
alleging various violations of the Exchange Act and the NASD Rules of Fair
Practice. The June 1996 Complaint consists of seven causes of action. The first
cause alleges that the Underwriter, through Messrs. Porush and Sanders, engaged
in the use of fraudulent and manipulative devices in the failure to make bona
fide distributions in specified public offerings of securities underwritten by
the Underwriter. The second cause alleges that the Underwriter, through Messrs.
Porush, Sanders, Stitsky and Shamah, engaged in the use of fraudulent and
manipulative devices in the failure to make a bona fide distribution of common
stock of a company whose initial public offering was underwritten by the
Underwriter. The third cause alleges that the Underwriter, through Messrs.
Porush and Sanders for a period of three days, manipulated the common stock of
such company. The fourth cause alleges that the Underwriter, through Mr.
Sanders, charged fraudulently excessive markups in connection with the warrants
of such company. The fifth cause alleges that the Underwriter, through Mr.
Porush, violated the NASD's Free-Riding and Withholding Interpretation inasmuch
as he allegedly allocated securities in certain public offerings to persons
restricted from purchasing such securities. The sixth cause alleges that Messrs.
Porush and Stitsky failed to adequately supervise the Underwriter's activity
relating to the various alleged violations. The seventh cause alleges that the
Underwriter and Mr. Porush failed to establish and maintain reasonable
supervisory procedures to prevent the Underwriter's violative conduct. The
Respondents have filed answers to the June 1996 Complaint denying all material
allegations and alleged violations and are contesting the proceeding.
- 41 -
<PAGE>
In addition, the Company has been advised by the Underwriter that the
NASD (District 10) filed a complaint (No. C10960068) on June 6, 1996
("Complaint") against the Underwriter and Patrick Gerard Hayes, the compliance
director of the Underwriter (collectively, the "Respondents"), alleging
violations of the NASD Rules of Fair Practice. The Complaint consists of two
causes of action. The first cause alleges that the Underwriter failed to report
information regarding at least 59 customer complaints the Underwriter received
during the relevant time periods as required by the NASD Rules of Fair Practice.
The second cause alleges that the Underwriter, through its compliance director,
failed to establish, maintain and enforce written procedures designed to ensure
that the Underwriter complied with the NASD Rules of Fair Practice. The
Respondents have filed answers to the Complaint and are contesting the
proceeding.
On or about July 13, 1996, the District Business Conduct Committee for
District No. 10 ("District Committee") of the NASD issued a complaint against
the Underwriter alleging that the Underwriter violated Article III, Section 1
and Article IV, Section 5 of the NASD Rules of Fair Practice by entering into
settlement agreements with former customers which condition customers' ability
to cooperate with NASD investigations. The charges in the complaint were upheld
by the District Committee on this same date as well as the National Business
Conduct Committee of the NASD, and a fine of $20,000 was assessed and the
Underwriter was ordered to get the NASD's agreement on language used in certain
customer settlement agreements. The Underwriter also is required, if asked by
the NASD, to release customers from provisions in settlement agreements that
impose conditions on a customer's ability to provide information to the NASD.
The sanctions follow an appeal of findings that the firm used certain agreements
when settling customer complaints that precluded, restricted, or conditioned
customers' ability to cooperate with the NASD in connection with its
investigation of customer complaints. The Underwriter also failed to release a
customer from the restrictive provisions of such a settlement. This action had
been appealed to the Commission and the sanctions aren't in effect pending
consideration of the appeal. The Underwriter contests the charges and has
perfected an appeal to the Commission.
The Company has been advised by the Underwriter that the Commission
instituted an action on December 14, 1994 in the United States District Court
for the District of Columbia against the Underwriter. The complaint alleged that
the Underwriter was not complying with the March 17, 1994 Administrative Order
by failing to adopt the recommendations of an independent consultant. The
Administrative Order was previously consented to by the Underwriter, without
admitting or denying the findings contained therein, as settlement of an action
commenced against the Underwriter by the Commission in March 1992, which found
willful violations of the securities laws such that the Underwriter:
o engaged in fraudulent sales practices;
o engaged in and/or permitted unauthorized trading in customer
accounts;
o knowingly and recklessly manipulated the market price of a
company's securities by dominating and controlling the market for
those securities;
o made improper and unsupported price predictions with regard to
recommended over-the-counter securities; and
o made material misrepresentations and omissions regarding certain
securities and its experience in the securities industry.
Pursuant to an Administrative Order, the Underwriter was censured and
the Stratton Consultant was chosen by the Commission to advise and consult with
the Underwriter and to review and recommend new supervisory and compliance
procedures. The complaint sought:
o to enjoin the Underwriter from violating the Administrative
Order;
o an order commanding the Underwriter to comply with the
Administrative Order;
o to have a Special Compliance Monitor appointed to ensure
compliance with the Administrative Order; and
o the Underwriter claimed that the Stratton Consultant exceeded his
authority under the Administrative Order and had violated the
terms of the Administrative Order.
- 42 -
<PAGE>
On February 28, 1995, the court granted the Commission's motion for a
permanent injunction (the "Permanent Injunction") and ordered the Underwriter to
comply with the Administrative Order, which required the appointment of an
independent consultant and a separate independent auditor and required that all
recommendations be complied with, including the taping of all telephone
conversations between the Underwriter's brokers and their customers. In granting
the Commission's motion for a Permanent Injunction, the court determined that
the Underwriter's conduct unequivocally demonstrated that there is a substantial
likelihood that it will continue to evade its responsibilities under the
Administrative Order. On April 20, 1995, the Underwriter filed an appeal to the
United States Court of Appeals for the District of Columbia, and on April 24,
1995 filed a motion to stay the Permanent Injunction pending the outcome of the
appeal. The motion to stay was denied. Subsequently, the Underwriter voluntarily
dismissed its appeal. The failure by the Underwriter to comply with the
Administrative Order or Permanent Injunction may adversely affect the
Underwriter's activities in that the court may enter a further order restricting
the ability of the Underwriter to act as a market maker of the Company's
securities. The effect of such action may prevent the holders of the Company's
securities from selling such securities since the Underwriter may be restricted
from acting as a market maker of the Company's securities and, in such event,
will not be able to execute a sale of such securities. Also, if other broker
dealers fail to make a market in the Company's securities, the public security
holders may not have anyone to purchase their securities when offered for sale
at any price and the security holders may suffer the loss of their entire
investment.
As a result of the Permanent Injunction, the States of Pennsylvania,
Indiana and Illinois have commenced administrative proceedings seeking, among
other things, to revoke the Underwriter's license to do business in such states.
In Indiana, the Commissioner suspended the Underwriter's license for a three
year period. The Underwriter has appealed the decision and has requested a stay
pending appeal. The requested stay would maintain the status quo pending appeal.
In Illinois, the Underwriter intends to file an answer to the administrative
complaint denying the basis for revocation. The District of Columbia suspended
the Underwriter's license pending the outcome of an investigation. The States of
North Carolina and Arkansas also have suspended the Underwriter's license
pending a resolution of the proceedings in those states. The States of Minnesota
and Nevada have served upon the Underwriter notices of intent to revoke the
Underwriter's license in such states. The State of Connecticut has served on the
Underwriter a notice of intent to suspend or revoke the Underwriter's
registration in that state with a notice of right to hearing. In the States of
Mississippi and Vermont, the Underwriter has agreed to a suspension of its
license pending resolution of certain claims and review of its procedures and
practices by such states authorities. In addition, the Underwriter withdrew its
registration in the State of New Hampshire (with the right of reapplication) and
in the State of Maryland. There may be further administrative action against the
Underwriter in Maryland. The Underwriter withdrew its registration in
Massachusetts with a right to reapply for registration after two years, withdrew
its registration in Delaware with a right to reapply in three years and agreed
to a temporary cessation of business in Utah pending an on-site inspection and
further administrative proceedings. The Underwriter's license in the State of
New Jersey was revoked by an administrative judge pursuant to an administrative
hearing, which revocation was affirmed by the New Jersey Bureau of Securities,
and an appeal has been filed with the appellate division of the New Jersey
Superior Court. The States of Georgia, Alabama, South Carolina and Rhode Island
have lifted their suspensions and have granted the Underwriter conditional
licenses. Such conditional licenses were granted pursuant to an order, which the
Underwriter has proposed to various states, which provides provisions for: (i)
the suspension of revocation, (ii) compliance with recommendations of the
Consultant, (iii) an expedited claims mediation arbitration process, (iv)
resolution of claims seeking compensatory damages, (v) restrictions on use of
operating revenue, (vi) the limitation on selling group members in offerings
underwritten by the Underwriter and the prohibition of participating as a
selling group member in offerings underwritten by certain other NASD member
firms, (vii) the periodic review of the Underwriter's agents, (viii) the
retention of an accounting firm, and (ix) supervision and training, restrictions
on trading, discretionary accounts and other matters. The State of Oregon, as a
result of the Permanent Injunction, has filed a notice of intent to revoke the
Underwriter's license subject to the holding of a hearing to determine
definitively the Underwriter's license status, and the Underwriter, in this
proceeding as well as other proceedings, expects to be able to demonstrate that
the Permanent Injunction is not of a nature as to be a lawful basis to revoke
the Underwriter's license permanently. Finally, the Underwriter has received an
order limiting its license in the State of Nebraska. Such proceedings, if
ultimately successful, may adversely affect the market for and liquidity of the
Company's securities if additional broker-dealers do not make a market in the
Company's securities. Moreover, should investors purchase any of the securities
in this Offering from the Underwriter prior to a revocation of the Underwriter's
license in their state, such investors will not be able to resell such
securities in such state through the Underwriter but will be required to retain
a new broker-dealer firm for such purpose. The Company cannot ensure that other
broker-dealers will make a market in the Company's securities. In the event that
other broker-dealers fail to make a market in the Company's securities, the
possibility exists that the market for and the liquidity of the Company's
securities may be adversely affected to such an extent
- 43 -
<PAGE>
that public security holders may not have anyone to purchase their securities
when offered for sale at any price. In such event, the market for, and liquidity
and prices of the Company's securities may not exist. It should be noted that
although the Underwriter may not be the sole market maker in the Company's
securities, it will most likely be the dominant market maker in the Company's
securities. In addition, in the event that the Underwriter's license to do
business is revoked in the states set forth above, the Underwriter has advised
the Company that the members of the selling syndicate in this Offering may be
able to make a market in the Company's securities in such states and that such
an event will not have a materially adverse effect on this Offering, although no
assurance can be made that such an event will not have a materially adverse
effect on this Offering. The Company has applied to register this Offering for
the offer and sale of its securities in the following states: California,
Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii,
Illinois, Louisiana, New York, Rhode Island and Virginia. The offer and sale of
the securities of this Offering are not available in any other state, absent an
exemption from registration.
The Company has been advised by the Underwriter that Honorable John E.
Sprizzo, United States Judge for the Southern District of New York on May 6,
1994 denied the class certification motion in Paul Carmichael v. Stratton
Oakmont, Inc., et al., Civ. 0720 (JES), of the plaintiff Paul Carmichael. The
class action complaint alleges manipulation and fraudulent sales practices in
connection with a number of securities. The allegations were substantially
similar and involve much of the same time period as the Commission's civil
complaint (discussed above). The Company has further been informed that counsel
for the class action plaintiff sought to re-argue the motion for class
certification, which motion for re-argument was denied.
DETERMINATION OF INITIAL PUBLIC OFFERING PRICE
Prior to this Offering there has been no public market for the
securities of the Company. The initial public offering price for the securities
and the exercise price of the Class A Warrants have been determined by
negotiations between the Company and the Underwriter. Among the factors
considered in the negotiations were an analysis of the areas of activity in
which the Company is engaged, the present state of the Company's business, the
Company's financial condition, the Company's prospects, an assessment of
management, the general condition of the securities market at the time of this
Offering and the demand for similar securities of comparable companies. The
initial public offering price of the securities and the exercise price of the
Class A Warrants do not necessarily bear any relationship to assets, earnings,
book value or other criteria of value applicable to the Company.
EXPERTS
The Financial Statements as of and for the period ended December 31,
1995 included in this Prospectus and elsewhere in the Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York,
New York 10022. Members of that firm own 75,000 shares of Common Stock. Certain
legal matters will be passed upon for the Underwriter by Bernstein & Wasserman,
LLP, 950 Third Avenue, New York, New York 10022.
PATENT COUNSEL
Legal matters in connection with the Company's licensed patents,
trademarks and related other proprietary assets are represented by Anderson,
Kill & Olick, P.C. incorporating the practices of Toren, McGeady & Associates,
521 Fifth Avenue, 21st Floor, New York, New York 10175. Such firms also
represent RIC and RILP in connection with such assets.
- 44 -
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on
Form SB-2 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the securities offered
hereby. This prospectus constitutes a part of the Registration Statement and
does not contain all the information set forth therein. Any statements contained
herein concerning the provisions of any contract or other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement. Each such statement is qualified in its entirety by such reference.
For further information regarding the Company and the securities offered hereby,
reference is made to the Registration Statement and to the exhibits thereto.
After consummation of this Offering, the Company will be subject to the
informational requirements of the Exchange Act, and in accordance therewith,
will be required to file reports, proxy statements and other information with
the Commission. These reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024 of the Commission's office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Seven World Trade Center, Suite 1300, New York, New York 10048, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can 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 maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the Commission, such as the Company. The address of
such site is http://www.sec.gov. The Company intends to furnish holders of its
Units, Common Stock and Class A Warrants with annual reports containing audited
financial statements of the Company after the end of each fiscal year, and make
available such other periodic reports as the Company may deem appropriate or as
may be required by law.
- 45 -
<PAGE>
INTERNATIONAL DISPENSING CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Accountants' Report.................................................................... F-2
Balance Sheets at June 30, 1996 (unaudited) and December 31, 1995.................................. F-3
Statements of Operations for the Six Months Ended June 30, 1996 (unaudited) and
the Period from October 10, 1995 (Inception) through
December 31, 1995............................................................................... F-4
Statement of Changes in Stockholders' Equity (Deficiency) for the Six Months
Ended June 30, 1996 (unaudited) and the Period from
October 10, 1995 (Inception) through December 31, 1995.......................................... F-5
Statements of Cash Flows for the Six Months Ended June 30, 1996 (unaudited) and
the Period from October 10, 1995 (Inception) through
December 31, 1995............................................................................... F-6
Notes to Financial Statements...................................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To International Dispensing Corporation:
We have audited the accompanying balance sheet of International Dispensing
Corporation (a Delaware corporation in the development stage) as of December 31,
1995, and the related statements of operations, stockholders' equity and cash
flows for the period from October 10, 1995 (date of inception) through December
31, 1995. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Dispensing
Corporation as of December 31, 1995, and the results of its operations and its
cash flows for the period from October 10, 1995 (date of inception) through
December 31, 1995 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, certain factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 3. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Arthur Andersen LLP
June 28, 1996
New York, New York
F-2
<PAGE>
INTERNATIONAL DISPENSING CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
(unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalent $ 5,168 $ 488,379
-------------- --------------
Total current assets: 5,168 488,379
Fixed assets:
Leasehold improvements 4,475 5,872
Office equipment 4,350 7,079
Accumulated depreciation and amortization (882) (1,322)
--------------- ---------------
Net fixed assets 7,943 11,629
Other assets 14,677 63,927
Deferred issuance costs -- 21,763
--------------- ---------------
Total assets: $ 27,788 $ 585,698
=============== ===============
</TABLE>
Liabilities and Stockholders' Equity
<TABLE>
<S> <C> <C>
Current Liabilities:
Accrued expenses $ 45,806 $ 97,509
Due to affiliate 3,649,739 2,883,893
Convertible promissory notes 150,000 100,000
Promissory Notes -- 300,000
Bridge loans payable, current portion -- 1,050,000
--------------- ---------------
Total current liabilities: 3,845,545 4,431,402
Bridge loans payable 175,000 --
--------------- --------------
Total liabilities: 4,020,545 4,431,402
Commitments and contingencies (Note 11)
Stockholders' Equity (Deficiency):
Preferred Stock, $.001 par value; 2,000,000 shares
authorized; no shares issued or outstanding -- --
Common Stock $.001 par value; 20,000,000
shares authorized: 5,887,500 and 6,325,000
issued and outstanding as of December 31,
1995 and June 30, 1996, respectively 5,888 6,325
Additional paid-in capital 251,150 1,125,713
Deficit accumulated during the development stage (4,249,795) (4,977,742)
---------------- ----------------
Total stockholders' equity (deficiency) (3,992,757) (3,845,704)
--------------- ---------------
Total liabilities and stockholders'
equity (deficiency) $ 27,788 $ 585,698
=============== ===============
</TABLE>
The accompanying notes are an integral part of these balance sheets
F-3
<PAGE>
INTERNATIONAL DISPENSING CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period For the Period
from Inception from Inception
(October 10, 1995) (October 10, 1995)
through Six Months through
December 31, Ended June 30,
1995 June 30, 1996 1996
(unaudited) (unaudited)
<S> <C> <C> <C>
Revenues $ -- $ -- $ --
Costs and expenses:
General and administrative 244,768 451,491 696,259
Depreciation and amortization 882 441 1,323
--------------- ------------- -------------
Total costs and expenses 245,650 451,932 697,582
Loss from operations 245,650 451,932 697,582
Interest expense 4,145 26,015 30,160
--------------- ------------- -------------
Net loss before extraordinary loss $ 249,795 $ 477,947 $ 727,742
Extraordinary loss on retirement
of debt -- 250,000 250,000
-------------- ------------ ------------
Net Loss $ 249,795 $ 727,947 $ 977,742
=============== ============= =============
Net loss per share before
extraordinary item $ (.03) $ (.06)
Extraordinary loss per share $ __ $ (.03)
Net loss per share $ (.03) $ (.09)
Weighted average shares outstanding 7,900,000 7,900,000
</TABLE>
The accompanying notes are an integral part of these statements
F-4
<PAGE>
INTERNATIONAL DISPENSING CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the Total
Common Stock Paid in Development Stockholders'
Shares Amount Capital Stage Deficit
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 10, 1995 -- $ -- $ -- $ -- $ --
Issuance of commo
stock pursuant to
License Agreement 2,900,000 2,900 -- -- 2,900
Issuance of common
stock pursuant to
Settlement Agreement 1,950,000 1,950 -- -- 1,950
Issuance of common
stock to management 950,000 950 76,238 -- 77,188
Purchase of License from
affiliate -- -- -- (4,000,000) (4,000,000)
Issuance of common
stock in private
placement 87,500 88 43,662 -- 43,750
Issuance of common stock
rights in private placement -- -- 131,250 -- 131,250
Net loss -- -- -- (249,795 ) (249,795)
------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 5,887,500 5,888 251,150 (4,249,795) (3,992,757)
Issuance of common
stock in private
placement 437,500 437 218,313 -- 218,750
Issuance of common stock
rights in private placement -- -- 656,250 -- 656,250
Net loss -- -- -- (727,947) (727,947)
------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 6,325,000 $6,325 $1,125,713 $ (4,977,742) $ (3,845,704)
(UNAUDITED)
==========================================================================================
</TABLE>
The accompanying notes are an integral part of this statement
F-5
<PAGE>
INTERNATIONAL DISPENSING CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period For the Period
from October 10, from October 10,
1995 (Inception) 1995 (Inception)
through Six Months through
December 31, Ended June 30,
1995 June 30, 1996 1996
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (249,795) $ (727,947) $ (977,742)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 882 441 1,323
Non-cash compensation 76,238 -- 76,238
Loss on retirement of debt -- 250,000 250,000
Changes in operating assets and
liabilities:
Increase in other assets (8,877) (71,013) (79,890)
Increase/(decrease) in accrued expenses 45,806 51,703 97,509
------------ ------------ ------------
Net cash used in operating activities (135,746) (496,816) (632,562)
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (8,825) (4,127) (12,952)
Purchase of license (350,261) (765,846) (1,116,107)
------------ ------------ ------------
Net cash used in investing activities (359,086) (769,973) (1,129,059)
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement 350,000 1,750,000 2,100,000
Proceeds from issuance of convertible debt 150,000 -- 150,000
------------ ------------ ------------
Net cash provided from financing activities 500,000 1,750,000 2,250,000
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,168 483,211 488,379
Cash and cash equivalents, beginning of
period 0 5,168 0
------------ ------------ ------------
Cash and cash equivalents, end of period $ 5,168 $ 488,379 $ 488,379
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest -- -- --
Cash paid for income taxes -- -- --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock $ 5,800 -- $ 5,800
Purchase of license from affiliate $ 4,000,000 -- $ 4,000,000
</TABLE>
The accompanying notes are an integral part of these statements
F-6
<PAGE>
INTERNATIONAL DISPENSING CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JUNE 30, 1996
IS UNAUDITED)
1. THE COMPANY AND ORGANIZATION
International Dispensing Corporation, formerly known as ReSeal Food
Dispensing Systems, Inc. (the "Company"), was incorporated in the State of
Delaware in October 1995. The Company was formed primarily for the purpose of
commercializing and marketing certain proprietary and patented delivery and
dispensing technologies (the "Reseal Technologies") licensed from ReSeal
International Corporation ("RIC"). The Reseal Technologies are designed to
dispense a flowable product while maintaining the product's sterility, purity
and freshness without employing preservatives.
The Company is subject to a number of risks including the Company's
lack of prior operating history. The Company is also subject to the availability
of sufficient financing to meet its future cash requirements and the uncertainty
of future product development and regulatory approval and market acceptance of
existing and proposed products. In the event of bankruptcy of RIC, the status of
the continuing obligations of the various parties to and under the License
Agreement (Note 4) is unclear since a court in a bankruptcy proceeding may not
enforce such continuing obligations. Additionally, other risk factors such as
loss of key personnel, lack of manufacturing capabilities, difficulty in
establishing new intellectual property rights and preserving and enforcing
existing intellectual property rights as well as product obsolescence due to the
development of competing technologies could impact the future results of the
Company.
The Board of Directors of the Company has authorized the Company to
file a registration statement with the Securities and Exchange Commission
("SEC") under the Securities Act of 1933, as amended, and to sell Units
consisting of two shares of common stock and two redeemable class A warrants of
the Company ("IPO Units"). Each warrant entities the holder to purchase one
share of common stock at a proposed price of $7.00 per share.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks, as well as highly
liquid investments with original maturities of less than three months.
Fixed Assets
Furniture and equipment are recorded at cost and are depreciated on a
straight line basis over their estimated useful lives, generally five years.
Leasehold improvements are recorded at cost and amortized over the term of the
lease or life of the asset, whichever is shorter.
Patents
Costs to develop patents are expensed when incurred.
Income Taxes
Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
this method, deferred income taxes are determined based on differences between
the tax bases of assets and liabilities and their financial reporting amounts at
each year end and are measured based on enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
Net Loss Per Share
Net loss per common share calculations are based on the weighted
average number of shares of common stock outstanding. Pursuant to the Securities
and Exchange Commission ("SEC") Staff Accounting Bulletin No.
F-7
<PAGE>
INTERNATIONAL DISPENSING CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JUNE 30,
1996 IS UNAUDITED)
(CONTINUED)
83, stock and stock rights issued during the twelve months preceding the initial
filing of this offering at prices below the expected initial public offering
price have been included in the Company's loss per share computations for all
periods presented even though they are antidilutive.
Supplementary net loss per share was computed as if all the outstanding
bridge notes (Note 5) and convertible promissory notes (Note 7) had been paid at
the date of issuance, and assuming that 288,127 shares of common stock were
issued to pay such notes and $3,489 and $35,000 of interest expense was
eliminated for the periods ended December 31, 1995 and June 30, 1996,
respectively, as a result of such payments. Such supplementary net loss per
share for the period ended December 31, 1995 was $.03 and for the six months
ended June 30, 1996 was $.08.
Use of Estimates
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
Interim Financial Information
The unaudited financial statements for the period ended June 30, 1996
include, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for the fair presentation of such
financial statements.
3. GOING CONCERN
As reflected in the financial statements, the Company has experienced
net losses and negative cash flows from operations and maintains negative
working capital and negative equity. The Company's continuing existence is
dependent on its ability to raise additional capital and achieve and maintain
profitable operations. The Company continues to be in the development stage and
does not foresee operating revenue until fiscal year 1997. Management plans to
finance the Company by obtaining additional financing, through either the
proposed IPO or additional private placements of equity, until operations
commence in 1996.
4. LICENSE AGREEMENT
In October 1995, the Company entered into a License Agreement (the
"Agreement") with RIC, which was amended on June 17, 1996, pursuant to which the
Company obtained the right to commercialize and market the Reseal Technologies
to third parties for its implementation in the food and beverage industries. The
Reseal Technologies are licensed by RIC from its parent, Reseal International
Limited Partnership ("RILP"). The Agreement is royalty free and allows the
Company to grant sublicenses to third parties. Pursuant to the Agreement, the
Company issued 2,900,000 shares of its common stock to RIC and is committed to
make a payment to RIC of $750,000 on the earlier of April 10, 1996 or the
completion of a private placement (Note 5) and another payment of $3,250,000 on
the earlier of December 31, 1996 or the completion of the proposed initial
public offering. The cash paid and payable to RIC and the common stock issued
for this acquisition was charged directly to stockholders' equity and therefore
not reflected as an asset on the Company's Balance Sheet. The Company has
reflected such obligation as a current liability. The Agreement terminates at
the end of the Reseal Technologies useful economic life.
5. PRIVATE PLACEMENT
The Company has been involved in a private placement ("Bridge
Financing"). The Bridge Financing consists of promissory notes, common shares,
and rights ("Bridge Options") to acquire Units identical in form to
F-8
<PAGE>
INTERNATIONAL DISPENSING CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JUNE 30,
1996 IS UNAUDITED)
(CONTINUED)
the IPO Units upon consummation of the IPO. The promissory notes bear interest
at 8% per annum and are due on the earlier of consummation of a public offering
or January 1, 1997. As of December 31, 1995, the Company had received gross
proceeds of $350,000 in connection with the Bridge Financing, which consisted of
$175,000 of promissory notes, 87,500 shares of common stock and rights to obtain
131,250 Units. As of June 30, 1996, the Company had received additional gross
proceeds of $1,750,000, which consisted of $875,000 of promissory notes, 437,500
shares of common stock and rights to obtain 656,250 Units. Upon completion of
the Bridge Financing, the Company had received an aggregate of $2,100,000 in
consideration for $1,050,000 in promissory notes, 525,000 common shares and
rights to obtain 787,500 Units. The Company has amended the Bridge Financing
agreements so that the 787,500 Units underlying the Bridge Options are
outstanding prior to the completion of the IPO, and all of such Units will be
registered in the proposed registration .
6. SETTLEMENT AGREEMENT
In October 1995, in connection with a settlement of actions and claims
against certain affiliates of RIC, the licensor of the Technology, the Company
agreed to issue (i) 2,900,000 shares of common stock to RIC, as partial
compensation under the License Agreement, (ii) an aggregate of 1,500,000 shares
of common stock (the "Investor Shares") to certain investors in RILP, and (iii)
an aggregate of 450,000 shares of common stock to certain individuals for
services rendered equal to the par value of such shares. Of the 1,500,000 shares
issued, 552,000 were issued to individuals who are now members of the board of
directors and of the 450,000 shares issued, 161,000 were issued to current
members of management and the board of directors.
Pursuant to such settlement, the holders of the Investor Shares may
require the Company to file a Registration Statement under the Securities Act
with respect to 25% of such shares of common stock, commencing one year from the
effective date of the Company's proposed IPO, subject to certain conditions and
limitation. Further, if the Company proposes to register any shares of common
stock under the Securities Act, other than pursuant to an initial public
offering or the previous sentence, then the holders of the Investor Shares are
entitled to include an additional 25% of their shares of common stock in such
registration.
7. CONVERTIBLE PROMISSORY NOTES
During 1995, two convertible promissory notes were issued for $100,000
and $50,000 (the "Convertible Notes") and are due on April 15, 1996 and December
20, 1996, respectively. These notes bear interest at 8% and each is convertible
at any time prior to the maturity date of the notes into 1,200,000 common
shares, subject to adjustments. The $100,000 note (the "Portenoy Note") converts
at a price of $.084 per common share, subject to adjustments, and the $50,000
note (the "ATG Note") converts at a price of $.042 per common share, subject to
adjustments.
On April 15, 1996, the Portenoy Note came due. On June 28, 1996, in
accordance with an agreement with the Company, the holder of the ATG Note, which
comes due on December 20, 1996 and contained the right to convert into 1.2
million shares of Common Stock, agreed to transfer such note to the Company for
cancellation in return for the Company agreeing to pay it $300,000. The amounts
owed by the Company to the holders of the Convertible Notes shall be paid out of
the proceeds of the proposed IPO. The Company has recorded an extraordinary loss
on retirement of debt of $250,000 in its June 30, 1996 unaudited financial
statements.
8. MANAGEMENT SHARES
In 1995, the Company issued an aggregate of 950,000 shares to
management at par as compensation for services rendered in incorporating the
Company. Such shares were issued at fair market value of the Company's common
stock, which was determined based upon the fair market value of the private
placement shares (see Note 5) and the convertible promissory notes. The
statement of operations reflects approximately $76,000 of compensation expense
related to such shares.
F-9
<PAGE>
INTERNATIONAL DISPENSING CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JUNE 30,
1996 IS UNAUDITED)
(CONTINUED)
9. RELATED PARTY TRANSACTIONS
The Company shares office space with certain affiliated companies,
including RIC and RILP. The Company also pays certain operating expenses,
including compensation of key personnel, on behalf of RIC and RILP. At December
31, 1995 and June 30, 1996, the Company had paid 85,261 and 332,794,
respectively, on behalf of RIC. The Company is entitled to be reimbursed for
these expenses and has offset such against the current liability related to the
License Agreement (Note 4) in the Company's balance sheet.
For both the period ended December 31, 1995 and the three months ended
June 30, 1996, the Company paid consulting fees to members of management in the
aggregate amount of $168,000.
10. INCOME TAXES
As a result of losses incurred during the year, there is no provision
for income taxes in the accompanying financial statements. The Company has
established a full valuation allowance against its net deferred tax assets as
realizability of such assets is predicated upon the Company achieving
profitability.
11. COMMITMENT AND CONTINGENCIES
The Company leases office space under a noncancellable operating lease,
expiring on November 30, 1997. Rental expense for the period ending December
31,1995 was $8,259. Future minimum lease payments under this lease agreement is
as follows:
Year Ending December 31
1996 $90,292
1997 84,571
--------
$174,863
12. SETTLEMENT OF PENDING LAWSUIT
In May 1996, in connection with the settlement of a lawsuit brought by
Banco Inversion, S.A. and Administratadora General de Patrimonios, S.A.
(collectively, "Banco") against certain affiliates of RIC, RIC entered into an
agreement pursuant to which it agreed, among other things, (i) to transfer an
aggregate of 300,000 of its shares of common stock (the "Settlement Shares") to
Banco, (ii) to pay Banco $50,000 at the closing of such settlement and $150,000
out of the licensing fees RIC receives from the proceeds of this Offering and
(iii) to exchange mutual releases with the parties of such lawsuit.
The number of Settlement Shares, subject to certain anti-dilution
adjustments, may be increased up to 600,000 shares in the event that 30 months
after the effective date of the registration statement the market value of the
300,000 Settlement Shares is less than $2,800,000.
The Company has granted to the holders of such Settlement Shares, the
right to register such shares along with shares registered by the Company in a
public offering, whether on behalf of the Company or other holders of common
stock, subject to customary market factor limitations. Such registration rights
terminate upon the earlier of (i) the date that all Settlement Shares have been
either registered or sold, or (ii) the date that all such shares may be sold
pursuant to Rule 144(k) under the Securities Act.
F-10
<PAGE>
INTERNATIONAL DISPENSING CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIOD ENDED JUNE 30,
1996 IS UNAUDITED)
(CONTINUED)
13. EMPLOYMENT AGREEMENTS
It is anticipated that the Company will enter into a three-year
employment agreement with Jon Silverman upon the closing of the proposed initial
public offering. Pursuant to such proposed employment agreement, Mr. Silverman
will receive a monthly salary of $15,000. In addition, the Company will be
obligated to pay the premium on his $1,000,000 life insurance policy, to which
his estate is the beneficiary. This insurance policy is in addition to the
$1,000,000 key-man life insurance policy maintained by the Company on the life
of Mr. Silverman. He will also be entitled to customary benefits and
perquisites.
F-11
<PAGE>
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, IMPLY THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATES AS OF WHICH SUCH INFORMATION IS GIVEN.
-----------------
TABLE OF CONTENTS
Page
----
Prospectus Summary.......................................... 3
Risk Factors................................................ 6
Use of Proceeds............................................. 17
Dividend Policy............................................. 18
Dilution.................................................... 18
Capitalization.............................................. 19
Management's Discussion and Analysis of
Results of Operations and Financial
Condition...................................... 20
Business ................................................... 21
Management.................................................. 27
Certain Relationships and
Related Transactions.................................... 29
Principal Stockholders...................................... 33
Description of Capital Stock................................ 34
Shares Eligible for Future Sale............................. 37
Selling Securityholders..................................... 38
Underwriting................................................ 39
Experts .................................................... 45
Legal Matters............................................... 45
Patent Counsel.............................................. 45
Available Information....................................... 45
Index to Financial Statements............................... F-1
-----------------
UNTIL JANUARY 1, 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
1,620,834 UNITS
INTERNATIONAL DISPENSING
CORPORATION
PROSPECTUS
STRATTON OAKMONT, INC.
OCTOBER 3, 1996
- --------------------------------------------------------------------------------
